2022 (6) TMI 328 - AT - Income Tax

Tribunal exempts land sale from capital gains tax, quashes penalty proceedings

The Tribunal allowed the appeal, determining that the land sold was agricultural and not a capital asset under Section 2(14) of the Act. Therefore, the ... Agricultural land versus capital asset under the definition of capital asset in section 2(14) of the Income-tax Act - continuation of agricultural use after conversion / conversion order not ipso facto altering character of land - mandatory condition in conversion order (use within two years) and its effect on conversion - exemption from capital gains under section 2(14) read with sections 45 and 48 - status of BMRDA/BIAPPA as not being a municipality within the meaning of section 2(14)(iii)(a) - revenue records/Record of Rights (RTC) and certificates as prima facie evidence of agricultural characterAgricultural land versus capital asset under the definition of capital asset in section 2(14) of the Income-tax Act - continuation of agricultural use after conversion / conversion order not ipso facto altering character of land - exemption from capital gains under section 2(14) read with sections 45 and 48 - Characterisation of the property sold - whether the land sold is an agricultural land (exempt from capital gains) or a capital asset liable to capital gains tax. - HELD THAT: - The Tribunal accepted the assessee's evidence that the land continued to be used for agricultural purposes up to the date of transfer (including RTC/record of rights and horticulture certificates) and that conversion for non agricultural purpose was effected only to facilitate sale. The fact that the conversion order was subject to a mandatory condition to put the land to non agricultural use within two years and that the condition was not acted upon weighed in favour of the assessee. Applying the settled tests identified in Sarifabibi Mohamed Ibrahim and the line of Tribunal and High Court decisions relied upon (including the jurisdictional High Court's decision in CIT v. Smt. K. Leelavathy and co-ordinate bench precedents), the Tribunal held that mere entry of conversion in revenue records does not automatically convert the physical character of land for the purposes of s.2(14). Where agricultural operations continued and no material showed that the land was put to non agricultural use after conversion, the land retains its agricultural character and the proceeds are not exigible to capital gains tax. [Paras 4, 6, 23]The land sold by the assessee is agricultural land and not a capital asset within the meaning of section 2(14); the addition on account of capital gains is deleted.Mandatory condition in conversion order (use within two years) and its effect on conversion - continuation of agricultural use after conversion / conversion order not ipso facto altering character of land - Consequence of conversion order obtained shortly before sale (including conversion effected to fetch better price and sale taking place within two days) on the character of the land. - HELD THAT: - The Tribunal examined the temporal sequence (conversion order dated 16.9.2013 and sale deed on 18.9.2013) and noted that conversion obtained merely to secure a buyer or a better price, when the land remained actually under agricultural use and the mandatory conditions of conversion (not being acted upon) were not satisfied, does not change the character of the land for income tax purposes. The brief interval between conversion and sale, absence of any non agricultural user in the interim, and accepted revenue records supported the view that conversion was a facilitative act and not an effective change in physical character. [Paras 4, 23]Conversion effected to facilitate sale (and sale shortly thereafter) did not convert the land into a capital asset where agricultural use continued and conversion conditions were not acted upon.Status of BMRDA/BIAPPA as not being a municipality within the meaning of section 2(14)(iii)(a) - revenue records/Record of Rights (RTC) and certificates as prima facie evidence of agricultural character - Whether the fact that the land lies within BMRDA/BIAAPA/BMRDA limits makes it fall within a 'municipality' for the purpose of s.2(14)(iii)(a), thereby excluding it from being agricultural land. - HELD THAT: - Relying on co ordinate bench reasoning and the Kerala High Court precedent (Murali Lodge) as applied by earlier Tribunal orders, the Tribunal held that BMRDA/BIAAPA is a planning/zoning authority and not an elected municipal body possessing the trappings of a municipality contemplated by s.2(14)(iii)(a). The Tribunal further observed that entries in revenue records and RTCs are prima facie evidence of agricultural character; absent material rebutting those records, the classification in revenue records and continued agricultural use favour treating the land as agricultural. [Paras 4]BMRDA/BIAAPA does not qualify as a 'municipality' under section 2(14)(iii)(a); the land's inclusion within BMRDA limits does not, by itself, negate its agricultural character.Final Conclusion: The Tribunal allowed the assessee's appeal for A.Y. 2014-15: the property sold was held to be agricultural land (not a capital asset) since cultivation continued and conversion conditions were not acted upon; BMRDA/BIAAPA was held not to be a municipality for s.2(14)(iii)(a); accordingly the addition for capital gains was deleted and the appeal was allowed. Issues Involved:1. Insufficient opportunity provided before passing the assessment order.2. Erroneous assessment order and CIT(A)'s order.3. Incorrect demand raised by the AO.4. Classification of the property under Section 2(14) of the Act.5. Use of the property for agricultural purposes.6. Tax exemption for surplus from the sale of agricultural land.7. Timing of the transfer post-conversion.8. Additions made without appreciating the explanations.9. Initiation of penalty proceedings under Section 271(1)(c).10. Independence and interrelation of grounds of appeal.Detailed Analysis:1. Insufficient Opportunity Provided:The appellant argued that the AO failed to provide sufficient opportunity before passing the assessment order under Section 143(3) of the Act. This procedural lapse was a significant point of contention, suggesting a violation of natural justice principles.2. Erroneous Assessment Order and CIT(A)'s Order:The appellant contended that both the assessment order and the CIT(A)'s order were erroneous in law and facts. The primary argument was that the land in question should not be classified as a capital asset under Section 2(14) of the Act because it was used for agricultural purposes and situated beyond the municipal limits.3. Incorrect Demand Raised:The AO raised a demand of Rs. 64,48,890, which the appellant claimed was erroneous. The appellant argued that the demand was based on incorrect assumptions regarding the nature of the land and its usage.4. Classification of the Property:The appellant maintained that the property did not fall within the meaning of Section 2(14) of the Act, arguing that it was agricultural land situated beyond 10 km from the nearest municipal limit. The AO, however, classified it as a capital asset because the land was converted for non-agricultural purposes before the sale.5. Use of the Property for Agricultural Purposes:The appellant asserted that the land was used for cultivation by family members and was classified as agricultural land in the revenue records. The appellant provided evidence of cultivation and agricultural income, which was declared and accepted by the department without any adverse findings.6. Tax Exemption for Surplus from Sale:The appellant argued that the surplus from the sale of agricultural land should be exempt from tax under Section 10(1) of the Act. The AO disagreed, stating that the land was converted for non-agricultural purposes before the sale, making it a capital asset subject to capital gains tax.7. Timing of the Transfer Post-Conversion:The appellant highlighted that the transfer was completed within two days of receiving the conversion order, leaving no time for the land to be used for non-agricultural purposes. This argument was used to support the claim that the land should still be considered agricultural.8. Additions Made Without Appreciating Explanations:The appellant contended that the AO made additions of Rs. 2,06,25,000 without properly considering the explanations provided. The appellant argued that the land was used for agricultural purposes until the date of transfer and that the conversion was solely to fetch a better price.9. Initiation of Penalty Proceedings:The appellant challenged the initiation of penalty proceedings under Section 271(1)(c) of the Act, arguing that the assessment itself was erroneous and that there was no concealment of income or furnishing of inaccurate particulars.10. Independence and Interrelation of Grounds of Appeal:The appellant submitted that each ground of appeal was independent and without prejudice to one another, indicating that the arguments should be considered both individually and collectively.Tribunal's Findings:- The Tribunal examined the evidence, including the revenue records and certificates from local authorities, which supported the appellant's claim that the land was used for agricultural purposes.- The Tribunal referred to several judicial precedents, including decisions by the Karnataka High Court and ITAT Bangalore, which held that land used for agricultural purposes until the date of sale should not be classified as a capital asset, even if it was converted for non-agricultural purposes.- The Tribunal noted that the land's classification as agricultural in the revenue records and the continued agricultural use until the sale supported the appellant's claim for exemption.- The Tribunal found that the BMRDA was not a municipality or local authority as per Section 2(14)(iii)(a) of the Act, further supporting the appellant's case.- The Tribunal directed the AO to delete the addition made under the head 'Capital Gains' on the sale of the agricultural land.Conclusion:The Tribunal allowed the appeal, holding that the land sold by the appellant was agricultural land and not a capital asset under Section 2(14) of the Act. Consequently, the surplus from the sale was exempt from capital gains tax, and the additions made by the AO were deleted. The Tribunal also quashed the initiation of penalty proceedings under Section 271(1)(c).