2025 (3) TMI 1282 - HC - Income Tax

Nature of land sold - LTCG or agricultural land - Capital Asset u/s 2(14) - HELD THAT - Section 2 14 defines what is capital asset . Any agricultural land which is not located with 8Km from the local limits of any Municipality or Cantonment Board is exempted from being considered as capital asset. From the reading of Section 2 14 of the Act it is seen that the term Municipality should be understood in the context to mean a Local Body whether known as Municipality Municipal Corporation Notified Area Committee Town Area Committee Town Committee or by any other name. Therefore the conclusion of the Commissioner of Income Tax is contrary to the plain language of Section 2 14 of the Act. In the present case the fact that the land is situated beyond 8Kms from the Municipality is not in dispute. Therefore the order of the Appellate Tribunal holding that the lands in Egathur and Navalur Villages are agricultural lands cannot be faulted. Investment in NABARD bonds to claim deduction u/s 54EC - It is admitted that another property was sold only on 13.02.2006 for a consideration. Therefore consideration received on 13.02.2006 was not available with the assessee to make the investment in NABARD bonds on 26.11.2005. Therefore the order of Commissioner of Income Tax is perfectly valid. Assessee is entitled to claim deduction u/s 54EC only for a sum by way of long term capital gain of sale of shares and a further sum by way of sale of property. As rightly held by the Commissioner out of a sum of Rs. 10 Crores the assessee can claim exemption or deduction u/s 54EC only to an extent of Rs. 8, 55, 54, 167/-. The claim for deduction under Section 54EC cannot be permitted to the extent of Rs. 1, 44, 45, 833/-. Therefore the order of the Tribunal impugned in this appeal cannot be sustained as regards the exemption claimed by the assessee to the tune of Rs. 10 Crores under Section 54EC of the Act. As a result this Tax Case Appeal is partly allowed. While confirming the order of the Tribunal as regards the finding that the sale of land in Egathur and Navalur Villages are agricultural lands to permit deduction under Section 10 37 r.w.s. 2 14 of the Act the order of Tribunal is modified by reversing the finding in relation to the deduction under Section 54EC of the Act.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

(a) Whether the Income Tax Appellate Tribunal (ITAT) was correct in setting aside the revision order passed by the Commissioner of Income Tax (CIT), holding that the order of the Assessing Officer (AO) was not erroneous and prejudicial to the interest of the revenue.

(b) Whether the ITAT was correct in law to hold that the investment in NABARD bonds for claiming reduction under Section 54EC need not be wholly from the sale consideration of the corresponding properties subject to long-term capital gains.

(c) Whether the Tribunal was right in law and on facts in setting aside the order under Section 263 by a liberal interpretation of Section 54EC, despite the absence of authority in its language.

ISSUE-WISE DETAILED ANALYSIS

Issue (a): Classification of Land as Agricultural

- Relevant Legal Framework and Precedents: The determination of whether land is classified as agricultural for tax purposes is governed by Section 2(14) and Section 10(37) of the Income Tax Act, 1961. Section 2(14) defines 'capital asset' and excludes agricultural land situated beyond 8 kilometers from the local limits of a municipality or cantonment board.

- Court's Interpretation and Reasoning: The Court noted that the land in question was situated beyond 8 kilometers from the municipality, thus qualifying as agricultural land under Section 2(14). The Tribunal's conclusion that the land was agricultural was upheld because the Government Order relied upon by the CIT only suggested future urbanization and did not alter the land's current classification as per revenue records.

- Key Evidence and Findings: The Tribunal found that the evidence supported the agricultural classification of the land, as the Government Order merely indicated potential urbanization, not an immediate change in land use.

- Application of Law to Facts: The Court applied the statutory definitions and determined that the Tribunal correctly classified the land as agricultural, making it exempt from capital gains tax under Section 10(37).

- Treatment of Competing Arguments: The CIT's argument that the land was urbanizable was dismissed as irrelevant to the current tax classification.

- Conclusions: The Court upheld the Tribunal's decision that the lands in Egathur and Navalur Villages were agricultural and exempt from capital gains tax.

Issue (b) and (c): Deduction under Section 54EC

- Relevant Legal Framework and Precedents: Section 54EC of the Income Tax Act provides for exemption from capital gains tax if the gains are invested in specified bonds within six months of the asset transfer. The section requires that the investment be made from the capital gains of the asset sold.

- Court's Interpretation and Reasoning: The Court found that the Tribunal's interpretation of Section 54EC was overly liberal. The Tribunal had allowed the deduction based on the availability of funds from various sources, not strictly from the capital gains of the specific asset sold.

- Key Evidence and Findings: The Court noted that the assessee had invested in NABARD bonds before selling one of the properties, meaning the investment was not entirely from the capital gains of the asset sold.

- Application of Law to Facts: The Court applied Section 54EC, determining that the deduction should be limited to the capital gains available at the time of the bond investment. Thus, the deduction was limited to Rs. 8,55,54,167/- instead of the Rs. 10 Crores claimed.

- Treatment of Competing Arguments: The Court rejected the Tribunal's broader interpretation, emphasizing adherence to the statutory requirement that the investment be made from the specific capital gains.

- Conclusions: The Court modified the Tribunal's order, allowing the deduction only to the extent of the capital gains available at the time of investment in the bonds.

SIGNIFICANT HOLDINGS

- The Court upheld the Tribunal's finding that the lands in Egathur and Navalur Villages were agricultural, exempting them from capital gains tax under Section 10(37) read with Section 2(14) of the Act.

- The Court reversed the Tribunal's decision regarding the deduction under Section 54EC, limiting the deduction to Rs. 8,55,54,167/-, as the investment in NABARD bonds was not wholly from the capital gains of the asset sold.

- Core Principles Established: The judgment reinforces the principle that statutory provisions must be interpreted according to their plain language, particularly regarding tax exemptions and deductions. The classification of land for tax purposes depends on current use and statutory definitions, not potential future uses.

- Final Determinations on Each Issue: The appeal was partly allowed, confirming the agricultural classification of the land while modifying the deduction allowed under Section 54EC. The claim for deduction beyond Rs. 8,55,54,167/- was disallowed.