Pace Buildcon Private Limited Vs Ward- 19 (3) (ITAT Delhi)
Rural Agricultural Land, Enhanced Compensation &; Stock-in-Trade – ITAT Orders Fresh Look at Taxability u/s 2(14) &; 56 as Crucial Land Records Were Ignored
Summary:
The Delhi ITAT dealt with an interesting controversy concerning taxation of enhanced compensation received on compulsory acquisition of rural agricultural land & profit arising from sale of such land. The assessee contended that the land was rural agricultural land falling outside the definition of “capital asset” u/s 2(14) & that the authorities had proceeded to tax substantial amounts without properly considering Government certificates, revenue records, sale deeds & other evidence. Finding merit in the grievance regarding violation of natural justice, the ITAT restored the entire matter to the AO for fresh consideration.
The twin additions
The first controversy related to ₹37,64,978 received as enhanced compensation on compulsory acquisition of agricultural land by the Government of Haryana.
The assessee challenged its taxation by contending that the land compulsorily acquired was rural agricultural land & therefore not a capital asset u/s 2(14). Consequently, according to the assessee, no capital gains arose & the compensation/enhanced compensation itself fell outside the charging provisions.
Interestingly, the assessee also specifically contended that it had never claimed exemption u/s 10(37). Its case was more fundamental—the receipt was not taxable in the first place because the underlying rural agricultural land was outside the definition of capital asset.
The assessee further challenged application of u/s 56(2)(vii) on the ground that the provision was applicable only to individuals & HUFs, whereas the assessee was a company.
₹76.73 lakh – Can agricultural land become business income merely because books call it stock-in-trade?
The second controversy concerned an addition of ₹76,73,353 as business income.
The authorities treated the rural agricultural land as stock-in-trade. The assessee strongly disputed this approach & contended that the intrinsic character of the property remained agricultural.
According to the assessee, the agricultural character was supported by Girdawari, Jamabandi, certificates issued by the Sub-Registrar & Tehsildar & the relevant sale deeds.
It was further claimed that the land was situated in a village having population below 10,000 & more than 8 kilometres from municipal limits. On that basis, the assessee contended that it was rural agricultural land excluded from “capital asset” u/s 2(14) & consequently the surplus arising from its sale was not taxable.
Book entry cannot decide the character of land – assessee’s argument
An interesting argument raised was that merely describing agricultural land as “stock-in-trade” in the books of account could not alter its inherent legal character.
The assessee contended that agricultural land continued to remain agricultural unless it was lawfully converted & that accounting treatment by itself could not transform the nature of the underlying property.
More importantly, according to the assessee, the lower authorities had not recorded any finding contradicting the documentary evidence regarding the location, population, distance from municipal limits & agricultural character of the land. The additions were therefore alleged to have been based on presumptions rather than examination of facts.
Documents filed – but apparently not examined
Before the ITAT, the assessee’s counsel focused primarily on the manner in which the assessment & first appeal had been decided.
It was submitted that both the AO & CIT(A) had failed to consider the assessee’s detailed submissions. Even the certificate issued by the Government of India, sale deeds, land records & other supporting documents placed on record had allegedly not been properly examined.
The assessee therefore argued that deciding the taxability of the land without examining these documents constituted a gross violation of principles of natural justice & itself requested restoration of the matter to the AO.
ITAT – First examine the evidence, then decide the tax
The Tribunal examined the orders of the AO & CIT(A) as well as the paper book produced by the assessee’s counsel. The counsel certified that the papers contained therein had already been filed before the lower authorities.
The ITAT found that all the documents & certificates filed by the assessee had not been properly considered by the lower authorities.
Accordingly, it held that principles of natural justice demanded reconsideration of the matter by the AO.
The case was therefore restored to the AO with directions to provide the assessee an adequate opportunity of being heard. Correspondingly, the assessee was directed to furnish all relevant details, certificates & papers before the AO in time so that the proceedings could be completed expeditiously.
Important – ITAT has not decided the taxability
This aspect of the order deserves emphasis.
The Tribunal did not hold that the enhanced compensation of ₹37.64 lakh was exempt or non-taxable. Nor did it finally hold that the profit of ₹76.73 lakh from the land could not be treated as business income.
Similarly, it did not finally adjudicate whether merely treating rural agricultural land as stock-in-trade in the books changes the tax consequences.
All these issues have effectively been left open for fresh examination by the AO after considering the documentary evidence.
Accordingly, the assessee’s appeal was allowed for statistical purposes.
Author’s Comment
The case raises an interesting distinction between the character of an asset & the head under which the resulting surplus may be taxable. The assessee’s argument that rural agricultural land is outside “capital asset” u/s 2(14) certainly addresses capital-gains taxation, but where a company itself holds land as stock-in-trade, the separate question whether profit from its trading activity can nevertheless constitute business income requires careful examination. The ITAT has wisely refrained from deciding that larger issue without proper factual findings.
Equally interesting is the enhanced-compensation issue. The assessee did not seek shelter u/s 10(37)– indeed, being a company, that provision presented its own difficulty. Instead, it argued that the underlying land itself was outside u/s 2(14) & therefore the receipt was outside the charging mechanism.
For the moment, however, the Tribunal has decided only one thing conclusively: before deciding whether agricultural land is taxable, the AO must at least look at the documents showing that it is agricultural land.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT DELHI
Appeal in this case has been filed by the Assessee against the order dated 29.09.2025 passed by the CIT(A)/NFAC, Delhi for the A.Y. 2020-21. Grounds of appeal are as under :-
1. That the Lower Authorities have erred in passing an order which is bad in law, contrary to facts and deserves to be quashed as the Lower Authorities have failed to appreciate the facts, evidences, and submissions placed on record.
2. That the Lower Authorities have erred both in law and on facts in confirming the addition of Rs. 37,64,978/-received as enhanced compensation on compulsory acquisition of agricultural land by Govt. of Haryana, by wrongly applying section 56(2)(vii) of the Act.
2.1 That the Lower Authorities have failed to appreciate that the land compulsorily acquired was rural agricultural land, not a “capital asset” u/s 2(14); hence, no capital gains arise and the compensation/enhanced compensation is not taxable.
2.2 That the Lower Authorities have erred in holding that exemption u/s 10(37) is not available to the appellant-company without appreciating that the appellant never claimed exemption under section 10(37); the receipt is outside the charging provisions altogether.
2.3 That the Lower Authorities have erred in law in confirming taxation us 56(2)(vii) provision applicable only to Individuals and HUFs, and not applicable to companies
3. That the Lower Authorities have erred in confirming the addition of Rs. 76,73,353/-as business income by treating the rural agricultural land as “stock-in-trade,” ignoring that the land is inherently agricultural, evidenced by Girdawari, Jamabandi, certificates of Sub-Registrar, Tehsildar, and sale deeds.
3.1 That the Lower Authorities have failed to appreciate that the agricultural land sold was rural agricultural land situated in a village with population < 10,000 and more than 8 km from municipal limits, as certified by Govt. authorities therefore it is not a capital asset u/s 2(14) and any surplus from its sale is not taxable.
3.2 That the Lower Authorities have erred in holding that book treatment as “stock-in-trade” changes the intrinsic character of land; whereas agricultural land continues to remain agricultural until lawfully converted.
3.3 That the Lower Authorities below failed to provide any finding to contradict the evidences filed, and the addition is based on presumptions rather than facts.
4. That the Lower Authorities upheld additions without considering the detailed submissions, Certificates sale deeds, land records, and other evidences filed by the appellant, thereby violating the principles of natural justice.”
2. During proceedings before us the Ld. Counsel of the assessee submitted before the Bench that both the AO in the assessment order and Ld. CIT(A) in the appellate order have not considered the detailed submissions filed by the assessee before them. They have also not taken into consideration the certificate issued by the Government of India and other documents like sale deed, records etc. filed as evidences by the appellant before them. Accordingly, the Ld. Counsel argued that it is a gross violation of natural justice that lower authorities have decided the case without considering submissions filed by the appellant. Even record which were filed have not been considered and accordingly made a prayer that the matter may be remanded back to the file of the AO for reconsideration of all the submissions and documents filed by the assessee.
3. Per contra the ld. DR relied on the order of the AO and the ld. CIT(A) in the appellate order.
4. We have considered the findings given in the assessment order and the Ld. CIT(A) in the appellate order. We have also considered the paper book brought on record by the Counsel of the assessee which he certified that these papers were filed before lower authorities.
5. We find that all the documents and certificate which have been filed by the appellant have not been considered properly by lower authorities. Accordingly, we are of this considered view that natural justice demands that the matter should once again be looked into by the AO. Thus, the case is remanded back to the file of the AO with the direction to give adequate opportunity to the assessee of being heard and the appellant is also directed to file all details certificates and papers before the AO in time so that the case may be assessed at the earliest.
6. In the result, the appeal filed by the assessee is allowed for statistical purpose.
Order pronounced in the Open Court on 10.08.2026.
