Sale of agricultural land does not attract capital gains tax

The briefly stated facts are that the assessee and his two other relatives Shri Ramjibhai Prabhudas and Shri Bhagubhai Valjibhai invested a sum of Rs. 1,85,000 in purchase of agricultural land which was situated at Survey No. 485/2 of Mansa village in February, 1992. The assessee’s share was 25 per cent and the investment in the said land was made by the assessee at Rs. 46,375. The said agricultural land was transferred to the above firm for a total sale consideration of Rs. 9,00,000 in July, 1995 to M/s Jaiprabhu Seeds & Ginning Factory, Mansa.

The assessee’s share was at Rs. 2,25,000 and the same was credited in the books of accounts of M/s Jaiprabhu Seeds & Ginning Factory, Mansa on account of land purchase. The assessee vide his letter dated 13th Oct., 2003 has submitted before the AO that no sale agreement was entered into with the said firm and no payment out of the sale consideration was received till date. It was stated that sale deed would be executed as and when the sale consideration of his share will be received. It was contended by the assessee that their agricultural land is situated in the rural area outside the municipal limit and hence does not fall within the ambit of provisions of s. 2(14) of the Act and not liable to tax in the assessee’s hand. But the AO has not accepted the contention of the assessee and treated the sale consideration of assessee’s share as undisclosed income of the asses see and added to the income of the assessee.

RAMJIBHAI P. CHAUDHRY vs. DEPUTY COMMISSIONER OF INCOME TAX

ITAT, AHEMADABAD ‘A’ BENCH

IT(SS)A No. 324/Ahd/2004; Block period 1st April, 1988 to 7th Oct., 1998

31st July, 2008

Block period 1st April, 1988 to 7th Oct., 1998

ORDER

MAHAVIR SINGH, J.M. :

These cross-appeals by the assessee and Revenue for block period 1st April, 1988 to 7th Oct., 1998, arise out of the order of CIT(A), Gandhinagar, Ahmedabad in Appeal No. CIT (A)/GNR/143/2003-04 date 30th Sept., 2004. The assessment was framed under s. 143(3) r/w s. 158BC r/w s158BD of the IT Act, 1961 (hereinafter referred to as ‘the Act’) by the Dy. CIT, Gandhinagar Circle, Gandhinagar vide his order dt. 28th Nov., 2003. IT(SS)A No. 324/Ahd/2004 :

2. The only issue in this appeal of assessee is whether the land transferred to M/s Jaiprabhu Seeds & Ginning Factory, Mansa is agricultural land or not, or land is capital asset within the meaning of s. 2(14) of the Act or not.

3. The briefly stated facts are that the assessee and his two other relatives Shri Ramjibhai Prabhudas and Shri Bhagubhai Valjibhai invested a sum of Rs. 1,85,000 in purchase of agricultural land which was situated at Survey No. 485/2 of Mansa village in February, 1992. The assessee’s share was 25 per cent and the investment in the said land was made by the assessee at Rs. 46,375. The said agricultural land was transferred to the above firm for a total sale consideration of Rs. 9,00,000 in July, 1995 to M/s Jaiprabhu Seeds & Ginning Factory, Mansa. The assessee’s share was at Rs. 2,25,000 and the same was credited in the books of accounts of M/s Jaiprabhu Seeds & Ginning Factory, Mansa on account of land purchase. The assessee vide his letter dated 13th Oct., 2003 has submitted before the AO that no sale agreement was entered into with the said firm and no payment out of the sale consideration was received till date. It was stated that sale deed would be executed as and when the sale consideration of his share will be received. It was contended by the assessee that their agricultural land is situated in the rural area outside the municipal limit and hence does not fall within the ambit of provisions of s. 2(14) of the Act and not liable to tax in the assessee’s hand. But the AO has not accepted the contention of the assessee and treated the sale consideration of assessee’s share as undisclosed income of the asses see and added to the income of the assessee. By holding as under in his assessment order at p. 3, the relevant para 8, which reads as under :

“The contention of the assessee that as no any agreement for sale entered into with the firm and no capital gain tax is leviable is not acceptable because of the facts that the assessee has given the possession of the land to the firm, M/s Jaiprabhu Seeds & Ginning Factory and as per provisions of s. 2(47)(v), there is a transfer and consideration has been credited in the assessee’s account by the firm. The contention of the assessee that the agricultural land is situated in rural area and hence not within the ambit of s. 2(14) of the Act and hence there will be no any taxable  gain is also not acceptable because of the facts that construction of property in the said land, i.e. shed was started in the month of July, 1995 which proves that land was not an agricultural land and was converted in to non-agricultural land. Moreover, as per order sheet entry, the assessee was asked to produce details when land in question was converted into non-agricultural land to prove his contention that the land in question was agricultural (and when transferred). However, the assessee failed to produce any evidence in this regard. In view of the facts stated above, the contention of the assessee has not been accepted and Rs. 2,25,000 appearing as a credit entry in the books of M/s Jaiprabhu Seeds & Ginning Factory, Mansa, is brought to tax as undisclosed income of the assessee.”

4. On these facts, the CIT(A) also upheld the action of the AO vide para 3.6 of his appellate order and the relevant portion of this para reads as under : “From the records, it is obvious that the permission was granted to the appellant for converting the above land into non-agricultural land vide letter dt. 21st Oct., 1995. At this point of time also the land continued to be in the name of the appellant. As there is no sale of agreement on record and there is no documentary evidence to indicate the exact date of transfer, the date of transfer has to be ascertained in accordance with the provisions of s. 2(47) of the Act. The provisions of s. 2(47) (vi) read as under :”(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company or other AOP or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property,”

As per above provisions, it is obvious that the transaction of the appellant with M/s Jaiprabhu Seeds & Ginning Factory would amount to transfer, the moment the other party is in the possession of the property and is able to enjoy such possession. In this case, the purpose of purchasing the property by M/s Jaiprabhu Seeds & Ginning  Factory was for construction of factory and which was not possible unless the land was converted into non-agricultural land. The buyer was thus in effective possession and enjoyment of the property only after 27th Nov., 1995 when appellant got the property converted into non-agricultural land. I therefore, find that the transfer of property in accordance with the provisions of s. 2(47) can be taken on 28th Nov., 1995 when the buyer was not only in possession of the property but the property also stood converted into non-agricultural land to enable him to enjoy the property in its business activity.”

5. After hearing rival contentions and going through the case records, it is noticed that as per the books of accounts, the agricultural land in rural area was transferred on 5th July, 1995, whereas the N.A permission was  granted to the assessee in November, 1995 after making the payments of conversion charges of Rs. 13,851 as per the receipt issued by Collector’s office of Treasury Department. We find from the records that the CIT(A) as well as the AO has wrongly presumed that the property was transferred as non-agricultural land and as on the date of transfer the property was agricultural land and it is not the case of the Revenue that it is not a rural land falling in the definition of capital assets and not as agricultural land as per the definition of s. 2(14) of the Act. Sub-cl. (iii) of s. 2(14) has defined specified urban areas and if the land does not fall in this specified urban areas that does not  constitute capital asset. As the facts are very clear that the land does not fall in the specified urban areas as held by the lower authorities, we are of the considered view that the sale of agricultural land does not attract any capital gains tax. Accordingly, we allow the claim of the assessee and the orders of lower authorities on this issue are reversed. This issue of appeal of assessee is allowed. IT(SS)A No. 346/Ahd/2004 : Now coming to the Revenue’s appeal, the Revenue has raised the ground that CIT(A) has erred in deleting the addition of Rs. 46,375 under s. 69 of the Act as unexplained investment in purchase of agricultural land. The Revenue has raised the further ground that CIT(A) erred in law and on facts of the case in directing to withdraw the addition of Rs. 50,000, made on account of unexplained marriage expenses. At the outset, it is seen that the CIT(A) had allowed relief on account of unexplained above relief on enquiry from the Bench, the learned Departmental Representative has fairly stated that the tax effect on deletion of addition for this assessment year is less than Rs. 2 lakhs. It is seen from the records that the appeal is not maintainable being tax effect less than Rs. 2 lakhs in view of CBDT’s Circular No. 2 of 2005 : F. No. 279/Misc. 64/05-ITJ, dt. 24th Oct., 2005 which has been followed by the Hon’ble Rajkot Bench in the case of Asstt. CIT vs. Rajoo Engineers Ltd. (2006) 102 TTJ (Rajkot) 733 : (2006) 100 ITD 555 (Rajkot) : ITA No. 1290/Rajkot/2005 vide its order dt. 1st March, 2006.

It is seen that tax effect in this appeal is less than Rs. 2 lakhs and the latest instruction issued by the CBDT in the above cited Circular No. 2 of 2005 providing tax effect limit in the case of income-tax amounting to Rs. 2 lakhs.

Since the Ahmedabad Bench is following the Co-ordinating Bench decision in the case of Rajoo Engineers Ltd. (supra), wherein the Hon’ble Bench has dismissed the Revenue’s appeal by holding as under (headnotes) : “It is true that the High Court decision in CIT vs. Pithwa Engg. Works (2005) 197 CTR (Bom) 655 : (2005) 276 ITR 519 (Bom) was not dealing with the new limit of the circular dt. 24th Oct., 2005. It was with reference to the earlier circular where reference was not required to be filed to the High Court if the tax effect was less than Rs. 2 lakhs. The contention of the Revenue in that case was that Rs. 2 lakhs limit was increased by circular dt. 27th March, 2000 and prior to that, the limit was only Rs. 50,000 and the contention of the Revenue was that the new limit would not be applicable to the old references. The High Court rejected the said contention of the Revenue. (para 4)

In those circumstances, though the said High Court decision did not deal with the circular dt. 24th Oct., 2005, but it had dealt with the earlier circular and the limits of that circular were applied even to the cases which were prior to the old circular. Therefore, the ratio of that decision was applicable in the instant case as well. The CBDT has taken a policy decision not to file appeals in such type of cases and the circular is binding on the Revenue even to appeals filed before 31st Oct., 2005 and the Department would not be justified in proceeding with those appeals within the monetary limit of tax effect prescribed in the circular date 24th Oct., 2005. (para 5)

The contention of the Revenue that the case of the assessee was covered by the exception 3 had also no force inasmuch as the said exception provides that the CBDT has also decided that in cases involving substantial question of law of importance as well as in cases where the same question of law will repeatedly arise, either in the case concerned or in similar cases, should be separately considered on merits without being hindered by the monetary limits. (para 6)”

10. Further, the Hon’ble Madhya Pradesh High Court in the case of CIT vs. Bhagwan Cloth Stores (2001) 181 CTR (MP) 315 : (2002) 170 Taxation 503 (MP) held as under : “This reference is made under s. 256(1) of the IT Act, as it stood before the amendment of 1998, made at the instance of Revenue for resolution of certain questions as mentioned in para 1 of the Revenue.

At the outset it is seen that the amount involved in this reference is a petty amount of Rs. 8,400, covering four assessment years. We are afraid, it was not advisable for the Revenue to seek reference in the case involving such  a petty amount. Earlier this Court, vide its order date 24th Feb.1999 in IT Ref. Nos. 69 of 1998 and 70 of 1998 has declined to entertain reference application in a case, which involved an amount of Rs. 13,700. The appeal preferred against the said order of this Court by he Revenue before the Supreme Court was also dismissed. CBDT’s Circular is there against making reference of a dispute involving less than Rs. 50,000, which is now raised to Rs. 1,00,000.

In this view of the matter, we decline to answer the reference, leaving the questions involved in this reference to be decided in some other appropriate matter.

This reference stands disposed of as aforesaid but without any order as to costs. A copy of this order be transmitted to the Tribunal.”

It is seen that the plea of the Revenue does not hold good in view of decision of the Hon’ble apex Court in the case of IT Ref. Nos. 69 of 1998 and 70 of 1998, dt. 24th Feb., 1999, which has been relied on by the Hon’ble Madhya Pradesh High Court in the case of CIT vs. Bhagwan Cloth Stores (supra). Respectfully following the decisions of the Hon’ble Supreme Court, Hon’ble Bombay (sic-Madhya Pradesh) High Court and the Co-ordinating Bench (all cited supra), we dismiss the appeal of the Revenue in limine. Accordingly, the Revenue’s appeal is dismissed.

In the result the appeal of assessee is allowed and the Revenue’s appeal is dismissed.

NF