NALINI,CHENNAI vs. ITO, NCW-10(3), CHENNAI

In the present case, the property in dispute is only a Town Panchayat, which is classified as a transitional area, as the same is undergoing a transition from rural to urban area, during the period in which the lands were sold. Thus, the land in dispute is agricultural land for the purpose of the Income Tax Act.

Ponneri, located in Thiruvallur District, has undergone several administrative upgrades over the years. It is situated approximately 50 kms from the District Headquarters, Thiruvallur, and about 37 kms from Chennai, the capital of Tamil Nadu, lying in the north western part of the state. The changes undergone over the years are tabulated hereunder; # Date Event 1. 21.02.1952 Ponneri was first upgraded as a Grade II Town Panchayat, vide G.O. No. 2449 2. Year 1963 It was further upgraded to a Grade I Town Panchayat 3. 24.02.1982 The Town panchayat was elevated to a Selection Grade Town Panchayat, as per the Director of Town Panchayats’ letter No. 1953/82 Nalini 4. 14.07.2006 Ponneri became a Town panchayat under G.O. Ms. No. 55, dated 14.07.2006 5. Year 2014 Still held Selection Grade status in subsequent years 6. 07.12.2021 Ponneri was upgraded to a Second Grade Municipality, as per G.O. No. 116, dated 07.12.2021 7. 09.12.2021 The Municipality was officially constituted on this date.

It is important to consider the fact that the grading of a Town Panchayat, whether Grade II, Grade I, or Selection Grade, does not confer the status of a Municipality. These are internal classifications within the Town Panchayat administrative framework and do not confer Municipal status under the Tamil Nadu District Municipalities Act, 1920. Ponneri was formally upgraded to a Municipality only in December 2021 as per G.O. No. 116 dated 07.12.2021.

The grading is used for governance and resource allocation purposes within the Town Panchayat structure and does not alter its fundamental legal character as a non-municipal, rural local body. Therefore, during the A.Y.2015-16, Ponneri remained outside the scope of an "urban area" as defined u/s. 2(14)(iii), and the land in question continued to qualify as rural agricultural land, exempt from capital gains taxation.

The distance of the nearby urban local bodies from Ponneri is tabulated hereunder: Nearby ULB Type of Governance Air Road Status in 2014 distance distance (km) (km) Gummidipoon Town Panchayat 12 km 13-16 Town Panchayat di km Tiruvallur Municipality 38 km 53 km Nearest Municipality Chennai Municipal Corporation 35 km 36 km City Corporation Avadi Muncipality 30-35 35-40 Urban Municipality km km 10. Agricultural Land in Town Panchayat is not a capital asset and the same is distinct from Municipality. Reliance is placed on the following decisions; 10.1. In K. Parameshwaran v. ITO [1982] 2 ITD 371 (Madras), the ITAT held that agricultural land situated in a Town Panchayat is not a "capital asset" under Section 2(14)(iii)(a) of the IT Act, and hence not liable to capital gains tax. The Tribunal clarified that Town Panchayats are distinct from Municipalities. It rejected the revenue's argument that Town Panchayats fall under the term "Municipality or by any other name" and emphasized that Panchayats represent rural self-government, not urban governance. Therefore, capital Nalini gains tax could not be levied on agricultural land sold in Musiri, a Town Panchayat. 10.2. In ITO v. P. Venkataramana [1993] 46 ITD 484 (Hyd.), the ITAT held that agricultural land situated in a Gram Panchayat does not qualify as a "capital asset" u/s. 2(14)(ii)(a) of the IT Act, even if the population exceeds 10,000. The tribunal rejected the AO's view that population alone determines taxability. clarifying that the land must lie within a Municipality, Municipal Corporation, or Cantonment Board with the required population as per the last census. 10.3. In CIT v. P.J. Thomas [1995] 211 ITR 897 (Madras), the Madras High Court held that agricultural land situated within a Panchayat area but outside the limits of a Municipality is not a "capital asset" u/s. 2(14)(iii) of the IT Act, and hence, not subject to capital gains tax. It rejected the revenue's contention that proximity to urban areas or inclusion within a panchayat transformed the land into a capital asset. The Court emphasized that a Panchayat is not equivalent to a Municipality or Cantonment Board as defined under the IT Act. 10.4. In ITO v. Chandar HUF [2011] 12 taxmann.com 305 (Chennai), the ITAT held that agricultural land within a Town Panchayat, but outside municipal limits, is not a "capital asset" u/s. 2(14)(iii) of the IT Act. 10.5. In CIT v. P. Mahalakshmi [2020] 121 taxmann.com 77 (Mad.), the Madras High Court in para 13 held: "13. When the correctness of the order of CITA was tested before the Tribunal, once again, the Tribunal made a factual exercise and found that agricultural activities were carried out in the land, there were standing banana crops as well as coconut trees etc., Furthermore, from the revenue records, which were placed before the Tribunal in the form of paper book by the assessees, the Tribunal had recorded a finding of fact that the lands, which was sold were indeed agricultural. Furthermore, it is relevant to note that the lands, which are subject matter of consideration, are situated 40 Kms away from Thiruvallur Municipality and 30 Kms away from Madhavaram Municipality."

In view of the submissions made above, it is prayed that the addition of capital gains made by the AO be deleted in full. He also referred the following case law Paper Book/citations: # Citation Ratio Pages 1. K. Parameshwaran v. ITAT held that agricultural land situated in a 1 – 5 ITO [1982] 2 ITD 371 Town Panchayat is not a "capital asset" (Mad) under Section 2(14)(iii) (a) of the Income- tax Act, 1961, and hence not liable to Nalini capital gains tax. The Tribunal clarified that Town Panchayats are distinct from Municipalities, as they are governed by the Panchayats Act, not the Municipalities Act. It rejected the revenue's argument that Town Panchayats fall under the term "Municipality or by any other name" and emphasized that Panchayats represent rural self-government, not urban governance. Therefore, capital gains tax could not be levied on agricultural land sold in Musiri, a Town Panchayat. 2. ΙΤΟ ν. ITAT held that agricultural land situated in a 6-10 P.Venkataramana Gram Panchayat does not qualify as a [1993] 46 JTD 484 "capital asset" u/s. 2(14)(iii)(a) of the IT (Hyd.) Act, even if the population exceeds 10,000. The tribunal rejected the AO's view that population alone determines taxability, clarifying that the land must lie within a Municipality, Municipal Corporation, or Cantonment Board with the required population as per the last census. Since the land in question was situated in Palamaner town, governed by the Panchayats Act and not within municipal limits, capital gains tax was not applicable. The Revenue's appeal was dismissed.

CIT v. P.J.Thomas Held that agricultural land situated within a 11- 12 [1995] 211 ITR 897 Panchayat area but outside the limits of a (Madras) municipality is not a "capital asset" u/s. 2(14)(iii) of the IT Act, and hence, not subject to capital gains tax. The Court affirmed the Tribunal's findings based on revenue records, cultivation activity, and the existence of coconut trees and irrigation, all of which established the agricultural character of the land. It rejected the revenue's contention that proximity to urban areas or inclusion within a panchayat transformed the land into a capital asset. The Court emphasized that a Panchayat is not equivalent to a Municipality or Cantonment Board as defined under the Act.

ITO v. Chandar HUF ITAT held that agricultural land within a 13-22 [2011] 12 Town Panchayat, but outside municipal taxmann.com 305 limits, is not a "capital asset" u/s. 2(14)(iii) (Chennai) of the IT Act, and thus not subject to capital gains tax. The land was cultivated until sale, and the layout permissions obtained earlier were never acted upon.

K. Parameshwaran v. ITO (1982) – ITAT (Madras) ruled that land in a Town Panchayat is outside the scope of Section 2(14)(iii)(a) and thus not taxable, distinguishing Town Panchayats from municipalities.

The Hon’ble jurisdictional High Court in the case of CIT v. P.J.Thomas [1995] 211 ITR 897 (Madras) has authoritatively held as under: In this tax case petition under section 256(2) of the Income-tax Act, 1961, the Revenue seeks a direction to the Tribunal to refer the following two questions of law, for the opinion of this court: "1.Whether on the facts and in the circumstances of the case and having regard to the provisions of section 2(14), the Appellate Tribunal was right and had valid materials in upholding the order of the Commissioner of Income-tax (Appeals) that the lands sold by the assessee were agricultural lands and no capital gains arose on the sale of those lands? 2. Whether the Appellate Tribunal's view that the agricultural lands within the panchayat cannot be regarded as falling within the scope of section 2(14) is reasonable, supported by valid materials and sustainable in law ?" With reference to the first question, we find that the conclusion arrived at by the Tribunal regarding the character of the land is factual. In arriving at the conclusion that the lands sold by the assessee were only agricultural lands, the Tribunal had taken into account not only the classification of the land in the revenue records as ‘garden land’ but also the circumstances that the land was under the actual cultivation of the sister of the assessee and it had the benefit of channel irrigation and there were also 42 coconut trees thereon. That apart, the Tribunal had also considered the receipt of agricultural income from the land in question. Based on the aforesaid circumstances, the Tribunal rightly came to the conclusion that the land in question sold by the assessee was agricultural land. Even as regards the second question, it is seen that under section 2(14) of the Income-tax Act, 1961, the exclusion of agricultural land as capital asset, would be applicable to land within the limits of a municipality and not a panchayat. The land sold by the assessee was situate in Koshancherry town and that was only a panchayat. Though learned counsel for the Revenue strenuously contended that a panchayat would also be comprehended within section 2(14) of the Income-tax Act, 1961, we are unable to accept the contention. Section 2(14)(iii) refers to the exclusion as capital asset of agricultural lands situate in an area which is comprised within the jurisdiction of a municipality (whether known as municipality or municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment, which has a population of not less than 10,000 according to the last preceding census. In order that the benefit Nalini of exclusion of agricultural land as capital asset may not be available, the land should be situated within the jurisdiction of a municipality or a cantonment board as stated earlier and is also related to the population. Though the expression, "municipality, municipal corporation, notified area committed town area committee, town committee", etc., have been used they refer only to certain specific entities either known by that name or by any other name and that cannot be taken to apply to a panchayat which is and has also always been understood as distinct and different from municipality, etc. In the absence of clear or specific words in the section to take in a panchayat, we are unable to countenance the argument of learned counsel for the Revenue. We are satisfied that the Tribunal was quite justified in deleting the tax arising on capital gains on account of the sale of the agricultural lands by the assessee. The tax case petition is dismissed. There will be no order as to costs.

In the aforesaid case, The Hon’ble High Court held that agricultural land situated within a Panchayat area but outside the limits of a municipality is not a "capital asset" u/s. 2(14)(iii) of the IT Act, and hence, not subject to capital gains tax. The Court affirmed the Tribunal's findings based on revenue records, cultivation activity, and the existence of coconut trees and irrigation, all of which established the agricultural character of the land. It rejected the revenue's contention that proximity to urban areas or inclusion within a panchayat transformed the land into a capital asset. The Court emphasized that a Panchayat is not equivalent to a Municipality or Cantonment Board as defined under the Act.