Sale Deed Not Document Issued By Revenue, Can't Be Used To Verify Land's Classification As 'Agricultural' For Taxation Purposes: Delhi HC

“A sale deed primarily reflects the transaction between the parties and the terms of sale, but it does not, in itself, verify the land's classification as agricultural for the taxation purposes. Therefore, heavy reliance on the sale deed to establish the agricultural character of the land would be misplaced,” a division bench of Justices Vibhu Bakhru and Swarana Kanta Sharma held.

The observation was made while hearing Revenue's appeal against ITAT order which set aside Principal Commissioner's (PCIT) order under Section 263 of the Income Tax Act whereby the Assessing Officer (AO) order determining assessee's land as “agricultural” and exempt from capital gain was found to be erroneous.

Significant to note that sale of agricultural land does not make an assessee liable to pay capital gains tax, either short-term or long-term. However, to qualify as an agricultural land, the land must meet specific criteria, including its distance from the municipal areas, as stipulated under Section 2(14)(iii)(b) of the Act.

As per the said provision (as it stood prior to its amendment i.e. at the time of AY 2013-14), if a land is situated within the distance of 8 kms from the local limits of any municipality, it would be treated as a capital asset and the assessee would be liable to pay the capital gains tax; otherwise, the land would be treated as agricultural land, which does not fall within the meaning of “capital assets”.

Assessee relied upon the sale deeds pertaining to the land in question to claim that land was agricultural in nature and was exempt from capital gains. It had also placed reliance on a certificate issued by the Tehsildar in the year 2012 allegedly to the effect that the land was situated beyond 8 kms of the municipal limits. The prescribed limit for Sohna District was 5 kms. Thus, the assessee claimed that the land did not qualify as a capital asset defined under Section 2(14) of the Act, and was thus.

However, on a perusal of the said certificate the Court noted that the same is a letter written by the assessee to the Tehsildar in which she had herself mentioned that she resided at Araji Waka Mauza Sohna, Tehsil Sohna, District Gurugram, and was requesting the Tehsildar to order the Patwari to give “certificate of distance from Sohna border of the above municipality of Araji”.

“Under normal circumstances, upon receiving such a letter, it would be the duty of the Tehsildar to undertake an inquiry and then to tender information or certify as to what is the distance of the land from the municipal limit. However, in the present case, the Tehsildar's certificate, which is only in the form of two liner endorsement beneath the application made by the assessee requesting for issuance of such certificate, would reveal that he has not even mentioned the distance of the land from the municipal limit, which is a fundamental criterion under Section 2(14)(iii) of the Act to determine whether the land qualifies as agricultural land or not, for seeking exemption from capital gains tax, but has merely mentioned that the land is out of the boundary of Sohna Municipal Corporation,” Court noted.

Before the PCIT, the assessee had also placed reliance on another certificate, which was issued by the Tehsildar in the year 2016.

However, the Court found that the said certificate draws upon the assessment made in 2012. It said, “since the 2012 certificate did not mention the distance of the land from the municipal limits, the 2016 certificate would suffer from the same deficiency inasmuch as it merely reiterates the earlier assessment without addressing the fundamental requirement of Section 2(14)(iii) of the Act.”

Court then turned to the District Town Planner's statement informing that the land in question was within 2.6 km from the old municipal limit and within 1.8 km of the extended municipal limit of Gurugram.

Moreover, the land was shown on the sectoral plan of Sector 2, 35 and 36 of Sohna, meaning thereby that the land had been developed into sectors, and thus, no agricultural operations could be carried out on the land.

In any case, the Court noted that the assessee sold the land in question within nine months from the date of purchase and did not show any agricultural income for the relevant assessment year.

It thus upheld PCIT order making assessee liable for short term capital gain.

The High Court also deemed it fit to cite Sarifabibi Mohmed Ibrahim & Ors. v. CIT (1993) whereby the Supreme Court had laid down guidelines/criteria regarding the land being defined as agricultural land.

It was held therein that the classification of land as agricultural depends on multiple factors. It was emphasized that each case must be evaluated based on its specific facts. A wide range of indicators would include the actual use of the land, whether the land is classified as agricultural in revenue records, and whether it is used for agriculture over a long period of time. Factors such as the land being under cultivation, being assessed as agricultural in revenue records, and the owner‟s intent to use it for agriculture plays a crucial role. However, conversion of the land to non-agricultural use, selling it for housing development, and the absence of agricultural activities for several years weigh against it being classified as agricultural land.

When can PCIT invoke Section 263?

In its judgment, the High Court also reiterated that PCIT would not have jurisdiction to pass an order under Section 263 of the Act solely for the reason that he held a different opinion with the AO.

“Twin conditions have to be met for assuming jurisdiction under Section 263 of the Act, and the PCIT has to form an opinion that the order passed by the AO is “erroneous” and “prejudicial to the interests of the Revenue…If the AO has applied his mind and had arrived at a plausible view, the same would not be amenable to a revision under Section 263 of the Act,” Court held.

It pointed out that the scope of these words was explained by the Supreme Court in Malabar Industrial Co. Ltd v. CIT (2000). It was held that an order passed by an assessing officer can be deemed erroneous if it is based on incorrect assumption of facts or an incorrect application of law, and also if it is passed without applying the principles of natural justice or without application of mind.

Similarly, in Gee Vee Enterprise v. Additional Commissioner of Income Tax: (1975) the High Court had held that the Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the officer should have made further inquiries before accepting the statements made by the assessee in the return.

In the present case, the High Court found that the AO neither read the contents of the certificate issued by the Tehsildar nor sought any additional evidence or document from the relevant authorities like the DTP, Gurugram. This, the Court said, “undoubtedly, suggests that the AO failed to undertake any inquiry or even apply his mind to the documents submitted by the assessee to arrive at the conclusion regarding the long-term capital gains exemption.”

It was thus of the view that the PCIT had exercised the jurisdiction under Section 263 of the Act correctly and legally, in view of the fact that the order passed by the AO was erroneous and prejudicial to the interest of the Revenue since the same was passed without conducting any enquiries and applying mind to the claims of the assessee.

Court also held that the ITAT erred in setting aside the order passed by PCIT and thus allowed Revenue's appeal.

Appearance: SSC Aseem Chawla with Advocate Pratishtha Chaudhary for Revenue; Advocate Rashmi Chopra for Respondent

Case title: Pr. Commissioner Of Income Tax Delhi -11 v. Sangeeta Jain

Case no.: ITA 1092/2018

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