Case Law Details
Manish Ambalal Patel Vs ITO (ITAT Ahmedabad)
ITAT Ahmedabad held that exemption under section 10 of the Income Tax Act not available as the said land was non-agricultural land as it failed to fulfil twin conditions for qualifying as agricultural land.
Facts-
The assessee had claimed exemption of Rs.28,49,662/- u/s. 10 of the Act taking the plea that he had sold agricultural land and sale proceeds of the agriculture land were exempt under section 10 of the Act.
AO however conducted detailed inquiry and found that the assessee along with two other persons viz. Shri Ajay Shah and Sh. Ambalal B. Patel, had acquired block of land for the purpose of selling the same to a company viz. KEC International Ltd. (KECIL) which was on the lookout for a suitable block of land for setting up industries in & around the city of Baroda.
AO held that that firstly, this block of lands sold by the assessee were not agricultural land as claimed by the assessee, and therefore, there was no question of the assessee being entitled for any claim of exemption u/s. 10 of the Act. The profits earned from the said transaction was accordingly held to be taxable under the head “income from business”. Further, the AO found that since the assessee had violated provisions of section 40A(3) by making payment in cash for acquiring the land, he disallowed all expenditure so incurred by the assessee by invoking provisions of section 40A(3) of the Act. Accordingly, AO computed business income of the assessee at Rs.89,94,290/-, after disallowing all cash payments made to the original land owners over and above documented value under section 40A(3) of the Act. The order of the AO was upheld by the CIT(A).
Conclusion-
The finding of fact by CIT(A) that the land is non-agricultural land has remained unchallenged before us. In the light of this fact, the distance of land from Municipal limit is wholly irrelevant for the purpose of determining whether the asset qualifies as “capital asset” or not as per section 2(14) of the Act, since as per the said section only agricultural land situated beyond the specified municipal limits do not qualify as capital assets. Therefore, twin conditions of the land being agricultural land and land being situated beyond a specified limit from the municipal boundary,both has to be fulfilled for the asset to qualify as not being a capital asset. In the present case, there being no dispute to the fact that the asset was not agricultural land, arguments raised vis-à-vis distance beyond municipal limit, is wholly irrelevant since the assesses fails to fulfill the criteria of being an agricultural land for not qualifying as a capital asset.
Held that capital gain derived from the sale of the land was exempt from tax as the asset sold did not qualify as capital asset and the income was not taxable as business income, and therefore, section 40A(3) of the Act did not apply. In this regard, we are in agreement with the finding of the ld.CIT(A) that the income from sale of the land was not exempt as it was not agricultural land. Further the assessee has nothing to say against holding the transaction as business income of the assessee. The income from the transaction having been assessed under the head “income from business”, disallowance made by invoking provisions of section 40A(3) has been rightly made by the lower authorities.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
Present appeal has been filed by the assessee against order passed by the ld. Commissioner of Income-Tax(Appeals)-5, Vadodara [hereinafter referred to as “Ld.CIT(A)”] under section 250(6) of the Income Tax Act, 1961 (“the Act” for short) dated 3.10.2019 pertaining to the Asst.Year 2011-12.
2. At the time of hearing, the ld.counsel for the assessee, Shri Bandish Soparkar, filed an application before us stating that he had instructions from the assessee to no-longer represent him. Accordingly, he sought withdrawal of his letter of authority issued by the assessee in his name in the present case. The same was permitted.
3. Further, we have noted that submissions in writing were filed before the Bench on 31.5.2022, on the basis of which matter was proceeded to be heard with in the absence of any other communication from the assessee .
4. The grounds raised in the appeal are as under:
“1. The order of the CIT(A) is against law and facts;
2. The ld.CIT(A) erred in treating gain from sale of agriculture land as business income without considering the facts of the case that the agriculture land is not a capital asset within meaning of the section 2(14) of the Income Tax Act, 1961 as it is situated outside the specified limits of 8 kms.
3. The ld.CIT(A) erred in disallowing the payment made to farmers u/s.40A(3) without considering the facts of the case that it is not a business income but gain from the sale of agriculture land”
5. We have gone through the orders of the authorities below duly assisted by the ld.DR and we have noted that the issue before us in appeal relates to the Revenue not accepting the assesses claim of income from sale of land being exempt u/s 10 of the Act , and on the contrary treating the income earned as business income of the assessee, being earned in the course of adventure in the nature of business conducted by the assessee.A consequential issue arising from this stand of the Revenue is the disallowance of payment made in cash for the purchase of the land as per the provision of section 40A(3) of the Act.
6. The orders of the authorities below reveal that the assessee had claimed exemption of Rs.28,49,662/- under section 10 of the Act taking the plea that he had sold agricultural land and sale proceeds of the agriculture land were exempt under section 10 of the Act. The ld.AO however conducted detailed inquiry during the course of assessment proceedings, and found as a matter of fact that the assessee along with two other persons viz. Shri Ajay Shah and Sh.Ambalal B. Patel, had acquired block of land for the purpose of selling the same to a company viz. KEC International Ltd. (KECIL) which was on the lookout for a suitable block of land for setting up industries in & around the city of Baroda; that KECIL had identified block of land situated in Village-Godhampura (Samlaya), Taluka-Savli, Dist. Baroda, and the assessee along with his associates thereafter facilitated the purchase of this land by KECIL by first acquiring them from the original land owners, and thereafter transferring them to KECIL and in the process completing all necessary formalities required for smooth acquisition of the land by KECIL which included converting the agricultural lands into non-agriculture land, since the laws of the State of Gujarat prohibited acquisition of agricultural land by persons other than non-agriculturalists. Noting all the facts and circumstances, therefore, the AO held that that firstly, this block of lands sold by the assessee were not agricultural land as claimed by the assessee, and therefore, there was no question of the assessee being entitled for any claim of exemption under section 10 of the Act. He further held that the entire exercise of the assessee along with his associates tantamounted to adventure in the nature of trade being undertaken with the primary purpose of making gains from the acquisition of block of land and sale of the same to KECIL. The profits earned from the said transaction was accordingly held to be taxable under the head “income from business” Further, the AO found that since the assessee had violated provisions of section 40A(3) by making payment in cash for acquiring the land, he disallowed all expenditure so incurred by the assessee by invoking provisions of section 40A(3) of the Act. Accordingly, the ld.AO computed business income of the assessee at Rs.89,94,290/-, after disallowing all cash payments made to the original land owners over and above documented value under section 40A(3) of the Act. The order of the AO was upheld by the ld.CIT(A).
7. Before us, first ground raised by the assessee in Ground No.2, is that the land sold was not capital asset as they were situated outside the specified limit of 8kms. (as mentioned in the grounds raised before us); meaning thereby that the land were rural agricultural land. In the written submissions filed before us, the thrust of the arguments made before us was with respect to the distance of the land from the municipal limit of Savli being more than 8 Kms, thus, qualifying as rural land. The submissions made before us in this regard are reproduced as under:
“My father, Jaydeep Patel and I had jointly sold total six plots of agricultural land situated at Samlaya, Savli, Vadodara bearing block no. 803, 804, 805, 828, 829 and 830 to KEC International Limited vide sale deed dated 18th August, 2010 amounting to Rs. 9,38,40,000/-. Out of the sale consideration, Rs. 2,75,93,000/-were directly paid by the KECL towards premium to the government. Moreover, KECL had paid amounting to Rs. 3,76,22,500/- to Mr. Ajay Shah, acted as facilitator. These plots of agricultural land, were purchased by me, my father and Jaydeep Patel jointly for Rs.3,38,02,857/-. The said payment includes janti Value amounting to Rs. 86,80,460/- and additional payment to the farmers of Rs. 2,51,22,397/-. I and my father jointly made payment to farmers amounting to Rs. 2,14,99,440/-. The total profit from sale of six plots amounted to Rs. 56,25,208/-. We both were owners of those plots and so had equal share in profit and loss from the sale of plots. Hence, the share of us has amounting to Rs. 28,12,604/-.
However, the learned assessing officer had made addition amounting to Rs.89,94,290/-being income from sale of agriculture land situated outside the specified limits, not a capital asset without considering the provision u/s 2(14) of the Income Tax act, 1961.
Further, I sold agricultural land situated at Samlaya and claimed exemption under section 10 (37) of the Income Tax Act, 1961, the extract of which is reproduced below for your ready reference:
“in this case , being an individual or a Hindu undivided family and any income chargeable under the head “Capital gains” arising from the transfer of agricultural land, where (i) such land is situate in any area referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of section 2.”
Section 2(14) of The Income Tax Act, 1961 defines capital asset. As per clause (iii) of the said section which clarifies the exemption of agricultural land from the definition of capital asset, which is reproduced below for your ready reference:
“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; or
(b) in any area within the distance, measured aerially,—
(I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
(II) not being more than six kilometres, from the local limits of any municipality cantonment board referred to in item (a) and which has a population of more one lakh but not exceeding ten lakh; or
(III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.”
8. We have gone through the orders of the ld.CIT(A) and we find that the ld.CIT(A) has categorically held that the land sold by the assessee to be non-agricultural land. His findings in this regard at para-6 to 6.2 are as under:
“6.0 Ground No.1 relates to treatment of agricultural land as capital asset current sale as advantage in the nature of trade. The appellant has vehemently opposed profit from sale of land on the ground that the land was outside the Municipal Limit i.e.8km and secondly at the time of sale, the land was agricultural which is evident from the sale deed itself. From the assessment order, the submission made before me and AR’s argument, it transpires that the AO has relied upon agreement clause made with him and the purchase company KECI Ltd., Reliance are based on following premises:
i) Sale of land was subject to N.A.
ii) Stamp duty was paid as per N.A. valuation and the purchaser had no objection in paying higher stamp duty,
iii) Purchaser knows well that sale is conditional and valid only when land in question converted into N.A. i.e. capital assets u/s 2(14) of the Act.
iv) Purchaser was a non agriculturist – M/s. KECI Ltd.
v) Sale deed for original land owner made on 05.08.2010. Appellant made excited sale deed on 18.08.2010. This shows intention of the appellant was only to invent agriculture land with non agriculture and derive profit out of it.
6.1 It is pertinent to mention that Collector is the sole authority to grant conversion of land from agriculture to non agriculture. Admittedly, Collector permission was granted after the registration of deed but fact is that it was a precondition of the sale deed. Hence, the Ld. AR’s argument that at the time of sale, land was an agricultural land is half truth. Truth is that the sale deed was considered matured only when agriculture land was converted into N.A. and of course the seller i.e. the appellant has agreed to these terms mentioned in the sale deed therein.
6.2 Further, the Ld. AR also agreed that a company cannot buy an agricultural land until and unless the nature of land is N.A. Agricultural land cannot used for industrial purpose as also mentioned in sale deed itself. M/s. KECI Ltd. i.e. the purchaser has categorically affirmed the clause and conditions in order to qualify as a valid ale deed. Therefore, the condition for sale of land subject to its conversion from agriculture to Non agriculture is of prime importance.”
9. Therefore, the finding of fact by the ld.CIT(A) that the land is non-agricultural land has remained unchallenged before us. In the light of this fact, the distance of land from Municipal limit is wholly irrelevant for the purpose of determining whether the asset qualifies as “capital asset” or not as per section 2(14) of the Act, since as per the said section only agricultural land situated beyond the specified municipal limits do not qualify as capital assets. Therefore, twin conditions of the land being agricultural land and land being situated beyond a specified limit from the municipal boundary ,both has to be fulfilled for the asset to qualify as not being a capital asset. In the present case, there being no dispute to the fact that the asset was not agricultural land, arguments raised vis-à-vis distance beyond municipal limit, is wholly irrelevant since the assesses fails to fulfill the criteria of being an agricultural land for not qualifying as a capital asset.
10. In view of the above this ground of appeal no.2 raised by the assessee is dismissed.
11. Next ground, Ground No.3, relates to disallowance of expenditure incurred on the acquisition of the land made in cash u/s 40A(3) of the Act. The relevant findings of the ld.CIT(A) at para-7 of the order in this regard are as under:
“7.0 Ground No.3 relates to invoking Sec.40A(3) of the Act on account of cash payment made to land owner I find AR has no where submitted quantum amount paid in cash. Neither in assessment order, I find quantum of payment made in contravention of Sec.40A(3) of the Act. AR argued that Sec.40A(3) was inapplicable due to capital gain derived from sale of land was Nil. AO on the other hand assessed profit derived from sale of land considering it adventure in the nature of trade. Admittedly, Sec.40A(3) applicable in case of business expenditure. Once I have upheld AO’s findings in Ground No.2 above then obviously, I would decline to interfere in invoking Sec.40A(3) of the IT Act. Ground No.3 also fails.”
12. Submissions made before us in writing in this regard are as under:
“2. With reference to disallowing the payment made to farmers u/s 40A (3) without considering the facts of the case that it is not a business income but gain from the sale of agriculture land we would like to submit as follows:
The learned A.O had not allowed the deduction for full payment made to farmers amounting to Rs. 2,14,99,440/- and instead allowed Rs. 91,35,920/- only and considered the applicability of Section 40A(3) of the Act. Further, I have submitted the full details of payment made to original land owners during the course of assessment proceedings, the copy of which is enclosed for your ready reference and marked as Annexure 2.
The payment includes:
1. Amount of Registered Deed
2. Additional Payment made to original land owners
Regarding the same, I would like to state that we have sold an agricultural land and the profit raised from said land which has been exempt under Section 2(14) of the Act. Section 40A(3) comes into picture once a person is undertaking any business activity. I helped my father who is a farmer, in the agricultural activities. My father was serving in Canara Bank and was retired pensioner during the assessment year. Hence, I have not carried out any business activity in past except helping my father in agricultural activity. Considering the same, the question of applicability of Section 40A(3) does not arise at all.
In addition, I would like to state that the said transaction had been accepted in my father’s case as he had hold fifty percent in said transaction. The learned AO as well as CIT (Appeals) in case of my father had accepted the said payment of Rs. 2,29,99,440/-. The copy of assessment order u/s 143(3) and Commissioner of Appeals’ order u/s 250 of the Income Tax Act, 1961 the case of my father is enclosed herewith as per Annexure_3 for your ready reference.”
13. We have gone through the above and we find that the assessee has only reiterated what was stated before the ld.CIT(A) that capital gain derived from the sale of the land was exempt from tax as the asset sold did not qualify as capital asset and the income was not taxable as business income, and therefore, section 40A(3) of the Act did not apply. In this regard, we are in agreement with the finding of the ld.CIT(A) that the income from sale of the land was not exempt as it was not agricultural land. Further the assessee has nothing to say against holding the transaction as business income of the assessee. The income from the transaction having been assessed under the head “income from business”, disallowance made by invoking provisions of section 40A(3) has been rightly made by the lower authorities. The only argument of the ld.counsel for the assessee that the income was not taxable under the head “income from business or profession” having already been rejected and the income having been held taxable under the head “income from business or profession” the disallowance under section 40A(3) of the Act, we hold, has been rightly made. This ground of appeal No.3 is dismissed.
14. In effect appeal of the assessee is dismissed.
Order pronounced in the Court on 28th September, 2022 at Ahmedabad.
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