Agricultural Land Cannot Be Treated as Capital Asset Due to Subsequent Commercial Use by Purchaser: ITAT Hyderabad

Madhavi Farms Private Limited Vs ITO (ITAT Hyderabad)

The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) allowed the assessee’s appeal and held that agricultural land situated beyond the prescribed municipal limits cannot be treated as a “capital asset” under Section 2(14)(iii)(b) of the Income Tax Act merely because the purchaser subsequently used or intended to use the land for commercial purposes.

The dispute related to the sale of agricultural land measuring 15 acres 28 guntas situated in Jainapally Village, Bibinagar Mandal, Nalgonda District, during AY 2017-18. The assessee contended that the land was rural agricultural land located beyond 8 kilometres from the nearest municipality, Bhongir Municipality, and therefore excluded from the definition of “capital asset.” The Assessing Officer nevertheless assessed the gains as taxable long-term capital gains under Section 45 on the ground that the assessee failed to prove actual agricultural operations and agricultural income from the land.

The Tribunal noted that the Assessing Officer’s own findings recorded that the land was situated at an aerial distance of 8.56 kilometres from Bhongir Municipality and that local enquiries with the Sarpanch confirmed that crops such as kandi, jowar and grass were cultivated on the land. The Assessing Officer had also accepted that the land was rural agricultural land in local records. However, the addition was made because the assessee allegedly failed to substantiate agricultural activities with documentary evidence.

The Tribunal observed that for the purposes of Section 2(14)(iii), the relevant considerations are whether the land is agricultural land as per revenue records and whether it is situated beyond the prescribed municipal distance. Actual agricultural use is not a mandatory condition once the land is classified as agricultural land and remains unconverted for non-agricultural use. The Tribunal further noted that the assessee had declared agricultural income in earlier assessment years, which had not been disputed by the Department.

The Revenue argued that the buyer intended to convert the land into plots and subsequently sold portions of the land, indicating commercial intent. Rejecting this contention, the Tribunal held that future or subsequent commercial use by the purchaser cannot alter the character of the land in the hands of the seller. The Tribunal stated that speculation regarding future use cannot justify reclassification of agricultural land as non-agricultural land where no competent authority had converted the land for non-agricultural purposes.

The Tribunal relied upon several judicial precedents, including decisions of the Bombay High Court and Madras High Court, which held that agricultural land recorded in revenue records does not lose its character merely because no substantial agricultural income is shown or because surrounding lands are commercially developed. It was also held that subsequent permission obtained by purchasers for non-agricultural use cannot retrospectively change the character of the land at the time of sale by the assessee.

After examining the facts and precedents, the Tribunal concluded that the land in question was agricultural land situated beyond 8 kilometres from the municipal limits and therefore fell within the exclusion clause of Section 2(14)(iii)(b). Consequently, the land could not be treated as a capital asset and the gains arising from its transfer were not chargeable to capital gains tax. The addition made by the Assessing Officer was deleted and the appeal of the assessee was allowed.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

This appeal by the assessee is directed against the Order dated 16.09.2025 of the learned CIT(A)-National Faceless Appeal Centre [in short “NFAC], Delhi, for the assessment year 2017-2018.

2. The assessee has raised the following grounds of appeal:

1. The order of the Commissioner of Income Tax (Appeals)- National Faceless Appeal Centre (‘the Ld. CIT(A)’) in confirming the addition of Rs 1,37,61,115 being gain on sale of agricultural land as capital gain chargeable to tax under section 45 of the Income Tax Act 1961 (‘the Act’) is unsustainable both in law and on facts.

2. The Ld. CIT(A) failed to appreciate and note that the Assessing Officer himself in the assessment order at Para 5.5, Page 3 recorded that on causing local enquiries with Sri. Bala Mallesh, Sarpanch of Jainapally Gram Panchayat office, it was gathered that the land was said to be rural agricultural land and crops like kandi, Jowar and grass were cultivated in the said land. The nearest municipality to the Jainapally Village is Bhongir Town and the aerial distance from the land to the municipal limits of the Bhongir town is about 8.56Kms. Further population of the Bhongir Municipality is 53,339 as per 2011 census. Therefore, to hold the agricultural land as capital asset under section 2(14) of the Act and stating that the assessee could not prove with documentary evidence that impugned land was used for cultivation and agricultural purpose is unsustainable both in law and on facts.

3. The Ld. CIT(A) failed to note that the land is situated in Jainapally Village which falls in Gram Panchayat, Bibinagar Mandal, Nalgonda District. The nearest municipality is Bhongir town and the aerial distance from Jainapaily Village to the Bhongir Municipality is more than 8kms. Therefore, to hold at Para 10 of the order that the agricultural land is situated in the Bhongir Municipality having 53,339 population and the appellant is not fulling the conditions laid in section 2(14)(iii) (b) of the Act is devoid of merit and to be quashed.

4. The order of the Ld. CIT(A) in holding that the assessee company has not filed any documentary evidence to prove that the agricultural land is not a capital asset is contrary to facts and record when the Department investigation clearly establishes that the land is a agricultural land.

5. The Appellant craves to add, modify, or amend the above grounds anytime during the course of appeal.”

3. The solitary issue arises for our consideration and adjudication is whether the land in question transferred by the assessee falls in the exclusion clause of ‘capital asset’ as per the provisions of sec.2(14)(iii)(b) of the Income Tax Act [in short “the Act”], 1961.

4. The learned Authorised Representative of the Assessee has submitted that the Assessing Officer has conducted an enquiry regarding the nature of the land sold/ transferred by the assessee during the year under consideration and found that the land in question is a rural agricultural land and situated beyond the 8.56 KM from nearest municipality limits. However, the Assessing Officer has assessed the long-term capital gains by treating the land as ‘capital asset’ on the ground that the agricultural activities carried out in the land has not been proved and the claim of such activity and agricultural income has not been substantiated with proof by the assessee as the majority of the land is open dry land. Thus, the learned Authorised Representative of the Assessee has submitted that despite the fact that the land is a rural agricultural land and situated beyond 8 KM from the nearest municipality/local authority, the Assessing Officer has made the addition for want of proof of carrying out the agricultural activities on this land which is contradictory finding of the Assessing Officer. He has referred to the relevant record and submitted that the revenue record shows the land in question is agricultural land and even the sale document also describes the land in question as agricultural land. Therefore, once the land is an agricultural land as per the revenue record an also situated beyond 8 KM from the nearest municipality limits then, the same cannot be treated as ‘capital asset’ as per sec.2(14) of the Act for want of proof of carrying out the agricultural activity. The learned Authorised Representative of the Assessee has also referred to the return of income for the assessment years 2015-2016 as well as 2016-2017 and submitted that the assessee has declared agricultural income in the preceding years which is not disputed by the Assessing Officer and therefore, this objection of the Assessing Officer is also contrary to the record. In support of his contention, he has relied upon the following decisions:

4.1. Thus the learned Authorised Representative of the Assessee has submitted that once the land is found to be an agricultural land and situated beyond 8 KM from the municipal limits then, the same cannot be held as ‘capital asset’ and consequently, the income arising from transfer of the said land cannot be assessed to tax.

5. On the other hand, the learned DR has submitted that the assessee failed to prove that the land is used for agricultural purposes and therefore, this land in question cannot be treated as agricultural land for taking the benefit of sec.2(14)(iii)(b) of the Act. He has further submitted that the assessee has sold the land in question through agreement to sell with Power of Attorney which shows that the buyer of the land is going to further sell the land after converting into plots. Therefore, the Assessing Officer has rightly treated the land in question as non-agricultural land and assessed the same to capital gain tax. He has relied upon the Orders of the authorities below.

6. We have considered the rival submissions as well as relevant material on record. During the year under consideration, the assessee has sold agricultural land measuring 15 acres 28 guntas situated in Sy.No.236E, 256, 257 and 238 of Jainapally (v), Bibinagar (M), Nalgonda District. The assessee has claimed that the land is an agricultural land and situated beyond 8 KM from the nearest Bhongir Municipality and therefore, the same does not fall in the definition of “capital asset” as per sec.2(14) of the Act. The Assessing Officer has conducted an enquiry by calling the information as well as through Income Tax Inspector and given its finding in Para nos.5.1 to 5.5 as under:

“5.1. During the course of assessment proceedings, the assessee was asked to furnish the details of agricultural land the same were furnished. Prior to and also during the course of the assessment proceedings, AQ gathered the information about the land and caused enquiries through Inspector of Income tax of this office and it is gathered that the matter of agricultural activity as being carried out in the land though in some areas grass is being cultivated and custard apple trees are grown in the land has not been proven & no proof of such activity, and agricultural income as having been derived is proven, as for proof not been submitted by the assessee. The enquiry of the ITI showed only majorly open dryland. The nearest municipality to the Jainapally village is Bhongir Town and the aerial distrance from the land to the muncipal lijits of the Bhongir Town is about 8.56 kms. Further enquiries reveals that the population of the Bhongir Municipality is 53,339 as per the 2011 census.

5.2. Further as per the statement of encumbrance downloaded from the internet for this property from Govt. of Telangana Registration & Stamps Department website the assessee has by document no 8541/2016 dated. 01.06.2016 sold the piece of land as per Sub-Registrar Yadagingutta data. The same encumbrance form shown transfer of the sold property, to other persons on 26.10.2016 (9122/2016), 26/10/2016 (9123/2016), 26. 102016 (9124/2016) hardly 4 months from date of sale and continued to be sold in that fashion in 2017,2018,2019. This appears to be in the line adventure in the nature of trade which shows that the Property was not meant to be for agriculture use as seen from the photographes taken in the site & the transfers of land as shown above.

5.3. Upon verifying from the website of HMDA the village in which the ‘Agricultural Land’ is shown & as sub such as per document no.8541/2016 dt.01.06.2016, the village being Jainapally village in the Bibinagar Mandal, Nalgonda District very clearly failing in the jurisdiction and limits of HMDA being listed at number 740 under Bibinagar Mandal & Nalgonda District of the said list in HMDA covered area.

5.4 Clearly the discussions of 5.1 to 5.3 prove that the property is a capital asset under Section 2(14) of the LT Act. 1961 as defined therein and not exempted as so claimed by the assessee of being agricultural land. The transfer of the asset clearly attract the provisions of the Chapter-IV E Capital Gains for the purpose section 45 of the income Tax Act.1961. Therefore the Long Term Capital Gain on the transfer of capital Asset is assessed as shown hereunder:

5.5. On causing from the local enquiries with Sri Bala Mallesh, Sarpanch of Jainapally Gram Panchayat Office, the above land was said to be rural agricultural land crops like kandi, Jowar and grass were used to cultivate in the above land. The nearest municipality to the Jainapally village is Bhongir Town and the aerial distance from the land to the municipal limits of the Bhongir tow is about 8.56 kms. Further enquiries reveals that the population of the Bhnogir Municipality is 53,339 as per the 2011 census.”

5.2. Thus, the Assessing Officer has accepted that the land in question is a rural land and situated at a distance of 8.56 KM from municipal limits of Bhongir town. He has also stated that on causing local enquiries with Sri Bala Mallesh, Sarpanch of Jainapally Gram Panchayat Office, the above land was said to be rural agricultural land and crops like kandi, Jowar and grass were used to be cultivated in the above land. Despite all these facts, the Assessing Officer has assessed the income arising from the sale of the land in question to capital gain tax. The only reason recorded by the Assessing Officer for assessing the capital gain to tax in Para no.5.1 of the Order is that the assessee has not proved that the land was used for agricultural purposes and also not produced the proof of agricultural income. Though for the purpose of sec.2(14)(iii) of the Act what is to be considered is whether the land is an agricultural land and situated beyond the prescribed distance from the municipal limits so as to fall in the exclusion clause of ‘capital asset’. The actual use of land for agricultural purpose is not a condition under the said Clause once the land as per the revenue record is an agricultural land and the same is situated beyond 8 KM from the municipal limits. Further, the reasons given by the Assessing Officer are also contrary to its own factual finding recorded in Para no.5.5 that as per local enquiries from the Sarpanch of the Gram Panchayat the above land was said to be rural agricultural land, and crops were also cultivated in the said land. It is manifested from record that for the assessment years 2015-2016 and 2016-2017, the assessee in the return of income has declared agricultural income which is also not in dispute as the assessee has filed the copy of the return of income and computation of total income placed at Page nos.50 to 53 and 46 and 47 of the paper book, respectively. Therefore, once the assessee has declared agricultural income from the land in question which is not disputed by the Department and particularly by the Assessing Officer in the preceding assessment years then, the objections raised by the Assessing Officer that assessee failed to prove the agricultural activities from the land as well as proof of agricultural income, are contrary to the facts and record. Therefore, once the land is an agricultural land as per the revenue record and has not been converted to non­agricultural use by the Competent Authority by Notification, then the speculation about the future use of the land cannot be a ground for re-classification of the land from agriculture to non-agriculture. The Hon’ble Bombay High Court in the case of CIT, Panaji-Goa vs. Smt. Debbie Alemao (supra), has considered an identical issue in Para no.5 as under:

“5. Under section 260A of the Income-tax Act, it is not open to the High Court to interfere in the finding of the fact. The finding of fact that could be interfered only if it was arrived at by application of wrong principles of law or was perverse, Le, to say that no prudent man versed in law would come to the said finding. In our view, the finding is neither perverse nor is it arrived at by wrong application of any principle of law and it is not open for us to interfere in the possible finding of fact in an appeal under section 260A of the Income-tax Act. The Assessing Officer has noted that the said land was entered in the revenue record as an agricultural land, ie, garden or orchard. The ITAT also held that the land was recorded in the revenue records as an agricultural land. This is not disputed by the revenue. It is however contended that the land was not actually used for agriculture inasmuch as no agricultural income was derived from this land and was not shown by the respondents in their Income-tax return. This was explained by the respondents by saying that there were coconut trees in the land but the agricultural income derived by sale of the coconuts was just enough to maintain the land and there was no actual surplus. Hence, no agricultural income was shown from this land. In our opinion, if an agricultural operation does not result in generation of surplus that cannot be a ground to say that the land was not used for the agricultural purpose. It is not disputed that the land was shown in the revenue record to be used for agricultural purpose and no permission was ever obtained for non-agricultural use by the respondents. Section 30 of the Goa, Daman and Diu Land Revenue Code, 1968 provides that no land used for agriculture shall be used for any non-agricultural purpose and no land assessed for one non-agricultural purpose shall be used for any other non-agricultural purpose except with the permission of the Collector. Section 32 of the Goa, Daman and Diu Land Revenue Code prescribes the procedure for conversion of use of land from one purpose to another including conversion from agricultural purpose to non-agricultural purpose. The permission for non­agricultural use was obtained for the first time by the Varca. Holiday Beach Resort Private Limited the purchaser after it purchased the land. Thus, the finding recorded by the two authorities below that the land was used for the purpose of agriculture is based on appreciation of evidence and by application of correct principles of law. The Tribunal has relied upon two unreported decisions of this Court in CIT v. Minguel Chandra Pais/Smt. Maria Leila Tovar Furtado [2006] 282 ITR 6181 which involved identical issue. In those appeals, this Court has upheld the order of the Tribunal holding that the land was agricultural land and its sale did not invite the payment of capital gain. It is not disputed before us that the facts of the said cases were similar to the facts of the present case. We are bound by the decision in those cases.”

5.3. Thus, the Hon’ble Bombay High Court has held that even the permission for non-agricultural use was obtained by the buyer of the agricultural land after it was purchased cannot change the character of the land in the hand of the assessee/seller. Similarly, in the case of Mrs. Sakunthala Vedachalam vs. ACIT, Business Circle-XIV, Chennai (supra), the Hon’ble Madras High Court has held in Para nos.10 to 18 as under:

“10. It is on record that in a report has been submitted by the revenue authorities, it is admitted that the lands are classified as agricultural lands in the revenue records and they are dry lands. The remand report of the Assessing Officer in this regard reads as follows:

“During the time of assessment proceedings itself, a confirmation was obtained from the Headquarters Deputy Tahsildar, Thirukazhukundram who has certified in his letter dated 23.12.2010, referred to at 2 above, that in the lands in question casuarinas are grown for the pas one and a half year and hence the same are agricultural lands. He has also confirmed in the said letter that the lands are situated at one kilometer distance from the Town Panchayat of Mamallapuram (Le. within the specified distance from the outer limits of the nearest municipality/town panchayat) and the population of the Mamallapuram Town Panchayat as per 2001 census was 12,345″.

11. The assessee has also produced a copy of the adangal and the letter from the Tahsildar, which showed that the lands were agricultural in nature and the Revenue has also accepted that the lands are falling within the restricted zone in terms of Section 2(14) of the Income Tax Act.

12. Hence, the only point that has to be considered is that whether the test as laid down in the decision reported in Siddharth J. Desai (supra) has been satisfied by the assessees. In the said decision, in paragraph 11, it is held as follows:

“On a conspectus of these cases, several factors are discernible which were considered as relevant and which were weighed against each other while determining the true nature and character of the land. It maybe useful to extract from those decisions some of the major factors which were considered as having a bearing on the determination of the question. Those factors are:

(1) Whether the land was classified in the revenue records as agricultural and whether it was subject to the payment of land revenue?

(2) Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time?

(3) Whether such user of the land was for a long period or whether it was of a temporary character or by way of a stop-gap arrangement?

(4) Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land?

(5) Whether, the permission under 65 of the Bombay Land Revenue Code was obtained for the non-agricultural use of the land? If so, when and, by whom (the vendor or the vendee)? Whether such permission was in respect of the whole or a portion of the land? If the permission was in respect of a portion of the land and if it was obtained in the past, what was the nature of the user of the said portion of the land on the material date?

(6) Whether the land, on the relevant date, had ceased to be put to agricultural use? If so, whether it was put to an alternative use? Whether such cesser and/or alternative user was of a permanent, or temporary nature?

(7) Whether the land, though entered in revenue records, had never been actually used for agriculture, that is, it had never been ploughed or tilled? Whether the owner meant or intended to use it for agricultural purposes?

(8) Whether the land was situate in a developed area? Whether its physical characteristics, surrounding situation and use of the lands in the adjoining area were such as would indicate that the land was agricultural?

(9) Whether the land itself was developed by plotting and providing roads and other facilities?

(10) Whether there were any previous sales of portions of the land for non-agricultural use?

(11) Whether permission under s. 63 of the Bombay Tenancy and Agricultural Lands Act, 1948, was obtained because the sale or intended sale was in favour of a non-agriculturist? If so, whether the sale oriented sale to such non-agriculturist was for non-agricultural or agricultural user?

(12) Whether the land was sold on yardage or on acreage basis?

(13) Whether an agriculturist would purchase the land for agricultural purposes at the price at which the land was sold and whether the owner would have ever sold the land valuing it as a property yielding agricultural produce on the basis of its yield?

At the risk of repetition, we may mention that not all of these factors would be present or absent in any case and that in each case one or more of those factors may make appearance and that the ultimate decision will have to be reached on a balanced consideration of the totality of circumstances.“

13. According to the Tribunal that if the above tests are applied, the assessees could not satisfy any of the conditions except condition Nos. 1.5.11 and 12. The Tribunal held that the assessees could not prove that the lands was actually or ordinarily used for agricultural purposes. This reasoning does not appear to be correct in view of the above-said decision of the Gujarat High Court, wherein it was clearly held in Clause (1) in paragraph 11 that whether the land was classified in the revenue records as agricultural land and whether it was subject to the payment of land revenue has to be considered for grant of exemption.

14. Thus it is evident from the above, which clearly states that any one of the above factors can be present in a case to qualify for the benefit of classification as agricultural lands. In this case, the assessees have qualified under clause 11(1) since as per the adangal records, these lands were classified as agricultural lands and the assessees have also paid revenue kist, namely, revenue payment. Therefore, the Tribunal has misconstrued the judgment of the Gujarat High Court (supra) that all conditions laid down in paragraph 11 should be satisfied, which is not a correct interpretation.

15. To get exemption, the assessee has to satisfy the conditions laid down in Section 2(14) of the Income Tax Act, which reads as follows:

2(14) “capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-

i. any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession:

ii. personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him:

Explanation. For the purposes of this sub-clause, “jewellery” includes –

a. ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel:

b. precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;

(iii) agricultural land in India, not being land situate –

a. in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or

b. in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;

iv. 6® per cent. Gold Bonds, 1977, or 7 per cent. Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;

v. Special Bearer Bonds, 1991, issued by the Central Government:

vi. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government.”

16. Once the Tribunal has accepted that the classification of lands as per the reveue records are agricultural lands, which are evidenced by the adangal and the letter of the Tahsildar and satisfies other conditions of Section 2(14) of the Income Tax Act, we are of the view that the Tribunal has misdirected itself as stated above.

17. Yet other reason given by the Tribunal is that the adjacent lands are put to commercial use by way of plots and therefore, the very character of the lands of the assssees is doubted as agricultural in nature. The manner in which the adjacent lands are used by the owner therein is not a ground for the Tribunal to come to a conclusion that the assessees’ lands are not agricultural in nature. The reason given by the Tribunal that the adjacent lands have been divided into plots for sale would not mean that the lands sold by the assessees were for the purpose of development of plots. Also the reasoning given by the Tribunal “No agriculturists would have purchased the land sold by the assessee for pursuing any agricultural activity” is based on mere conjectures and surmises.

18. The plea of the learned standing counsel appearing for the Revenue that there was no agricultural operations 9 prior to the date of sale is of no avail as the definition under Section 2(14) of the Income Tax Act has the answer to such a plea raised. Further more, it is also on record that the lands are agricultural lands classified as dry lands, for which kist has been paid.”

5.4. Therefore, in case no agricultural activities are carried out on a land which is classified as dry land that will not change the nature of the land from agricultural land to non-agricultural land. This view has been reiterated by the Hon’ble High Courts in series of decisions relied upon by the assessee cited (supra). Accordingly, in the facts and circumstances of the case, we are of the considered view that once the land as per the revenue record is an agricultural land and situated beyond 8 KM from the municipal limits then, the same cannot be held as capital asset for the purpose of assessing the capital gain tax on transfer of the same. Hence, the addition made by the Assessing Officer is deleted.

6. In the result, appeal of the Assessee is allowed.

Order pronounced in the open Court on 23.04.2026.