2023 (9) TMI 1619 - AT - Income Tax

Agricultural land sale not taxable as capital gains under section 2(14)(iii) until actual conversion occurs

Hiten Tulshibhai Engineer Versus ITO Ward-1 International Tax Ahmedabad

Hiten Tulshibhai Engineer Versus ITO Ward-1 International Tax Ahmedabad - TMI Issues Involved:1. Validity of the addition of Rs. 3,56,70,539/- on account of undisclosed capital gain.2. Characterization of the land as agricultural or non-agricultural for determining its qualification as a 'capital asset.'Detailed Analysis:1. Validity of the Addition of Rs. 3,56,70,539/- on Account of Undisclosed Capital Gain:The core issue under consideration was whether the addition of Rs. 3,56,70,539/- to the assessee's income as capital gain was justified. The Assessing Officer (AO) initiated reassessment proceedings under Section 147 of the Income Tax Act, 1961, after discovering that the assessee sold land for Rs. 3,86,98,710/- but did not report any capital gain from the transaction. The assessee argued that the land was 'rural agricultural land' and thus not a 'capital asset' as per Section 2(14)(iii) of the Act, making the capital gain non-taxable. However, the AO concluded that the land was non-agricultural, as it was purchased by a company for industrial purposes under Section 63AA of the Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997. The Dispute Resolution Panel (DRP) upheld this view, leading to the addition being confirmed in the final order.2. Characterization of the Land as Agricultural or Non-Agricultural:The primary contention revolved around the nature of the land sold by the assessee. The assessee maintained that the land was agricultural, as evidenced by the conveyance deed and its classification at the time of sale. The AO and DRP, however, classified the land as non-agricultural based on its intended industrial use by the purchaser and the permissions obtained under Section 63AA of the Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997. The AO noted that the land was sold to a non-agriculturist company, which had received permission for industrial use before the sale, and that stamp duty was paid at non-agricultural rates.The tribunal examined the provisions of the Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997, and the Bombay Land Revenue Code, 1879. It clarified that Section 63AA allows the sale of agricultural land for bona fide industrial purposes without changing its agricultural character until actual use is changed post-sale. The tribunal found that the land was indeed agricultural at the time of sale, as the conversion to non-agricultural use occurred only after the sale, when the purchaser notified the collector and received a certificate for industrial use.Conclusion:The tribunal concluded that the AO and DRP misinterpreted the relevant land laws and incorrectly classified the land as non-agricultural. It held that the land was agricultural at the time of sale and did not qualify as a 'capital asset' under Section 2(14)(iii) of the Income Tax Act. Consequently, the capital gain of Rs. 3,56,70,539/- was not taxable, and the addition made by the AO was set aside. The appeal concerning the characterization of the land and the resultant capital gain was allowed in favor of the assessee. The order was pronounced on 13th September 2023, at Ahmedabad.