2025 (6) TMI 386 - AT - Income Tax

Land Tax Exemption Hinges on Historical Agricultural Use, Not Just Current Cultivation Under Section 2(14)

Archita Farms Pvt. Ltd Versus The PCIT, Ahmedabad-1

The SC Tribunal addressed the tax classification of land under section 2(14) of the Income Tax Act. The key issue was whether land qualifies as ... Revision u/s 263 - Nature of land sold - AO treated the said land as agricultural land - whether the land in question would fall in the definition of agricultural land or not as per the provisions of section 2(14)? - HELD THAT:- As held time and again that the criteria to determine the nature of the land is not solely based on the fact that in a particular year or in the year of the sale of the land, any agricultural activity was carried upon it or not. It has been time and again held that if, the nature of the land recorded in the land revenue record is mentioned as agricultural land and in the past agricultural activities has been carried out and, if for certain reasons, the agricultural activities could not be done for a year or in the year of sale of land, that could not be the sole criteria to hold that the land is not an agricultural land and exemption cannot be denied for that reason u/s. 2(14) - the exercise of revisional jurisdiction by the ld. PCIT in this is not justified. The impugned order passed by PCIT is hereby quashed and the appeal of the assessee stands allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered in this appeal is whether the income earned by the assessee from the sale of certain land is taxable under the head 'capital gains' or exempt from taxation on the ground that the land qualifies as agricultural land under section 2(14) of the Income Tax Act, 1961. Specifically, the issues are:Whether the land in question falls within the definition of 'capital asset' or is exempt agricultural land under section 2(14) of the Act.Whether the absence of agricultural activity on the land in the year of sale affects its classification as agricultural land for exemption purposes.The validity of the Principal Commissioner of Income Tax's (PCIT) exercise of revisionary jurisdiction under section 263 of the Act in setting aside the assessment order on the ground that the Assessing Officer erred in granting exemption.2. ISSUE-WISE DETAILED ANALYSISIssue: Classification of the land as agricultural land under section 2(14) of the Income Tax ActRelevant legal framework and precedents: Section 2(14) of the Income Tax Act defines 'capital asset' and excludes agricultural land in certain specified areas from being treated as a capital asset, thereby exempting gains arising from its transfer from capital gains tax. The nature of land as agricultural or non-agricultural is generally determined by land revenue records (such as the 7/12 extract) and the location of the land (whether within municipality limits or not). Judicial precedents have consistently held that the classification of land depends primarily on the nature recorded in official land revenue documents and the historical use of the land, rather than solely on whether agricultural activity was carried out in the year of sale.Court's interpretation and reasoning: The Tribunal noted that the PCIT's order was based on the observation that the land was not used for agricultural purposes in the year of sale, and that it fell within municipal limits, thus disqualifying it from exemption. However, the Tribunal found that the PCIT did not dispute the assessee's claim that the land was situated about 14.5 kilometers outside the municipality limits. The Tribunal emphasized that the absence of agricultural activity in the year of sale cannot be the sole criterion to deny exemption if the land is recorded as agricultural land in the land revenue records and agricultural activities had been carried out in the past.Key evidence and findings: The assessee produced the 7/12 extract, a land revenue record, which classified the land as agricultural. The Department failed to produce any conclusive evidence to rebut this classification or to establish that the land was converted to non-agricultural use prior to the sale. The PCIT's reliance on the lack of agricultural activity in the year of sale was found insufficient to override the land revenue record.Application of law to facts: Applying the settled legal principle that the nature of land is to be determined primarily by land revenue records and historical use, the Tribunal held that the land in question qualifies as agricultural land under section 2(14). The absence of agricultural activity in the year of sale does not alter this classification and cannot justify denial of exemption.Treatment of competing arguments: The Department argued that since no agricultural activity was carried out during the relevant year, the land could not be considered agricultural land for exemption. The assessee countered by relying on the land revenue record and past agricultural use. The Tribunal favored the assessee's position, following judicial precedents that have rejected the Department's narrow approach.Conclusions: The Tribunal concluded that the PCIT's exercise of revisionary jurisdiction under section 263 was not justified because the Assessing Officer's order was not erroneous or prejudicial to the revenue. The land was agricultural land as per section 2(14), and the exemption was rightly allowed.Issue: Validity of revision under section 263 of the Income Tax ActRelevant legal framework and precedents: Section 263 empowers the Principal Commissioner or Commissioner to revise an assessment order if it is erroneous in so far as it is prejudicial to the interests of the revenue. However, the scope of revision is limited and cannot be exercised merely because the authority disagrees with the assessment officer's findings if those findings are based on relevant material and are not perverse.Court's interpretation and reasoning: The Tribunal observed that the PCIT did not examine or dispute the land's location outside municipality limits and did not consider the land revenue records. The PCIT's conclusion was based primarily on the absence of agricultural activity in the year of sale, which is not a sufficient ground to hold the assessment order erroneous or prejudicial. Hence, the exercise of revisional jurisdiction was unwarranted.Key evidence and findings: The assessment order was passed after considering the nature of the land and the exemption claim. The PCIT's order did not bring any new material to establish error or prejudice.Application of law to facts: Since the Assessing Officer's order was based on relevant evidence and legal principles, and the PCIT failed to demonstrate any error or prejudice, the revision under section 263 was held to be unjustified.Treatment of competing arguments: The Department contended that the Assessing Officer erred in granting exemption, justifying revision. The assessee argued that the Assessing Officer's order was valid and supported by records. The Tribunal sided with the assessee, emphasizing the limited scope of revision.Conclusions: The Tribunal quashed the PCIT's revision order and restored the assessment order.3. SIGNIFICANT HOLDINGS'It has been held time and again that the criteria to determine the nature of the land is not solely based on the fact that in a particular year or in the year of the sale of the land, any agricultural activity was carried upon it or not.''If the nature of the land recorded in the land revenue record is mentioned as agricultural land and in the past agricultural activities has been carried out and, if for certain reasons, the agricultural activities could not be done for a year or in the year of sale of land, that could not be the sole criteria to hold that the land is not an agricultural land and exemption cannot be denied for that reason u/s. 2(14) of the Act.''Under the circumstances, the exercise of revisional jurisdiction by the ld. PCIT in this is not justified.'The Tribunal established the principle that the classification of land for exemption under section 2(14) depends primarily on land revenue records and historical agricultural use, not merely on agricultural activity in the year of sale. It reaffirmed the limited scope of revision under section 263 and held that absence of agricultural activity in the year of sale does not justify denial of exemption or