Rural Agricultural Land Exclusion prevents capital gains charge and bars attribution of unrecorded 'on money' where disclosure and confrontation are absent.

Land at Village Magarchaba was found to constitute rural agricultural land falling within the statutory exclusion from capital asset status; accordingly sale proceeds do not attract long-term capital gains. The tribunal emphasised that the assessing officer failed to disclose or furnish materials relied upon and denied the assessee an opportunity to rebut, violating principles of natural justice; for that reason and because the land is not a capital asset, attribution of alleged unrecorded 'on money' to taxable capital gains was held inadmissible and the additions were deleted.

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Issues: (i) Whether the land at Village Magarchaba is rural agricultural land outside the scope of capital asset under Section 2(14) of the Income-tax Act, 1961 and therefore not chargeable to long-term capital gains; (ii) Whether the addition of alleged 'on-money' as part of sale consideration can be sustained when the transaction concerns rural agricultural land that is not a capital asset.

Issue (i): Whether the land is a rural agricultural land not being a capital asset under Section 2(14) of the Income-tax Act, 1961.

Analysis: Evidence on record includes measurement by reference to municipal limits (google map showing 2.75 km) and patwari certificate verifying distance and rural character. The appellate authority accepted that the land lies beyond 2 km from municipal limits and that the population threshold is not met. The assessing officer did not furnish the specific materials relied upon nor afforded adequate opportunity to the assessee to rebut those materials, resulting in a violation of principles of natural justice.

Conclusion: The land at Village Magarchaba is rural agricultural land falling within Clause (iii) of Section 2(14) of the Income-tax Act, 1961 and is not a capital asset; the long-term capital gains addition is not sustainable.

Issue (ii): Whether the addition of alleged 'on-money' of Rs.16,84,620/- forming part of enhanced sale consideration can be sustained when the underlying transaction concerns rural agricultural land which is not taxable as capital gain.

Analysis: Once the transaction is held to be outside the charge to capital gains because the land is rural agricultural land, any separate attribution of unrecorded 'on-money' as part of taxable capital gains lacks relevance. Further, the assessing officer failed to disclose or confront the assessee with the evidence relied upon for such attribution and did not allow opportunity to rebut, contrary to fair procedure.

Conclusion: The addition on account of alleged 'on-money' cannot be sustained in view of the determination that the land is not a capital asset and procedural infirmities; the addition is to be deleted.

Final Conclusion: The appeal is allowed on the substantive issues decided, the additions made by the assessing officer on account of long-term capital gain and alleged 'on-money' are deleted and the assessing officer is directed to give effect to this order.

Ratio Decidendi: Where land is established as rural agricultural land within Clause (iii) of Section 2(14) of the Income-tax Act, 1961, transactions concerning its sale do not attract capital gains tax, and consequent attributions of unrecorded 'on-money' as taxable capital gains are inadmissible, especially where the assessing authority fails to disclose and confront the evidence relied upon.

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