Rural agricultural land converted for non-agricultural purposes but factually continued to be used for agriculture is not a capital asset in spite of conversion

Shri Kamanahalli Pilla Reddy Nagesh Vs ITO (ITAT Bangalore), Appeal Number : ITA No. 1396/Bang/2019, Date of Judgement/Order : 21/06/2022

Rural agricultural land converted for non agricultural purposes but factually continued to be used for agriculture is not a capital asset in spite of the conversion

Assessee contended that the agricultural land outside municipal limit is to be treated as agricultural land and not a capital asset as per section 2(14) .

Claim of the assessee was that

– land was got converted as per condition laid down by the purchaser in sale agreement.

– conversion of  property for non-agricultural purpose was only to fetch good price &  not any other intention.

– property was sold within a period of 2 days after the order of conversion

–  land was not subjected to use for non-agricultural purpose on any day

– sole intention of conversion was to get good price

-land has been used by the assessee till the date of transfer as agricultural land and also assessee declared
income from agriculture in its return of income

– the above  cannot be reason to hold that the land sold  is non-agricultural land.

AO made addition  as long term capital gain  since the land was converted for non agricultural purposes before execution of sale deed treating the land as a capital asset u/s 2(14) .  On appeal, the Ld. CIT(A) confirmed the above finding of the A.O. Assessee preferred further appeal & the Tribunal relied on the earlier decision in the case of co-owner in  Shri K.P. Manjunatha Reddy vs. ITO in ITA No. 977/Bang/2019 vide order dated 25.03.2022.

It is noted and held :

(i) The lands in question do not cease to be agricultural lands merely because it stood converted in the records of the land revenue authorities of the state government.

(ii) The land continued to be agricultural land for the limited purpose of determining whether the same falls under the definition of capital asset under section 2(14) of the Act in view of the following facts :-

(a) The said land was put to use as agricultural land by the assessee right up to the date of sale and the assessee has also been declaring the agricultural income earned therefrom in the returns of income filed before the Dept in this period;

(b) The assessee did nothing to change the physical character of land from agricultural to non-agricultural even after obtaining the permission to convert;

(c) The land continued to be agricultural land in actual physical condition even after a period of six years after its sale.

(d) The assessee obtained permission to convert the land merely to facilitate its sale to corporate entity as the sale would otherwise not been possible.

Tribunal followed its earlier decision and held that the land though converted as per revenue records, is not a capital. asset