ITAT Mumbai Deletes Rs 49 Lakh Capital Gains Addition, Holds Actual Agricultural Operations Not a Statutory Condition Under Section 2(14)(iii)
Mumbai ITAT allowed a HUF's appeal for AY 2012-13, holding that land situated 17–18 kilometres from Pune's municipal limits retained agricultural character and fell outside the capital asset definition under section 2(14)(iii) of the Income-tax Act, 1961.
The Income Tax Appellate Tribunal, Mumbai ‘B’ Bench, on 27 May 2026 allowed the appeal of Sohanlal Sewaram Jaggi (HUF) against a reassessment order for assessment year 2012-13. The Assessing Officer had treated land sold by the HUF at Village Wada Bolhai, Taluka Haveli, District Pune as a “capital asset” under section 2(14) of the Income-tax Act, 1961, and brought long-term capital gains of Rs 49,04,000 to tax. The Additional Commissioner of Income Tax (Appeals), Bengaluru, confirmed that addition. The Tribunal, constituted by Shri Amit Shukla (Judicial Member) and Shri Prabhash Shankar (Accountant Member), deleted the addition in full. The bench held that the authorities below had imported into section 2(14)(iii) a condition of actual agricultural user that Parliament had consciously omitted from that provision.
The Dispute Before the Tribunal
The HUF, along with co-owners, transferred land forming part of Gat No. 831/2 at Village Wada Bolhai, Taluka Haveli, District Pune. Reassessment proceedings were initiated under section 147, and the Assessing Officer examined the nature of the land.
The Assessing Officer accepted that revenue records — including 7/12 extracts — classified the land as agricultural. He nonetheless held that mere revenue classification was not conclusive. He observed that no substantial agricultural income had been reflected in the return, and no documentary evidence of cultivation expenses, irrigation expenditure, labour payments, or crop sale receipts had been produced. He further noted the land's proximity to Pune city and inferred that the transaction indicated commercial exploitation rather than agricultural use. On this basis, he treated the land as a capital asset and assessed long-term capital gains of Rs 49,04,000.
Before the CIT(A), the assessee argued that the land was situated approximately 17 to 18 kilometres from Pune's municipal limits, placing it beyond the notified urban limits under section 2(14)(iii). The assessee also pointed to 7/12 extracts recording cultivation of Bajra crop, the absence of any non-agricultural conversion permission, the land's classification within a “No Development Zone”, and the fact that the purchaser continued agricultural activities after the sale. The CIT(A) was not persuaded and confirmed the addition, holding that the assessee had failed to furnish convincing evidence of actual agricultural operations.
The Assessee's Case Before the Tribunal
Counsel for the assessee, Shri Dharan Gandhi, took the bench through the statutory provisions, legislative history, CBDT circulars, and judicial precedents governing the concept of “agricultural land” under the Income-tax Act.
The central argument was that section 2(14)(iii), as amended by the Finance Act, 1970, shifted the legislative focus to objective geographical and population-based criteria. Before the 1970 amendment, all agricultural land in India was excluded from the definition of “capital asset”. The amendment narrowed that exclusion: land within municipal or cantonment board limits with a population of not less than ten thousand, or within a notified distance of up to eight kilometres from such limits, was brought within the capital asset definition. Land beyond those limits retained its exclusion.
Counsel drew attention to CBDT Circular No. 45 dated 2 September 1970, which explained that agricultural land in rural areas — outside any municipality or cantonment board with a population of not less than ten thousand, and beyond the notified distance — would continue to be excluded from the term “capital asset”.
The assessee's argument on legislative drafting was precise. Where Parliament intended to impose a condition of actual agricultural use, it said so expressly. Section 54B requires that the land “was being used” for agricultural purposes during the two years immediately preceding transfer. Section 10(37), inserted by the Finance (No. 2) Act, 2004, similarly requires actual agricultural use during the preceding two years. Section 2(14)(iii) contains no such language. The conscious omission, counsel submitted, demonstrated that actual agricultural operations are not a mandatory statutory condition under section 2(14)(iii).
On the facts, the assessee relied on an affidavit by Shri Sohanlal Sewaram Jaggi explaining that due to advanced age and practical difficulties, the co-owners could not personally supervise cultivation, and local caretakers attended agricultural activities, retaining negligible produce against maintenance expenses. It was submitted that absence of reflected agricultural income in the return could not by itself destroy the agricultural character of the land.
The assessee also pointed to a significant consistency argument: in the case of co-owner Talikraj Sewaram Jaggi HUF, arising from the same transaction and the same reassessment proceedings, the Department itself had accepted the agricultural character of the land and had not subjected the gains to tax.
The Legal Question: What Section 2(14)(iii) Actually Requires
The Tribunal directed counsel to address decisions both in favour of and against the assessee, covering the pre-1970 position, the 1970 amendment, and subsequent judicial evolution.
The bench surveyed the Supreme Court's decision in Commissioner of Wealth-tax v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133 (SC), which held that revenue record entries are good prima facie evidence but that actual condition and intended user must be examined. It also considered Smt. Sarifabibi Mohmed Ibrahim v. CIT [1993] 204 ITR 631 (SC), which confirmed that whether land is agricultural is a question of fact on cumulative consideration of all circumstances, and that revenue records are relevant but not conclusive. The Tribunal noted, however, that Sarifabibi was decided in the context of the pre-1970 law, and the Supreme Court had consciously not interpreted the term “agricultural land” under the amended provision.
The Tribunal placed weight on the Bombay High Court's decision in Ashok Chaganlal Thakkar v. National Faceless Assessment Centre [2024] 466 ITR 726 (Bom.), which held that actual carrying on of agricultural operations is not a necessary condition for deciding that a parcel of land is agricultural land under section 2(14)(iii), and explicitly distinguished that provision from sections 54B and 10(37).
The bench also considered decisions where courts had ruled against assessees — including Prashant Jaipal Reddy v. ITO [481 ITR 547 (Bom.)] and GRK Reddy & Sons (HUF) — and found that in each instance the adverse outcome rested on overwhelming evidence of commercial non-agricultural character, not on a holding that actual agricultural operations are an express statutory requirement under section 2(14)(iii).
How the Tribunal Reasoned
The bench synthesised the judicial position as follows: actual agricultural operations may constitute one relevant evidentiary factor, but they are neither the sole test nor an independent statutory mandate under section 2(14)(iii). The decisive inquiry is whether the land, viewed holistically and cumulatively, retained agricultural character at the time of transfer.
Applying that standard to the facts, the Tribunal found the cumulative evidence overwhelmingly in the assessee's favour. Seven specific circumstances were identified.
First, the land had consistently remained classified as agricultural in official revenue records including 7/12 extracts. Second, the land was admittedly situated approximately 17 to 18 kilometres from Pune's municipal limits, placing it beyond the notified urban limits under section 2(14)(iii). Third, contemporaneous survey records and 7/12 extracts recorded the existence of Bajra crop and other agricultural produce on the land. Fourth, the sale agreement itself recorded that the land fell within a “No Development Zone”, substantially negating immediate urban or commercial exploitation. Fifth, no permission for non-agricultural conversion had ever been obtained by either the assessee or the purchaser. Sixth, the purchaser continued agricultural activities after purchase. Seventh, surrounding areas remained rural without industrial estate or housing complex development.
The Tribunal accepted the explanation in Shri Sohanlal Sewaram Jaggi's affidavit regarding cultivation through local caretakers. It observed that agricultural operations carried out through caretakers cannot destroy agricultural character merely because separate agricultural income was not reflected in the return.
On the legal error committed below, the bench was direct. The authorities had virtually equated absence of substantial agricultural income with absence of agricultural character. That reasoning effectively imported into section 2(14)(iii) the statutory conditions consciously incorporated in sections 54B and 10(37). The bench held this approach legally impermissible: “courts cannot legislate by interpretation nor obliterate the distinction consciously maintained by Parliament.”
The consistency point also weighed with the Tribunal. In the co-owner Talikraj Sewaram Jaggi HUF's case, arising from the same transaction and the same reassessment proceedings, the Department had accepted the agricultural character of the land and had not brought the gains to tax. While strict principles of res judicata do not apply to income-tax proceedings, the bench observed that consistency and fairness remain important facets of tax administration.
Outcome
The Tribunal held that the impugned land retained its agricultural character and did not fall within the ambit of “capital asset” under section 2(14)(iii). The Revenue authorities had proceeded substantially upon presumptions and by importing into the statute a condition consciously omitted by Parliament. The addition of Rs 49,04,000 made by the Assessing Officer and sustained by the CIT(A) was deleted in full. The appeal of the assessee was allowed. The order was pronounced on 27 May 2026.