ORDER
Sanjay Awasthi, Accountant Member.- The present appeal arises from order, passed u/s 250 of the Income Tax Act, 1961 (hereafter as “the Act”), dated 30.05.2025, passed by Ld. CIT(A)-NFAC, Delhi. In this case, it is seen that the assessee did not file any return of income u/s 139(1) of the Act. The Ld. AO received certain information indicating that sometime deposits were purchased by the assessee and also some payments had been received in respect of transfer of immovable property. The facts in brief are that the assessee sold a property comprising of land and factory building for Rs.1,92,27,000/-. The assessee had claimed indexation benefit on the cost of acquisition from 31.03.1993. The Ld. AO has recorded that the assessee did not submit any document supporting the cost of acquisition or cost of improvement of the property. The Ld. AO has given a finding that the benefit of indexation cannot be allowed for any depreciable asset, being the factory building in this case. Thereafter, the Ld. AO considered only the cost of land as cost of acquisition and recomputed the capital gains. Furthermore, a second portion of the same plot of land was also sold as agricultural land but the Ld. AO is seen to have denied this claim on the ground that the assessee did not give any proof of agricultural activity being conducted on the said land. Thus, the facts that emerge are that the assessee sold two portions from a plot of land measuring 5 acres. The first portion comprising 1.51 acres also had a factory building on it and the second part comprising 3.49 acres was claimed to be agricultural land. Thereafter, the Ld. AO added long term capital gains at Rs.1,82,30,107/- for one parcel of land and Rs.1,04,55,911/- for the second parcel.
1.1 Aggrieved with this order, the assessee approached the ld. CIT(A) where he could succeed on both counts. Regarding the sale of 1.51 acres of land (with factory building), it has been mentioned in the impugned order that the said building was in a very bad shape and the land was also encroached. Also, the assessee could get part of this land converted to agricultural status (24.05.2016) and the portion which comprised of the factory building was termed as “residential land”. Thus, the Ld.CIT(A) is seen to have relied on the fact that at the time of sale the land was reconverted to agricultural status and the factory building was termed as “residential building”. Regarding the remaining portion the findings of Ld. CIT(A) deserve to be extracted for the sake of capturing the facts:
“In the present case, out of total 5 acres of agricultural land purchased by the appellant, on one portion of the land (1.51 acres), the appellant had constructed a factory building post the change in land use to “industrial” in the Revenue records vide order dated 22.02.1988 passed by the Assistant Collector, Kashipur. As explained herein before under ground no. 2, the appellant had defaulted in repayment of the loan taken from PICUP and as a consequence thereof the industrial unit and the land were taken over on 30.01.1993 and the business activity came to standstill. After prolonged litigation, the land and building were handed over to the appellant by PICUP on 11.01.2013 on “As is where is and whatever there is basis”. Due to these events, the land and factory building thereon that happened to be a very old construction and in a dilapidated condition were sold as such by the appellant. However, the other portion of the land (3.49 acres) was agricultural land as is evident from the copy of Sale Deed wherein the subject land is classified as agricultural land in the Revenue records and the same is also substantiated by the order of the Assistant Collector, Kashipur whereby the status of the land area of1.595 hectares was restored to that of an agricultural land. It is worthwhile to mention here that during the course of negotiations with PICUP, vide application dated 22.03.2007, addressed to the Tehsildar of Kashipur, the appellant had sought to ascertain the fact whether Village Gangapur Gosain, Teltsil Kashipur, District Udham Singh Nagar, where the appellant’s land was situated was a declared industrial area. In response to the same, on 03.04.2007, the appellant was informed that the said area was not a declared industrial area as per Notification dated 19.07.2006 [Page 91] issued by the Government. Based on this, the appellant had sent a letter dated 27.04.2007 to PICUP drawing attention to the fact that the said area did not fall in the areas certified for industrial use.”
1.2 Aggrieved with this action of Ld. CIT(A) the Revenue has approached the ITAT with the following grounds:
“1. On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.1,82,30,107/- made under the head Long Term Capital Gain.
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) was correct in allowing the indexation on the depreciable asset while calculating the capital gain by the assessee.
3. The Ld. CIT(A) has erred in deleting the addition of Rs.1,04,55,911/- made under the head Long Term Capital Gain.
4. Whether on the facts and circumstances of the case, the Ld.CIT(A) was correct in taking two different view on the same asset which was purchased and sold at once, treating the one piece of land as commercial land while the other as Agriculture land.
5. Whether on the facts and circumstances of the case, the Ld.CIT(A) was correct in ignoring the fact that assessee failed to substantiate agricultural activities being undertaken/carried out on the land sold as agriculture land
6. The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.”
2. Before us, the Ld. DR argued that the Ld. AO has given a finding in paras 9, 10 & 16.2 of his order that there was no legal possibility of indexation being allowed on factory building. It was the submission that as per the provisions mandating taxation of capital gains, the depreciable assets could be taxed only as per the provisions of section 50 of the Act. It was the submission that as per para 16.2 at page 10 of the Ld. AO’s order the depreciated value of the assets in question would be negligible at the time of sale, considering the passage of time. The Ld. DR also pointed out that in this regard before the AO no documents pertaining to interest paid by the assessee on loan for acquisition of assets was furnished. Thus, the Ld. AR supported the action of Ld. AO in treating only the land portion for the purposes of indexation and capital gains thereon. Regarding the second aspect of the sale of the plot of land measuring 3.49 acres, the Ld. DR pointed out the fact-finding done in this regard by the Ld. AO at pages 14-15 of his order. It was pointed out that before the Ld. AO no documents were filed by the assessee in evidence of any agricultural activity being carried out on such land. It was the submission by the Ld. DR that the AO was left with no option but to deny the claim of the said parcel of land being agricultural in nature.
2.1 Per contra, the Ld. AR supported the impugned order and stated that only in the first year of its existence was depreciation charged on the factory building and thereafter, till the time of its sale, no depreciation was ever charged. The Ld. AR submitted that the factory building was not a business asset since there was absolutely no commercial activity whatsoever undertaken through it. It was pointed out that in the sale deed dated 28.07.2016, placed at pages 26 to 28 of the Paper Book, the building was mentioned as “residential”. The reason for such classification was that the entire premises were taken over by PICUP on 30.01.1993 and was handed over on 11.01.2013 back to the assessee only after a High Court order. It was the submission that while PICUP had possession over the said land and building, there was large scale encroachment, making the area look like a dwelling unit. It was clarified by the Ld. AR that due to this fact the Revenue officials of the district were requested to term the land pertaining to the factory building to be classified as non-agricultural. However, the remaining land was classified as agricultural by the district revenue authorities. Regarding the remaining 3.49 acres, the same was classified as “agricultural land”. It was the submission that once the said land was classified as agricultural by the revenue authorities then there was no reason why the land could be treated as anything else. The Ld. AR relied on the following cases:
| (i) | | CIT v. Borhat Tea Co. Ltd. [1982] 138 ITR 783 (Calcutta). Through this case law it was averred that agricultural operational need not be carried out and only the land should be capable of sustaining agriculture for the same to be identified as being agricultural in nature. |
| (ii) | | Hindustan Industrial Resources Ltd. v. Asstt. CIT [2011] 335 ITR 77 (Delhi). Through this case law it was argued that the classification of the land of the District Collector would be the determining factor. |
The Ld. AR also relied on several other case laws to canvass the point that there could be no capital gains of agricultural land. In the end the Ld. AR read out the relevant portion from the impugned order at pages 22 & 23 (supra).
3. We have carefully considered the rival submissions and have gone through the documents before us. Before adjudicating on the merits of this case, it is necessary to mention that the capital gains treatment of a depreciable asset is governed by Section 50 of the Act. Also Section 2(14)(iii) defines agricultural land in India. For the sake of reference, the two sections deserve to be extracted:
Section 2(14)(iii):
“[(iii) agricultural land in India, not being land situate-
(a) in any area which is comprised within the jurisdiction of a municipality 59 (whether know as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand [***] ; or
[(b) in any area within the distance, measured aerially,-
(I) not being more than two kilometres, from the local limits of any municipality c cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
(II) not being more than six kilometres, from the local limits of any municipality c cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or
(III) not being more than eight kilometres, from the local limits of any municipality c cantonment board referred to in item (a) and which has a population of more than ten lakh.
Explanation.-For the purposes of this sub-clause, “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;]]
Section 50
[Special provision for computation of capital gains in case of depreciable assets.
50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :-
(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capita asset falling within the block of assets during the previous year, exceeds the aggregate of the following amounts, namely: –
| (i) | | expenditure incurred wholly and exclusively in connection with such transfer or transfers; |
| (ii) | | the written down value of the block of assets at the beginning of the previous year; and |
| (iii) | | the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short term capital assets; |
(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short term capital assets:]
[Provided that in a case where goodwill of a business or profession forms part of a block of asset for the assessment year beginning on the 1st day of April, 2020 and depreciation thereon has been obtained by the assessee under the Act the written down value of that block of asset and short-term capital gain, if any, shall be determined in such manner as may be prescribed.]
[Explanation.-For the purposes of this section, reduction of the amount of goodwill of a business or profession, from the block of asset in accordance with sub-item (B) of item (ii) of subclause (c) of clause (6) of section 43 shall be deemed to be transfer.]”
3.1 A plain reading of the Section 50 reveals that any depreciable asset, as in this case, would be subjected to the provisions of Section 50 of the Act. Admittedly, depreciation was charged for one year in the beginning and thereafter, there was no such charge in the profit & loss account. In our opinion, the character of the asset would not change since there are a catena of judgments which indicate that a commercial asset need not be used commercially for there to be a right to claim depreciation. The fact that the building was not used commercially and was even encroached would not matter since the original character of the said building would remain commercial. It is also a trite position of law that one can advert to descriptions and definitions etc. as per some other rule or law only when the I.T. Act is silent on such aspect. In the present instance there is a clear provision for the treatment of a depreciable asset u/s 50 of the Act and the same shall prevail over any other classification that may be rendered on the basis of any other local rule or law. Thus, the view of the Ld. AO in regard to the treatment of the said factory building is worth supporting and we do so.
3.2 Regarding the claim of the remaining portion of land (out of total 5 acres) that has been treated as agricultural land on the strength of its description in the revenue records, it is felt that Section 2(14)(iii) of the Act requires a degree of fact finding which was certainly not done by the Ld. AO as no documents were produced before him and even before the Ld.CIT(A) by the assessee. It is seen that some documents have been produced at first appeal stage, which have been accepted at face value without testing the facts against the provisions of section 2(14)(iii) of the Act. Accordingly, the entire land parcel, except the piece of land on which the factory is situated, deserves to be examined in the light of the provisions of Section 2(14)(iii) of the Act and thereafter it needs to be decided whether the said parcel of land can be justifiably termed as “agricultural land” in India. Accordingly, we set aside the impugned order to the extent of the findings given for the entre parcel of land, other than the land on which the factory is situated, and remand this matter back to the file of Ld. AO for examination of facts in the backdrop of the provisions of Section 2(14)(iii) of the Act.
4. Before parting with this issue, it deserves to be mentioned that the case laws relied upon by the Ld. AR determined facets of law based on the peculiar facts before the Hon’ble High Courts under consideration. Thus, while we do not specifically propose to test the facts of the said case laws with the present set of facts, we do expect that the Ld. AO would be mindful of the same before passing afresh assessment order.
5. In the result, this appeal is partly allowed.