Agricultural Land Sale Revenue Not Considered Capital Asset: ITAT Verdict

The Income Tax Appellate Tribunal (ITAT) in Delhi has ruled that income generated from the sale of agricultural land should not be considered as a capital asset. The bench, comprising Saktijit Dey (Judicial Member) and M. Balaganesh (Accountant Member), has concluded that income tax is not applicable to the proceeds obtained from the sale of agricultural land.

The case involved a search and seizure operation carried out on the taxpayer, which led to proceedings under Section 153A of the Income Tax Act being initiated against them. In response to the notices, the taxpayer filed their income tax return, declaring an income of Rs. 54,93,260 for the assessment year 2013-14 and Rs. 79,20,750 for the assessment year 2014-15.

Later, the taxpayer submitted revised income tax returns for the disputed assessment years, where they increased the sale consideration received from the sale of land to Rs. 1,36,20,000 and Rs. 3,18,31,000 for the assessment years 2013-14 and 2014-15, respectively.

During the assessment process, the Assessing Officer referred to a statement given by the taxpayer and a valuation report from 2004 and requested an explanation as to why the additional cash received as on-money for the land sale should not be regarded as undisclosed income.

The taxpayer argued that the valuation report discovered during the search and seizure operation, which indicated a higher land value in 2004, should not be considered reliable. The reason being that the report was primarily obtained for the purpose of securing a bank loan and may not accurately reflect the true market value of the land.

The taxpayer contended that the sold lands were categorized as agricultural land situated in Surajpur, Uttar Pradesh, and was located more than 8 kilometers beyond the boundaries of Nagar Panchayat, Dadri. They further argued that the area's population was below the 10-lakh threshold.

According to the assessee, since the land sold was agricultural land and did not fall within the definition of a capital asset as outlined in Section 2(14), any additional consideration received from the sale, even if considered as on-money, would be exempted from taxation as it would be classified as agricultural income.

However, the Assessing Officer remained unconvinced by the taxpayer's submissions and proceeded to treat the additional consideration received on the land sale as undisclosed income​, subjecting it to taxation.

The department argued that if there is strong evidence suggesting that the declared sale price is significantly lower than the fair market value, it proves that the taxpayer has received additional undisclosed income, commonly known as on-money.

Consequently, this undisclosed income must be subject to separate taxation. The main concern was whether the amount received by the taxpayer for the sale of agricultural land, whether declared as the sale consideration or on-money, should be subject to taxation.

According to the ITAT's ruling, the Assessing Officer has not disputed the nature and character of the land that was sold. Once it is established that the land in question is agricultural land, it should not be classified as a capital asset.

Therefore, any income generated from the sale of agricultural land, whether through the declared sale consideration or on-money, would be considered exempt income since the source of both the declared sale consideration and the on-money received is the same.