Agricultural Land Taxable as Capital Asset as It Fell Within Statutory Distance from Municipality

Narayanan Sundaramahalingam Rajkumar Vs ACIT (ITAT Chennai)

ITAT: Agricultural land falls within the ambit of a capital asset under section 2(14)(iii) upon fulfilment of the prescribed population and distance criteria

The ITAT Chennai partly allowed the assessee’s appeal concerning taxation of gains arising from the sale of agricultural land and alleged undisclosed cash consideration. The Tribunal held that agricultural land situated within the prescribed distance from a municipality having the requisite population falls within the definition of a capital asset under section 2(14)(iii)(b), irrespective of its classification in revenue records or agricultural use. Accordingly, the gains were taxable as capital gains. On the issue of alleged on-money, the Tribunal held that only the cash consideration of ₹84.60 lakh, which was ultimately admitted by the assessee during assessment proceedings, could be added as part of the sale consideration. It ruled that the balance addition of ₹3.87 crore could not be sustained solely on the basis of search statements and third-party electronic records without independent corroborative evidence. The Tribunal also directed the Assessing Officer to allow 70% of the indexed cost claimed while recomputing capital gains, sustaining a 30% disallowance.

Facts

• The assessee, is an individual carrying on business as the proprietor of M/s. Guru Builders, engaged in the business of construction and development of residential flats. For the impugned assessment year, the assessee filed his original return of income on 30.09.2015 declaring a total income of Rs.70,41,740/-.
• Subsequently, a search and seizure operation u/s.132 of the Act was conducted on 27.11.2019 in the cases belonging to the group of M/s. Asvini Fisheries Pvt. Ltd. (“AFPL”). During the course of such search proceedings, the Investigation Wing unearthed certain transactions relating to acquisition of lands by M/s. Prathishri Properties Pvt. Ltd., a group concern of AFPL. The investigation revealed that the assessee had sold lands situated at Madambakkam Village, Tambaram Taluk, during the financial year 2014-15 to M/s. Prathishri Properties Pvt. Ltd. It was further alleged that consideration in excess of the value disclosed in the registered sale deed had been paid to the assessee in cash. Consequently, the residential premises of the assessee were also subjected to search u/s.132 of the Act.
• During the course of search and post-search investigations, the Department found and seized various documents, loose sheets and property related records. According to the Revenue, such materials evidenced payment of substantial cash consideration over and above the registered value reflected in the conveyance documents executed in favour of M/s. Prathishri Properties Pvt. Ltd.
• The record reveals that the assessee had transferred land admeasuring approximately 1.41 acres situated at Madambakkam Village. The sale transaction was evidenced by registered Sale Deed bearing Document No.1357/2015 dated 09.02.2015. As per the registered document, the assessee sold the land comprised in Survey Nos.77/2, 88/1B, 86/2B2 and 92/1 for a consideration of Rs.1,26,90,000/-, which was also stated to be the market value adopted for registration purposes.
• The Revenue relied heavily upon the statement recorded u/s.132(4) of the Act from Shri K. Sreejith, Managing Director of M/s.Lotus Castle Pvt. Ltd., a company stated to have acted as land aggregator for M/s. Prathishri Properties Pvt. Ltd. During the search conducted in the cases of Lotus Group on 29.01.2019, Shri K.Sreejith allegedly admitted that an amount of Rs.4,72,35,000/- had been paid in cash to the assessee over and above the registered consideration for acquisition of the aforesaid land. According to him, the agreed rate for acquisition was Rs.4,25,000/- per cent and a substantial portion of the agreed consideration was discharged in cash.
• The assessee was confronted with the aforesaid information during the search conducted at his premises on 27.11.2019. In the statement recorded u/s.132(4) of the Act, the assessee acknowledged that the land at Madambakkam belonged to him and had been sold to M/s.Prathishri Properties Pvt. Ltd. He further stated that while he had received Rs.1,26,90,000/- through demand drafts as reflected in the sale deed, he had also received approximately Rs.4.72 crores in cash. The assessee specifically admitted that the total consideration received by him was around Rs.5.99 crores. The assessee further admitted that the cash component had not been incorporated in his books of account and had never been offered to tax in any assessment year. In response to a specific question, the assessee admitted that the cash component represented his undisclosed income pertaining to Financial Year 2014-15.
• Consequent to the search, the case of the assessee was centralized. Thereafter, proceedings u/s.153C of the Act were initiated against the assessee. Notice u/s.153C of the Act dated 17.02.2021 was issued calling upon the assessee to furnish a return of income for A.Y. 2015-16. In response thereto, the assessee filed his return of income on 28.02.2021 declaring the same total income of Rs.70,41,740/- as originally returned.
• Subsequently, notice u/s.143(2) of the Act dated 13.03.2021 and notice u/s.142(1) of the Act dated 15.04.2021 were issued. The assessee, furnished details and explanations from time to time. During the course of assessment proceedings, the AO observed that despite the categorical admission made by the assessee during the search proceedings, the additional cash consideration had not been offered for taxation in the return filed pursuant to notice issued u/s.153C of the Act.
• Accordingly, the AO issued a show-cause notice proposing to bring to tax the sum of Rs.4,72,00,000/- received in cash over and above the registered consideration. In response, the assessee submitted that the land transferred was agricultural land and that exemption had been claimed in respect thereof. It was contended that since the assessee was under the bona fide belief that the land was not a capital asset, the additional consideration was also not offered to tax. The assessee requested that the amount should not be assessed as income from other sources u/s.56(2)(vii)(a) of the Act.
• The AO examined the nature and location of the land and found that the land was situated within an aerial distance of 4.45 kilometres from the limits of Tambaram Municipality. The AO further noted that the population of Tambaram Municipality as per Census 2011 was 1,64,830. Relying upon the provisions of section 2(14)(iii) of the Act, the AO concluded that although the land was agricultural in nature, it constituted an urban agricultural land falling within the definition of “capital asset”. Consequently, the exemption claimed by the assessee on the footing that the land was not a capital asset was proposed to be denied.
• During the course of assessment proceedings, the assessee sought copies of the seized documents and the statement recorded from Shri K.Sreejith. The AO furnished the same. Thereafter, the assessee requested that an opportunity be granted to cross-examine Shri K.Sreejith. Accepting the request, the AO arranged for cross-examination on 10.08.2021.
• In the course of cross-examination, Shri K.Sreejith reiterated his earlier statement and maintained that cash consideration of Rs.4,72,35,000/- had been paid to the assessee in connection with the purchase of 1.41 acres of land at Madambakkam. He affirmed that the agreed rate was Rs.4,25,000/- per cent and that the registered consideration represented only a part of the actual consideration agreed between the parties. The assessee, however, disputed the quantum and contended that he had received only Rs.84,60,000/- in cash in addition to the documented consideration of Rs.1,26,90,000/-.
• Following the cross-examination, the assessee furnished a revised computation of income wherein he admitted receipt of cash consideration of Rs.84.60 lakhs but continued to claim exemption on the ground that the land was agricultural land not falling within the ambit of a capital asset. It was also argued that any additional consideration received was intrinsically connected with the transfer of land and therefore could not be assessed separately under the head “Income from Other Sources”.
• The AO accepted the latter contention and held that the additional amount received by the assessee represented consideration for transfer of land and therefore formed part of the full value of consideration for the purposes of computation of capital gains. Consequently, the proposal to assess the amount u/s.56(2)(vii)(a) of the Act was dropped.
• However, the AO rejected the assessee’s contention regarding the quantum of on-money received. The AO observed that the assessee had unequivocally admitted receipt of approximately Rs.4.72 crores in his statement recorded u/s.132(4) of the Act on the date of search. Further, during post-search proceedings before the Investigation Wing, the assessee had again referred to receipt of Rs.4,72,35,000/- and had even prepared a cash book reflecting receipt of such amount in February 2015 while explaining the source of cash found during the search. The AO noted that the assessee had not disputed the quantum in his earlier replies and that the plea of receipt of only Rs.84.60 lakhs had been raised for the first time much later during the assessment proceedings.
• The AO further observed that despite being afforded an opportunity of cross-examination, the assessee had failed to discredit the testimony of Shri K.Sreejith. It was also noted that although the assessee claimed to have negotiated the transaction through one Shri Bala and one Shri Sivaramakrishnan, neither of them was produced before the Department to substantiate the assessee’s version. The valuation report subsequently produced by the assessee estimating the value of the land at Rs.2.04 crores was also rejected by the AO as a self-serving document incapable of displacing the categorical admissions and corroborative evidence available on record.
• Based on the foregoing, the AO held that the retraction attempted by the assessee was belated, unsupported by evidence and merely an afterthought. Accordingly, the entire amount of Rs.4,72,35,000/- was treated as additional sale consideration and included in the full value of consideration for computing long-term capital gains arising from transfer of the Madambakkam property.
• The AO also examined the deductions claimed by the assessee towards indexed cost of acquisition and indexed cost of improvement/development. In respect of the Madambakkam land, while evidence regarding cost of acquisition was furnished, no satisfactory evidence was produced in support of the indexed cost of development amounting to Rs.68,70,154/-. The assessee was unable to establish either the nature of the development activities allegedly undertaken or the expenditure incurred thereon. Consequently, the claim of indexed cost of development was disallowed.
• Similarly, in respect of capital gains arising from sale of lands situated at Athur, the assessee claimed indexed cost of development amounting to Rs.21,19,754/-. Although a year-wise break-up of expenditure was furnished, no supporting vouchers, bills or documentary evidence substantiating the expenditure were produced. In the absence of adequate supporting evidence, the AO disallowed 30% of the indexed cost of development amounting to Rs.6,35,926/- while computing long-term capital gains from the Athur land transaction.
• The assessment was ultimately completed by treating the land at Madambakkam as a capital asset within the meaning of section 2(14) of the Act, by including the alleged on-money consideration of Rs.4,72,35,000/- in the full value of consideration for computation of long-term capital gains, and by making consequential disallowances in respect of the indexed cost of development claimed by the assessee. Thus, the impugned assessment was completed u/s.153C of the Act on 21.09.2021 determining the total income of the assessee at Rs.6,56,09,211/-.
• Aggrieved of the above assessment order, the assessee carried the matter in appeal before the Ld.CIT(A), who vide the impugned appellate order dated 16.12.2024 dismissed the appeal of the assessee.

Issues:

• Whether the land sold by the assessee constituted an agricultural land excluded from the definition of a capital asset under section 2(14)(iii) of the Act.
• Whether the addition towards alleged cash consideration of Rs. 4,72,35,000 received over and above the registered sale consideration was justified.
• Whether the disallowance of indexed development expenditure of Rs. 68,70,154 claimed while computing long-term capital gains was justified.

Observations:

• The Tribunal first dealt with the assessee’s contention that the land situated at Madambakkam Village was agricultural land and, therefore, outside the ambit of section 2(14) of the Act. The assessee relied upon revenue records such as Chitta, Adangal and Patta showing the land as Nanjai land and contended that agricultural operations were actually carried on thereon.
• The Tribunal observed that the decisive question was not whether the land was classified as agricultural land in the revenue records or whether agricultural activities were carried on. The real issue was whether such agricultural land satisfied the statutory conditions prescribed under section 2(14)(iii). The statutory scheme makes it clear that once agricultural land is situated within the prescribed distance from a municipality having the requisite population, it loses the exclusion provided under section 2(14)(iii) and assumes the character of a capital asset for the purposes of the Act.
• The Tribunal noted that the Assessing Officer had independently verified that the impugned land was situated at an aerial distance of approximately 4.45 kilometres from the limits of Tambaram Municipality and that the population of the Municipality as per Census 2011 was 1,64,830. The Commissioner (Appeals), instead of merely affirming these findings, independently examined the geographical location of the property and the municipal limits prevailing during the relevant period. Upon such examination, the Commissioner (Appeals) recorded that the limits of Tambaram Municipality extended up to Selaiyur and that the aerial distance between the assessee’s land and Camp Road, Selaiyur, was only about 3.70 kilometres. It was further observed that the actual municipal boundary would be even nearer.
• The Tribunal further observed that the assessee had failed to produce any survey report, municipal records or any geographical evidence to establish that the land was situated beyond the statutory distance prescribed under section 2(14)(iii)(b). Likewise, the statutory population criterion remained undisputed. Once these two conditions stood established, the inevitable legal consequence was that the land fell within the ambit of a capital asset irrespective of its classification in the revenue records or the agricultural operations allegedly carried on therein.
• The Tribunal also held that the decisions of the Hon’ble Supreme Court relied upon by the assessee regarding the agricultural character of land did not advance his case. Those decisions merely laid down the tests for determining whether land possesses agricultural character. In the present case, however, the controversy was governed by the statutory fiction contained in section 2(14)(iii)(b), which becomes applicable once the land is situated within the prescribed distance from a municipality having the requisite population. Consequently, the Tribunal upheld the findings of the Commissioner (Appeals) and held that the land constituted a capital asset, making the gains arising therefrom chargeable to tax under the head “Capital Gains.”
• Addition towards alleged unaccounted cash consideration
• The Tribunal thereafter considered the principal controversy relating to the alleged receipt of cash consideration of Rs. 4,72,35,000 over and above the registered consideration. It observed that the Revenue had primarily relied upon the statement of Shri K. Sreejith recorded under section 132(4), the Evernote electronic records maintained by Lotus Castle Pvt. Ltd., the assessee’s own statement recorded during the course of search and the proceedings before the Interim Board for Settlement.
• The Tribunal observed that there was no dispute that during the course of search the assessee had admitted receipt of cash consideration over and above the registered sale consideration. It also noted that during the assessment proceedings and cross-examination the assessee clarified that the actual cash received by him was only ₹84.60 lakh and not Rs. 4.72 crore.
• According to the Tribunal, while appreciating such evidence, it was necessary to distinguish between the amount clearly admitted by the assessee and the balance amount sought to be assessed on the basis of third-party materials. Insofar as ₹84.60 lakh was concerned, the Tribunal observed that the assessee himself had unequivocally admitted receipt of the said amount during the assessment proceedings after examining the seized material and after availing the opportunity of cross-examination. The receipt of that amount therefore stood established beyond doubt and rightly formed part of the full value of consideration.
• However, with regard to the balance amount of Rs. 3,87,75,000, the Tribunal found that there was no independent evidence demonstrating its actual receipt by the assessee. Apart from the entries contained in the Evernote records and the original statement recorded during search, the Revenue had failed to establish movement of cash from the purchaser to the assessee. No corresponding withdrawals, investments, acquisition of assets, expenditure pattern or deployment of funds attributable to such huge cash receipts had been brought on record despite extensive investigation carried out over several years.
• The Tribunal observed that the transaction pertained to February 2015 whereas the search was conducted only in November 2019. During this intervening period, the Department had examined several assessment years. If the assessee had in fact received cash consideration of Rs. 4.72 crore, some evidence relating to its investment, utilisation or deployment would ordinarily have surfaced during the course of investigation. The complete absence of such evidence assumed considerable significance while evaluating the correctness of the Revenue’s allegation.
• The Tribunal further observed that although a statement recorded under section 132(4) constitutes an important piece of evidence, it is not conclusive. Its evidentiary value must always be tested in the light of surrounding circumstances and corroborative evidence. Courts have consistently held that substantial additions cannot be sustained solely on the basis of confessional statements where independent supporting evidence is lacking.
• Similarly, the Tribunal observed that the Evernote entries undoubtedly constituted relevant evidence but they were merely records maintained by a third party. Such records could justify further investigation and lend support to the Revenue’s case, but where the assessee disputed the quantum recorded therein, the Revenue was still required to establish by cogent evidence that the amount recorded therein had actually changed hands. In the present case, such corroborative evidence was conspicuously absent.
• The Tribunal also accepted the assessee’s contention that the proceedings before the Interim Board for Settlement in the case of Lotus Castle Pvt. Ltd. could not be treated as substantive evidence against him. Since the assessee was not a party to those proceedings, the findings recorded therein could not automatically bind him and could only serve as background material.
• Considering the entirety of the facts and circumstances, the Tribunal concluded that the Revenue had successfully established receipt of cash consideration only to the extent of ₹84.60 lakh, which stood admitted by the assessee. Insofar as the balance amount of ₹3,87,75,000 was concerned, the evidence fell short of the degree of proof required to sustain the addition. The Tribunal accordingly restricted the addition to ₹84.60 lakh and directed deletion of the balance addition.
• Indexed cost of acquisition/improvement
• The Tribunal finally considered the disallowance of the indexed cost of acquisition and improvement. It observed that although the assessee had failed to substantiate the entire expenditure with complete documentary evidence, it would be wholly unrealistic to presume that no expenditure whatsoever had been incurred towards acquisition, maintenance, improvement and development of the property during the long period of ownership.
• The Tribunal emphasised that the provisions governing computation of capital gains contemplate taxation of real gains and not hypothetical gains. Where expenditure is demonstrably relatable to the asset but precise quantification becomes difficult owing to lapse of time and non-availability of complete records, a reasonable estimate is permissible. The Tribunal also noted that in another land transaction involving the same assessee, the Revenue itself had adopted an estimated disallowance of 30% of similar expenditure. Applying the principle of consistency and considering the totality of the facts, the nature of the asset, the long period of ownership and the probabilities of the case, the Tribunal held that the ends of justice would be served by allowing 70% of the indexed cost claimed by the assessee while sustaining a disallowance of 30%.
• Accordingly, the Tribunal upheld the finding of the Commissioner (Appeals) that the land sold by the assessee constituted a capital asset within the meaning of section 2(14)(iii)(b) of the Act. It further held that the addition towards undisclosed cash consideration should be restricted to Rs. 84.60 lakh and the balance addition of Rs. 3,87,75,000 was liable to be deleted. The Assessing Officer was also directed to allow 70% of the indexed cost claimed by the assessee while recomputing the capital gains. Consequently, the appeal of the assessee was partly allowed.

FAQs

Q.1 Why did the Tribunal treat the agricultural land as a capital asset?