ITAT Remands Capital Gains Dispute to AO: Faults Revenue on Legal Oversight, Upholds Principles of Justice [Read Order]

The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) has remanded the matter of capital gains taxation involving agriculturist Harwant Singh Grewal back to the Assessing Officer (AO) for a fresh assessment. The Tribunal found that both the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] had failed to consider foundational legal issues, leading to an erroneous assessment and unjust tax burden.

The assessee, Harwant Singh Grewal of Ludhiana, had filed his income tax return declaring an income of ₹2,13,450. The return was selected for scrutiny after the AO noticed cash deposits totaling ₹77.10 lakhs in his savings account with Punjab & Sind Bank. While initially investigating the source of these funds, the AO shifted focus to capital gains allegedly arising from the sale of agricultural land measuring 12 Kanal 4 Marla.

According to the AO, although the registered sale deed recorded a consideration of ₹23.76 lakhs for 2 Kanal of land, the actual transaction, based on an earlier agreement to sell, was allegedly carried out at ₹1.44 crore, leading to a proposed addition of ₹1.20 crore to the assessee’s income as unreported capital gains. Additionally, the AO denied deduction under Section 54F of the Income Tax Act amounting to ₹35.87 lakhs, citing a lack of documentation for house construction before the due date for filing the return.

The Tribunal, after examining the submissions and records, found multiple lapses in the revenue’s handling of the case. The Tribunal noted that the primary issue of whether the land in question qualifies as a ‘capital asset’ under Section 2(14) of the Income Tax Act was never examined. Agricultural land located outside municipal limits is not treated as a capital asset, and thus, any gain arising from its sale may not be taxable.

It was observed that AO relied solely on the sale agreement to impute the value of land at ₹12,000 per sq. yd., while ignoring the registered sale deed and failing to refer the matter to the District Valuation Officer (DVO) under Section 50C(2). This procedural lapse, the Bench held, vitiates the integrity of the valuation exercise.

It was further observed that the AO and CIT(A) failed to properly evaluate the assessee’s claim under Section 54F. The assessee, a semi-literate farmer, could not produce bills or deposit proof in a specified bank account. However, the Tribunal held that tax officials ought to guide such assessees, especially when ignorance, not evasion is at play. The Tribunal found that both authorities had placed undue reliance on the agreement to sell without corroborating it with supporting evidence or conducting a factual valuation.

Setting aside the assessment order, the Bench observed that quasi-judicial authorities are respected not on account of their power to legalize injustice on technical grounds but because they are capable of removing injustice. It further directed that the AO must reframe the assessment after giving due opportunity to the assessee and consider all legal provisions, including Sections 2(14), 48, 50C, 54B, and 54F. The assessee is also permitted to submit any fresh material in support of his case during the reassessment.

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