Deduction u/s 54B not allowed if land is not used for agriculture for last preceding two years: ITAT

Amartbhai Mandanbhai Desai Vs PCIT (ITAT Ahmedabad)

In the recent ruling ITAT held that deduction u/s 54B would not be applicable in case land was not used for agricultural purposes in two years preceding date of transfer.

Assessee filed return for AY 2017-18 at Rs. 3,26,550/- after claiming deduction under Section 54B on account of capital gain on sale of property, which was accepted. Subsequently, PCIT observed that the assessee had sold agricultural land along with three co-owners and the assessee’s share in the property was 1.73 crores whereas assessee had claimed deduction by way of deposit of Rs. 85 lakhs in the capital gains account and the assessee also claimed to have purchased new agricultural land jointly with two other persons on 09.11.2016 for a consideration of 1.98 crores, wherein the assessee’s share in investment was Rs. 69,93,533/-. PCIT observed that claim of deduction u/s 54B was properly examined by AO as in order to claim deduction u/s 54B, the first condition is that the land which was sold was being used for agricultural purposes for two years immediately preceding the date on which the transfer took place. PCIT observed that assessee sold the land on 26.10.2016, whereas the assessee submitted computation of income for succeeding AYs which is irrelevant. Assessee failed to demonstrate that land was used for agricultural purpose for two years immediately preceding the sale. PCIT observed that no agricultural activity was carried out from the year 2014 till 2018 in both the lands i.e. the agricultural land which was transferred by the assessee and also the land which was purchased by the assessee. PCIT observed that neither the land sold nor the newly purchased land had been used for agricultural purposes by the assessee for the period between 2014 to 2018. Therefore, the claim of deduction u/s 54B was not tenable. PCIT further observed that while making purchase of new land on which deduction u/s 54B was claimed, the assessee made payment of Rs. 8,33,333/- to the original agricultural landowner and made another payment of Rs. 57,66,666/- to the “confirming parties” for relinquishment of their rights in their said agricultural land. Therefore, PCIT was of the view that this amount of Rs.57.66 lakhs had not been spent for purchase of agricultural land but for relinquishment of rights of the “confirming parties” which was held as not liable for deduction u/s 54B. PCIT noted that AO ought to have made necessary enquiries / investigation before allowing the claim of the assessee u/s 54B and absence of such basic investigation rendered the assessment order as being erroneous and prejudicial to the interest of the Revenue.

On appeal before ITAT, assessee submitted that the case of the assessee was opened for limited scrutiny and AO had duly enquired into this aspect. Gujarat High Court has also held that mere conversion of agriculture land into non-agriculture land does not mean that the land was not used for agricultural purposes prior to conversion into non-agricultural land. Assessee has also grown Castor Seeds and Brinjal on this land prior to sale. On the hand revenue submitted that the land was not put to agricultural use prior to sale and the assessee has not been able to demonstrate that the land was used for agricultural purposes prior to this sale. AO failed to enquire that part of the purchase was paid towards obtaining relinquishment right from the “confirming parties”.

After considering the submissions of both sides ITAT observed that that the assessee has not been able to demonstrate that he carrying out agricultural activities prior to sale of land. For claiming deduction u/s 54B, the capital asset should be used for agricultural purposes for two years immediately preceding the date of transfer of such agricultural land. PCIT has clearly brought on record certain anomalies with this aspect which AO omitted to enquire. AO also failed to enquire that whether sum of Rs. 57,66,666/- which had been paid by the assessee towards obtaining relinquishment rights from third parties, was liable to deduction u/s 54B. PCIT also obtained report from the govt. agency whether any agricultural activities were carried out or not. ITAT after relying upon the decision of Ramanbhai Bholidas Patel vs. PCIT [2023] 148 taxmann.com 92 (Ahmedabad – Trib.), held that Section 54B would not be applicable in case land was not used for agricultural purposes in two years preceding date of transfer.

Appeal filed by the assessee is dismissed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal has been filed by the Assessee against the 263 order passed by the Ld. Principal Commissioner of Income Tax, (in short “Ld. PCIT”), Ahmedabad-3 vide order dated 30.03.2022 passed for A.Y. 2017-18.

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

“1.1 The order passed u/s. 263 on 30.03.2022 by Pr. CIT-3, A’bad, holding the assessment order passed u/s 143(3) on 09.07.2019 by AO as erroneous and prejudicial to the interest of Revenue in respect of deduction allowed u/s 54B and the character of the land as agricultural land is wholly illegal, unlawful and against the principles of natural justice.

2.1 The ld. Pr. CIT-3 A’bad has grievously erred in law and or on facts in invoking the provisions of revision u/s 263 of the Act and holding that the order of original assessment passed u/s 143(3) on 09.07.2019 by AO was erroneous and prejudicial to the interest of Revenue in so far as the same related to deduction u/s 54B. The ld. Pr. CIT-3 A’bad has grievously erred in law and or on facts in holding that the AO had not carried out examination in respect of exemption u/s 54B during the assessment proceedings.

2.2 That in the facts and circumstances of the ld. Pr. CIT-3 A’bad has grievously erred in law and or on facts in invoking the provisions of revision u/s 263 and in holding that the AO had not carried out examination in respect of exemption u/s 54B during the assessment proceedings.

2.3 The observations made and conclusions reached by Pr. CIT to hold that the lands were not agricultural lands and the claim of exemption u/s 54B was unjustified are denied in toto.

3.1 The ld. Pr. CIT has grievously erred in law and or on facts in directing the AO to make fresh assessment in respect of claim of exemption u/s 54B.”

3. The brief facts of the case are that the assessee filed return of income for A.Y. 2017-18 declaring total income of Rs. 3,26,550/-. The assessee had claimed deduction under Section 54B of the Act and the case of the assessee was selected for limited scrutiny to examine the capital gain on sale of property and claim of deduction / exemption from capital gains. During the course of original assessment proceedings, the return of income file by the assessee was accepted. However, later, on examination of records, the PCIT observed that the assessee had sold agricultural land along with three co-owners and the assessee’s share in the property was 1.73 crores. In the return of income the assessee had claimed deduction under Section 54B of the Act by way of deposit of Rs. 85 lakhs in the capital gains account and the assessee also claimed to have purchased new agricultural land jointly with two other persons on 09.11.2016 for a consideration of 1.98 crores, wherein the assessee’s share in investment was Rs. 69,93,533/-. However, on going through the records, the PCIT observed certain anomalies in the assessee’s claim of deduction under Section 54B of the Act, which according to PCIT were not examined by the Assessing Officer. Firstly, in order to claim deduction under Section 54B of the Act, the first condition is that the land which was sold was being used for agricultural purposes for two years immediately preceding the date on which the transfer took place. During the course of 263 proceedings, the PCIT observed that assessee submitted copies of computation of income for A.Ys. 2018-19 and 2019-20 and also 07/12 abstract. However, PCIT observed that while the assessee had sold the land on 26.10.2016, whereas the assessee submitted computation of income for A.Ys. 2018-19 and 2019-20 showing agricultural income offered to tax, which are for succeeding assessment years and therefore, this data was not relevant. Further, the PCIT observed that the 7/12 abstract shows the land holding as on 13.03.2011 and not for preceding two years from the date of sale of land i.e. 26.10.2016. Therefore, PCIT was of the view that the assessee was not able to demonstrate that this essential condition for claiming deduction under Section 54B of the Act, of land being used for agricultural purposes for immediately two years prior to date of sale of land was not substantiated by the assesee. Further, the PCIT called for information from the Bhaskaracharya National Institute for Space Applications & Geo-Informatics (in short BISAG-N), Ministry of Electronics & Information Technology, Government of India, Gandhinagar. On the basis of report submitted by the aforesaid Government Authority, Ld. PCIT observed that no agricultural activity was carried out from the year 2014 till 2018 in both the lands i.e. the agricultural land which was transferred by the assessee and also the land which was purchased by the assessee, and which as per the assessee was being used for agricultural purposes. Therefore, PCIT observed that neither the land sold nor the newly purchased land had been used for agricultural purposes by the assessee for the period between 2014 to 2018. Therefore, the claim of deduction under Section 54B of the Act was not tenable. Thirdly, the PCIT observed that for claiming deduction under Section 54B of the Act, the assessee is required to “purchase another land for being used for agricultural purposes”. However, PCIT observed that while making purchase of new land on which deduction under Section 54B was claimed, the assessee made payment of Rs. 8,33,333/- to the original agricultural land owner and made another payment of Rs. 57,66,666/- to the “confirming parties” for relinquishment of their rights in their said agricultural land. Therefore, PCIT was of the view that this amount of Rs. 57.66 lakhs had not been spent for purchase of agricultural land but for relinquishment of rights of the “confirming parties”. The assessee submitted during the course of 263 proceedings that this amount of Rs. 57,66,666/- had been made to the confirming parties on the direction of the land owner, since the land owner had entered into an agreement for sale of land with the confirming parties vide agreement dated 01.09.2012 and therefore, even this payment qualified for deduction under Section 54B of the Act. However, PCIT observed that the word “purchase” has a narrow interpretation as compared to the term “transfer” used in respect of original asset and therefore, strictly speaking this amount of Rs. 57.66 lakhs was not eligible for claim of deduction under Section 54B of the Act. Further, PCIT noted that the Assessing Officer ought to have made necessary enquiries / investigation on these aspects before allowing the claim of the assessee under Section 54B of the Act and absence of such basic investigation rendered the assessment order as being erroneous and prejudicial to the interest of the Revenue.

4. The assessee is in appeal before us against the aforesaid order passed by Ld. PCIT.

5. Before us, the Counsel for the assessee reiterated the submissions made before PCIT. Secondly, the Counsel for the assessee submitted that the case of the assessee was opened for limited scrutiny and therefore, the Assessing Officer had duly enquired into this aspect. The Counsel for the assessee drew our attention to relevant pages of the Paper Book giving details of various documents submitted by the assessee including 7/12 abstract. Further, the Counsel for the assessee submitted that Gujarat High Court has also held that mere conversion of agriculture land into non-agriculture land does not mean that the land was not used for agricultural purposes prior to it’s conversion into non-agricultural land. The Counsel for the assessee submitted that the assessee has also grown Castor Seeds and Brinjal on this land prior to it’s sale.

6. In response, the Ld. D.R. submitted that the land was not put to agricultural use prior to it’s sale and the assessee has not been able to demonstrate that the land was used for agricultural purposes prior to this sale. This crucial aspect was not examined by the Assessing Officer. Secondly, the Assessing Officer was also failed to enquire into the crucial aspects that part of the purchase was paid towards obtaining relinquishment right from the “confirming parties” and the Assessing Officer had not enquired into this aspect. Therefore, there is no infirmity in the order of Ld. PCIT so as to call for any interference.

7. We have heard the rival contentions and perused the material on record.

8. On going through the facts of the instant case and the various documents which was submitted by the assessee during the course of assessment proceedings as well before PCIT in 263 proceedings, we are of the considered view that the assessee has not been able to demonstrate that he carrying out agricultural activities prior to sale of land on which deduction under Section 54B of the Act was claimed. In our view the language of Section 54B of the Act is very categorical in which it has been expressly stated that for claiming deduction under Section 54B of the Act, the capital asset should be used for agricultural purposes for two years immediately preceding the date of transfer of such agricultural land. However, we observe that PCIT has clearly brought on record certain anomalies with respect to this aspect and the Assessing Officer has in our view omitted to enquire into this crucial aspect. Another aspect on which there was failure on part of the Assessing Officer to make due inquiries was that a sum of Rs. 57,66,666/-had been paid by the assessee towards obtaining relinquishment rights from third parties, and the Assessing Officer had not made due inquiries whether this amount was eligible for claim of deduction under Section 54B of the Act. We observe that PCIT had also obtained report from the concerned Government Authority / agency to substantiate that no agricultural activities were being carried out between the years 2014 to 2018 in respect of both the properties which was sold by the assessee and also the property which was subsequently purchased by the assessee with respect to which deduction under Section 54B of the Act was claimed. We observe that the Counsel for the assessee has cited several case laws, however, we are not discussing the same in the present order since those judicial precedents have been rendered with regards to their own set of facts and have no bearing to the issue under consideration before us.

9. In the case of Ramanbhai Bholidas Patel vs. Principal Commissioner of Income-tax [2023] 148 com 92 (Ahmedabad – Trib.), ITAT has held that Section 54B would not be applicable in case land was not used for agricultural purposes in two years preceding date of transfer. Where Assessing officer had not made necessary inquiry before allowing deduction under Section 54B but grossly allowed claim made by assessee, revisional order passed by Principal Commissioner under section 263 setting aside assessment order, should not call for any interference. Accordingly, looking into the instant facts, we find no infirmity in the order of PCIT so as to call for any interference.

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

This Order is pronounced in the Open Court on 08/01/2025