Agricultural land sale remains exempt from capital gains tax despite buyer's subsequent conversion under section 63(AA)

The ITAT Ahmedabad dismissed the Revenue's appeal regarding capital gains taxation on land transactions. The assessee purchased eight pieces of agricultural land within a short span and sold them shortly thereafter. The AO treated the land as non-agricultural for industrial purposes, resulting in short-term capital gains. However, CIT(A) held the land remained agricultural at the time of sale, exempting it from capital gains tax. The ITAT upheld CIT(A)'s decision, noting that land records confirmed agricultural status at purchase and sale. The sale deeds contained conditional clauses under section 63(AA) requiring purchasers to convert land to non-agricultural use within 90 days, with automatic cancellation upon failure. Since conversion responsibility lay with purchasers after sale completion, the assessee sold agricultural land that was subsequently converted by buyers. This subsequent conversion did not retroactively change the agricultural nature of land sold by the assessee, maintaining the capital gains exemption.

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ISSUES:

Whether the profit from sale of agricultural land, subsequently converted to non-agricultural land by the purchaser, constitutes short-term capital gains taxable under the Income Tax Act.Whether the nature of the land at the time of sale by the assessee determines the taxability of capital gains, despite the purchaser's intended industrial use and conversion.Whether the short holding period and significant profit on sale of multiple land parcels indicate a taxable capital gain event.

RULINGS / HOLDINGS:

The court held that the land sold by the assessee was agricultural land at the time of sale, and "transfer u/s 63(AA) is conditional and has to be converted into non-agricultural land within 90 days," failing which the sale deed gets cancelled; hence, the land sold cannot be treated as non-agricultural land for capital gains taxation.The court affirmed that "the assessee has purchased agricultural land and sold agricultural land which has been subsequently converted into nonagricultural land by the purchaser," and this does not ipso facto make the land sold by the assessee non-agricultural.The court declined to interfere with the appellate order deleting the addition of short-term capital gains, emphasizing that the land's agricultural nature at the time of sale prevails over the purchaser's subsequent conversion for industrial use.

RATIONALE:

The court applied the provisions of Section 63(AA) of the Income Tax Act, which conditions the validity of transfer of agricultural land on its conversion to non-agricultural land within 90 days, otherwise rendering the sale deed void.The decision relied on land records and sale deeds confirming the agricultural status of the land at the time of sale by the assessee, distinguishing the purchaser's post-sale conversion as not affecting the nature of transfer for capital gains purposes.The ruling reinforces the principle that the taxability of capital gains on land sales depends on the land's status at the time of transfer, not on subsequent use or conversion by the buyer.

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