2025 (2) TMI 512 - AT - Income Tax

Agricultural land beyond 8km from municipal limits not capital asset under section 2(14)(iii), LTCG addition deleted but unexplained cash deposits partially upheld.

Kanchanben Maheshbhai Patel Versus The ITO, Ward – 2, Bardoli

ITAT held that agricultural land located 8.5 kilometres from municipal limits was not a capital asset under section 2(14)(iii), as it exceeded the ... Nature of land sold - LTCG on the sale of agriculture land not being capital asset within meaning of section 2(14)(iii) - HELD THAT:- As per clause (iii) of sub-section (14) of section 2, ‘capital asset’ means agricultural land in India, not being land situated more than 8 kilometres from the local limits of any municipality or cantonment board. AR has given a certificate from the Dy. EE (R & B), Surat, according to which the distance was 8.5 kilometres. CBDT in its Circular No.17/2015 has made it clear that the shortest road distance has to be measured to decide whether the agricultural land is a capital asset or not. In the present case distance between the municipal limit and the agricultural land is to measured having regard to the shortest road distance and not arial distance. The assessment year involved is AY.2012-13 and as per the certificated issued by the Dy. EE (R & B), Surat, the distance was 8.5 kilometres. Thus, agricultural land was situated beyond 8 kilometres of the municipal limit. Hence, it was not a capital asset within the meaning of section 2(14)(iii)(b) of the Act. Thus addition towards LTCG is deleted and the grounds are allowed. Application of the provisions of section 50C - Since, we have held that the subject land was not a capital asset u/s 2(14) of the Act, application of the provisions of section 50C are not applicable. Therefore, the AO is directed to delete the addition. Addition being cash deposited in the bank account during financial year - HELD THAT:- As found by AO that assessee had withdrawn cash from bank account on regular interval. In the return filed u/s 148 of the Act, she has shown income of Rs. 1,62,947/- and agricultural income of Rs. 90,000/-. CIT(A) has repeated the finding of AO and upheld the addition. No supporting evidence was filed by the assessee before us to substantiate availability of cash of Rs. 12,01,000/- as on 01.04.2011. The cash book submitted by the lower authorities was only a feeble attempt to justify deposit of cash by the assessee. Assessee has withdrawn various amounts from her bank account. She has also shown agricultural income of Rs. 90,000/- during the year. Considering the totality of facts, it would be reasonable if cash of Rs. 4,00,000/- is treated as explained and addition of remaining amount Rs. 8,89,500/- is upheld. The AO is, accordingly, directed to restrict the addition. Appeal of the assessee is partly allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment included: Whether the land sold by the assessee was a capital asset under section 2(14)(iii) of the Income-tax Act, 1961, and if the gain from its sale should be taxed as long-term capital gain (LTCG). Whether the provisions of section 50C of the Act, regarding the valuation of sold property, were applicable to the land in question. Whether the cash deposits made by the assessee in her bank account were explainable as being derived from agricultural income. Whether the initiation of penalty proceedings under section 271(1)(c) was justified.ISSUE-WISE DETAILED ANALYSISLong-term Capital Gain and Capital Asset Classification (Ground Nos. 1 & 4)The relevant legal framework involved section 2(14)(iii) of the Income-tax Act, which defines a capital asset as agricultural land situated within 8 kilometers of any municipality. The Court considered the CBDT Circular No. 17/2015, which clarified that for assessment years prior to 2014-15, the shortest road distance should be used to measure proximity to municipal limits.The assessee argued that the land was not a capital asset as it was more than 8 kilometers away from municipal limits, based on a certificate from the Deputy Executive Engineer. The Court agreed with the assessee, finding that the distance was 8.5 kilometers by road, thus not a capital asset under section 2(14)(iii). This interpretation was supported by the CBDT Circular and relevant case law.Application of Section 50C (Ground Nos. 2 & 5)Section 50C pertains to the valuation of capital assets for tax purposes. Since the Court determined the land was not a capital asset under section 2(14), section 50C was deemed inapplicable. The Court directed the deletion of the addition made under this section.Cash Deposits and Agricultural Income (Ground Nos. 3 & 6)The assessee claimed that cash deposits were from accumulated agricultural income. However, the Court found no substantial evidence supporting the availability of cash as claimed. While the assessee had shown some agricultural income, the Court only partially accepted the explanation, allowing Rs. 4,00,000 as explained and sustaining an addition of Rs. 8,89,500.Initiation of Penalty Proceedings (Ground No. 7)The Court noted that penalty proceedings under section 271(1)(c) were merely initiated, not concluded. Therefore, this issue was considered premature and not adjudicated.SIGNIFICANT HOLDINGSThe Court made several significant determinations: The land in question was not a capital asset under section 2(14)(iii) due to its distance from municipal limits, measured by the shortest road distance as per CBDT Circular No. 17/2015. Consequently, the provisions of section 50C were not applicable, and the related addition was deleted. The cash deposits were not fully explained; however, a partial explanation was accepted, reducing the addition to Rs. 8,89,500. The initiation of penalty proceedings was deemed premature for adjudication.The appeal was partly allowed, with the Court providing specific directions for adjustments to the assessed income.