Income from sale of agricultural land situated beyond the municipal limits cannot be taxed as business income

The profits arising out of sale of an agricultural land which is far away from the limits of municipality cannot be treated as a regular business activity of the assessee, as such cannot be subjected to income tax under the head “business income” or “capital gains”. This was held recently by the Division Bench at ITAT Jodhpur in the case of Smt. Supriya Kanwar vs. ITO [ward 1 – (3)].
A land which is situated beyond the municipal limits is excluded from the term “capital asset” as the sale profits should be considered as revenue received from agricultural land.
It is well settled that under the provisions contained in the Income Tax Act 1961, capital gains tax is payable when a profit is made from the transfer of any capital asset. But in India agricultural land is generally not treated as a capital asset as per section 2(14) of the Act.
The profits arising out of sale of agricultural land gives rise to agricultural income which is not assessable to income tax under normal circumstances. For the said reason the amount received from sale of a land which was far away from the municipal limits cannot be assessable as capital gain.
The Punjab and Haryana High Court also decided the case of CIT v. Lal Singh and others, 325 ITR 588, on similar terms.

Facts and circumstances of the case:
The assessee purchased some agricultural land and sold the same in the previous year relevant to the assessment year for a valuable consideration. The assessee stated that the income arising from the sale of agricultural land was exempt under section 10 of the Act and is not assessable to capital gains tax as per the provisions of section 2(14) of the Act. The case of the Revenue was that it was an adventure in connection with business and the income from the said land was nothing but business income. The AO was of the opinion that the amount received by the assessee from sale of the land should be treated as business income.

When the case came up before the Division Bench at ITAT Jodhpur, it was observed that the said land was purchased on 07.02.2006 and was sold on 23.03.2007 and the land was situated beyond the municipal limits in a village, as such the sale proceeds were not assessable to tax as business income. It was further observed that the impugned land was purchased and sold together with standing crops and the Department accepted the return of income. The assessee took the plea that he purchased five pieces of agricultural land adjacent to each other through different sale deeds which were registered on separate dates but he never sought for conversion of the impugned land use by making any application before the concerned authorities. Though the assessee was dealing in sale of land in urban areas, he had no intention to convert the land into residential or commercial plots and fact remained that he sold the agricultural land with standing crops to a single party. The assessee contended that he did not engage professional architects for getting any plan approved or did not try to initiate development works over the impugned land.
However the revenue contended that the assessee was engaged in the business of real estate and his impugned purchases were not with the intention to carry out agricultural operations.
The assessee argued that he had also included the impugned sale proceeds for the purposes of rates of income tax.

The judgment:
The tribunal held that whether the transaction was an adventure relating to trade or not depends upon many factors and it is a mixed question of facts and law. It was stated that if any transaction is done with an intention to derive maximum profit, it should be treated as an adventure relating to trade.
It was held that there is no fixed formula to determine whether a transaction is made for trade purpose. It was stated that though the term “agricultural income” has not been defined in the Income Tax Act, but as per section 2(1A), any revenue arising out of a land situated in India, can be considered as agricultural income.
Taking into consideration the circumstances of the case it was inferred that a land situated beyond the municipal limits should be excluded from the term “capital asset”; as such the profits from sale of such land should be treated as agricultural income.
It was pointed out that by virtue of section 2(14) (iii) of the Act, an agricultural land situated within the municipal limits is not included in the definition of agricultural land. On the contrary, an agricultural land situated outside the municipal limits, upon sale, provides only agricultural income.
As per the respective opinion of majority of the Members of the Tribunal, the appeal was disposed in the favour of the assessee.