Muniswamappa Ananda Vs Income Tax Officer (ITAT Bangalore)
Section 2(14): Rural Land Stays Outside the Capital Gains Fence-₹1.28 Crore Addition Deleted Despite TDS u/s 194-IA
Summary:
Background of the Case
Based on specific information flagged under the Risk Management Strategy, the Revenue noticed that the assessee had sold agricultural land during FY 2015-16. Consequently, the assessment was reopened & notice u/s 148 was issued.
In response, the assessee filed his return on 24.04.2023, declaring sale consideration of ₹1,28,00,000 as exempt income on the ground that it arose from the sale of rural agricultural land.
The AO thereafter issued notices u/s 142(1), a show-cause notice & also a notice u/s 133(6) to the purchaser, Ms Vandana Gupta. Since the assessee failed to produce supporting documents establishing that the land was rural agricultural land, the AO completed the assessment ex parte u/s 144.
The entire sale consideration of ₹1.28 crore was treated as undisclosed short-term capital gain, resulting in the total income being determined at the same amount.
First Appeal Dismissed for Non-Compliance
Aggrieved, the assessee filed an appeal before the CIT(A). However, he failed to comply with the notices issued during the appellate proceedings. The CIT(A), therefore, dismissed the appeal without granting any relief.
The assessee then approached the Bangalore ITAT, contending that the land sold was ancestral agricultural land situated beyond the prescribed municipal limits & hence did not constitute a “capital asset” u/s 2(14).
Delay of 180 Days Condoned
There was a delay of 180 days in filing the appeal before the Tribunal. The assessee explained that he was an agriculturist with limited educational qualifications & was not conversant with the English language. He could not properly understand the electronic notices & communications issued by the Income-tax Department.
The assessee was also under a bona fide belief, based on professional advice, that no return was required since the sale of agricultural land situated beyond the prescribed municipal limits did not give rise to taxable income.
The ITAT accepted the explanation & relied upon the Supreme Court’s landmark ruling in Collector, Land Acquisition, Anantnag v. Mst. Katiji (1987) 167 ITR 471 (SC). The Supreme Court had held that where substantial justice & technical considerations are pitted against each other, the cause of substantial justice must prevail. There can be no presumption that every delay is deliberate, mala fide or attributable to culpable negligence.
Considering the assessee’s background & the surrounding circumstances, the Tribunal held that there was sufficient & reasonable cause for the delay. Accordingly, the delay was condoned & the appeal was taken up on merits.
Additional Evidence Admitted Under Rule 29
Before the Tribunal, the assessee filed a petition under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963, seeking admission of additional evidence comprising a population certificate & distance certificate.
These documents had not been produced before the AO or CIT(A). However, since they went to the root of the controversy—whether the land was situated beyond the prescribed municipal limits—the Tribunal admitted them.
The assessee contended that the documents conclusively established that the land was rural agricultural land falling outside the definition of “capital asset” u/s 2(14). He further submitted that the purchaser’s erroneous deduction of tax at source u/s 194-IA could not alter the true character of the land or render an otherwise exempt transaction taxable.
Reliance was also placed on the decision in Swamiappan v. DCIT (56 taxmann.com 185).
Whether the Land Was a Capital Asset
The Tribunal observed that the crucial test was whether the land satisfied the exclusion prescribed u/s 2(14)(iii). Agricultural land in India situated outside the jurisdiction of the specified municipality or cantonment board & beyond the prescribed aerial distance—depending upon the population of the municipality—is excluded from the definition of “capital asset”.
Accordingly, the principal considerations were the agricultural character of the land, the population of the concerned municipality & its aerial distance from the relevant municipal limits.
On examining the population certificate & translated copy of the distance certificate, the Tribunal found that the documents prima facie established that the agricultural land was situated beyond the prescribed municipal distance contemplated u/s 2(14)(iii).
The Tribunal accepted that the land was inherited or ancestral agricultural land & was located outside the statutorily specified urban limits. Consequently, it did not constitute a “capital asset” within the meaning of s.2(14).
Once the land itself was outside the definition of a capital asset, the gain arising from its transfer could not be brought to tax as capital gains u/s 45.
Addition of ₹1.28 Crore Deleted
The ITAT held that the AO was not justified in treating the entire sale consideration as undisclosed short-term capital gain. The addition of ₹1,28,00,000, as sustained by the CIT(A), was therefore deleted & the assessee’s appeal was allowed.
Author’s Comments
The decision confirms that tax deduction does not determine taxability. TDS u/s 194-IA by the purchaser cannot convert rural agricultural land into a capital asset when the statutory conditions u/s 2(14)(iii) are otherwise satisfied.
The ruling also reflects a justice-oriented approach: an agriculturist’s limited education & inability to understand electronic communications should not permanently defeat a legally valid exemption. After all, a rural field does not become an urban capital asset merely because TDS was harvested from the sale consideration.
Cases Discussed
- Collector, Land Acquisition, Anantnag v. Mst. Katiji & Ors. (1987) 167 ITR 471 (SC)
- Swamiappan v. DCIT (56 taxmann.com 185)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT BANGALORE
This appeal is filed by the Assessee against the order of Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre [“learned CIT(A)”] vide DIN: ITBA/NFAC/S/250/2024-25/1070684027(1) dated 27-Nov-2024 for the Assessment Year 2016-17.
2. Based on specific information flagged as per Risk Management Strategy during the financial year 2015-16, it was noticed that the assessee during the relevant previous year, has sold agricultural land. The case was reopened and notice u/s 148 of the Act was issued. The assessee, in response to notice u/s 148, filed the return of income on 24.04.2023 claiming exempt income of Rs.1,28,00,000/- on account of sale of agricultural land. Thereafter Notice u/s 142(1) of the Act was issued calling for details, followed by SCN. The AO also issued notice u/s 133(6) to Ms Vandana Gupta the purchaser of the land. In absence of any document/evidence in respect of the claimed exempt income, the AO completed the assessment on an ex-parte basis under section 144 of the Act and made an addition of Rs.1,28,00,000/- as undisclosed short-term capital gain. Thus, the AO determined the total income at Rs.1,28,00,000/-.
3. On being aggrieved by the Order of the Ld AO, the assessee filed an appeal before learned CIT(A). The assessee did not comply with the notices issued by Ld CIT(A). The Ld CIT(A) therefore dismissed the appeal.
4. Assailing the order of the learned CIT(A), the assessee is now before the Tribunal.
5. At the outset, it was noticed that the assessee has sought condonation of delay of 180 days in filing the appeal before Tribunal.
6. The assessee has explained that the delay was neither intentional nor deliberate. It is submitted that the assessee is an agriculturist, has limited educational qualifications and is not conversant with the English language. It has further been submitted that the communications/notices issued electronically were not properly understood by him and that he was under a bona fide belief, based on the advice received by him, that no return was required to be filed in respect of the sale of agricultural land situated beyond the prescribed municipal limits.
7. We have considered the explanation furnished by the assessee and perused the material available on record. The Hon’ble Supreme Court in Collector, Land Acquisition, Anantnag & Anr. v. Mst. Katiji & Ors. [(1987) 167 ITR 471 (SC)] has held that when substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. The Hon’ble Supreme Court further emphasized that there is no presumption that delay is occasioned deliberately or on account of culpable negligence or mala fides. Accordingly, keeping in view the totality of the facts and circumstances of the case and the principles laid down by the Hon’ble Supreme Court, we are satisfied that the assessee was prevented by sufficient and reasonable cause from filing the appeal within the prescribed period. Accordingly, the delay in filing the appeal is hereby condoned and we now proceed to adjudicate the appeal on merits.
8. The assessee has raised the following grounds:
1) Ground 1. The appellant requested the honorable appellate (ITAT) to condone the delay of filing the appeal due to non-understanding the English by the appellant, that to sale of exempted agricultural land. 2. The appellant begs to honorable appellate authority that it is ancestral agricultural land beyond the limits of municipality under section 2(14) of the income tax act. And filing of return not required under section 139(1) due to exempted income, and requested to delete the addition made by the commissioner of appeals order and assessment order. 3. The appellant fully explained before filing with the commissioner of appeal the statement of facts and grounds of appeal. 4. The appellant beg the honorable appellate authority (ITAT) to delete the additions as per natural justice of the exempted sale of agricultural land and any additional grounds to the chair at the time of hearing of the appeal.
9. The short question arising for consideration is whether the agricultural land sold by the assessee constituted a “capital asset” within the meaning of section 2(14) of the Act and, consequently, whether the amount received on sale thereof could be subjected to capital gains taxation.
10. The Ld AR submitted that he has filed a petition under Rule 29 of the ITAT Rules seeking admission of additional evidence in the form of population certificate and Distance certificate.
11. The Ld AR submitted that the assessee was under a bona fide belief that the sale of ancestral agricultural land situated beyond the prescribed municipal limits did not result in taxable income and, therefore, there was no requirement to file a return of income merely on account of such sale. It was also submitted that the additional evidences filed before Hon Tribunal proves the fact that the land sold was rural agricultural land falling outside the definition of “capital asset” under section 2(14) of the Act. It was also submitted that erroneous deduction of tax at source u/s 194IA cannot alter the nature of income. The Ld AR relied on the decision of co-ordinate Bench in Swamiappan vs DCIT (56 taxmann.com 185). He therefore prayed that the addition be deleted.
12. Per Contra the Ld DR relied on the orders of lower authorities.
13. We have heard the rival contentions and carefully perused the material on record, including the written submissions of the assessee. The assessee has filed additional evidences invoking Rule 29 of the ITAT Rules. Since these additional evidences relate to the core issue contested by the assessee we admit the additional evidences. It was submitted that these additional evidences were not available before the revenue authorities during the assessment and the first appellate proceedings.
14. The assessee has consistently claimed that the land sold was agricultural land which was inherited/ancestral agricultural land.
15. The assessee has specifically contended that the land was situated beyond the prescribed distance from the relevant municipality/municipal limits and, therefore, fell outside the definition of “capital asset”. Section 2(14) of the Act defines the expression “capital asset” which reads as follows:
(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) held for personal use by the assessee or any member of his family dependent on him, but excludes—
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
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;]
The following item (b) shall be substituted for the existing item (b) of sub-clause (iii) of clause (14) of section 2 by the Finance Act, 2013, w.e.f. 1-4-2014 :
(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 or cantonment board referred to in item (a) and which has a population of more than 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.
Explanation.—For the purposes of this sub-clause, “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;
[(iv) 6½ 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.]
[Explanation.—For the removal of doubts, it is hereby clarified that “property” includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever;]
16. On plain reading of the above stated definition, the exclusion contained in section 2(14)(iii) is material for the present case. Agricultural land situated outside the specified municipal/cantonment limits and beyond the prescribed distance, subject to the statutory conditions, is not regarded as a capital asset. The primary question is the character of the land and its location in terms of section 2(14)(iii).
17. This contention is required to be examined with reference to the additional evidences, including the population of the concerned municipality/cantonment board and the prescribed distance certificate filed by the assessee before us. The population certificate and the distance certificate (translated copy) is extracted below:
18. Prima facie, the documents relied upon by the assessee establish that the agricultural land was situated beyond the prescribed municipal distance contemplated under section 2(14)(iii) of the Act.
19. In view of the foregoing discussion, we are of the considered opinion that the land sold by the assessee was agricultural land which was situated beyond the prescribed municipal limits/distance contemplated under section 2(14)(iii) of the Act and therefore, did not constitute a “capital asset” within the meaning of section 2(14) of the Act. Consequently, the gain arising from the sale of the said rural agricultural land is not chargeable to tax as capital gains under section 45 of the Act.
20. The addition made by the Assessing Officer and sustained by the learned CIT(A) on account of the sale of the said agricultural land therefore cannot be sustained and hence deleted.
21. In the result the appeal of the assessee are allowed.
Pronounced in the open court on the date mentioned on the caption page.
