54B Exemption Remanded as Assessee Failed to Prove Land’s Agricultural Use.

By | November 5, 2025
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54B Exemption Remanded as Assessee Failed to Prove Land’s Agricultural Use.

Issue

Whether a taxpayer is entitled to claim the capital gains exemption under Section 54B for the sale of agricultural land if they fail to provide any cogent documentary evidence to prove that the land was actually used for agricultural purposes for the two years preceding the sale.

Facts

  • The assessee sold a piece of land, claimed it was agricultural, and reinvested the proceeds in new agricultural land, claiming an exemption under Section 54B.
  • The Assessing Officer (AO) disallowed the exemption.
  • The AO’s reasoning was that the assessee had failed to provide any verifiable or contemporaneous records (like revenue records, sale bills for produce, or affidavits) to substantiate the claim that the land was actually cultivated during the two years before the sale.
  • The Commissioner (Appeals) allowed the exemption, not by examining the assessee’s evidence, but by merely relying on a favorable decision in the case of a co-owner of the same land.

Decision

  • The High Court set aside the order of the Commissioner (Appeals) and remanded the matter for a fresh decision.
  • It held that the burden to establish the agricultural character and use of the land lies squarely upon the assessee.
  • The court found that the Commissioner (Appeals) had erred by simply following the co-owner’s case without independently verifying the specific facts recorded by the AO in the assessee’s own case.
  • The matter was sent back to the Commissioner (Appeals) to decide the issue afresh based on the actual evidence (or lack thereof).

Key Takeaways

  • Burden of Proof is on the Assessee: To claim a Section 54B exemption, the taxpayer must provide positive and verifiable proof that the land was used for agricultural purposes by them or their parents for the two years prior to the sale.
  • Mere Claim is Insufficient: A simple assertion that the land was agricultural is not enough. The claim must be backed by cogent documentary evidence, such as land revenue records (e.g., Khasra, Girdawari), bills for the sale of agricultural produce, or proof of expenditure on agricultural inputs.
  • Appellate Authorities Must Verify Facts: An appellate authority cannot blindly follow a decision in a co-owner’s case. They have a duty to adjudicate the appeal based on the specific facts and records of the assessee before them, especially when the AO has recorded a clear finding of “no evidence.”
  • No Proof = No Exemption: The absence of any supporting documentary evidence to prove cultivation is a valid ground for the tax department to disallow the Section 54B exemption.
IN THE ITAT AHMEDABAD BENCH ‘C’
Income-tax Officer
v.
Nitinbhai Kanubhai Patel
MS. SUCHITRA R. KAMBLE, Judicial Member
and MAKARAND V. MAHADEOKAR, Accountant Member
IT Appeal No. 183 (Ahd) OF 2025
[Assessment year 2016-2017]
OCTOBER  14, 2025
Veerabadram Vislavath, Sr. DR. for the Respondent.
ORDER
Makarand V. Mahadeokar, Accountant Member. – This appeal by the Revenue is directed against the order dated 11.11.2024 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “the CIT(A)”] for the Assessment Year 2016-17, arising from the assessment order dated 22.05.2023 passed under section 147 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] by the Assessment Unit of Income Tax Department [hereinafter referred to as “Assessing Officer or AO”].
2. Facts of the Case
2.1 The assessee is an individual engaged in the profession of law and also deriving agricultural income. For the year under consideration, the assessee filed his return of income on 04.08.2016, declaring total income of Rs. 13,08,330/-. The return was processed under section 143(1) and subsequently selected for scrutiny. The original assessment was completed under section 143(3) on 16.11.2018 accepting the returned income.
2.2 Subsequently, information was received from the office of DCIT (International Taxation)-1, Ahmedabad, that the assessee, along with his brother Shri Ashok Kanubhai Patel (PAN ARRPP4895J), had sold certain immovable properties during the previous year relevant to A.Y. 2016-17 and both co-owners had claimed exemption under section 54B of the Act in respect of the long-term capital gains. In the case of the co-owner, Shri Ashok Kanubhai Patel, the claim under section 54B was disallowed by the Assessing Officer and the addition of Rs. 6,64,83,153/- was confirmed by the CIT(A). Although the ITAT, Ahmedabad, subsequently allowed the coowner’s appeal vide order dated 31.05.2021 in Ashokbhai Kanubhai Patel v. ACIT(IT) [IT Appeal No. 405 (Ahd) of 2020. dated 31-5-2021], the Department’s appeal before the Hon’ble Gujarat High Court (Tax Appeal No. 121 of 2022) is stated to be pending adjudication.
2.3 Based on this information, the Assessing Officer reopened the assessment by issuing notice under section 148 on 30.06.2021 in accordance with the provisions of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 and CBDT Notifications Nos. 20 and 38 of 2021. The said notice, issued during the transitional period, was treated as notice under section 148A(b) pursuant to the judgment of the Hon’ble Supreme Court in Union of India v. Ashish Agarwal (SC)/2022 SCC Online SC 543). After considering the assessee’s reply, an order under section 148A(d) was passed on 29.07.2022, and thereafter a fresh notice under section 148 was issued after obtaining necessary approval from the competent authority.
2.4 In response to the statutory notices under sections 142(1) and 143(2), the assessee furnished replies electronically. The Assessing Officer noted that the assessee had sold agricultural land situated at Village Khoraj, Taluka Gandhinagar, for substantial consideration, and claimed deduction under section 54B on long-term capital gains amounting to Rs.2,95,92,616/- by asserting that the land had been used for agricultural purposes in the two years preceding its transfer and that the sale proceeds were invested in the purchase of new agricultural land.
2.5 The assessee submitted copies of sale and purchase deeds, 7/12 extracts of land, bills of seeds, fertilizers, and pesticides, and claimed that he personally carried out agricultural activities on the said land engaging the labour. It was stated that he cultivated crops, part of which were consumed for personal use and part sold locally, and that such activities were also reflected in agricultural income declared in the return of income.
2.6 After examining the submissions, the Assessing Officer recorded that the Village Form No. 12 for the relevant years revealed cultivation of castor (Arandi) during F.Y. 2014-15 only and no crop was recorded for F.Y. 201516, which was one of the two years preceding the sale. The AO observed that the assessee had not furnished any conclusive evidence of agricultural produce or sales for the period 2015-16 and that certain bills submitted were undated or pertained to subsequent years. The AO therefore concluded that no agricultural activity was carried out on the land during the stipulated two years, and accordingly, the condition under section 54B(1)(i) was not fulfilled.
2.7 The Assessing Officer accordingly disallowed the assessee’s claim for deduction under section 54B of Rs.2,95,92,616/-, and assessed total income at Rs.3,09,00,950/-. Penalty proceedings under section 271(1)(c) were initiated separately for furnishing inaccurate particulars of income.
2.8 Aggrieved, the assessee preferred appeal before the learned CIT(A). Before the learned CIT(A), the assessee filed detailed statement of facts challenging the findings of the Assessing Officer. The assessee contended that the land was agricultural and had been used for agricultural purposes during the two years immediately preceding its transfer on 20.05.2015. It was argued that the condition under section 54B required agricultural use for two years preceding the date of transfer, meaning that use up to F.Y. 2014-15 was relevant, whereas the Assessing Officer had erroneously relied upon the non-mention of crop for F.Y. 2015-16, which was subsequent to the sale. The assessee submitted that the agricultural income was modest because part of the produce was consumed for household use and part sold locally in the open market without formal sale bills. The assessee submitted that the level of income could not be a determinant of the agricultural nature of land and that the AO failed to appreciate that small-scale farming often yielded low monetary returns.
2.9 Regarding the Assessing Officer’s reliance on the co-owner’s case, the assessee emphasised that the Co-ordinate Bench, in Ashok Kanubhai Patel (supra), had already held that agricultural operations were carried out on the same land and allowed deduction under section 54B. Since the coordinate Bench of the Tribunal had verified the same land records and evidences, the assessee’s case was fully covered by that decision. It was contended that the pendency of the Department’s appeal before the Hon’ble Gujarat High Court did not alter the binding nature of the ITAT’s factual findings, as admission of an appeal by the High Court is only on a question of law and not on facts. The assessee also contended that the Department’s appeal was not maintainable in view of the CBDT monetary limit, as the disputed tax effect was below the prescribed threshold. Hence, the finding of the Co-ordinate Bench in the coowner’s case continued to hold the field.
2.10 The CIT(A) observed that identical disallowance made in the case of the co-owner Shri Ashok Kanubhai Patel had already been deleted by the Co-ordinate Bench, holding that the Revenue had failed to prove that the land was not used for agricultural operations. The CIT(A) reproduced relevant portions of the order of Co-ordinate Bench and found that the assessee’s case stood on identical facts. Relying on the binding precedent of the ITAT in the co-owner’s case, the CIT(A) directed the Assessing Officer to delete the addition of Rs.2,95,92,616/-. For the sake of clarity, we reproduce the relevant paras from the order of CIT(A) –
6.5. During the course of the appellate proceeding, the Appellant has also stated that in the case of Sh. Ashok Kanu Bhai Patel assessment was also completed u/s 143(3) on 26.12.2018 and addition of Rs. 6,64,83,153/- on account of disallowance of deduction u/s. 54B of the IT Act was made which was also confirmed in first appeal by Ld. CIT(A) vide order no. CIT(A)-13/Intl. Taxn/Ahd/2018-19 dated 13.03.2020. However, Sh. Ashok Kanu Bhai Patel preferred appeal before the Hon’ble ITAT allowing the appeal of the appellant and deleted the addition made AO. The main reliance of the Hon’ble ITAT was made on the fact that the Revenue failed to prove that the land in dispute was not used for the purpose of agricultural operations by bringing tangible material on record which can be used against the assessee and against the form 7/12 along with form 8 available on record. Relevant portion of the ITAT order is re-produced as under:

“.11.10 However, the onus is upon the revenue to prove that the land in dispute was not used for the purpose of agricultural operations by bringing tangible material on record which can be used against the assessee and against the form 7/12 along with form 8 available on record. In the case on hand, the assessee has furnished the necessary details such as affidavit of the party who carried out the agricultural operations as well as form 7/12 along with form 8 which have rejected by the authorities below but without assigning sensible reason and without bringing any corroborative evidence on record. Accordingly, we are inclined to reverse the order of the authorities below and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.”

6.6. On perusal of the order of the Hon’ble ITAT, it is seen that the case of the Appellant is identical on facts with the case on which the Hon’ble ITAT has adjudicated. In the instant case also, the AO could not bring sufficient material to establish that the appellant’s income has escaped assessment in the relevant assessment year. Moreover, the appellant submitted the Google earth photos along with the Revenue Records towards the claim of agricultural activities being carried out on the said land. Onus was on the Assessing Officer to bring enough evidence to rebut the appellant claim and also prove that the Land was not used for agricultural activities which he failed to discharge in the instant case. In view of the same and also respectfully following the jurisdictional binding decision of the Hon’ble ITAT, the AO is directed to deleted the addition of Rs. 2,95,92,616/-. Thus, the ground no. 2 filed by the appellant is allowed.
2.11 Aggrieved by the order of CIT(A), the Revenue is in appeal before us raising following grounds:
(a)The learned CIT(A) has erred in law and on facts in allowing the exemption claimed u/s. 54B of the IT Act on LTCG of Rs.2,95,92,616/- without appreciating that as per revenue records, there was no mention of any agricultural produce on the land for FY 2015-16 and the assessee has not filed any corroborative evidence with regard to the agricultural land on which agricultural activities were being carried out.
(b)Whether in the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in allowing the assessee exemption of the capital gain on transfer of land not used for agriculture purpose u/s 54B of the IT Act, 1961, which was denied by the AO since the assessee did not satisfy the conditions for availing said exemption?
(c)Whether in the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in holding that the revenue has failed to discharge its onus when all possible corroborative evidences have been collected by AO and made part of the order?
(d)Whether in the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in completely ignoring all the evidences collected by AO and stating that the AO has rejected documents without assigning sensible reasons and corroborative evidences on record when there is substantial evidence to prove that agricultural operations were not carried on?
(e)Whether in the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in allowing the claim of the assessee for deduction u/s 54B of the IT Act, 1961 completely ignoring the facts that the basic condition for claiming deduction u/s 54B of the Act is that the land in respect of which deduction u/s 54B of the Act is claimed is required to be used for agricultural activities but the assessee has failed to prove with valid documentary evidence that the land in question was used for agricultural activities?
(f)Whether in the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in allowing the claim of the assessee for deduction under section 54B of the IT Act 1961 completely ignoring the fact that it is the assessee who has claimed deduction u/s 54B of the Act and, therefore, the onus is on the assessee to prove with valid documentary evidences that the land in respect of which deduction u/s 54B of the Act is claimed is not a barren land and the same was used for agricultural activities thereby fulfilling the basic condition for claiming deduction u/s 54B of the Act but the assessee has failed to do so?
(g)Whether in the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in ignoring the judgment of Hon’ble Supreme Court in the case of Commissioner of Wealth Tax v. Officer in charge (Court of Wards) reported in [1976] 105 ITR 133 (SC), when onus to prove that land in disputed was not used for agricultural purpose has been completely discharged by the AO?
(h)The appellant craves leave to add, alter and /or to amend all or any the ground before the final hearing of the appeal.
3. During the course of hearing before us, we noted that the appeal was fixed for hearing on several occasions. As recorded in the order-sheet entry dated 21.07.2025, it was noted that the present appeal had been filed by the Revenue against the order passed by the learned CIT(A), allowing the assessee’s appeal by holding the issue to be covered by the decision of the Co-ordinate Bench in the case of Shri Ashokbhai Kanubhai Patel v. ITO in ITA No. 405/Ahd/2020.
3.1 However, on perusal of the assessment order in the present case, the Bench observed that the assessee himself had stated before the Assessing Officer that the facts of his case were different and distinguishable from those in the case of Shri Ashokbhai Kanubhai Patel. The learned Counsel for the assessee, when confronted with this fact during the early hearing dated 21.7.2025, sought time to prepare and advance his arguments. Accordingly, the matter was adjourned to 18.08.2025 at the request of the assessee’s counsel, which was listed for hearing on 20.8.2025 as Bench did not function on 18.8.2025. Subsequently, on 10.09.2025, an adjournment request was received from the assessee seeking further time. The matter was thereafter listed for hearing on 13.10.2025, but on the said date, none appeared on behalf of the assessee, and no written submissions were filed despite due notice of hearing.
4. The learned Departmental Representative (DR) appeared and placed reliance on the order of the Assessing Officer, contending that the learned CIT(A) had erred in allowing deduction under section 54B without appreciating that the assessee had failed to furnish evidence of agricultural use of the land for the requisite period of two years preceding its transfer.
5. We have carefully considered the rival contentions advanced on behalf of the Revenue, perused the orders of the lower authorities, and examined the materials available on record. Despite being afforded adequate opportunity, none appeared on behalf of the assessee when the matter was taken up for hearing on 13.10.2025. We, therefore, proceed to adjudicate the appeal ex parte qua the assessee, on the basis of material available on record and after hearing the learned Departmental Representative.
It is noted that the Assessing Officer, in the reassessment order passed under section 147 read with section 143(3) of the Act, had denied the assessee’s claim of exemption under section 54B of Rs.2,95,92,616/-, primarily on the grounds that—(i) the revenue records for Financial Year 2015-16 did not record any agricultural crop on the land sold; (ii) the assessee had not produced any corroborative evidence such as sale bills, bills for seeds, fertilizers, or other inputs showing actual agricultural activity; and (iii) the agricultural income declared was nominal and disproportionate to the size of the land holding. The Assessing Officer thus concluded that the land was not used for agricultural purposes during the period of two years preceding the date of transfer, a precondition for deduction under section 54B.
5.1 Before the CIT(A), the assessee submitted that the land was used for cultivation and that agricultural income was partly consumed and partly sold. He also relied upon the order of the Hon’ble ITAT, Ahmedabad Bench, in the case of the co-owner Shri Ashok Kanubhai Patel (ITA No. 405/Ahd/2020), wherein exemption under section 54B was allowed on similar land. The learned CIT(A), without addressing the detailed findings of the Assessing Officer on factual discrepancies, accepted the assessee’s contention and deleted the addition solely on the strength of the decision of Co-ordinate Bench in the co-owner’s case.
5.2 The Revenue’s primary grievance is that the learned CIT(A) erred in allowing deduction under section 54B without appreciating that, as per revenue records (Village Form No. 12), there was no entry of agricultural produce on the land for Financial Year 2015-16, and the assessee failed to substantiate his claim with any corroborative evidence of agricultural activity. We find merit in the Revenue’s contention. The Assessing Officer had made specific observations that, as per the revenue record, only “Castrol (Arandi)” was mentioned in Form No. 12 for Financial Year 201415, irrigation was marked as “Not a tool,” and no agricultural produce was recorded for subsequent years, including the relevant Financial Year 201516. It was further noted that most bills of agricultural produce furnished were undated, unnumbered, and unauthenticated. These findings were neither controverted nor dealt with by the learned CIT(A) in his order.
5.3 On perusal of the appellate order, we find that the CIT(A) has primarily reproduced the assessee’s submissions and relied upon the order of the Coordinate Bench in the case of the co-owner Shri Ashok Kanubhai Patel, without undertaking any independent verification of the facts or examining whether the distinguishing features pointed out by the Assessing Officer rendered the ratio of that decision inapplicable. In fact, the assessment order itself records that the assessee had admitted before the Assessing Officer that his facts were different from those of the co-owner’s case decided by the Co-ordinate Bench. This aspect has not been addressed at all by the CIT(A).
5.4 It is pertinent to note that the assessee himself, in his written submission before the Assessing Officer, admitted that though the reassessment proceedings were initiated on the basis of information arising from the case of his real brother Shri Ashokbhai K. Patel, the factual matrix in his own case stood on a different footing. The assessee categorically stated that, unlike his brother’s case, he had personally carried out the agricultural activities through hired labour and under his personal supervision. This explicit statement, reproduced in the assessment order, demonstrates that the assessee himself did not claim absolute parity of facts with the co-owner’s case but sought to distinguish his own factual circumstances. In contrast, the learned CIT(A) proceeded on the premise that the facts of the present case were identical to those considered by the Coordinate Bench in Ashokbhai K. Patel v. ITO (ITA No. 405/Ahd/2020). However, a perusal of paragraph 11.10 of the said order reveals that the Tribunal’s decision in that case was primarily founded on the finding that the Revenue had failed to rebut the contemporaneous documentary evidence such as Form 7/12 and Form 8 entries, along with the affidavit of the person who carried out agricultural operations, which were available on record and not found to be false or fabricated. In the present case, the Assessing Officer has specifically recorded that the revenue records for Financial Year 2015-16 did not show any crop, irrigation was absent, and the agricultural income claimed was minimal and unsupported by verifiable documents. Thus, the foundational facts which persuaded the Coordinate Bench in the co-owner’s case are not present here.
5.5 It is a settled position that while judicial discipline requires following a binding precedent, such reliance must be based on similarity of material facts. The CIT(A) was expected to first record a factual finding on whether agricultural operations were actually carried out on the assessee’s land, and whether the evidences furnished were authentic and adequate, before applying the precedent. The absence of such findings renders his order unsustainable in law.
5.6 The law is well-settled that the initial burden to prove eligibility for deduction under section 54B rests on the assessee. Only when prima facie evidence of agricultural use is furnished does the onus shift to the Department. In the present case, the assessee failed to file cogent, verifiable, and contemporaneous records of cultivation during the relevant period. The CIT(A) erred in reversing the finding of the Assessing Officer without recording independent satisfaction that the assessee had indeed discharged this initial burden. The Revenue has also contended that the learned CIT(A) failed to appreciate the ratio of CWT v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133 (SC), SC), which holds that the onus to prove the character and use of land as agricultural lies upon the assessee. We find merit in this submission. The CIT(A) has not discussed or applied this principle while granting relief. Rather, he placed complete reliance on the co-owner’s ITAT order without ensuring factual parity or analysing whether the evidentiary deficiency pointed out by the Assessing Officer was addressed in that case.
5.7 We also find that in paragraph 5 of the impugned order, the learned CIT(A) has recorded that the assessee was provided with various opportunities of being heard through notices issued on different dates and that the assessee had filed certain details electronically in response to such notices. However, the appellate order does not specify the nature, contents, or relevance of the said details, nor does it discuss how those submissions were examined in the context of the Assessing Officer’s specific findings. There is no reference to any supporting documentary evidence such as copies of revenue records, sale bills, or affidavits which could substantiate the claim of agricultural use of the land. The order of the CIT(A) thus lacks clarity on what precise evidences were produced and how those were found satisfactory to overturn the detailed factual conclusions drawn by the Assessing Officer. The absence of any analytical discussion or correlation between the submissions made and the reasoning adopted renders the order unspeaking on material aspects of fact and law.
5.8 In view of the foregoing discussion and considering the deficiencies noted in the appellate order, we are of the considered view that the learned CIT(A) has failed to examine the issue in its proper factual and legal perspective. The order of the CIT(A) merely relies upon the decision of the Coordinate Bench in the case of the co-owner without verifying the distinguishing facts recorded by the Assessing Officer, without examining the evidence on record, and without addressing the specific legal contentions raised by the Revenue. The appellate authority has also not dealt with the applicability of the binding ratio of the Hon’ble Supreme Court in Officer-in-Charge (Court of Wards) (supra), which clearly enunciates that the burden to establish the agricultural character and use of land rests on the assessee.
5.9 Accordingly, in the interest of justice, we set aside the impugned order of the learned CIT(A) and restore the matter to his file with a direction to decide the issue afresh after conducting an independent and comprehensive examination of all relevant evidences, including the revenue records, details of crops cultivated, irrigation records, bills of agricultural produce, and any other corroborative documents the assessee may rely upon. The learned CIT(A) shall also specifically address the Assessing Officer’s findings, the assessee’s own admission regarding factual distinctions from the co-owner’s case, and the applicability of judicial precedents. The assessee shall be afforded due opportunity of being heard and shall cooperate by producing all requisite details.
5.10 We clarify that this remand is confined to the limited issue of allowability of deduction under section 54B of the Act, and the learned CIT(A) shall adjudicate the same on merits in accordance with law, by passing a reasoned and speaking order.
6. In the result, the appeal of the Revenue is allowed for statistical purposes.