Agricultural land situated in rural area is outside the purview of expression ‘capital asset’

DCIT Vs Janki Hitendrakumar Patel (ITAT Ahmedabad)

CIT(A) has rightly concluded that the agricultural land parcels being situated in the rural area is outside the purview of expression ‘capital asset’ defined in Section 2(14) of the Act. Consequently, the rural agricultural land in question not being a capital asset is not susceptible to tax under s.45 r.w.s. 48 of the Act. The capital gains arising on sale of rural agricultural land (new asset) is thus outside the purview of taxation at the threshold.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The captioned appeal has been filed at the instance of the Revenue. The assessee has also filed cross objection in the appeal of the Revenue against the order of the Commissioner of Income Tax (Appeals)-3, Ahmedabad (‘CIT(A)’ in short) dated 30.08.2016 arising in the assessment order dated 30.03.2015 passed by the Assessing Officer (AO) under s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (the Act) concerning AY 2010-11.

2. The appeal of Revenue and cross objection of assessee emanates from common issue and thus disposed off together.

3. To begin with, we shall take up Revenue appeal for adjudication purposes.

ITA No. 2833/Ahd/2016 (Assessee’s appeal)

4. As per its grounds of appeal, the Revenue has challenged the action of the CIT(A) in reversing the action of the AO on withdrawal of exemption under s.54B of the Act on sale of agricultural land and chargeability of capital gains on sale of freshly acquired land.

5. Briefly stated, the assessee company filed its return of income for A.Y. 2010-11 at Rs.1,46,58,290/-. The case was reopened under s.147 of the Act and re-assessment was carried out in the course of the re-assessment, the AO determined the total income at Rs.3,19,77,410/- after making an addition on account of short term capital gains (STCG) by withdrawal of exemption under s.54B of the Act and bringing to tax the capital gains arising on sale of agricultural land (new asset) during the year owing to non­fulfillment of conditions prescribed under s.54B of the Act..

6. The AO observed that the assessee in the instant case has sold off the land within a period of two years on 22.02.2010. Hence, at the end of two years contemplated under Section 54B of the Act, the assessee did not have the land holding at its disposal which he was expected to have. It was thus observed by the AO that when the assessee did not have any agricultural land in his possession at the end of two years then it cannot be stated that the conditions of Section 54B of the Act have been fulfilled. Thus, for the reasons mentioned in the assessment order, the AO denied the claim of exemption under s.54B of the Act.

7. Aggrieved, the assessee preferred appeal before the CIT(A). It was contended before the CIT(A) that the agricultural land giving rise to capital gain is situated in rural area and is not a capital asset as per definition of Section 2(14)(iii) of the Act at the first instance and hence, the chargeability under s.45 of the Act on such gains do not arise in any manner. Consequently, in the absence of any chargeable capital gains, Section 54B of the Act would not apply. The CIT(A) found substantial merit in the plea raised on behalf of the assessee for non-chargeability of capital gains. The CIT(A) also found merit in the alternate contention of the assessee for eligibility of exemption under s.54B of the Act. The relevant operative para of the order of the CIT(A) is reproduced hereunder:

“3.1. I have gone through the facts mentioned in the assessment order and the submission filed by the appellant carefully. The case of the appellant was re-opened under 147 rws 148 of the Act with the reason recorded that why the capital gain tax of Rs.1,73,19,910/- in respect of Agro Land at Survey No. 335 should not be added to the total income and exemption claimed u/s. 54B(1)(i) of the I.T. Act should not be withdrawn. As against the reopening proceedings, the appellant had submitted various submissions vide letter dated 4.9.2014, 10.10.2014, 26.02.2015 and 26.03.2015 before the A.O and submission dated 24.05.2016 & 29.08.2016 in the appellate proceedings. The main contention taken by the appellant was that the rural agricultural land situated at Village Sachana is not a capital asset as per the provision of section 2(14)(iii) of the Act. In support of the same, the distance certificate of the Gram Panchayat and the population certificate of the Village, was submitted by the appellant. Further, the appellant has relied upon the decision of Hon’ble Punjab &Haryana High Court in the case of CIT vs. Satinder Pal Singh 229 CTR 82 [2010] wherein also, it was held that capital asset would not include any agricultural land which is not situated within 8 kms from the local limits of the Municipality Committee or Cantonment Board.

3.2.   The A.O while rendering the order u/s. 143(3) rws 147 dated 30.03.2015 has mainly withdrawn the exemption of capital gain u/s. 54B(1)(i) which is as under :-

(i) if the amount of the capital gain is greater than the cost of the land so purchased /hereinafter referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in reaped of the new asset any capital gain arising from its transfer within a period of three years of UK purchase, the cost shall be nil; or

The appellant has clearly stated that the provision of section 54B(1)(i)is only applicable in case of a capital asset and as the Rural agricultural land situated at village Sachana is not a capital asset and hence the provision of section 54B(1)(i) would not apply. Further, section 45 is the charging section and section 48 is the section for computation of capital gain and both provisions are integrated with each other. As the rural agricultural land situated at Village Sachana is not a capital asset as per the definition of section 2(14)(iii) of the Act and hence, the chargeability u/s. 45 would fail and accordingly, the computation provision as per section will also fail. The appellant has also placed reliance on the decision of Hon’ble Apex Court in the case of CIT vs. B.C. Srinivasa Setty reported in 128 ITR 294 and Bombay High Court in the case of Cadell Weaving Mills Co. (P) Ltd. vs. CIT reported in 249 ITR 265. The ratio laid down in the aforesaid judgments is squarely applicable to the case of appellant.

3.3. As per the section 54B(1)(i) of the Act, the amount of capital gain, if is greater than the cost of the land purchased and if such new assets is sold within a period of three years from its purchase, the cost of the asset shall be Nil and the entire sales consideration of the new asset would be subject to tax. In the instant case of appellant as the rural agricultural land situated at Sachana is not a capital asset as per the definition of section 2(14)(iii) of the Act rws 45, the computation would be as under:-

As from the above chart, it is clear that the sales consideration received on sale of rural agricultural land at Sachana is exempt as it is not a capital asset, even if the provisions of section 54B(1)(i) is applied and the cost of the asset is treated as Nil, it is having no tax impact in the case of the appellant.

3.4. I agree with the appellant that the Rural Agricultural Land situated at Village Sachana is not a capital asset as per provisions of section 2(14)(iii) r.w.s 45 and the sales consideration is exempt. Further, as per the decision of Hon’ble Apex Court in the case of CIT vs. B.C. Srinivasa Setty reported in 128 ITR 294 which is squarely covered to the facts of the case of appellant that section 45 charging section would fail as the Rural Agricultural Land situated at Village Sachana is not a capital asset. Therefore, the addition made by the A.O for an amount of Rs. 1,73,19,120/- is directed to be deleted and the provisions of section 54B(1) are not applicable in the case of the appellant as the rural agricultural land is not a capital asset and alternatively the capital gain exemption u/s. 54B of Rs.1,37,74,997/-granted to the appellant cannot be withdrawn. Hence, this ground No.I of appeal is allowed.”

8. Aggrieved by the reversal of action of the AO by the CIT(A), the Revenue is in appeal before the Tribunal.

9. We have carefully considered the rival submissions made on behalf of the Revenue as well as the assessee and perused the assessment order and the first appellate order. The material referred to and relied upon has also been perused in terms of Rule 18(6) of the ITAT Rules, 1963. The question that arises for determination is whether assessee is liable to capital gain tax having regard to the provisions of Section 2(14) r.w.s. 54B of the Act in the factual matrix or not.

9.1 The issue is essentially factual in nature. The assessee, in the instant case, had purchased agricultural land parcels situated at Sarkhej in F.Y. 2006-07 relevant to F.Y. 2007-08 on 29.03.2007. The aforesaid agricultural land parcels at Sarkhej was sold in F.Y. 2008-09 relevant to A.Y. 2009-10 on 14.05.2008. A capital gain of Rs.2,70,88,834/- arose to the assessee on sale of the agricultural land. The assessee, in turn, purchased agricultural land at Sachana, Viramgam (new asset) and claimed deduction of Rs.1,37,74,997/-being cost of purchase of agricultural land in A.Y. 2009-10 out of capital gains of Rs.2,70,88,834/-. It was noticed by the AO that the aforesaid agricultural land at Sachana (new asset) have been sold at a consideration of Rs.1,82,30,683/- within 14 months on 22.02.2010 in F.Y. 2009-10 relevant to A.Y. 2010-11 in question. The share of consideration (95%) attributable to assessee stands at Rs. 1,73,19,120/-. In these facts, the AO had disputed the eligibility of claim of deduction under s.54B of the Act in the earlier year on the ground that the assessee had sold the land parcels at Sachana (new asset) without holding it for three years from the date of purchase in violation of the conditions of Section 54B of the Act. The AO thus brought to tax whole of sale consideration Rs.1,73,19,120/- in A.Y. 2010-11 in question being the year of sale of new asset.

9.2 In the factual backdrop noted above, the CIT(A) on the basis of documentary evidences, agreed with the plea of the assessee that new asset i.e. land parcel at Sachana (new asset) being a rural agricultural land is not a capital asset as per provision of Section 2(14)(iii) r.w.s. 45B of the Act and consequently, no chargeability arises in the hands of the assessee on sale of such new asset being rural agricultural land.

9.3 The assessee has reiterated and demonstrated with documentary evidences before us that the land parcels at Sarkhej as well as Sachana (new asset) were used for agricultural purposes. It was further demonstrated that the agricultural land situated at Village Sachana is about 15 km away for Viramgam Taluka Panchayat and 40 kms away from Ahmedabad Municipal Corporation limits. Coupled with this, the population of Sachana Village located at Viramgam Taluka is 3844 as per Census 2011. The extract of google map showing the distance of Sachana village from Viramgam Taluka Panchayat and Ahmedabad Municipal Corporation was also placed on record. The assessee has also pointed out on facts that the land was used for agriculture of crops, namely, Bajri and Jowar etc. The factual matrix demonstrated by the assessee could not be successfully rebutted on behalf of the Revenue.

9.4 Having regard to the aforesaid facts, the CIT(A), in our view, has rightly concluded that the agricultural land parcels being situated in the rural area is outside the purview of expression ‘capital asset’ defined in Section 2(14) of the Act. Consequently, the rural agricultural land in question not being a capital asset is not susceptible to tax under s.45 r.w.s. 48 of the Act. The capital gains arising on sale of rural agricultural land (new asset) is thus outside the purview of taxation at the threshold. We thus see no error in the conclusion drawn by the CIT(A) in favour of the assessee. Consequently, we decline to interfere with the first appellate order.

10. In the result, appeal filed by the Revenue is dismissed.

11. The cross objection filed by the assessee merely supports the action of the CIT(A) and therefore does not call for separate adjudication. Consequently, the cross objection is also dismissed as infructuous in terms of observations in the substantive appeal of the Revenue.

12. In the result, appeal of the Revenue as well as cross objection of the assessee are dismissed.

This Order pronounced on 24/11/2021