Permission for non-agricultural use not make land non-agricultural and liable to capital gain tax – ITAT

Permission for non-agricultural use not make land non-agricultural liable to capital gain tax when it was proved beyond doubt that lands were agricultural in nature – ITAT

ABCAUS Case Law Citation:
ABCAUS 1265 (2017) (05) ITAT

The Grievance:
The appellant assessee was aggrieved by the order passed by the Commissioner of Income Tax  (Appeals) [CIT(A)] confirming the order of the Assesseing Officer (‘AO’) passed u/s 143(3) r.w.s. 148 of the Income Tax Act, 1961 (‘the Act’) treating the land sold as non-agricultural land and imposing capital gain tax.

Assessment Year : 2005-06
Date/Month of Pronouncement: May, 2017

Important Case Laws Cited/relied upon:
CIT Vs. Vajulal Chunilal
Smt. Chandravati Atmaram
CWT V. Officer-in-Charge (Court of Wards)

Brief Facts of the Case:
The appellant assessee was an individual who had not filed any return of income. As a result of  search and seize operations conducted in a case, it was found that the appellant was owning agricultural lands which were transferred to a Cooperative Housing Society through a private Developer. The capital gains arising on transfer of lands were not offered to income tax. Hence, notice u/s 148 was issued to the appellant.

However, the AO did not allow the claim of the appellant that the lands were agricultural lands and accordingly he brought the transaction of sale of the land to tax under the head “capital gains” by passing u/s 143(3) r.w.s. 148 of the Act.

CIT(A) also upheld the tax on the sale of land.

Contentions of the appellant assessee:
It was contended that lands in question were agricultural lands as the assessee continued to carry on the agricultural activity which is evident from the land revenue records. It was further submitted that the conversion of the land into non-agricultural purpose was undertaken by the purchaser himself. Thus when the lands were actually transferred pursuant to the agreement of the sale, the land was actually agricultural in nature and therefore not liable to the capital gains.

Observations made by the Tribunal:
It was observed that the lands were not situated within the prescribed area of any municipality or cantonment. There was also no dispute that the agricultural activities were continued to be carried on the said land till the date of sale and the lands were converted for non-agricultural purposes by the purchaser.

The ITAT opined that once the lands did not fall within the definition of the capital asset as defined under the provisions of section 2(14) of the Act, the question of subjecting the profit arising on sale of such land to tax did not arise. Once it was proved beyond doubt that the lands were agricultural in nature, then there was no question of levying tax on the profits arising on the transfer of such land. The Tribunal observed that the conversion fees was paid by the buyer and not by the appellant. Therefore this factor proved that the conversion took place at the instance of the buyer of the land. The ITAT stated that the only issue for adjudication was whether the said conversion alone could militate against the appellant to claim that it is an agricultural land.

It was observed that the Hon’ble Gujarat High Court had held that the land does not seem to be agricultural land merely because the permission is granted for non-agricultural use and the land would continue to be agricultural land until the land is put to non-agricultural use by the purchaser himself.

The Tribunal noted that there was no dispute that the agricultural operations continued to be carried on the said land till the date of execution of the sale deed and the fact that the permission was obtained for non-agricultural purposes did not militate against the claim of the appellant that it was an agricultural land.

Held:
It was held that the profit arising on sale of this land could not be brought to tax. Therefore, the appeal filed by the assessee was allowed.