Delhi HC: Sale Deed Cannot Be Used to Verify Land’s Agricultural Classification for Taxation Purposes

The Delhi High Court has ruled that a document issued by revenue authorities or any government body certifying the agricultural status of the land is not a sale deed.

A division bench consisting of Justices Vibhu Bakhru and Swarana Kanta Sharma stated that the primary purpose of a sale deed is to document the transaction between terms of sale and the parties involved. However, it does not verify the land’s classification as agricultural land for tax purposes. Therefore, relying solely on the sale deed to determine the land’s agricultural status would be inappropriate.

This conclusion was made during the hearing of the Revenue’s appeal against an order by the Income Tax Appellate Tribunal (ITAT), which had overruled a directive by the Principal Commissioner (PCIT) under Section 263 of the Income Tax Act.

In that decision, the PCIT had determined erroneous the Assessing Officer’s (AO) conclusion that the assessee’s land was agricultural and thus exempt from capital gains tax.

It is important to note that the sale of agricultural land does not subject an assessee to capital gains tax, whether short-term or long-term. However, for land to come under agricultural criteria, its distance from municipal areas must be considered a crucial factor, as per Section 2(14)(iii)(b) of the Act.

Under the provision as it applied before its amendment (at the time of AY 2013-14), land located within 8 kilometres of local municipal limits was considered a capital asset, thereby subjecting the assessee to capital gains tax. Contrarily, land situated beyond this distance would be deemed agricultural and not classified as a “capital asset.”

The assessee argued that sale deeds for the land in question verified its agricultural status and thus exempted it from capital gains. Additionally, the assessee cited a certificate issued by the Tehsildar in 2012, which purportedly stated that the land was located more than 8 kilometres from municipal limits. For Sohna District, the stipulated distance is 5 kilometres.

Therefore, the assessee contended that the land did not fulfil the requirement of being considered a capital asset under Section 2(14) of the Act.

However, upon reviewing this certificate, the Court observed that on the matter, a letter from the assessee to the Tehsildar. In the letter, the assessee said that she is a resident of Araji Waka Mauza Sohna, Tehsil Sohna, District Gurugram. She requested the Tehsildar to instruct the Patwari to issue a “certificate of distance from Sohna border of the said municipality of Araji.”

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The Court noted that, ordinarily, in such cases where such request is made through a letter, the Tehsildar must do his duty of conducting an inquiry and then provide information or certification regarding the distance of the land from municipal limits.

In this case, however, the Tehsildar’s certificate, which was merely a two-line endorsement on the assessee’s request, failed to specify the land’s distance from municipal limits.

The distance is a fundamental criterion under Section 2(14)(iii) of the Act for determining if the land qualifies as agricultural and is exempt from capital gains tax. Instead, the certificate simply stated that the land lies outside the boundary of Sohna Municipal Corporation.

The assessee also presented another certificate issued by the Tehsildar in 2016 before the PCIT.

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However, the Court found that the certificate provided in 2016 was based on the 2012 assessment. The Court stated, that since the 2012 certificate did not specify the land’s distance from municipal limits, the 2016 certificate suffers from the same inadequacy, as it merely reiterates the earlier assessment without addressing the fundamental requirement of Section 2(14)(iii) of the Act.

Finally, the Court referred to a statement from the District Town Planner, indicating that the land in question is within 2.6 kilometres of the old municipal limit and within 1.8 kilometres of the extended municipal limit of Gurugram.

The land was mentioned on the sectoral plans of Sectors 2, 35, and 36 of Sohna, indicating that it had been designated for sectoral development. This meant the land was developed for specific purposes, preventing any agricultural activities from being conducted there.

The Court also observed that the assessee sold this land within nine months of purchasing it and did not report any agricultural income for the relevant assessment year.

Therefore, the Court upheld the Principal Commissioner of Income Tax’s (PCIT) order, stating the assessee qualifies for short-term capital gains tax.

Additionally, the High Court cited the Supreme Court’s ruling in Sarifabibi Mohmed Ibrahim & Ors. v. CIT (1993), which established guidelines for classifying land as agricultural. In that decision, the Supreme Court emphasized that land classification as agricultural should be assessed through multiple factors and the specific circumstances of each case.

Important indicators involve the lawful use of the land, whether it is consistently listed as agricultural in revenue data, and whether it has been used for agricultural activities over time.

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Key elements supporting an agricultural classification include active cultivation, classification as agricultural land in revenue records, and the owner’s demonstrated intended use of the land for farming. Contrarily, factors like conversion of the land for non-agricultural purposes, selling it for residential use, and prohibiting agricultural uses for an extended period argue against such classification.

When Section 263 Applies to PCIT?

In its order, the High Court reiterated that the PCIT cannot invoke jurisdiction under Section 263 of the Income Tax Act solely due to holding a differing opinion from the Assessing Officer (AO).

To assume jurisdiction under Section 263 of the Act, two conditions must be met: the PCIT must conclude that the AO’s order is ‘erroneous’ and ‘prejudicial to the interests of the Revenue.’ If the AO has observed, it would not be subject to revision under Section 263, the Court held.

The Supreme Court in Malabar Industrial Co. Ltd v. CIT (2000) clarified the scope of these terms. It was ruled that an AO’s order can be considered erroneous if it is derived from incorrect facts, misapplication of law, failure to follow principles of natural justice, or lack of consideration.

Likewise, in Gee Vee Enterprise v. Additional Commissioner of Income Tax (1975), the High Court held that a Commissioner may deem an AO’s order erroneous if, under the given circumstances, the AO should have conducted further investigations before deeming the assessee’s statements in the return.

In this case, the High Court observed that the AO neither thoroughly examined the Tehsildar’s certificate nor sought additional documentation from concerned authorities like the District Town Planner (DTP) of Gurugram. The Court remarked that “this clearly shows the AO couldn’t conduct any inquiry or even review the documents furnished by the assessee to conclude the long-term capital gains exemption“.

Thus, the Court concluded that the PCIT had validly exercised its authority under Section 263, as the AO’s order was both erroneous and detrimental to the Revenue’s interests, having been issued without adequate inquiry and consideration of the assessee’s claims.

Consequently, the Court also held that the Income Tax Appellate Tribunal (ITAT) had erred in overruling the PCIT’s order, and it ruled in favour of the Revenue’s appeal.