Delhi HC upholds PCIT Order overruling AO’s erroneous Land Classification in Income Tax Assessment Order [Read Order]

The Delhi High Court in a recently upheld an Order passed by the Principal Commissioner of Income Taxes, Delhi-11 ( PCIT ), ruling against the incorrect classification of an Assessee’s land by the jurisdictional Assessing Officer in the course of income tax assessment.

The decision was rendered by the Delhi High Court while adjudicating an Income Tax Appeal filed by the PCIT against the Respondent-Assessee Sangeeta Jain, impugning an order dated 15.02.2018 passed by the Income Tax Appellate Tribunal ( ITAT ) in respect of the financials of the Assessee for the Assessment Year (A.Y.) 2013-14.

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The Respondent-Assessee conducts business under her proprietary concern ‘M/s Fashion Club Global’ and filed her return of income declaring a total income of Rs.2,64,51,220/-. The Assessee’s returns were selected for scrutiny under Computer Assisted Scrutiny Selection ( CASS ) and Notice under Section 143(2) was served on the Assessee; subsequently another notice under Section 142(1) of the Act was served, with a questionnaire being part of the notice.

The Assessee responded to the above notices, stating that she had earned long term capital gain ( LTCG ) of Rs.10,72,76,180/- from the sale of agricultural land which was situated beyond the prescribed limits of Sohna District in Haryana; hence, the Assessee claimed that the said land would not qualify as a capital asset under Section 2(14) of the Income Tax Act, 1961 and thus exempt from capital gains.

The Assessing Officer pursuantly completed his Assessment under the impression that the Assessee’s land was indeed ‘Agricultural’ in nature. The PCIT, being wary of the AO’s order, issued show-cause notice to the AO under Section 263 of the Act averring that the AO had failed in properly ascertaining the nature of the Assessee’s land and had instead blindly relied on a “certificate” stated by the Assessee to be issued by the Tahsildar which was issued in a routine manner and without any corroborative evidence.

Subsequent to investigative proceedings, the PCIT recognized the gross mistakes conducted by the AO regarding classification of the land and its position in terms of local limits. The PCIT proceeded to make an addition of short-term capital gain of Rs.10,72,76,180/- to the total income of the Assessee.

The PCIT Order was appealed before the ITAT who upheld the AO Order and sanctioned the Tahsildar’s certificate, while averring that the PCIT had erroneously claimed the AO’s order to be prejudicial to the interest of the Revenue.

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The two-member Bench of the Delhi High Court comprising Justice Vibhu Bakhru and Justice Swarana Kanta Sharma considered the submissions on record and concluded that the AO had absolutely erred in his decision by failing to measure the distance of the land from nearest municipal limits, which is a critical requirement under Section 2(14)(iii) of the Income Tax Act, 1961.

Furthermore, the Bench held that the AO had not adduced any reasoning as to how he concluded the subject land to be ‘agricultural’ in nature. In light of the observations, the Delhi High Court set aside the impugned order by the ITAT averring that the Assessment Order by the AO was prejudicial to the interest of the Revenue.

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