Sale of Agricultural Land is not liable for capital gain tax if it is not a capital asset

ITAT Ahmedabad in the case of Dashratbhai Gopalbhai Patel Vs ITO has held that the provisions regarding aerial measurement of distance is applicable prospectively after the amendment by way of Finance Act, 2013.

ITAT has observed as under:

1. We also take affirmative note of the significant plea on behalf of the assessee that distance of 8 kms. from the Municipality has to be seen from the date of notification dated 06.11.1994 in the light of judicial pronouncements quoted above.

2. Hence, on objective analysis of the facts and law enunciated by the judicial pronouncements, we find that impugned land falls outside the ambit of definition of capital asset provided in Section 2(14) of the Act. Consequently, the capital gains arising on sale of agricultural land which is not a capital asset cannot be brought to charge under s.45 of the Act.

 

The copy of the order is as under:

ITAT Ahmedabad

Dashratbhai Gopalbhai Patel

Vs

Income Tax Officer

I.T.A. No. 1356/Ahd/2017

Order Dated 31/08/2021

The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals)-10, Ahmedabad (‘CIT(A)’ in short), dated 29.03.2017 arising in the assessment order dated 23.03.2015 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2012-13.

The grounds of appeal raised by assessee read as under:

“1.0 The learned Commissioner of Income-tax (Appeals) erred in law and on facts in dismissing the appeal of the appellant.

2.0  The learned Commissioner of Income-tax (Appeals) erred in law and on facts in treating the agriculture land bearing Survey No. 361/1, 362, Block No.4 74 in village Adalaj District Gandhinagar as a capital asset u/s 2(14)(iii) (a) as well as u/s 2(14)(iii) (b) of the Income Tax Act, 1961.

3.0 The learned Commissioner of Income-tax (Appeals) further erred in law and on facts in confirming the addition of Rs.1,33,25,071/- made by the ld. A.O. as long term capital gain.

4.0  The learned Commissioner of Income-tax (Appeals) erred in law and on facts in confirming the action of ld. A.O. whereby the exemption claimed u/s 54B has been restricted to Rs.20,00,000/-instead of Rs.2,11,00,000/-.”

3. Briefly stated, the assessee in its return of income for A.Y. 2012-13 inter alia declared long term capital gains of Rs.1,33,25,071/-on sale of certain land parcels at Adalaj, Gujarat. The assessee claimed deduction under s.54B of the Act to the extent of aforesaid long term capital gain by way of purchase of another land at Khoraj for a consideration of Rs.2,11,00,000/-. Consequently, the taxable capital gain was shown at Nil in the return of income. While framing the assessment under s.143(3) of the Act, the AO held that the capital gains on sale of agricultural land arising to the assessee falls within the definition of capital asset under s.2(14)(iii) of the Act for the reason that the land parcel giving rise to capital gains is situated in an area which is comprised within the Municipality and such agricultural land falls within the distance not being more 8 kilometers from the local limits of Municipality/Contentment Boards. The AO accordingly held that capital gains arising on sale of agricultural land situated within the Municipal limits are not excluded from the definition of ‘capital asset’ and is thus chargeable to tax. Further, the exemption claimed by the assessee under s.54B of the Act to the tune of Rs.2,11,00,000/- was restricted to Rs.20 Lakhs on the basis of actual payments made by the assessee against the agreed consideration.

4. Aggrieved, the assessee preferred appeal before the CIT(A).

5. The CIT(A), however, did not find merit in the plea raised on behalf of the assessee for exclusion of the agricultural land from the definition of ‘capital asset’. The CIT(A) also endorsed the action of the AO in restricting the exemption to the extent of Rs.20 Lakhs stated to be invested by the assessee for purchase of another agricultural land.

6. Further aggrieved, the assessee preferred appeal before the Tribunal.

7. In the course of hearing, the learned counsel for the assessee made extensive arguments to support its plea that the agricultural land parcel situated at Adalaj did not fall within 8 kilometers of the Municipal limits in the peculiar fact situation and consequently the land in question was claimed to be outside the scope and ambit of Section 2(14) of the Act. It was thus argued that the land not being a ‘capital asset’ is not chargeable to capital gain arising on sale thereof. We shall deal with various plea at appropriate place in succeeding paragraphs.

8. The learned DR for the Revenue mainly relied upon the order of the CIT(A).

9. We have carefully considered the rival submissions and perused the orders of authorities below as well as the material referred to in terms of Rule 18(6) of the ITAT Rules, 1963 and also case laws cited. The principle question that arises in the instant case is whether the agricultural land parcel in question situated at Village Adalaj, Gujarat falls within the definition of ‘capital asset’ under s.2(14) of the Act for the purposes of chargeability of capital gains on sale thereof or not. The other question relates to quantification of capital gains under s.54B of the Act in the event of the capital gain arising on sale of Adalaj land is found chargeable to tax.

10. The key points raised on behalf of the assessee to defend the stance of the assessee that the agricultural land sold giving rise to capital gains does not fall within the purview of definition of ‘capital asset’ and consequently not chargeable capital gain tax are listed hereunder:

(a) It is admitted fact that the impugned land at Survey No.361/lm 362 Block No.474, Village Adalaj (sold on 17.06.2011) was an ‘agriculture land’ because the above fact is neither disputed by the Id. A.O, nor by the ld. CIT(A). It is also admitted that Adalaj is a village administered by the/Gram Panchayat and not by any ‘municipality’ etc.

(b) The final figures of Census 2011 were not published before 1st April, 2011. In view of the above, the population of village Adalaj as per data last published as per the Census of 2001 were less than 10,000. Moreover, Adalaj is a village not having ‘municipality’ or ‘municipal corporation’ and therefore the sub-clause (a) of Section 2(14)(iii) would not be applicable in view of the decisions in the following cases:-

(a) CIT v/s P.J. Thomas (1995) 211 ITR 897

(b) Srichand Dembla v/s DCIT 39 com 180 (Jodh-Trib.)

(c) ITO v/s Uppala Bhktavatsala Rao 12 Taxmann 40 (Hvd-Trib.)

(c) The Gandhinagar Urban Development Authority (GUDA) was created on 12.03.1996 under “The Gujarat Town Planning & Urban Development Act, 1976” with a view to carry out sustained planned development of the area falling outside the periphery of Gandhinagar Notified Area. A Municipality or Municipal Corporation is Constitutional body, while a Development Authority is a creation of statute. The role of Municipality or Municipal Corporation is all-together different from Development Authority. GUDA does not have elected representatives but only nominated representatives by the Government further it does not provide civic amenities etc. Moreover, it does not have power to levy taxes. Later, on 16.03.2010 consequent to the judgment delivered by the Hon’ble Gujarat High Court in 2009, an elected body administrating Gandhinagar was set up as “Gandhinagar Municipal Corporation”. Similarly, Ahmedabad Urban Development Authority (AUDA) is also not termed as ‘municipality’ or ‘municipality corporation’. It is held by Hon’ble Kerala High Court in the case of CIT v/s Murali Lodge 194 ITR 125 (Ker) that only those local authorities, township, etc. can be treated as municipality within meaning of section 2(14)(iii)(a) which satisfy the requirements of a municipality within the meaning of relevant Municipal Act. It is held in following judgements that a Development Authority is not a Municipality: –

(a) T. Urmila v/s ITO (2012) 34 CCH 0477 HvdTrib &

(b) ITO v/s Shri Adela Krishna Reddy [ITA No.l838/Hvd/2013]

(d) The provision regarding measurement of distance ‘aerially’ has been introduced for the first time by the Finance Act, 2013 w.e.f, 01.04.20l5 only. Thus, in this case the distance between the impugned land ‘municipality’ or ‘municipal corporation’ must be measured via the shortest road distance. Reliance is placed in the case of CIT(A) v/s Nitish Rameshchandra Chordia (2015) 374 ITR 531 (Bom) & ITO v/s Akash Deep Farms P. Ltd. 2016 (9) TMI 918-ITAT AHMEDABAD.

(e) For the purpose of sub-clause (b) of Section 2(14)(iii), the distance of 8 Kms. from the ‘municipality’ or ‘municipal corporation’ has to be seen as on the date of Notification No. [SO 9447] [FileNo.l64/3/87-ITA.l] dated 06.01.1994 i.e. 06.01.1994 as per Explanation (2) to the above Notification. Moreover, the following decisions also support the above view:-

(a) Pr CIT v/s Khetilal Sharma (HUF) 2017 (11) TMI 1651 -Raj HC

(b) ITO v/s Akash Deep Farms P. Ltd 2016 (9) TMI 918-ITAT AHD

(f) In view of the above propositions, it is evident that the impugned land is not a ‘capital asset’ being not a land which falls in either sub-clause (a) or (b) of section 2(14)(iii) of the Income Tax Act, 1961.

(g) Moreover, in the case of one of the co-owners Shri Gabhaji Somaji Thakur (l/3^rd share), the ld. CIT(A), Gandhinagar vide his order dated 18.01.2019 has held that the impugned land is not a ‘capital asset’ within meaning of section 2(14) of the Act.

11. We straightway notice that the CIT(A), Gandhinagar in the case of other co-owner Shri Gabhaji Somaji Thakur (l/3^rdshare), has given a reasoned order and held that impugned land is not a capital asset within the meaning of Section 2(14) of the Act and consequently, not susceptible to capital gain tax. The relevant para of the CIT(A) in the case of Shri Gabhaji Somaji Thakur (supra) is reproduced hereunder:

“5.2 I have carefully considered the assessment order and submission filed by Appellant. The brief facts of present case are that Appellant alongwith co-owners had sold land at Adalaj, Dist. Gandhinagar for Rs.4,12,50,000/- and claimed that such land is agricultural land situated beyond 4 kms from Gandhinagar Municipal Corporation (CMC). The AO has taxed gain arising on sale of above land as income from long term capital gain and agricultural land exigible to capital gains tax mainly on the reason that land sold was transferred from category of ‘new condition’ to ‘only agriculture purpose and eligible for premium’ and also gathered that the population of village Adalaj was 11,957 people as was gathered from Taiati-Cum-Mantri, u/s 133(6) of the Act. On this basis, the AO concluded that land sold by Appellant is not a capital asset Thus, the AO has taxed income from long term capital gain of Rs. 1,33,33,645/-. On the other hand, the Appellant has referred to provisions of Section 2(14)(iii) of the Act and stated that CBDT has issued Notification No. 9447 dated 6th January, 1994 specifying the limit of 4 kms of Gandhinagar Municipal Corporation. The case of the Appellant is squarely covered by the decision of Hyderabad Tribunal in case of Adela Krishna Reddy vide ITA No: 1838/Hyd/2013 dated 29/06/2016 as under:

Capital Asset—Agricultural Land—Assessee filed his return of income admitting total income of Rs.5,05,620—AO completed assessment by determining taxable income of assesses at Rs.76,12,500—Assessing officer considered HADA as Govt. Notified Local Authority and concluded that it was Municipality within meaning of section 2(14)(iii)(a)—AO held that land sold by Assessee was not in nature of agricultural land and Assesses fell within capital asset as defined u/s 2(14)(iii)—CIT(A) held that land sold by assesses did not fall within such distance of not bang more than 8 km from local limit of any municipality or cantonment board as referred to in sub-clause(b) of section 2(14)(iii) as lands covered under HADA were more than 21 Kms from Municipal areas—CIT (A) allowed relief to assessee declaring said land as agricultural land and that they did not fall within capital asset as defined u/s 2(14)(iii)—Held, it was in record that land sold by assessee also did not fall within such distance of not being more than 8 kms from local limit of any municipality or cantonment rather lands covered under HADA were more than 21 Kms from municipal areas i, e. GHMC of Hyderabad—In case of T. Urmila, in similar issue Tribunal held that HADA was not local body and lands within HADA was not capital asset u/s 2(14)(iii)—In assessee’s case, land sold by assessee was within HADA and therefore, character of land was agricultural land—ITAT did not see any reason to interfere with order of CIT (A)—Revenue’s Appeal dismissed.

It is observed that the Notification No So: 9447 dated 06/01/1994 issued by the Central Government specifically provides for measuring the distance of particular land from Municipal Corporation Limit and accordingly it is held that the reliance of AO on the certificate of AUDA is justified.

Further, it is also observed that distance of particular land is to be ‘measured from the date of Notification No: 9447 dated 06/01/1994 and even considering such fact that distance between Gandhinagar Municipal Corporation to Adalaj is beyond 4 kms and accordingly the Appellant has correctly claimed capital gammon sale of land as exempt u/s 2(14)(iii) of the Act. The case of the Appellant is squarely covered by the decision of Hon’ble Ahmedabad Tribunal in case of Akash Deep Farm Pvt Ltd vide ITA No: 2138/Ahd/2012 dated 11/08/2015 as under:

10. Next objection of the AO was that the State Government has enhanced the municipal limit in 2006 and the distance is to be measured from new boundary of the Ahmedabad Municipal Corporation Limit, AMC limit was extended upto Sarkhej since 2006. The ld.CIT(A) has examined this aspect, and has observed that perusal of sub-clause (b) of section 2(13)(iii) would indicate that the municipal limit is to be taken from the area which has been notified by the Central Government in its gazette notification. Central Government has notified the area on 6.1.1993, and from that notification, the agriculture land of the ITA No.2564 and 2138/Ahd/2012 assessee was situated beyond a distance of 8KMs. This aspect has been lucidly considered by the ld. CIT(A) in the finding extracted supra. We do not see any reason to interfere in this finding. In view of the above discussion, we do not find any merit in the appeal of the Revenue. It is dismissed.

The AO has contended that the land was situated within 100 mtrs from Zundal Circle of AMC limit and from Zundal Circle to Adalaj is 5.66 kms. 8 kms from Municipal limit of Ahmedabad and therefore gain is taxable as Long Term Capital Gain. On the other hand, appellant has referred to Notification No 9447 dated 06/11/1994 wherein distance of area falling outside local limit of Gandhinagar Municipality hence argued that land is beyond the prescribed Municipal limit and not liable for capital gain.

On careful consideration of entire facts along with circular referred by the appellant, it is observed that for the purpose of section 2(14), distance of land from Gandhinagar Municipality is more than 5 kms and falling in the Gandhinagar district and not Ahmedabad district as held by the AO in the assessment order. The appellant has also submitted a certificate from the office of the District Inspector, Land Records Gandhinagar, wherein it is stated that above land is situated at 5017 meters from Municipal Limit of Gandhinagar which supports the contention of the appellant that the land is beyond 4 kms from the limits of Gandhinagar Municipal Corporation. From the above, it can be concluded that the land in question is situated 5.017 kms from the Gandhinagar Municipality limit and population of Adalaj is 9776 people as per last census conducted in 2001, hence, gain on sale of land is not liable for taxation u/s 2(14) of the Act.

Therefore, it is held that the AO is not justified in treating the gain on sale of land as taxable long term capital gain. The land is agriculture land within the definition of section 2(14) of the Act and therefore, the addition made by the AO of Rs.1,33,33,645/- is directed to be deleted.”

Needless to say, the stance of the revenue has to be consistent in the same list. The order of the CIT(A) in the case of other co-owner of the impugned land Shri Gabhaji Somaji Thakur in not under challenge. Therefore, the view taken in the case of other co-owner has attained finality and ought to have been followed as a matter of judicial discipline. The Revenue cannot be permitted to take different stand in two different cases emanating from same set of facts. The case of the assessee for exclusion of agricultural land from the definition of ‘capital asset’ placed in identical factual matrix thus requires to be upheld on this ground alone.

12. Moving further on merits, we find that the assessee has successfully demonstrated that the land parcels situated as Adalaj does not fall within the meaning of expression ‘Municipality’ or ‘Municipal Corporation’ and therefore falls in exception provided in sub-clause (a) to Section 2(14)(iii) of the Act. As stated on behalf of assessee, the development authority i.e. GUDA is a creation of statute. It cannot be equated with Municipal Corporation in the light of the ratio of decisions of Hon’ble Kerala High Court in the case of Murali Ldge (supra) and T. Urmila (supra) as rightly pointed out on behalf of the assessee. The provisions regarding aerial measurement of distance is applicable prospectively after the amendment by way of Finance Act, 2013. We also take affirmative note of the significant plea on behalf of the assessee that distance of 8 kms. from the Municipality has to be seen from the date of notification dated 06.11.1994 in the light of judicial pronouncements quoted above.

13. Hence, on objective analysis of the facts and law enunciated by the judicial pronouncements, we find that impugned land falls outside the ambit of definition of capital asset provided in Section 2(14) of the Act. Consequently, the capital gains arising on sale of agricultural land which is not a capital asset cannot be brought to charge under s.45 of the Act. We thus find merit in the plea of the assessee for exemption of capital receipt from ambit of taxation.

14. Once, it is found that the capital gains arising from sale of agricultural land itself is not susceptible to chargeability, the claim of deduction under s.54B becomes infructuous and therefore not adjudicated upon.

15. As a consequence, appeal of the assessee is allowable both on merits as well as on the grounds of doctrine of consistency. The order of the CIT(A) is accordingly set aside and additions made by the AO on this score is quashed.

16. In the result, the captioned appeal of the assessee is allowed.