Sale of Land Not Used for Agriculture Is Chargeable to Tax: Bombay HC

Moneylife Digital Team 18 February 2025

Economy & Nation

In a significant ruling, the Bombay High Court (HC) upheld the taxation of income derived from the sale of land that was not used for agricultural purposes. The judgement was delivered in the case of Prashant Jaipal Reddy vs income tax officer (ITO), reinforcing the principle that land must be actively used for agriculture to qualify for exemption under Section 2(14)(iii) of the Income Tax (I-T) Act.

The appellant, Mr Reddy, challenged the decision of the income-tax appellate tribunal (ITAT), which upheld the findings of the assessing officer (AO) and first appellate authority (FAA). These authorities had determined that the land in question was not utilised for agricultural activities and was, therefore, a capital asset subject to taxation.

In an order last week, the division bench of justice MS Sonak and justice Jitendra Jain said, "From the perusal of the three orders, we agree with the fact-finding authorities that the assessee (Mr Reddy) was bent upon adopting inconsistent and contrary stances on the issue of property being used for agricultural purposes. The various inferences drawn by the three fact-finding authorities from the holistic consideration of the material on record are most reasonable and can hardly be described as perverse."

"The FAA had observed that one could not ignore the fact that the property under reference was near Kalyan and Bhiwandi, and suburban parts of Mumbai. From this, the FAA correctly inferred that this property was embedded with commercial opportunity and viability for commercial exploitation. The future conduct of the assessee has only confirmed this," the bench says.

The division bench also noted that the revenue records, including the 7/12 land extract, were not conclusive evidence of agricultural use. The court emphasised that the land was developed and subsequently sold in plots, indicating commercial intent.

Mr Reddy had incurred significant expenses towards developing the land rather than engaging in farming, the bench observed adding, "There was an admission that agricultural activities were either negligible or non-existent on the property. The proximity of the land to urban areas such as Kalyan, Bhiwandi, Thane, and Mumbai suggested its potential for commercial exploitation."

Advocate Naresh Jain, counsel for Mr Reddy, argued that previous cases, including Shri Shankar Dalal & Ors vs Commissioner of I-T and HV Mungale vs Commissioner of Wealth-Tax, supported the agricultural status of the land. However, the HC held that these cases were distinguishable based on their specific facts.

Advocate Suresh Kumar, representing the I-T department, successfully defended the concurrent findings of the tax authorities, asserting that Mr Reddy failed to demonstrate that the land was actively used for agricultural purposes.

The HC dismissed the appeal, ruling that Mr Reddy had not provided sufficient grounds to overturn the concurrent factual findings of the tax authorities. The court reiterated that appeals under section 260A of the I-T Act should be based on substantial legal questions rather than mere disagreements with factual determinations.

This decision reaffirms that landowners seeking tax exemptions for agricultural land must provide substantial evidence of actual agricultural use. Merely possessing land designated as agricultural in official records does not suffice to claim tax exemptions if the land is not actively cultivated.

The ruling is expected to have broader implications for real estate transactions and tax assessments involving agricultural land, particularly in urban and semi-urban areas.

Comments

User

2 months ago

If agricultural land which has been converted & sold as plots is used for agriculture, will it be eligible for Tax Exemption ?

D Srinivas

2 months ago

Many people are claiming farm Support schemes like Rythu Bandhu with out any agricultural activities being undertaken. There are MLAs Ministers, Big businessmen. And most of the landlords sell or develop them and make money. One example is Hyderabad surrounding areas in Telangana.