Rural agricultural land, not converted to non-agricultural, is not a "capital asset" : Does not attract capital gains tax.
Income Tax Appellate Tribunal Rules in Favor of Bhadrabala Joshi: Agricultural Land Sale Exempt from Capital Gains Tax. Tribunal affirms rural agricultural land is not a capital asset, quashes penalty proceedings; reassessment based on natural justice upheld.
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Surat Bench has delivered a judgment favoring Bhadrabala Dhimantrai Joshi, appellant, against the Assistant Commissioner of Income-tax. The Tribunal determined that the sale of Joshi's rural agricultural land does not attract capital gains tax, as it is not classified as a "capital asset" under Section 2(14)(iii) of the Income-tax Act, 1961. The bench, comprising Shri Dinesh Mohan Sinha, Judicial Member, and Shri Bijayananda Pruseth, Accountant Member, delivered the decision on September 26, 2025.
The core issue revolved around whether Joshi's sale of agricultural land, recorded as such in revenue documents and located in a village with a population below 10,000, could be classified as a "capital asset." The Tribunal found that the land was not converted to non-agricultural use, nor subjected to any development, and was situated more than 15 kilometers from Amod Municipality. Consequently, it ruled that the surplus from the land's sale is not liable to capital gains tax.
The Tribunal's decision overturned the assessments made by both the Assessing Officer and the Commissioner of Income-tax (Appeals), who had previously determined the land as a capital asset and added Rs.1,21,92,898 to Joshi's income as business income. This addition was based on the land's perceived potential for non-agricultural use and its sale price, which was presumed to be influenced by nearby industrial developments.
Supporting its decision, the Tribunal cited numerous precedents, including the cases of Siddharth J. Desai and Manilal Somnath, wherein similar agricultural land sales were exempt from capital gains taxation despite being sold for non-agricultural purposes later. The Tribunal emphasized that the land's potential future use or its sale to non-agriculturists does not alter its classification as agricultural land under the Income-tax Act.
Additionally, the Tribunal quashed the penalty proceedings initiated under Sections 270A(8) and 270A(9) of the Act, as the foundational addition to Joshi's income was deleted. However, the Tribunal upheld the assessment procedures under Section 143(3), dismissing claims of denial of natural justice. It noted that Joshi was given ample opportunity to present evidence and respond to notices, confirming the validity of the assessment proceedings.
The judgment represents a critical interpretation of the Income-tax Act concerning rural agricultural lands, reinforcing the criteria under which such lands are exempt from being classified as capital assets. This decision provides clarity for other taxpayers in similar situations, emphasizing the importance of adhering to statutory definitions and the significance of revenue records in determining land classification.
Bottom Line:
Rural agricultural land, not converted or used for non-agricultural purposes, is not a "capital asset" as per Section 2(14)(iii) of the Income-tax Act, 1961, and the sale thereof does not attract capital gains tax.
Statutory provision(s): Income-tax Act, 1961 Sections 2(14)(iii), 270A(8), 270A(9), 143(3)
