Land cannot be held as an agricultural land to claim the exemption from capital gains tax, if it is not carrying out agricultural operations
Capital gains tax is a levy assessed on the positive difference between the sale price of the asset and its original purchase price. Under section 2(14)(iii) of the Income Tax Act, “capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include an agricultural land in India, not being a land situated-
- in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the 1st day of the previous year ; or
- in any area within such distance, not being more than eight kilometres from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;
Let us refer to the case of Jairam G Kimmane v. Deputy Commissioner of Income Tax, Central Circle-1(3) where the issue under consideration was whether the land/property sold by the assessee was an agricultural land and thus was not eligible to capital gains tax?
Facts of the Case
- The assessee is an individual.
- In the course of assessment proceedings, the AO noticed that assessee received a sum of Rs 2 crores on sale of 0.40 hectares (ha) of land at Raigad District, Maharashtra.
- Since capital gain on sale of the property had not been disclosed in the ITR, the AO called upon the assessee to explain why the same was not declared.
- The assessee took a stand that the property was an agricultural land and therefore was not a capital asset and capital gain on sale of agricultural land was not eligible to tax.
Observations of the AO
- AO was of the view that the main business of assessee was trading in arecanut.
- The Assessee owned the land in question for more than 16 years and had not offered any agricultural income from the said land.
- The assessee had not brought any material on record to show that he conducted agricultural operations/activities over the property.
- In the vicinity of assessee’s land were leisure and entertainment spots where there were lot of holiday homes, home stay and resorts.
- The sale value of the property @ Rs. 2 Crores was not a value which was generally offered by persons who were agriculturists and who purchased agricultural land.
- The assessee did not bring any documentary evidence on record to suggest basic agricultural operations like tilling, ploughing, weeding, planting, etc. were conducted during the period of ownership nor was there evidence to show that the assessee deployed peasants to conduct agricultural operations.
- The Assessee pointed out that Agricultural land in India was outside the purview of the definition of capital asset u/s.2(14)(iii).
- The Assessee took a stand that Agricultural activities were carried out on the property and was therefore an Agricultural land.
- The AO did not dispute the fact that the property is not situate within the jurisdiction of a municipality or a cantonment board and therefore did not fall within the exclusion clause or that it was within 8 kms from the local limits of any municipality.
- There was no dispute that the property did not fall within clauses of Sec.2(14)(iii)(a) or (b).
- The mere fact that a land was situated in an area outside the area referred to in clause (a) or (b) of section 2(14)(iii), did not automatically make it an Agricultural land
- To be called an agricultural land, the land must have been used for Agricultural purposes.
- According to the AO, the Assessee did not establish use of the land for agricultural purpose and other circumstances showed that the Assessee’s land was not agricultural land and was sold as a capital asset and not as agricultural land and hence the gain on sale of the property was chargeable to tax as income under the head “Capital Gain”.
On appeal by the Assessee, the CIT(A) agreed with the view of the AO. Therefore, assessee appealed before the Income Tax Appellate Tribunal (ITAT).
Reference to Sarifabibi Mohmed Ibrahim v. CIT (SC) by ITAT
There was no dispute that the property that was sold by the Assessee did not fall within clauses of Sec.2(14)(iii)(a) or (b). The mere fact that a land is situate in an area outside the area referred to in clause (a) or (b) of sec.2(14)(iii) of the Act, did not automatically make it an Agricultural land. Such land has to be used for agricultural purposes as laid down in several judicial pronouncements.
The Supreme Court in Sarifabibi Mohmed Ibrahim v. CIT (SC) laid down the principles to be followed in deciding the question as to what can be construed as “Agricultural land” as under:-
In as much as agricultural land is exempted from the purview of the definition of the expression “assets”, it is impossible to adopt so wide a test as would obviously defeat the purpose of the exemption given”. The idea behind exempting the agricultural land is to encourage cultivation of land and the agricultural operations. In other words this exemption had to be necessarily given a more restricted meaning. What is really required to be shown is:-
- the connection with an agricultural purpose and user and not the mere possibility of user of land by some possible further owner or possessor, for an agricultural purpose
- It is not the mere potentiality but its actual condition and intended user which has to be seen for purposes of exemption
- The person claiming an exemption of any property of his from the scope of his assets must satisfy the conditions of the exemption
- The determination of the character of land, according to the purpose for which it is meant or set apart and can he used, is a matter which ought to be determined on the facts of each particular case
- The fact that the land is assessed to the Land Revenue as agricultural land under the State Revenue Law is certainly a relevant fact but if is not conclusive
Reference to Commissioner of Income-Tax v. V.A. Trivediby ITAT
- In this case the assessee had purchased the 7 acres of land in February 1966. The land was covered by the Nagpur Improvement Trust Scheme.
- In August 1966 he obtained permission to convert the said land to non-agricultural use. In June 1968 he entered into an agreement with a Housing Cooperative Society to sell 3 acres out of it.
- The sale-deed was executed in October 1968.
- In the assessment proceedings the assessee claimed that the surplus income arising from the sale of land was exempt from tax as it was agricultural land at the time of its sale.
- The matter reached the High Court. The Division Bench referred to several facts established from the record.
- The Bench observed that to ascertain the true character and the nature of the land, it must be seen whether it was put to use for agricultural purposes for a reasonable span of time prior to the relevant date and further whether on the relevant date the land was intended to be put to use for agricultural purposes for a reasonable span of time the future.
- The Bench held that the agreement entered into by the assessee with the Housing Society was the crucial circumstance since it showed that the assessee agreed to sell the land to Housing Society admittedly for utilization for non-agricultural purposes.
- The sale-deeds were executed four months after the agreement of sale and even if any agricultural operations were carried on within the said span of four months
- The Bench held that it was evidently in the nature of a stop-gap arrangement.
- On the date the land was sold, the Bench held, the land was no longer agricultural land which was evident from the fact that the assessee had obtained permission even in August 1966 to convert the said land to non-agricultural purposes.
Observations of the ITAT
- In the present case, the claim of the Assessee that agricultural operations were carried out over the property and the property was actually used for agricultural purpose was sought to be established by relying on the classification of the property in revenue records.
- The Revenue contended that there was no evidence of the Assessee carried out agricultural activities over the property.
- The Assessee had not established as to how agricultural activities were carried out and what expenses were incurred in carrying out agricultural operations over the property.
- The revenue also contended that the Assessee had not declared any income from Agriculture from the property in question
- There is no evidence of availability of Agricultural produce and how they were dealt utilized. The Revenue also contends that the burden of proof that the property was agricultural land at the time of transfer to claim exemption was on the Assessee.
- The question whether the land was Agricultural land was to be decided on facts of each case and decided cases are only guidelines to be kept in mind.
- In the given case, large number of circumstances may be indicative of agricultural character, but one circumstance may outweigh all of them and on its basis the land would be held to be a non-agricultural land.
- If one considers the facts and circumstances of the present case as a whole and an overall view is to be taken in deciding whether the land was an agricultural land, one would come to a conclusion that the property could not be considered as Agricultural land.
- Though the circumstance that the land was classified as Agricultural in the revenue records was in favour of the assessee, in ITAT’s view, the other circumstances pointed out outweighted all of the circumstances in favour of the Assessee
- On the basis of those circumstances, ITAT concluded that the property was not an agricultural land.
In conclusion, land cannot be held as an agricultural land to claim the exemption from capital gains tax, if it is not carrying out agricultural operations.