2023 (11) TMI 787 - AT - Income Tax

Nature of land sold - gain on sale of land - agricultural land or capital asset - definition of 'local authority' - HELD THAT - Gain on sale of an agricultural land would be exigible to tax only when the land transferred is located within the jurisdiction of a municipality. The fact that all the expressions enlisted after the word municipality are placed within the brackets starting with the words 'whether known as' clearly indicates that such expressions are used to denote a municipality only, irrespective of the name by which such municipality is called. This fact is further substantiated by the provisions contained under clause (b) wherein it has been clearly provided that the authority referred to in clause (a) was only municipality. We find force in the argument of the AR that clarifying within the brackets in the section 2(14)(iii)(a) is for the apparent reason that the name of the local body varies based on the nature of the area for which it is constituted and also for the reason that there is a lack of uniformity all over India with reference to the nomenclature of the urban local authority. In fact, municipality is known by different names in various parts of the country. This fact is also evident from Art.243Q of the Constitution of India, dealing with creation of municipalities. In the light of decision of R.C. Jain 1981 (2) TMI 200 - SUPREME COURT we have observe that land in question also not located in any local authority. Land does not fall in sub- clause (a) of section 2(14)(iii) of the Act as the land is outside of any municipality. Further we have to see whether the land falls in clause (b) of section 2(14)(iii). This section prescribes that any area within such distance, not being more than 8 km from the local limit of any municipality or cantonment board as referred to in sub-clause (a) of section 2(14)(iii) of the Act, as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette. The outer limits of this Municipality, assessee's land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. When the land which does not fall under the provisions of section 2(14)(iii) of the IT Act and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in Revenue records, the land is not subjected to any conversion as non-agricultural land by the assessee or any other concerned person, transfers such agricultural land as it is and where it is basis, and also it is not the transfer of any share in the right in the development of such land through any joint development agreement, in such circumstances, in our opinion, such transfer like the case before us cannot be considered as a transfer of capital asset. Being so, in our opinion, land in question cannot be treated as non-agricultural land on the reasons explained above and to be treated as agricultural land not liable for tax on capital gain. Assessee appeal allowed.

Summary

Issues Involved:
1. Validity of notice issued under Section 143(2) of the Income-tax Act, 1961.
2. Classification of land as agricultural or non-agricultural for the purpose of capital gains tax.

Summary:

1. Validity of Notice Issued Under Section 143(2):
The assessee argued that the notice issued under Section 143(2) was not digitally signed, rendering the assessment orders invalid. However, this ground was dismissed as the appellant did not present serious arguments on this issue during the hearing.

2. Classification of Land as Agricultural or Non-Agricultural:
The core issue was whether the land sold by the assessee was agricultural, thus exempt from capital gains tax under Section 2(14) of the Income-tax Act, 1961. The assessee contended that the land was agricultural, located beyond 20 km from the Hosur Municipality, and had a population of around 4000. The land was sold for Rs. 3,16,42,000, but only Rs. 66,42,000 was declared in the sale deed based on the guidance value.

Arguments and Findings:
- Assessing Officer (AO) and CIT(A) Observations:
- The AO rejected the assessee's claim, stating that there was no evidence of agricultural activity, such as bills or vouchers for agricultural produce, or records of crops cultivated.
- The CIT(A) upheld the AO's decision, noting that the land was sold at a high price to a company engaged in manufacturing concrete products, indicating it was not agricultural land. The CIT(A) also referenced Supreme Court rulings emphasizing that mere entry in revenue records does not constitute agricultural land without evidence of agricultural activity.

- Assessee's Evidence and Arguments:
- The assessee provided certificates from the Village Administrative Office and the President of Uddanapalli Panchayat, stating the land was under cultivation and located 20 km from Hosur Municipality. However, the CIT(A) found these documents insufficient and not credible due to lack of dates.
- The assessee argued that the AO did not inspect the land or obtain information from the revenue department, relying instead on suspicion and surmise.

- Tribunal's Decision:
- The Tribunal found that the land was classified as agricultural in revenue records and there was no evidence of its use for non-agricultural purposes. It emphasized that the land had not been converted for non-agricultural use and no developmental activities had taken place in the surrounding area.
- The Tribunal cited various judicial precedents supporting the view that land used for agricultural purposes and classified as such in revenue records should be considered agricultural land, exempt from capital gains tax.
- The Tribunal concluded that the land sold by the assessee was agricultural land and not liable for capital gains tax. Consequently, the appeals were allowed in favor of the assessee.

Conclusion:
The Tribunal ruled that the land sold by the assessee was agricultural land, exempt from capital gains tax, and allowed the appeals. The issue of the notice under Section 143(2) was dismissed due to lack of serious argument.