The Ahmedabad Bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that the sale of agricultural land is exempt from capital gain tax under Section 45 of the Income Tax Act, 1961 until the land is officially converted for non-agricultural use. This ruling applies regardless of the purchaser’s intended use of the land at the time of sale.
Rajeshkumar Shantilal Sanghvi (Assessee), filed his income tax return for the Assessment Year 2012-13 declaring Rs.39,42,875 as total income. The assessing officer found that the assessee had sold agricultural land to Madhukar Infrastructure & Developers Pvt. Ltd. (MIDPL) but did not declare any capital gains arising from the sale. The assessee claimed the land was not a capital asset under Section 2(14)(iii) of the Income Tax Act, 1961.
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The AO issued a notice under Section 148 but no response from the assessee. The assessing officer completed that assessment by adding Rs. 54,37,086 computed from short-term capital gain on the land sale. The AO held the agricultural land as short-term gain capital because it was purchased for industrial purposes as mentioned in the sale deed.
Aggrieved by the AO order, the assessee appealed before the Commissioner of Income Tax (Appeals). After hearing the assessee, the CIT(A) deleted the addition made by the assessing officer and treated the land as agricultural land.
The revenue appealed against the CIT(A) order before the Ahmedabad Bench of ITAT. The revenue questioned the CIT(A) decision as it had erred in law and on facts by treating the land as agricultural land and deleting the addition made by the assessing officer. The revenue’s counsel argued that the agricultural land was purchased by MIDPL, a non-agriculturalist for industrial purposes as reflected in the sale deed, making it taxable. As per a Gujarat Government resolution, the land was deemed non-agricultural (NA) and taxable upon sale.
On the other hand, the assessee’s counsel relied on the order of CIT(A) which held that the land was indeed agricultural and not within the definition of a capital asset under Section 2(14)(iii). The counsel submitted that the land was located beyond the 8-kilometer limit from a municipality and thus did not qualify as a capital asset. The counsel further submitted that the agricultural nature of the land was documented in land records (7/12 extract) and the last census. The land was not converted for industrial purposes at the time of sale.
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The two-member bench comprising Suchitra Kamble (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) considered the CIT(A) order. The tribunal noted that the assessee relied on the judgment of the Madras High Court in M.S. Srinivas Naicker (292 ITR 481) (2007) where the court held that the time of sale is crucial and agricultural land does not become a capital assessee just because it was sold to a non-agriculturalist or intended to use for non-agricultural purposes.
Considering the facts and precedents, the tribunal agreed with CIT(A)’s decision that the land was agricultural at the time of sale. The tribunal clarified that agricultural land sold under the provisions of Section 63AA of the Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997 remains agricultural until its use is officially converted, regardless of the purchaser’s intentions for future industrial use. Therefore, the tribunal upheld the decision of the CIT(A) order and dismissed the revenue’s appeal.
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