Facts of the Case

The assessee sold land described as agricultural land during the relevant assessment year. The Assessing Officer treated the land as a capital asset and brought the sale consideration to tax under the head “Capital Gains” under Section 45 of the Income-tax Act, 1961.

The assessee contended that the land was rural agricultural land situated beyond prescribed municipal limits and therefore did not fall within the definition of “capital asset” under Section 2(14). The Assessing Officer rejected the contention and made the addition. The CIT(A) confirmed the action. The assessee appealed before the ITAT.

 Issues Involved

  1. Whether the land sold qualifies as “capital asset” under Section 2(14).
  2. Whether capital gains tax is applicable on sale of rural agricultural land.
  3. Determination of location and nature of land for tax purposes.

Petitioner’s Arguments (Assessee)

  • The land was agricultural in nature and used for agricultural purposes.
  • It was situated outside notified municipal limits and therefore excluded from the definition of capital asset.
  • Revenue records and other documents supported the agricultural character of the land.
  • Consequently, the gain from sale was not taxable as capital gains.

Respondent’s Arguments (Revenue)

  • The land had potential for non-agricultural use and therefore constituted a capital asset.
  • The Assessing Officer was justified in taxing the gain under Section 45.
  • The order of the CIT(A) deserved to be upheld.

 Court Order / Findings (ITAT Allahabad)

  • The land was recorded as agricultural in official revenue records.
  • It was situated beyond the prescribed distance from municipal limits.
  • No material was produced to show conversion to non-agricultural use.

Important Clarification

  • Only urban agricultural land falling within specified limits qualifies as capital asset.
  • Rural agricultural land remains outside the scope of capital gains taxation.
  • Classification in revenue records and actual use are crucial factors.
  • Potential for development alone does not convert agricultural land into a capital asset.

Link to download the order –

https://itat.gov.in/public/files/upload/1631257832-186%20ganga.pdf

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