Profit from the sale of agricultural land is not included in the calculation of book profit.

Facts and issues of the case

Learned counsel for the assessee, at the outset, submitted that during the year under consideration the assessee had sold an agricultural land on which it had earned capital gain which was exempt as having been earned on an agricultural land. It was submitted that the assessment of the assessee for the year under consideration was completed u/s 143(3) of the Act and Assessing Officer, vide notice u/s 142(1) dated 20/06/2017, specifically required the assessee to explain the claim of capital gain being exempt and in response to that the assessee vide letter dated 16/08/2017 filed various documentary evidences to demonstrate that it had earned capital gain on the sale of agricultural land. In this respect our attention was invited to pages 66 & 67 of the paper book where the copy of reply to the Assessing Officer was placed. Our attention was further invited to page 73 of the paper book wherein again vide letter dated nil, the assessee in continuation of its earlier explanation had again clarified its position with regard to exempt capital gain. It was submitted that the Assessing Officer, after due application of mind and after verifying the documentary evidences,rightly allowed the claim of the assessee of exempt capital gain being earned on agricultural land. Learned counsel for the assessee further submitted that after completion of the assessment, the Assessing Officer vide notice u/s 154 of the Act dated 02/05/2018, proposed rectification of the order passed u/s 143(3) of the Act by including profit on sale of agricultural land in the computation of book profits u/s 115JB of the Act. In view of the rectification notice the assessee again explained its case before the Assessing Officer and after considering the explanation offered and documents submitted by the assessee, the Assessing Officer dropped proceedings initiated u/s 154 of the Act vide order dated 14/06/2018. In view of the above, it was argued that the Assessing Officer twice verified the facts that the land sold by the assessee was not a capital asset and only after being satisfied with the submissions made before him drew the conclusion that the land was rural agricultural land which was not a capital asset by virtue of provisions of section 2(14) of Act and hence, the income arising from its sale was to be treated as exempt. In view of these extensive verification by the Assessing Officer, it was argued that the order passed by the Pr.CIT u/s 263 is not justified as the assessment order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue. Learned counsel for the assessee submitted that the Pr.CIT treated the assessment order as erroneous and prejudicial to the interest of the Revenue by holding that the Assessing Officer did not carry any inquiry regarding actual distance of the land under consideration from the limits of the Municipal Corporation and also he had not done any verification to ascertain that the land in question was agricultural land and whether any agricultural activities were being carried out on such land.

Learned counsel for the assessee submitted that another reason for holding the assessment order erroneous and prejudicial to the interest of Revenue is that the claim of the assessee for agriculture income of Rs.26,600/- for assessment year 2014-15 was denied as being from non-agricultural income. Learned counsel for the assessee submitted that in view of the detailed show cause notice by the Pr.CIT, the assessee filed detailed submissions and filed the documents filed during assessment proceedings and in addition also filed Google Map showing the arial distance of land which was more than six Kms. from the Village Hiranthla where the said land was situated. Learned counsel for the assessee submitted that a certified copy of Khasra Girdavri of crop sold on the on the land was also submitted wherein the details of crop produced on the above said land from the year 2012 to 2018 was mentioned. It was submitted that the Pr.CIT disregarded the submissions made and set aside the assessment order.

Learned counsel for the assessee submitted that it is wrong on the part of learned Pr. CIT to hold that agricultural land was not being used for agricultural purposes whereas the meaning of such line, mentioned in sale deed, was that said land had not been given on oral agreement for cultivation to any person. Regarding the observation of learned Pr. CIT that assessee was not able to demonstrate that the land was being used for agricultural purpose, Learned counsel for the assessee submitted that the crop inspection report by Lekhpal was also filed which shows that the land was being used for agricultural purposes. In view of the above facts and circumstances, it was argued that since the Assessing Officer had twice carried out the verification and had held the land to be agricultural land therefore, the order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue. In view of the above, Learned counsel for the assessee prayed that the order passed by learned Pr. CIT be set aside. Reliance in this respect was placed on an order of Chennai Tribunal in a bunch of appeals where under similar facts and circumstances, the Tribunal had held the land to be agricultural land.

Learned CIT, (D. R.), on the other hand, submitted that the purchaser of the land and seller of the land, both are private limited companies and the land in question cannot be classified as agricultural land as it was to be used for economic purposes and therefore, the Assessing Officer had wrongly allowed the claim of the assessee and learned Pr. CIT has rightly invoked the provisions of section 263 of the Act. learned CIT, D.R. in this respect heavily placed reliance on the order of the learned Pr. CIT.

Observation by the court

Court had heard the rival parties and have gone through the material placed on record. We find that during the year under consideration the assessee declared a profit on sale of agricultural land which the Assessing Officer verified after calling information from the assessee u/s 142(1). The Assessing Officer vide notice dated 20/06/2017 wanted the assessee to furnish details of exempt income claimed along with all the necessary documents.

On further clarification from the Assessing Officer, the assessee vide letter dated nil again submitted the following documents in support of its claim of having earned capital gain on agricultural land:“Please refer to our letter dated 16/08/2017, we submitted necessary details and documents as mentioned in serial no. 5 of such letter. further submit as under:

Original/certified copies of Khasra, Jamabandi, Khatauni in Form No. 10 and the Certificate of Tehsildar of NUH District. Certifying the distance of the agricultural land more than eight kms. from the municipal corporation are enclosed .

Court further enclose details of population in villages and towns in NUH Tehsil of Mewat, District-Haryana. This is down loaded from the web site of Census 2011 of India. It may be observed that the population of NUH Municipal Committee was only 16,260 as per last Census.

Court also enclose the location details of Hiranthla village as down loaded from the web site of Mewat, District-Haryana. It is mentioned that the NUH is the Sub-district head quarter of Hiranthla village and it is situated Ten kilometers away from the village.

Since the population of NUH Municipal Committee as per last Census is less than One lac and the Village Hiranthla is situated more than Two kilometers from the Municipal Committee, the land sold by us is an agricultural land as defined in Sec- 2(14)(iii)(b) of Income Tax Act, 1961.

From the above replies, filed by the assessee, Court found that the Assessing Officer, to his satisfaction, has arrived at the conclusion that the land sold by the assessee indeed was agricultural land and allowed the claim of the assessee. Again, vide notice dated 02/05/2018 u/s 154 of the Act, the Assessing Officer wanted a rectification of the order passed u/s 143(3) as the profit on sale of agricultural was not included while computing book profit u/s 115JB of the Act. The assessee, in response to notice u/s 154, filed the reply and Assessing Officer, after going through the submissions of the assessee, dropped the proceedings u/s 154 , copy of order u/s 154 dated 14/06/2018 is placed at pages 10 and 11 of the paper book. From the above facts and circumstances, it is evident that the Assessing Officer twice carried out investigation regarding the character of land and held the same to be an agricultural land and took a plausible view. Therefore, the order passed by Assessing Officer is neither erroneous nor prejudicial to the interest of Revenue.

In response to the notice issued by the Pr. CIT, the assessee filed detailed reply, a copy of which is placed at pages 57 to 84 of the paper book. However, the Pr. CIT rejected the contentions of the assessee and passed order u/s 263.

Regarding first observation of learned Pr. CIT regarding a line written in sale deed, we find from the copy of sale deed placed at pages 31 to 37 of the paper book, specifically at page 32, there is mention of the fact that the said land has not been given to any person orally for cultivation. The learned Pr. CIT has wrongly inferred from this line that the said agricultural land was not being used for agricultural purposes whereas the only purpose of writing this line in the sale deed is that the seller had not given any contract orally for cultivation on this land to any other person. The purpose of this line in sale deed is only to ensure that the land has not been given to any person for cultivation through an oral contract. Therefore, the first observation of learned Pr. CIT has no force which could be used to initiate proceedings u/s 263 of the Act.

As regards the second observation of having not accepted agricultural income declared by the assessee in assessment year 2014-15, Court found that non acceptance of agricultural income from agricultural land by the Revenue authorities cannot be a reason to classify the said land as not being used for agricultural purposes. The fact of the matter is that the assessee filed necessary evidences regarding cultivation of said land which is apparent from the copy of Khasra Girdwari placed at pages 40 to 42 of the paper book wherein it has been mentioned that the assessee is Khudcast. The detail of agricultural produce on such land from the years 2012-13 to 2017- 18 is mentioned on copy of Khasra, a copy of which is placed in paper book pages 68 & 69. The said copy was filed with AO vide covering letter No. NIL dated NIL, placed in paper book page 73. This Khasra Girdwari clearly mentions that there was cultivation of Sarson during these years. Therefore, there was enough evidence before the Assessing Officer to hold that agricultural activities were being carried out on such land. The findings of Pr. CIT that evidence for agricultural activities was not filed before Assessing Officer is not correct. Such evidence of existence of agricultural activities was filed with Pr. CIT also which is part of submissions before him but which he ignored while holding that no agricultural activities were being carried out on such land.

Regarding the third observation of learned Pr. CIT that classification of land in revenue records, as agricultural land, will not conclusively prove that nature of land was an agricultural land is not correct as the character of land is ascertained from the classification in the Revenue records which undoubtedly in the Revenue record is agricultural land. The Hon’ble Supreme Court in the case of CWT vs. Officer-in-Charge (court of wards) 105 ITR 138 has held that entries in the Revenue records are considered as good prima facie evidence for classifying the land as agricultural land.

The fourth observation of learned Pr. CIT that the future land use is for economic utilization also has no force as held by the Chennai Bench of the Tribunal in a bunch of appeals in an order dated 05/04/2017 where the

Tribunal has held that the future scope of the area to use the land for non agricultural purposes do not reflect that the land is not an agricultural land. The Tribunal in a consolidated order dated 05/04/2017 in a bunch of appeals has relied on different decisions of Hon’ble High Courts to arrive at such conclusion. In the present case there is no denying of the fact that in the Revenue records the land has been classified as agricultural land. The evidence of agricultural activities being carried out on such land was filed with the Assessing Officer. The copy of Jamabandi and Khasra Khatauni was filed with the Assessing Officer, a copy of covering letter submitting these documents, is placed in paper book pages 73. The copy of Khasra/Girdwari and crop inspection book was filed before the Assessing Officer which was again filed before Pr. CIT, a copy of which is placed in paper book pages 68 & 69 where from 2012-13 to 2017-18, Sarson has been mentioned to have been cultivated. The evidence of the land being situated at an ariel distance of 10 Kms., was also filed with the AO vide letter dated nil wherein the details of location, details of land as downloaded from web along with details of population as per census 2011 was submitted. The contents of such letter has already been reproduced in our order vide para 4.1. Therefore, keeping in view these documents and evidences the Assessing Officer took a plausible view and held such land to be agricultural land.

Court further find that 154 proceedings were initiated against assessee for rectification of a mistake apparent from record. The proposed rectification, as mentioned in the notice u/s 154 proceedings, is as below:“The following discrepancies have been noticed from the perusal of Balance Sheet, Profit & Loss Account, Auditors report, Computation of Income and other relevant documents submitted by you for the A.Y. 2015-16. during the assessment proceeding. Therefore, the same is proposed to be rectified.

On perusal of records it was observed that the assessee had sold a property situated at NUH municipal committee at village Hiranthaila for a consideration of Rs.6,32,90,000/- which was purchased in the year 2010-11 for a consideration of Rs.1,75,18,500/- The profit on sale of this agricultural land amounting to Rs.4,57,71,500/- was credited in P & L account while computing income under normal provisions of act claimed the gain not chargeable to tax as the said property was not a capital asset. While computing the Book Profit u/s. 115JB, the gain of Rs.4,57,71,000/- cannot be reduced from Net Profit because the amount credited in

P&L is not exempt in section 10 as the gain is not an agricultural income which is restricted to the nature of income mentioned in section 2(1A) and the instant income is not covered therein.In the light of the Book Profit comes to Rs.4,80,02,457/- and tax including surcharge, EC, SHEC & Interest comes Rs.1,22,83,111/- is short charge.”In view of the above facts and circumstances, the order passed by learned Pr. CIT is not justified. The order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue nor the Assessing Officer has assumed wrong facts while arriving at the conclusion. In view of the above, the order passed by learned Pr. CIT u/s 263 is quashed.