Computation of capital gains tax on sale of agricultural land converted into non-agricultural land

Ilaben Bharatbhai Amin Vs ITO (ITAT Ahmedabad)

Introduction: The case of Ilaben Bharatbhai Amin vs Income Tax Officer (ITO), recently decided by the Income Tax Appellate Tribunal (ITAT) Ahmedabad, delves into the intricacies of calculating capital gains tax arising from the sale of agricultural land that undergoes conversion into non-agricultural land before the sale. The tribunal’s decision sheds light on the determination of the cost of acquisition in such scenarios, providing valuable insights for taxpayers and legal practitioners.

Background: Ilaben Bharatbhai Amin, the appellant, filed an appeal against the order of the Commissioner of Income Tax (CIT) in proceedings under section 250 of the Income Tax Act for the assessment year 2012-13. The appeal contested the assessment order passed by the Assessing Officer under section 143(3) of the Act.

Key Grounds of Appeal:

i. Dispute over the assessment order passed by the Assessing Officer.

ii. Contestation of the valuation adopted by the Assessing Officer on 01.04.1981, and disagreement with the CIT(A)’s affirmation of this valuation.

iii. Rejection of the claimed cost of improvement and contestation of the CIT(A)’s decision to uphold the disallowance.

Summary of Facts: During the relevant assessment year, the appellant sold non-agricultural land for a total sum of Rs. 3,85,71,000. The said property, inherited from the appellant’s late father, was initially agricultural land as of 01.04.1981. However, the conversion into non-agricultural land occurred in the year under consideration, preceding the sale. The appellant, in her return of income, declared the total cost of the property as of 01.04.1981 to be Rs. 38,47,000. The Assessing Officer, dissatisfied with the valuation, referred the matter to the Departmental Valuation Officer (DVO), who assessed the cost of acquisition as of 01.04.1981 at Rs. 1,17,865.

The Assessing Officer rejected the appellant’s valuation, citing the valuer’s lack of approval from the Income Tax Department and the absence of authorization to value agricultural land by the Government of Gujarat. Consequently, the Assessing Officer added Rs. 1,07,23,060 as capital gains tax. The appellant’s claim for the cost of improvement amounting to Rs. 9,00,000 was also rejected.

Adjudication by the CIT(A): The CIT(A) affirmed the Assessing Officer’s decision, emphasizing that the property was agricultural land as of 01.04.1981 and converted to non-agricultural land in the current year. The CIT(A) questioned the reliability of the valuer appointed by the appellant, highlighting the absence of comparative sale instances and the use of a reverse formula to determine the cost of acquisition. The appellant’s reliance on section 55A to contest the reference to the DVO was dismissed by the CIT(A). The disallowance of the claimed cost of improvement was upheld due to the appellant’s failure to provide supporting evidence.

Key Legal Insights:

i. Determination of Cost of Acquisition: The tribunal upheld the principle that in the case of the sale of agricultural land converted into non-agricultural land before the sale, the cost of acquisition for calculating capital gains tax would be the original cost of acquisition by the assessee. The tribunal referred to the decision in Meccano Industries, emphasizing the actual cost of acquisition of the agricultural land to the assessee as the relevant factor for section 48(ii).

ii. Section 55A and Reference to DVO: The tribunal dismissed the appellant’s argument regarding the inapplicability of section 55A, affirming the Assessing Officer’s right to refer the matter to the DVO for valuation. The tribunal highlighted that the valuation was based on data from the sub-registrar and comparative sale instances provided by the DVO.

iii. Cost of Improvement: The tribunal concurred with the CIT(A)’s decision to disallow the claimed cost of improvement, stressing the appellant’s failure to produce supporting evidence for the cost incurred.

Conclusion: The Ilaben Bharatbhai Amin vs ITO case provides valuable legal clarity on the computation of capital gains tax in scenarios involving the sale of agricultural land converted into non-agricultural land. The tribunal’s decision reinforces the significance of the original cost of acquisition for such properties and underscores the need for robust documentation and evidence to substantiate claims, particularly in the context of cost of improvement. Taxpayers and practitioners can draw guidance from this case in navigating similar intricacies in capital gains tax assessments.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax, CIT(A), Gandhinagar, Ahmedabad, in proceeding u/s. 250 vide order dated 30/05/2016 passed for the assessment year 2012-13.

2. The assessee has taken the following grounds of appeal:-

“1. The learned CIT (A) has erred in law and on facts in confirming the assessment order passed by the Assessing Officer u/s. 143(3) of the Act.

2. The Ld. CIT (A) has erred by confirming the valuation adopted by the Ld. Assessing Officer as on 01.04.1981 he further erred by mentioning in the Appellate Order that the value of land adopted by the registered valuer appointed by the appellant is without any basis just because he has not given any comparative sale instances. The Ld. CIT (A) has conveniently misstated the facts of the case of Nellore Straw Brothers relied upon by the appellant stating that the same are different from the case of the appellant. The Ld. CIT (A) further erred by not accepting the plea of reverse indexation method upheld by judicial precedent. Hence the fair market value as ascertained by the registered valuer is prayed for

3. The Ld. CIT (A) has erred in not allowing the cost of improvement as claimed by the appellant. The Ld. CIT (A) has wrongly differentiated the case of ITO v, Anilkumar 56 com 320 with the case of appellant even though it is held that the cost of improvement cannot be declined only for the want of evidence. He disregards the fact that for a property worth Rs.3 cr. Improvement cost of Rs. 9L is a meager amount and should not be denied. Thus the disallowance sustained by the Ld. CIT (A) suffers from legal infirmity. The same may kindly be deleted.

4. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of appeal.”

3. The assessee has taken the following additional grounds:-

“1.1 That both the lower authorities have failed to appreciate that the provision of Sec 55A (a) does not permit AO/DVO to make variance if the value determined by the assessee is higher than FMV of the immovable property proceedings estimated by DVO.

1.2 That in the facts and circumstances of the case, as well as in law, the valuation adopted by AO was illegal, unlawful and without jurisdiction in view of the Sec 55A(a) prior to amendment brought w.e.f. 01.07.2012.”

4. The brief facts of the case are that during the year under consideration, the assessee sold non-agricultural land jointly for a sum of Rs. 3,85,71,000/-. The assessee received a sum of Rs. 1,00,66,666/- as her share in property. The aforesaid property was inherited by the assessee from her late father, who had purchased the property prior 01-04-1981. The land as on 01-04-1981 was an agricultural land and the said land was converted into non-agricultural land only during the impugned year under consideration, prior to the date of sale. The assessee claimed total cost of the property as on 01-04-1981 at Rs. 38,47,000/- in the return of income. During the course of assessment, the Assessing Officer referred the matter to DVO for valuation and the DVO on the basis of data received from sub-registrar, Dehgam, computed the cost of acquisition of the property as on 01-04-198 1 as at Rs. 1,17,865/-. The assessee objected to the above computation of cost of acquisition by the Assessing Officer and submitted that since the sale transaction is prior 01-07-2012, therefore as per provisions of section 55A, the Assessing Officer can refer the matter to DVO only, if the Assessing Officer is of the opinion that the value so claimed is less than the fair market value of such property. Accordingly, the assessee objected to the matter being referred to the DVO. However, the Assessing Officer rejected the valuation report submitted by the assessee for determining the cost of acquisition, on the ground that the valuer of the assessee is not an approved registered valuer by the Income Tax Department and further the valuer is not authorized to value agricultural land by the Government of Gujarat. Accordingly, the Assessing Officer made an addition of Rs. 1,07,23,060/- as capital gain tax in the hands of the assessee. Further, the Assessing Officer also rejected the assessee’s claim of cost of improvement of Rs. 9,00,000/- while computing the long term capital gain.

5. In appeal before ld. CIT(A), he observed that the said land was agricultural land in 01-04-1981 and the said land was converted into non­agricultural land in the current year only. Further, the ld. CIT(A) observed that during the course of appellate proceedings, the assessee produced “registration certificate of valuer” however, the said certificate only gave permission to the valuer for valuation of immovable properties “other than agricultural land”, whereas in the assessee’s case, valuation of land as on 01- 04-198 1 was required to be made for “agricultural land” and not for non­agricultural land. The ld. CIT(A) further observed that the valuer on which reliance was placed by the assessee had estimated the value of the land as on 01-04-1981 @ Rs. 163.20 per square meter without any basis . The valuer had not given any comparative sale instances as given by the DVO. The valuer appointed by the assessee had arrived at value of cost of acquisition of land by adopting reverse formula i.e. by taking base of sale rate in current year and applying inflation index. However, the aforesaid method for valuing the cost of acquisition is not acceptable since the land sold in the current year is after converting such land into non-agricultural land during the current year itself, but the said land was agricultural as on 01-04-198 1 and hence the cost of land as on 01-04-198 1 being agricultural land cannot be determined based on sale of rate of non-agricultural land in the current year. Thus, the ld. CIT(A) of the view that fair value of land adopted by valuer appointed by the assessee is misleading and incorrect and that too without any supporting evidences. Accordingly, the ld. CIT(A) held that firstly, assessee’ s contention that as per the provisions of section 55A as existing prior to 01-07-2012, the Assessing Officer cannot refer to DVO are not acceptable given the facts of the instant case. Secondly, the ld. CIT(A) observed that the DVO has valued as on 01-04-1981 considering the data received from sub-registrar and comparative sale instances given by DVO in support of its computation. Thus, the Assessing Officer was correct in considering the cost of acquisition as adopted by the DVO. Accordingly, the ld. CIT(A) held that the Assessing Officer is correct in applying the cost of acquisition of land as on 01-04-1981 based on DVO’s report. Thirdly, regards assessee’s claim of cost of improvement of Rs. 9,00,000/-, the ld. CIT(A) observed that even during appellate proceedings, the assessee has failed to give any supporting evidences for such cost of improvement. Accordingly, the ld. CIT(A) held that since the assessee has failed to give even basic details of cost of improvement incurred by him, such cost of improvement cannot be allowed without any evidence at all. Further, the ld. CIT(A) also rejected the assessee’s reliance on the case of ITO vs. Anilkumar 56 taxman.com 320, wherein it was held that improvement cost cannot be declined only for want of evidence, since in that case, the ITAT held that since the cost of improvement was only Rs. 1,00,000/- and for such a small amount, the assessee is not required to maintain third party evidences. Accordingly, the aforesaid decision was rendered on its own set of facts and hence was rejected by ld. CIT(A).

Additional Grounds of Appeal:

6. Before us, by way of additional ground of appeal, the assessee again submitted that in view of language of section 55A of the Act reference cannot be made to the DVO. We observe that this issue has been dealt by the ld. CIT(A) in the appellate order wherein similar arguments were made but were rejected by ld. CIT(A) with the following observation:-

“Appellant has objected the above computation by AO and also stated that sale transaction is prior 01/07/2012 and as per provisions of said section AO can refer to DVO only when the value of the asset as claimed by the appellant is in accordance with the estimate made by a registered valuer, if the AO is of opinion that the value so claimed is less than its fair market value.

On careful consideration of entire facts, it is observed that though appellant had sold the land was non agriculture land, said land was agriculture land only on 01/4/1981 and said land became non agriculture land in current year. Though appellant has submitted the valuation report, AO has observed that valuer is not approved registered valuer by the Income Tax department and valuer is not authorised to value agriculture land by Government of Gujarat. During the course of appellate proceedings, appellant has submitted registration certificate of valuer by office of CCIT, Ahmedabad II vide letter dated 03/02/2004. However, this certificate is not produced before the AO during assessment proceedings. Even the said certificate clearly give registration of valuer for immovable properties other than agriculture land whereas in appellant’s case, valuation of land as on 01/04/1981 is required to be made for agriculture land and not for non agriculture land. Even the valuer has estimated the value of land as on 01/4/1991 at Rs.1 63.20 per Square meter without any basis. He has not given any comparative sale instances as provided by DVO. The valuer appointed by appellant has arrived at value of land by adopting reverse formula i.e. by taking base of sale rate in current year and applying inflation indexed . It is observed that land sold in current year is non agriculture land but land was agriculture land as on 01/04/1981, hence, cost of land as on 01/4/1981 being agriculture land cannot be determined based on sale rate of non agriculture land in current year. Thus, fair value of land adopted by valuer appointed by appellant is misleading and incorrect and that too without any supporting evidences. Hence, appellant cannot take stand that as per provisions of section 55A as existed prior to 01/07/2012, AO cannot refer to DVO.

It is further observed that DVO has valued land as on 01/04/1981 considering data received from Sub registrar and comparative sale instances given by DVO in support of its computation. Thus, AO was correct in considering the cost of acquisition as adopted by DVO.”

Accordingly, we find no infirmity in the order of ld. CIT(A) so as to call interference. In the instant case, we are of the considered view that ld. CIT(A) has correctly observed that the report of the registered valuer on which reliance has been placed by the assessee is not reliable for various reasons as elaborated in the order passed by ld. CIT(A). Accordingly, looking into the facts of the case, the ld. CIT(A) has correctly held that in the instant case, the Assessing Officer was correct in referring the matter to the valuation officer to determine the value of such asset. Accordingly, we find no merit in the additional ground raised by the assessee. The additional ground raised by the Assessee is hereby rejected.

7. On merits, we observe that in the return of income, the assessee has taken the value of cost of acquisition, by considering the same to be non­agricultural property at the time of purchase. However, we are of the considered view that there is apparently no justification for considering the cost of acquisition of the aforesaid property as non-agricultural land as on 01-04-1981, when such property was agricultural property as on the date of acquisition and such property had been converted into non-agricultural property only during the impugned year under consideration, prior to sale. Further, the valuation adopted by the assessee has not given any comparative sale instances and has simply arrived at value of cost of acquisition of land by adopting reverse formula i.e. by taking sale rate of non-agricultural property in the current year and applying inflation index. However, we are of the considered view that ld. CIT(A) has correctly observed that the land sold in current year is non-agricultural land but the land was agricultural land as on 01-04-1981 and therefore cost of land as on 01-04-1981 cannot be determined based on sale rate of non-agricultural land for the current year and thereafter applying reverse formula thereon. In our view, the ld. CIT(A) has correctly concluded that fair value of land adopted by the valuer appointed by the assessee is incorrect and that too without any supporting evidences. Further, the decisions relied upon by the assessee have been rendered on their own set of facts and even in our view correctly discussed and distinguished by ld. CIT(A) in the appellate order. In the case of Meccano Industries 14 ITD 151 (Mad.) (TM), the ITAT held that in case of sale of agricultural land, which was not capital asset at time of its acquisition by assessee but was subsequently converted into capital asset by its division into plots prior to sale, cost of acquisition of such capital asset  for working out capital gains would be taken as its original cost of acquisition to assessee and not its market value on date of its conversion into non-agricultural land. The ITAT made the following observations while passing the order:

“The Gujarat High Court’s decision in the case of Ranchhodbhai Bhaijibhai Patel v. CIT [1971] 81 ITR 446 squarely applied to the facts of the instant case. It was held there that the words ‘the capital asset’ in section 48(ii) are identificatory and demonstrative and they are intended to refer to the property which is the subject of levy of charge of capital gains lender section 45. In view of the aforesaid decision, the cost of acquisition of the capital asset for the purpose of section 48(ii) should be the actual cost of acquisition of the agricultural land to the assessee.”

8. In the result, ground no. 2 of assessee’s appeal is dismissed.

Ground No. 3: Cost of Improvement of Rs. 9 lakhs

8. Before us, the ld. counsel for the assessee submitted that he shall not be pressing for ground no. 3 in relation of cost of improvement amounting to 9 lakhs.

9. Accordingly, ground no. 3 of assessee’s appeal is dismissed.

10. In the result, the appeal of the assessee is dismissed.

Order pronounced in the open court on 10-11-2023