Non-agricultural property even in a remote village is a “capital asset”

On 20th Feb 2013, ITAT bench held that Non-agricultural property, whether inside the municipality or outside
the municipality or even in a remote village is a "capital asset" and transfer
of the same may generate income liable for capital gains taxation.
The assessee had sold twelve pieces
of land belonging to him to M/s. Pallanishamy Properties Pvt. Ltd. for a
consideration of 26,40,00,000/-. All the parcels of land are contiguously
situated at Padur Village. The parcels of land sold by the assessee in the
previous year relevant to the assessment year under appeal, were purchased by
the assessee over a period of ten years from 1980 to 1991. The assessee did not
offer any income for taxation by way of long-term capital gains on account of
sale of lands, as stated above. The claim of the assessee before the Assessing
Officer was that the lands sold by him were agricultural land and, therefore,
not a capital asset exigible to capital gains taxation.

The AO summoned the Village
Administrative Officer and obtained a sworn statement on 9.12.2011. In his
statement given before the AO, the Village Administrative Officer made it clear
that the lands sold, belonged to the assessee but he did not carry on any
agricultural activities at the time of selling the lands. He also stated that
as per the land records, the assessee had not carried on any agricultural
activities for so many years in the past. He also stated that the assessee has
not paid local land cess, land cess surcharges and water charges for the lands
sold by him, as is otherwise required in the case of agricultural lands. He
also stated that agricultural activities were not carried out, not only in
assessee's property but also in surrounding properties. He further stated that
even though the land was classified as agricultural land, no agricultural
activities were being carried out in the area because of development of real
estate business. He further stated that the assessee still holds lands unsold
and those unsold lands were also not used for agricultural purposes.

Assessee before AO stated that the
lands are classified as agricultural lands in revenue records as nanjai and punjai
lands and this classification establishes that the lands were agricultural in
nature. After the sale of lands, the purchasers might have developed the lands
but that does not alter the character of the lands before its sale. The
assessee explained that when the lands were sold by him, they were agricultural
in nature and, therefore, the lands did not partake the character of capital
asset.

Assessing Officer held that the
properties sold by the assessee were not agricultural in nature. Accordingly, he
computed the long term capital gains at 26,16,06,595/- arising out of the sale
of lands made by the assessee for a consideration of 26,40,00,000/-.

CIT(A) accepted the contentions
of the assessee and held that the properties sold by the assessee were
agricultural in nature.

Aggrieved by the order passed by
Ld. CIT(A), revenue appeal before ITAT

Whether a particular land is agricultural or not, is basically a
question of fact.

ITAT bench observed that the core
of the arguments of the assessee is on the classification of the land in revenue
records. But, that alone does not conclusively prove the nature of the land
sold by the assessee, as other evidences are shadowing the said presumption
prima facie created by the entry made in the revenue records. The properties
were in fact, purchased over a period of ten years since 1980. At the time of purchase
of these parcels of land, they might have been agricultural lands. That is why
the land parcels are classified in the revenue records as agricultural lands.
That position was continued in a religious manner without any annual
verification of the nature of the property. But, the character of the land sold
by the assessee has been explained by the Village Administrative Officer in
unequivocal terms in his statement given under sec. 131 before the assessing
authority. The Village Administrative Officer has stated that not only for the
impugned previous year but also for so many earlier previous years, no
agricultural activities were carried out in that area. The assessee as well as
the owners of surrounding properties were not in fact carrying on any agricultural
activities. The statement given by the Village Administrative Officer is very
exhaustive and descriptive. He has stated the reasons as to why the
agricultural activities were not being carried out on those properties.

Because of urbanization, the
properties, real estate development has started taking place in that area as
well. Four educational institutions have been set up in the area within a short
period. A lot of private and commercial buildings are constructed. Because of
the boom of the real estate development, the entire contingent of that land has
become subject matter of transactions intended for the purpose of real
estate development. In that
background no agricultural activities were being carried out in that area. The
case of the assessee is also not an exception.

The past history of the land
alone is not the deciding factor. Once upon a time the land might have been
used for agricultural operations. In that way of speaking, almost all parts of Chennai
Metropolis might be agricultural or marshy land in good old past. Therefore,
history is not the only test to be applied to decide the character of the land
at the time of sale. A temporary stoppage in the agricultural activities
carried on by an assessee also should not go against an assessee. For one or
other reason, an assessee may not be carrying on agricultural operations for
one or two years, he might be carrying on agricultural operations for all the
years in a consistent manner. In such cases, it is not possible to hold that
non carrying on agricultural operations for one or two years permanently
changes the character of the land.

It is not a case of intermittent stoppage
of agricultural operations. It is a case of permanent stoppage of agricultural
operations in the light of real estate development taking place in the
particular area. Therefore, by
virtue of not carrying on
agricultural activities for a quiet long time in the past, the character of the
land occupied by the assessee has been naturally converted into a
non-agricultural land.

ITAT further observed that in the
context of agricultural operations, it is necessary to see that the
agricultural operations carried on by the assessee must be activity of economic
gain. It must generate meaningful income to the person who is carrying on
agricultural activities. If the agricultural activities carried on by the
assessee as a hobby or casual or incidental, it is very difficult to hold a
view that the land is agricultural in nature.

In fact, the assessee had started
purchasing the land since 1980. He continued to purchase the land till 1991.
Since then upto the assessment year 2003-04, the assessee had not returned any
agricultural income. The assessee started filing returns for the assessment
years 2004-05 to 2008-09. We cannot rule out that this was only a ploy carried out
by the assessee to make an impression before the tax authorities that the
assessee's land was agricultural in nature, so that the assessee can claim the
benefit of agricultural land, when the lands are sold, in view of high demand
of land in the area and in view of hectic activities of real estate
development.

the agricultural land sold by the
assessee had a market value of more than 6 crores per acre. It is unheard of.
It clearly illustrates that the land has become an non-agricultural land with
high market potential for real estate development, not all of a sudden in the previous
year relevant to the assessment year under appeal but over a period of long
years in the past.

Held, the lands sold by the
assessee in the previous year relevant to the assessment year under appeal for
a consideration of 26,40,00,000/- were not agricultural in nature, but, on the
other hand, they are non-agricultural land. Therefore, it definitely comes
under the category of "capital asset". Accordingly, the gains arising out of transfer
of that capital asset is exigible to capital gains tax.

A non-agricultural property,
whether inside the municipality or outside the municipality or even in a remote
village is a "capital asset" and transfer of the same may generate income
liable for capital gains taxation.


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