2019 (4) TMI 1981 - AT - Income Tax

Gain on sale of land - nature of land sold - agricultural land or capital asset - Whether the land was classified in the revenue records as agricultural and whether it was subjected to payment or land revenue? - HELD THAT - In the present case in hand the assessee has obtained preliminary approval for conversion of agricultural land into non-agricultural purposes. However neither the assessee nor the purchaser used the said land for non-agricultural purposes and the status of the asset remains in the Revenue records as AGRICULTURAL LAND as could be evidenced from the Encumbrance Certificate issued by the Registration Department for the period from 01.07.2007 to 01.03.2016. The Information Officer Dy. Block Development Officer Sholavaram Panchayat Union vide his letter bearing No. N.K. No. 2272/2015/A-3 dated 27.07.2015 which was obtained under Right to Information Act 2005 confirmed that the approval obtained by the assessee was valid for 3 years only based on the file District Fire Dept. License and Dist. Health Dept. approval has not been obtained and submitted and if NO action has been initiated to fulfil the terms and conditions of the approval then the approval is considered to be lapsed. While conveying approval for conversion the competent authority has imposed various conditions and one of the conditions at 7 is that This concern should be accorded final sanction only after obtaining necessary approvals from the other Central and State Government Departments under the applicable laws and regulations . Admittedly the assessee has not obtained any approval as mandated in the preliminary approval. Encumbrance Certificate issued by the Registration Department for the period from 01.07.2007 to 01.03.2016 the status of the land remains as agricultural land and moreover the assessee has declared agricultural income from their agricultural lands. The Assessing Officer accepted the agricultural income declared by the assessee during regular assessment under section 143(3) of the Act but in the assessment under section 143(3) r.w.s. 263 of the Act the Assessing Officer treated the same as income from other sources merely on the ground that the assessee has not produced any bills or vouchers either for sale of produce or for purchase of seeds etc. Even now also it is not possible to obtain any pakka bill or vouchers for the sale of agricultural produce or purchase of seeds from surrounding farmers/villagers. We find that most of the replies stated by the ld. DR are incorrect or not supported by any material and or against the valid documents of the State Revenue authorities. In our considered opinion and based on our observations on the replies filed by the ld. DR it is not the case of the Department. Thus we hold that the land sold by the assessees and purchased by M/s. Agility Logistics Pvt. Ltd. is in the nature of agricultural land and the sale of agricultural land no capital gain tax is warranted in all the assessees case. - Decided against revenue.

Summary

Issues Involved:
1. Classification of land as agricultural or non-agricultural.
2. Taxability of capital gains arising from the sale of the land.
3. Validity of preliminary approval for land conversion.
4. Compliance with conditions for final approval of land conversion.
5. Acceptance of agricultural income by the Assessing Officer.

Detailed Analysis:

1. Classification of Land as Agricultural or Non-Agricultural:
The primary issue was whether the land sold by the assessees was agricultural land, which would exempt it from capital gains tax. The Revenue argued that the land had been converted for non-agricultural purposes, evidenced by the assessees obtaining a "No Objection Certificate" from the Tahsildar and selling the land to Agility Logistics Private Limited for constructing a cargo cum truck terminal. The assessees countered by submitting extracts from Adangal and Chitta Register, Encumbrance Certificate, and argued that the preliminary approval for conversion did not change the land's status pending final approval. The Tribunal referenced the Supreme Court's judgment in Sarifabibi Mohamed Ibrahim, where various factors were considered to determine the land's nature. The Tribunal found that majority of these factors supported the assessees' claim of the land being agricultural.

2. Taxability of Capital Gains Arising from the Sale of the Land:
The Tribunal examined whether the sale of the land attracted capital gains tax. The Revenue's stance was that the land's conversion to non-agricultural purposes made it a capital asset. However, the Tribunal noted that the land was not used for non-agricultural purposes and remained classified as agricultural in revenue records. The Tribunal cited the case of CIT v. Ashok Kumar Rathi, where the Madras High Court held that land entered as agricultural in revenue records and generating agricultural income could not be taxed as capital gains. The Tribunal concluded that the land sold was agricultural and exempt from capital gains tax.

3. Validity of Preliminary Approval for Land Conversion:
The Tribunal scrutinized the preliminary approval obtained by the assessees for converting the land to non-agricultural purposes. The assessees argued that the preliminary approval did not change the land's status as it required further approvals to attain finality. The Tribunal found that the preliminary approval had not reached finality as the assessees had not obtained necessary approvals from other Central and State Government Departments, as mandated by condition No. 7 of the preliminary approval.

4. Compliance with Conditions for Final Approval of Land Conversion:
The Tribunal considered whether the assessees complied with the conditions for final approval of land conversion. The assessees presented evidence that the necessary approvals were not obtained, and the land remained classified as agricultural in the Encumbrance Certificate. The Tribunal referenced the Information Officer's letter confirming that the preliminary approval was valid for three years and had lapsed due to non-compliance with the conditions. Thus, the Tribunal held that the land had not been converted to non-agricultural purposes.

5. Acceptance of Agricultural Income by the Assessing Officer:
The Tribunal addressed the issue of the Assessing Officer accepting the agricultural income declared by the assessees during regular assessment but treating it as income from other sources in the assessment under section 143(3) r.w.s. 263 of the Act. The Tribunal found that the land had plantation crops, and the assessees had declared agricultural income, which was accepted during regular assessment. The Tribunal held that the agricultural income was genuine and supported by evidence, including photographs of the land with coconut trees.

Conclusion:
The Tribunal dismissed the Revenue's appeals, holding that the land sold by the assessees was agricultural and exempt from capital gains tax. The Tribunal emphasized that the preliminary approval for conversion did not alter the land's status, and the necessary final approvals were not obtained. The Tribunal also upheld the acceptance of agricultural income declared by the assessees. The judgment was pronounced on April 26, 2019, in Chennai.