2026 (2) TMI 249 - AT - Income Tax

Rural agricultural land treatment under section 56(2)(vii)(b) clarified; exclusion from capital asset leads to deletion of addition.

Application of the gifttax provision was tested against the statutory definition of capital asset; because the land lay beyond municipal limits and the ... Nature of land sold - applying Section 56(2)(vii)(b) to rural agricultural land - Definition of 'capital asset' under section 2(14) - distinguish urban and rural agricultural land - CIT(A) rejected assessee contention that provisions of section 56(2)(vii)(b) would not be applicable in the instant case as agricultural land is not a capital asset - assessee’s second contention that the AO should have made reference to the DVO to determine fair market value of the land HELD THAT:- Since agricultural land is excluded from the definition of capital asset in section 2(14), it remains outside the scope of section 56(2)(vii)(b) of the Act. Admittedly, in the instant case, the land in question is located beyond 6 kms from the municipal limits of Sambhal town as per the certificate of the Tehsildar dated 21.11.2022 and the population of Sambhal as per last census is also below 10 lakhs, in view of screenshot of the Census website filed before us. We, therefore, hold that the same is an agricultural land eligible to be excluded from the definition of ‘Capital Asset’ under section 2(14) of the Act. In view of these facts, provisions of section 56(2)(vii)(b) in the light of Explanation (d) are not applicable in respect of impugned transaction. Hence addition made u/s 56(2)(vii)(b) by the Ld. AO is, hereby, deleted. Assessee appeal allowed. Issues: (i) Whether section 56(2)(vii)(b) of the Income-tax Act, 1961 is applicable to the assessee's acquisition of agricultural land which is excluded from the definition of 'capital asset' under section 2(14) of the Income-tax Act, 1961.Analysis: The statutory text of section 2(14) excludes specified agricultural land from the definition of 'capital asset' where the land is situated beyond the prescribed municipal/population/distance thresholds. Explanation (d) to section 56(2)(vii)(b) lists 'immovable property being land or building or both' among items captured by the deeming provision, but does not itself carve out the agricultural-land exclusion contained in section 2(14). The material facts establish that the land is agricultural in revenue records, is located more than six kilometres from the local limits of the relevant municipality, and the municipal population falls below the threshold; these facts are supported by a Tehsildar certificate and census data. On applying the statutory exclusion in section 2(14) to the facts, the asset does not qualify as a 'capital asset' for purposes of the deeming provision in section 56(2)(vii)(b).Conclusion: Section 56(2)(vii)(b) is not applicable to the impugned transaction; the addition of Rs. 59,32,667 under section 56(2)(vii)(b) is deleted and the appeal is allowed in favour of the assessee.Ratio Decidendi: Agricultural land that falls within the exclusion in section 2(14) of the Income-tax Act, 1961 (on the basis of municipal limits, distance and population tests) is not a 'capital asset' and therefore the deeming provisions of section 56(2)(vii)(b) do not apply to such land.