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Facts
The assessee, a private limited company, claimed exempt income from the sale of agricultural land under Section 2(14) of the Income Tax Act. The Principal CIT (PCIT) invoked Section 263, holding that the assessment order was passed without proper inquiry into whether the land qualified as agricultural land, making it erroneous and prejudicial to revenue.
Held
The Tribunal held that the assessment order suffered from infirmity due to lack of proper inquiry by the Assessing Officer regarding the agricultural nature of the land. The PCIT's revisionary order under Section 263 was found to be legal and justified, and the assessee's grounds of appeal were dismissed.
Key Issues
Whether the PCIT rightly invoked Section 263 due to the AO's alleged lack of inquiry into the agricultural nature of the land sold by the assessee for exemption under Section 2(14).
Sections Cited
263, 2(14), 143(3), 142(1), 143(2), 144B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAJ KUMAR CHAUHAN
O R D E R PER RAJ KUMAR CHAUHAN (J.M.): 1. This appeal is filed by the appellant/assessee against the order dated 29.03.2025 of Ld. Principal Commissioner of Income Tax, Mumbai [hereinafter referred to as the “PCIT”], passed under section 263 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] for the A.Y. 2020-21, wherein the assessment order dated 06.09.2022 was set aside Dhananjay Estate and Reality Private Limited on the ground that the same has been suffered from infirmity being erroneous and also prejudicial to the interest of revenue for allowing ineligible claim of exempt income of Rs. 3,74,91,265/- u/s 2(14) of the Act.
The brief facts as culled out from the proceedings of authorities below are that the assessee is a private limited company and e-filed its return of income for the assessment year 2020-21 on 10.01.2021, admitting the total income of Rs. Nil. Subsequently, the case was selected under CASS as limited scrutiny to examine mainly the issue of „Agricultural Income‟. As per the information available with the department, the assessee has claimed large agricultural income in ITR and accordingly, notice u/s 143(2) of the Act was issued to the assessee on 29/06/2021 and duly served through e-mail on ITBA to the assessee. Subsequently, notice u/s 142(1) of the Act was issued on 15/11/2021 and which was duly served on the assessee through e-mail on ITBA Portal. In response to the notices issued, the assessee company furnished required details online on e- proceedings module. The explanation submitted by the assessee were collated and examined and on the basis of material available on record,
3. Further the Ld. PCIT exercised jurisdiction u/s 263 of the Act and observed that as per profit and loss account of the assessee, the assessee has shown at Schedule (c) Any other exempt income Sr. No.1 Sale of rural agricultural land to the tune of Rs.3,74,91,265/- and the same has been claimed as exempt u/s 2(14) of the Act. Ld. PCIT further noticed that there was nothing on record to show that the land is assessed to land revenue as agricultural land under the relevant revenue enactment and in absence of any documentary evidence on record such as 7/12 extracts, Khasra Girdwari etc., to show that the land was agricultural land, the assessee was not eligible for exemption. It was further observed that the assessment order was passed by AO without making enquiry or verification on the above issues as regards the eligibility of the assessee company to hold agricultural land as such, purchase document of the said agricultural land to ascertain if it was purchased as agricultural or non-agricultural etc. and this discrepancy rendered the assessment order suffer from infirmity and it is prejudicial to the interest of the revenue. Accordingly, a notice u/s. 263 of the Act dated 03/03/2025 was Dhananjay Estate and Reality Private Limited issued and provided opportunity to the assessee of being heard. In response to the said notice, assessee made submission on 27.03.2025. In the reply made by the assessee with respect to observation of the revenue that as per the current laws in India, a private limited company cannot directly purchase agricultural land unless it is for agricultural purposes, such as farming or allied activities, the assessee submitted that assessee has purchased land in the state of UP and buying agricultural land in India is governed by state-specific laws, with some states restricting purchases to existing farmers and the states like Uttar Pradesh allows land purchase subject to ceilings of 12.5 acres. It was further submitted that provision of section 63 of the Bombay Tenancy & Agricultural Lands Act, 1948 were not applicable in this case as the land had been purchased in the state of Uttar Pradesh. It was further submitted that purchase and registry of sale deed is the subject matter of State government and the taxation laws under the Income Tax Act are Central Government subject and governed by Central Laws of the Union of India and once the land is purchased and Sale deed is being registered in revenue records of the state government in favor of the company, the transaction of purchase of land by the assessee company is legally executed and as such upon the sale of land the nature of income as to Page | 4 Dhananjay Estate and Reality Private Limited whether it is taxable or not is governed by the provisions of the Income Tax Act, 1961. It is therefore claimed that purchase of land and upon sale of that land the income earned by the company being of exempted income is claimed as such in its Income Tax Return. It was further submitted that the assessment order was neither erroneous nor prejudicial to the interest of the revenue.
4. Ld. PCIT has dealt with the claim made by the assessee and found that the assessment order without any specific enquiry on the issue whether the land in question was eligible for claim of exempt income u/s 2(14) of the Act and the relevant portion of the order of Ld. PCIT is extracted below:-
“4. Finding and Decisions:
4.1 After going through the findings in the assessment order and the issue raised in the audit objection and submissions of the assessee, following facts are noted:
(i) The case of the assessee was selected for scrutiny to examine the issue of „Agricultural Income”. During the assessment proceedings, the assessee was requested to furnish the details of agriculture income during the year under consideration along with the details of measurement of agricultural land in acre, whether agriculture land is owned or held on lease, whether irrigated or rain fed, documentary evidence with regard to sale of agricultural proceeds etc. In response, the assessee replied that during the year under Page | 5 Dhananjay Estate and Reality Private Limited consideration no agriculture operation was carried out, but sale of agricultural land was effected which was wrongly stated under the head „Agriculture Income‟ in the return filed. Further, also submitted that the assessee has not shown agriculture income in any of the F.Y. 2018-19 and 2019-20. The consideration received on sale of land is to the tune of Rs.4,00,00,000/- reduced by the cost of land to the tune of Rs. 25,08,735 and the balance amount of Rs. 3,74,91,265/- has been claimed as exempt u/s. 2(14) of the I.T.Act, 1961.
(ii). Further, the assessee was also requested to furnish the details of agricultural land held during F.Y. 2018-19 and F.Y. 2019-20 along with measurement, district location, PIN code, nature of ownership and nature of land. The assessee has replied that the measurement and location of the land are already mentioned in the Sale Deed. However, on perusal of the Sale Deed provided by the assessee, it is seen that no where there is mention of actual distance of the area in which the land is situated from the Municipal Limits except the following “There is abadi in 50 mtr radius of the said Khasara”. An agricultural land in India is not a capital asset but becomes a Capital Asset if it is the land located under Sec. 2(14)(iii)(a) and (b) of the Act. Sec. 2(14)(iii)(a) of the Act covers a situation where the subject agricultural land is located within the limit of municipal corporation, notified area committee, town area committee, town committee or cantonment committee and which has a population not less than 10,000. Section 2(14)(iii)(b) of the Act specified the land situated within aerial distance of 2KM/6KM/8KM limits from any municipality (cantonment) with population of 10,000 to 1,00,000/upto 1 lacs/more than 10 lacs respectively. The mere fact that the land is situated outside the area referred to in clause (a) or (b) of Sec.2(14) (iii) of the Act, does not automatically make it an Agricultural Land and such land has to be used for agricultural purposes as laid down in several judicial pronouncements. As held in various judicial pronouncements much weight cannot be given to mere Dhananjay Estate and Reality Private Limited potentiality of the land for use for agricultural purposes and what is really required to be shown is the connection with an agricultural purposes and user and not the mere possibility of user of land by some possible future owner or possessor for an agricultural purpose. It is not mere potentiality but its actual condition and intended user which has to be seen. One of the objects for exemption is to encourage cultivation or actual utilisation of land for agricultural purposes and hence, if there is neither applying in its condition nor anything in the evidence to indicate the intention of its owners or possessors so as to connect it with an agricultural purposes, the land could not be an agricultural land. Further, there is nothing on record to show that the land is assessed to land revenue as agricultural land under the relevant revenue enactment. In absence of any documentary evidence on record such as 7/12 extracts, Khasra Girdwari etc., by whatever name called, to show that the land is agricultural land, the assessee is not eligible for exemption.
(iii). On perusal of the Return of Income, under the head (H) „Financial Assets‟ I (investments) (vii) – Other Investments, the assessee has shown an amount of Rs.4,36,24,293/- as „Investment in Land‟. Further, on perusal of the website of Uttar Pradesh Government (eKhasra), it is seen that the assessee has not undertaken any agricultural activities during the A.Y. 2020-21 and also during the A.Y. 2019-20.
4.2 In view of the facts discussed here in above, it is apparent that the A.O had no occasion to examine the issue of exempt income u/s. 2(14) of the Act claimed by the assessee. In current proceeding also, the assessee has not demonstrated through documentary evidences that the land in question was beyond the purview of Section 2(14) of the Act and in the immediately „2‟ previous years prior to sale, the said land was in use as agricultural activities. The AO should have enquired into and verified the claim of agricultural income in the light of Hon'ble Supreme Court decision in the Dhananjay Estate and Reality Private Limited case of Sarifabibi Mohammed Ibrahim Vs. CIT [204 ITR 631 (1993)]. To this extent, it can be held that the assessment order suffers from infirmity being erroneous and also prejudicial to the interest of revenue for allowing ineligible claimed of exempt income of Rs.3,74,91,265/- u/s. 2(14) of the Act. Hence, the assessment order dated 06/09/2022 is hereby partly set aside to the file of the AO to inquire and verify various aspects of the land to be treated as agricultural land and modify the assessment order accordingly.
Further, the assessee in its reply dated 07.12.2021 during the original assessment proceedings, has stated that interest of Rs.4,812/- received has not been offered to tax inadvertently due to clerical mistake and during the course of assessment proceedings has filed Revised Computation of Income with a request to consider the same while framing the assessment. In the original Computation of Income loss was shown at Rs. 56,062/- and in the Revised Computation of Income loss has been shown at Rs. 51,250/- . On perusal of the Computation Sheet dated 06.09.2022, it is seen that the Total Income/Loss has been determined at Rs. Nil and in Col. 18 – „Loss in Current Year to be Carried Forward‟ has been shown at Rs. 56,062/-. Thus, the amount of Rs.4,812/-, being interest income should be treated as income of the assessee.
6. Order u/s. 263 of the Act, 1961 is passed accordingly.”
5. Aggrieved by the above order, the assessee is in appeal before us and has raised the following grounds of appeal:-
“1. That the Ld. Principal Commissioner of Income Tax-4, Mumbai, has erred in law and on facts and circumstances of the case in invoking the provisions of section 263 of the Income-tax Act, 1961 in an ambiguous manner.
Dhananjay Estate and Reality Private Limited 2. That the Ld. PCIT-4, Mumbai has failed to appreciate that the order under section 143(3) r.w.s. 144B of the Income Tax Act was passed after due investigation by the Ld. Assessing Officer with reference to the agriculture income and, therefore, the reopening of the same tantamount only to a change of opinion, which is not permissible in law and, therefore, the order passed deserves to be quashed.
That the Ld. PCIT-4, Mumbai has failed to appreciate that the provisions of section 263 of the Act does not permit to reopen the assessment merely on change of opinion without there being any actual lack of inquiry or verification by the Ld. Assessing Officer and, therefore, the order passed deserves to be quashed.
That the Ld. PCIT-4, Mumbai has failed to appreciate that the case of the appellant was selected for scrutiny through CASS for examination of agriculture income only, and Ld. PCIT-4, Mumbai has gone beyond the basis / germane of selection of the case for scrutiny under CASS.
5. That the Ld. PCIT-4, Mumbai has erred in law and on facts and circumstances of the case in revisiting the limited scrutiny order of the Ld. Assessing Officer without appreciating that the Ld. Assessing Officer was not required to look into the matter other than that forming part of limited scrutiny, as decided by the CBDT‟s instruction No. 7/2014 dated 26.09.2014, hence, the revision under section 263 of the Act, on the ground that the Ld. Assessing Officer has not considered (a) Income from Sale of Agriculture Land (b) the Interest Income, is bad in law. As such, the same was not required to be verified / inquired by the Ld. Assessing Officer.
6. That the Ld. PCIT-4, Mumbai has erred in law and on facts and circumstances of the case in setting aside the order of the Ld. Assessing Officer holding that the order passed by the Ld. Assessing Officer is
That the Ld. PCIT-4, Mumbai has incorrectly held that the Agriculture Land sold by the assessee is not an Agriculture Land and their by holding that exempt income claimed under section 2(14) of the Income Tax Act, 1961 in the return filed is not allowable.
8. That the Ld. PCIT-4, Mumbai has incorrectly held the claim under section 2(14) of the Income Tax Act for Profit on Sale of Agriculture Land as not allowable and incorrectly disallowed the exemption under section 2(14).
That the Ld. PCIT-4, Mumbai has incorrectly Set-aside the Assessment Order under section 143(3) dated 06/09/2022 on misapprehensions of the facts of the case and the provision of section 2(14) of the Income Tax Act.
10. That the appellant craves leave to add, alter, amend or withdraw any or all the grounds of appeal at any time before or during the course of the hearing of the appeal.”
We have heard Ld. AR and Ld. DR and examined the record. At the outset, Ld. AR submitted that the assessee has purchased agricultural land and the Ld AO was satisfied with the explanation of the assessee with respect to purchase land being agricultural land and entitled to be exempted from income tax u/s 2(14) of the Act. It was further argued that enquiry was made by the AO and inadequacy of the enquiry does not permit to the PCIT to invoke the jurisdiction of section 263 of the Act.
Dhananjay Estate and Reality Private Limited 7. Ld. DR on the other hand submitted that from the assessment order, it is reflected that no enquiry was conducted by the AO to ascertain whether the purchased land would fall in the category of agricultural land so as to grant exemption u/s 2(14) of the Act. It is therefore submitted that assessment order suffers from lack of enquiry and has been rightly rectified by directing to the AO to verify the status of the land for its entitlement for exemption u/s 2(14) of the Act and the order passed by Ld. PCIT is a legal and justified order and the appeal filed by the assessee is liable to be dismissed.
We have considered the rival submissions and examined the record. From the perusal of the order of Ld. CIT(A) in para no. 4.2 of its order as extracted above, it is evident that the assessment order really suffers from infirmity as no enquiry has been conducted by the AO, if the questioned land was situated beyond the municipality limit so as to bring into the category of the agricultural land fulfilling the requirement of exemption of tax being agricultural land as has been pointed by Ld. PCIT in the impugned order. The assessment order is therefore, covered by explanation 2 of section 263 of the Act and the Ld. PCIT has rightly exercised the jurisdiction u/s 263 of the Act and there is no illegality in Dhananjay Estate and Reality Private Limited issuing direction to the AO regarding the enquiry. We find strength from the judgment of Hon‟ble High Court of Delhi in the case of Pr. CIT vs. Ms. Sangeeta Jain in dated 08.11.2024 wherein the Hon‟ble High Court has decided the identical issue pertaining to the question of agricultural land and the assessment order has been revised u/s 263 of the Act by the PCIT on the ground that the AO has not conducted specific enquiries. The relevant portion of the order of Hon‟ble High Court is extracted below:-
“24. In the present case, the taxability of capital gains hinges upon whether or not the land in question qualifies as an agricultural land.
A „capital asset‟ is defined under Section 2(14) of the Act. Short-term capital gains tax applies to gains arising from transfer of short-term capital assets; whereas long-term capital gains tax applies to gains arising from transfer of long-term capital assets. Section 2(14) also provides as to what assets would not fall within the meaning of „capital assets‟ which includes agricultural land. The sale of agricultural land does not make an assessee liable to pay capital gains tax, either short-term or long-term.
However, to qualify as an agricultural land, the land must meet specific criteria, including its distance from the municipal areas, as stipulated under Section 2(14)(iii)(b) of the Act. As per the said provision (as it stood prior to its amendment i.e. at the time of AY 2013-14), if a land is situated within the distance of 8 kms from the local limits of any municipality, it would be treated as a capital asset and the assessee would be liable to pay Dhananjay Estate and Reality Private Limited the capital gains tax; otherwise, the land would be treated as agricultural land, which does not fall within the meaning of „capital assets‟.
The assessee had also relied upon the sale deeds pertaining to the land in question. It is to be noted that a sale deed is not a document issued by the revenue authorities or any government authority which would certify the agricultural nature of the land. A sale deed primarily reflects the transaction between the parties and the terms of sale, but it does not, in itself, verify the land‟s classification as agricultural for the taxation purposes. Therefore, heavy reliance on the sale deed to establish the agricultural character of the land would be misplaced. However, even if we consider the contents of the sale deed, it shall be important to note that though the sale deed dated 20.04.2012 executed between the assessee and Vallabham Buildcon mentioned the land as „agricultural land‟, it was specified in the contents of the sale deed itself that the land was not beneficial for the purposes of sowing and cultivation. This fact was also taken note of by the PCIT, alongwith the fact that the Vallabham Buildcon, in its reply, had informed the PCIT that it was in process of aggregating the land for the development of integrated township and group housing projects at Sohna.
Thus, the Hon‟ble Supreme Court in Sarifabibi Mohmed Ibrahim (supra) had discussed various factors and precedents to clarify the criteria for identifying agricultural land. It was held that the classification of land as agricultural depends on multiple factors, not just one. It was emphasized that each case must be evaluated based on its specific facts. A wide range of indicators would include the actual use of the land, whether the land is classified as agricultural in revenue records, and whether it is used for agriculture over a long period of time. Factors such as the land being under cultivation, being assessed as agricultural in revenue records, and the owner‟s intent to use it for agriculture plays a crucial role.
Dhananjay Estate and Reality Private Limited However, conversion of the land to non-agricultural use, selling it for housing development, and the absence of agricultural activities for several years weigh against it being classified as agricultural land.
Therefore, it is clear that the Hon‟ble Supreme Court and the Coordinate Benches of this Court had also dealt with the scope of „erroneous orders‟ for the purpose of Section 263 of the Act, even when Explanation 2 had not been inserted in the said provision, and had held that an erroneous order would include an order which is passed without conducting sufficient inquiries or without application of mind.”
9. Respectfully following the aforesaid judgment, we are of the considered opinion that the identical issue has already been decided by the Hon‟ble High Court and the same is applicable mutatis mutandis in the present appeal as well. Therefore, we find no illegality or perversity in the impugned order passed by the Ld. PCIT and the same is hereby upheld. Resultantly, the grounds raised by the assessee are dismissed.
In the result, appeal filed by the assessee is allowed in above terms. Order pronounced in the open court on 26.11.2025