Official revenue classifications and specific statutory distance notifications override administrative presumptions regarding agricultural land taxation.

By | July 9, 2026
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Official revenue classifications and specific statutory distance notifications override administrative presumptions regarding agricultural land taxation.

Issue

  • Whether the revenue department can deny a tax exemption under Section 10(37) on capital gains from the compulsory acquisition of land by relying on localized reports of non-cultivation, when official state revenue records explicitly classify the land as agricultural and no commercial conversion has occurred.

  • Whether a parcel of land can be classified as a taxable “capital asset” under Section 2(14)(iii)(b) based on its market development potential and municipal sub-registrar classifications, in the absence of a valid, gazetted Central Government notification defining that specific area’s geographical limits.

Facts

  • Issue I (Compulsory Acquisition): The assessee’s land was compulsorily acquired for the expansion of National Highway No. 49 during the Assessment Year 2012–13. The assessee claimed a tax exemption on the compensation under Section 10(37).

  • The AO’s Denial: The Assessing Officer (AO) rejected the exemption after obtaining statements from the local Tahsildar and Village Administrative Officer indicating no active farming operations were visible. The AO also noted that the assessee had never declared agricultural income in past tax returns.

  • The Counter-Evidence: The assessee produced official state land records—including Patta, Chitta, and Adangal extracts—confirming the land’s official classification as agricultural. The revenue department provided no proof that the land had ever been legally converted, platted, or put to commercial use.

  • Issue II (Open Market Sale): The assessee sold a separate parcel of land and excluded the profits from capital gains tax, arguing it was rural agricultural land and not a “capital asset” under Section 2(14).

  • The Sub-Registrar’s Class: The AO disallowed this claim because the sale deed mentioned development potential, the land was currently vacant with no standing crops, and the local Sub-Registrar Office classified the location as “Residential Class-I, Type-I.”

  • The Notification Deficit: The revenue department failed to produce any official Gazette Notification from the Central Government demonstrating that the land fell within the restricted statutory distance of a notified municipality or cantonment board for that specific assessment year.

Decision

  • Exemption Under Section 10(37) Upheld: A taxpayer’s failure to report agricultural income in their regular returns does not legally prove that the underlying land is non-agricultural. Because the official state revenue entries (Patta, Chitta, and Adangal) explicitly categorized the property as agricultural, and no commercial transformation took place, the Section 10(37) exemption applies. (In favour of assessee)

  • Capital Asset Status Rejected: To tax rural land under Section 2(14)(iii)(b), the department cannot rely solely on distance or municipal pricing categories; it must prove the area is bound by an active Central Government Gazette Notification. Since no such notification was established on record, the land remains a non-capital asset, and the sale is exempt from tax. (In favour of assessee)

Key Takeaways

  • Revenue Records Prevail Over Visual Inspections: Official state revenue entries like Patta and Adangal carry primary evidentiary weight. The temporary absence of standing crops or a lack of self-reported agricultural income cannot override the legal, unchanged status of agricultural land.

  • Strict Construction of Section 2(14): For the revenue department to claim a property has lost its rural tax-exempt status based on its proximity to an urban center, it must satisfy a dual test: geographical distance and an explicit, active Central Government Gazette Notification.

  • Potential Use vs. Current Status: The fact that a buyer purchases land for future development, or that a sub-registrar applies a residential rate for stamp duty purposes, does not retroactively strip the land of its agricultural character on the date of the transfer.

IN THE ITAT CHENNAI BENCH ‘A’
Sundaramahalingam Narayanan
v.
Income-tax Officer
George George K., Vice President
and S.R. Raghunatha, Accountant Member
IT Appeal No. 438 (Chny.) of 2025
[Assessment year 2012-13]
JUNE  15, 2026
N.R. Krishnamoorthy, FCA for the Appellant. Ms. E. Pavuna Sundari, CIT for the Respondent.
ORDER
S.R. Raghunatha, Accountant Member. – The present appeal of the assessee is directed against the order of the Learned Commissioner of Income Tax (Appeals) – 20, Chennai [hereinafter referred to as “the Ld.CIT(A)”] dated 16.12.2024, arising out of the assessment order dated 27.03.2015 passed by the Income Tax Officer, Non Corporate Ward 14(1), Chennai [hereinafter referred to as the ‘AO”] u/s.143(3) of the Incometax Act, 1961 [hereinafter referred to as “the Act”] pertaining to the Assessment Year 2012-13.
2. The brief facts of the case as emanating from the records are that the assessee is an individual engaged in the business of flat promotion under the proprietary concern styled as M/s.Guru Foundations. For the assessment year 2012-13, the assessee filed his return of income on 30.09.2012 declaring a total income of Rs.7,77,160/-. The return was selected for scrutiny and statutory notices were issued.
3. During the course of assessment proceedings, the AO observed from the Balance Sheet that the assessee had disclosed a sum of Rs.3,33,46,206/-under the head “Advance Received”. The assessee furnished party-wise details of such advances along with copies of the construction agreements. Upon verification of the details furnished and on examination of the concerned parties, the AO noticed that one of the purchasers had taken possession of the flat during the financial year 2011-12 itself after remitting the entire sale consideration of Rs.26,60,000/-. However, the said amount had been shown by the assessee as “advance received” and had not been recognized as income for the year under consideration. The assessee also admitted the said factual position before the AO. Accordingly, the AO treated the sum of Rs.26,60,000/-as income chargeable to tax for the assessment year under consideration and brought the same to tax.
4. The AO further noticed from the computation of income that the assessee had received compensation/award amounting to Rs.83,70,119/- on account of compulsory acquisition of land situated at Paiyanur and had claimed exemption thereof u/s.10(37) of the Act. In support of the claim, the assessee failed to furnish any evidence to establish that the land in question had been used for agricultural purposes during the year of transfer and in the two years immediately preceding the date of transfer, as required under the provisions of section 10(37) of the Act.
5. The AO, therefore, called for information from the Village Administrative Officer (VAO) and the Tahsildar concerned. On the basis of the information received, it was found that, as per the revenue records, no agricultural operations had been carried out on the said land from the year 2007 onwards. Both the VAO and the Tahsildar confirmed that the land had remained vacant and that no crops had been cultivated thereon. The AO further observed that the assessee had not disclosed any agricultural income in any of the returns of income filed by him. Considering the aforesaid facts, the AO concluded that the land was not used for agricultural purposes and, consequently, the assessee was not entitled to exemption u/s.10(37) of the Act.
6. Though the assessee claimed deduction towards cost of acquisition and cost of improvement in computing the capital gains, the claim relating to cost of improvement amounting to Rs.10,73,112/- and indexed cost of improvement of Rs.13,82,907/- was rejected by the AO for want of supporting documentary evidence. Accordingly, the AO computed the taxable long-term capital gain arising from the compulsory acquisition of the Paiyanur land at Rs.80,60,324/-.
7. The AO also noted that the assessee had sold a parcel of land situated at Poonchery Village for a consideration of Rs.6,90,750/- and had claimed that the land was agricultural land falling outside the definition of “capital asset” u/s.2(14) of the Act. In support of the claim, the assessee furnished a certificate issued by the Village Administrative Officer stating that the land was cultivable in nature and situated approximately 27 kilometres away from the municipal limits. However, on examination of the sale deed, the AO observed that the land had been held for development purposes and not for carrying on agricultural operations. The sale deed further revealed that the land was vacant and there was no reference to the existence of any standing crops. The AO also noticed that, as per the records available on the website of the Sub-Registrar Office, Thirukazhukundram, the land had been classified as “Residential Class-I, Type-I”. Accordingly, the claim that the land was agricultural in nature was not accepted. The assessee’s claim towards cost of improvement amounting to Rs.1,04,458/- and indexed cost of improvement amounting to Rs.1,48,819/-was also disallowed for want of documentary evidence. The taxable long-term capital gain was thus computed at Rs.5,09,709/-.
8. The assessment was completed u/s.143(3) of the Act vide order dated 27.03.2015, determining the total income at Rs.1,20,07,190/-, inter alia, by making an addition of Rs.26,60,000/- towards income from sale of flat and by bringing to tax long-term capital gains of Rs.80,60,324/- and Rs.5,09,709/-arising from the transfer of lands situated at Paiyanur and Poonchery respectively.
9. Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals)-7, Chennai. The Ld.CIT(A), vide order passed in ITA No.84(T-1)/CIT(A)-7/2015-16 dated 26.06.2019, dismissed the appeal and confirmed the additions made by the AO. On further appeal, this Tribunal vide order dated 07.07.2022 in S. Narayanan v. ITO [IT Appeal No. 44 (Chny.) of 2021], set aside the order of the Ld.CIT(A) and restored the matter to his file with a direction to adjudicate the issues afresh by passing a reasoned and speaking order after affording adequate opportunity of being heard to the assessee. In compliance, the Ld.CIT(A) passed the impugned appellate order dated 16.12.2024 dismissing the appeal of the assessee by confirming the additions made by the AO.
10. The Ld.CIT(A), after considering the assessment order, submissions of the assessee, and the material available on record, dismissed both grounds raised by the assessee for the following reasons.
11. The Ld.CIT(A) observed that though the land in question was compulsorily acquired by the Government and compensation of Rs.83,70,119/-was received by the assessee, the essential condition prescribed u/s.10(37)(ii) of the Act, namely that the land should have been used for agricultural purposes during the period of two years immediately preceding the date of transfer, remained unproved.
12. The Ld.CIT(A) noted that the assessee had relied only upon revenue records such as Patta, Chitta, Adangal and website extracts. On examination of these records, it was found that while the land was classified as agricultural land, there was no indication whatsoever regarding actual cultivation. In particular, the relevant columns in the Adangal relating to the nature of crop, extent of cultivation, irrigation particulars and other cultivation details were left blank. According to the Ld.CIT(A), classification of land as agricultural in revenue records by itself does not establish actual agricultural operations.
13. Placing reliance upon the decision of the Hon’ble Supreme Court in Commissioner of Wealth-tax v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133 (SC), the Ld.CIT(A) held that mere classification of land as agricultural in revenue records is not conclusive evidence of agricultural use. The assessee had also failed to produce any corroborative evidence such as sale receipts of agricultural produce, expenditure vouchers, bills relating to agricultural operations, or any other material demonstrating cultivation during the relevant period.
14. The Ld.CIT(A) further recorded that during the assessment proceedings, independent verification was conducted by the AO through the Village Administrative Officer (VAO) and the Tahsildar. Both authorities confirmed, on the basis of revenue records maintained by them, that no cultivation had been carried out on the land from the year 2007 onwards and that the land remained vacant. The assessee had also not disclosed any agricultural income in the preceding years. Despite being afforded sufficient opportunity during the appellate proceedings to furnish supporting evidence, the assessee failed to produce any additional material.
15. In view of the above facts, the Ld.CIT(A) concluded that the assessee had failed to establish that the land was used for agricultural purposes during the two years immediately preceding the transfer, which is a mandatory condition for claiming exemption u/s.10(37) of the Act. Accordingly, the exemption claimed was denied and the addition made by the AO was confirmed.
16. With regard to the capital gains arising from sale of land situated at Poonchery Village for a consideration of Rs.6,90,750/-, the Ld.CIT(A) examined the claim of the assessee that the land constituted agricultural land falling outside the ambit of “capital asset” u/s.2(14)(iii) of the Act. The Ld.CIT(A) noted that the AO had found from the records of the Sub-Registrar Office, Thirukazhukundram, that the land was classified as “Residential Class-I, Type-I” and was situated within the limits of Mamallapuram Town Planning. The assessee neither disputed these findings nor furnished any evidence to rebut the same. The Ld.CIT(A) observed that once the land itself was classified as residential land, it could not prima facie be regarded as agricultural land for the purpose of exclusion u/s.2(14) of the Act.
17. The Ld.CIT(A) further observed that, even assuming for the sake of argument that the land had been used for agricultural purposes, the provisions of section 2(14)(iii)(b) of the Act, as applicable to the year under consideration, specifically treated agricultural land situated within eight kilometres of the limits of a municipality or notified urban area as a capital asset. The AO had recorded a finding that the land was situated within the limits of Mamallapuram Town Planning and, therefore, fell within the notified urban limits contemplated under the statute. Despite specific opportunities granted during the appellate proceedings, the assessee failed to furnish any evidence regarding the exact location of the land, its distance from the nearest municipal limits, or any material to disprove the findings recorded by the AO. Though the documents produced by the assessee indicated that the land was agricultural in nature and that paddy cultivation had been carried out in an earlier fasli year, the same could not outweigh the official classification by the Sub-Registrar and the findings regarding its location within the urban planning limits. Accordingly, the Ld.CIT(A) held that the land constituted a “capital asset” within the meaning of section 2(14)(iii)(b) of the Act and that the gains arising from its transfer were chargeable to tax under the head “Capital Gains”. The addition made by the AO was therefore upheld and the ground of appeal was dismissed. Thus, both grounds raised by the assessee were rejected by the Ld.CIT(A), and the additions made by the AO in respect of the Payanur land and the Poonchery land were sustained.
18. Aggrieved of the above order of the Ld.CIT(A), assessee is in appeal before this Tribunal.
19. The Ld.AR, appearing on behalf of the assessee submitted that the land situated at Paiyanur Village, Chengalpattu Taluk, the assessee received compensation of Rs.83,70,119/- during the relevant previous year on account of compulsory acquisition of the said agricultural land for the purpose of expansion of National Highway No.49. The assessee claimed exemption u/s.10(37) of the Act, which provides exemption in respect of capital gains arising from compulsory acquisition of agricultural land, subject to fulfilment of the prescribed conditions. The Ld.AR submitted that all the statutory requirements contemplated under the said provision stand satisfied in the present case. The land acquired was agricultural land as evidenced by the revenue records in the form of Patta, Chitta and Adangal. The transfer was effected through compulsory acquisition by the Government for a public purpose and the compensation was received after 01.04.2004. The land was situated in a rural area outside the limits of any notified municipality.
20. The Ld.AR submitted that the AO has denied the exemption primarily on the ground that the assessee had not disclosed agricultural income and by placing reliance upon certain statements attributed to the Village Administrative Officer. According to the Ld.AR the said reasoning is unsustainable both on facts and in law. The nature and character of land have to be determined on the basis of revenue records, classification maintained by Government authorities and the surrounding facts and circumstances. The Ld.AR submitted that mere absence of agricultural income in the return of income cannot alter the character of land which is otherwise classified and recorded as agricultural land in official records. The Ld.AR submitted that the assessee has produced Patta, Chitta and Adangal records evidencing the agricultural nature of the land and no material has been brought on record by the Revenue to establish that the land had been converted for non-agricultural purposes or put to any commercial or urban use. In this regard, reliance is placed on the decision of the Hon’ble Bombay High Court in CIT v. Smt. Debbie Alemao 331 ITR 59 (Bombay), wherein it was held that exemption relating to agricultural land cannot be denied merely because agricultural income was not declared by the assessee. The Hon’ble Court recognised that the classification and character of the land are of primary relevance while determining eligibility for exemption. The Ld.AR submitted that in the present case, the documentary evidence produced by the assessee clearly establishes that the land acquired was agricultural land and, therefore, the compensation received is fully eligible for exemption u/s.10(37) of the Act. The Ld.AR thus submitted that the denial of exemption by the AO is therefore liable to be set aside.
21. As regards the land situated at Poonchery Village, the Ld.AR submitted that the assessee had sold the said agricultural land and claimed that no capital gains were chargeable to tax on the ground that the land did not constitute a “capital asset” within the meaning of Section 2(14)(iii) of the Act. The Ld.AR submitted that the definition of “capital asset” specifically excludes agricultural land situated outside notified municipal limits and outside such notified distances as may be prescribed by the Central Government through a Gazette Notification. The AO, however, treated the land as a capital asset mainly on the ground that it was situated within eight kilometres of Mamallapuram and that the Sub-Registrar had classified the property as “Residential Class-I”.
22. The Ld.AR submitted that the approach adopted by the AO is contrary to the statutory provisions. For the purpose of Section 2(14)(iii)(b) of the Act, it is not sufficient that the land is situated within a particular distance from a town. The municipality or local authority concerned must also be one that has been specifically notified by the Central Government through a Gazette Notification issued under the said provision. The Ld.AR submits that Mamallapuram does not find place in Gazette Notification No. S.O. 10(E) dated 06.01.1994 issued under Section 2(14)(iii)(b). The relevant entries pertaining to the State of Tamil Nadu do not include Mamallapuram or Poonchery. Consequently, even if the land is assumed to be situated within eight kilometres of Mamallapuram, the statutory requirement of notification is absent and therefore the provisions of Section 2(14)(iii)(b) cannot be invoked.
23. The Ld.AR submitted that the assessee has also produced Chitta, Adangal and Village Administrative Officer records demonstrating that the land was agricultural in nature. The classification adopted by the Sub-Registrar for registration purposes cannot override the revenue records maintained by the Government authorities. The true nature of the land has to be determined on the basis of its actual character, classification and use and not merely on the basis of nomenclature adopted for registration purposes.
24. The Ld.AR placed reliance on the decision of the Jaipur Bench of the Tribunal in Khetilal Sharma (HUF) v. ITO [IT Appeal No. 103 (JP.) of 2012, dated 18-3-2016], wherein it was held that unless the area falls within a municipality notified under the relevant Gazette Notification, the land cannot be regarded as a capital asset merely because of its distance from an urban area. The Ld.AR argued that the Tribunal categorically held that the distance contemplated u/s.2(14)(iii)(b) of the Act must be reckoned with reference to a municipality specifically notified by the Central Government. Applying the said principle, the land situated at Poonchery cannot be treated as a capital asset and consequently no capital gains are chargeable to tax.
25. In view of the above submissions, the Ld.AR submitted that the AO has failed to properly appreciate the documentary evidence furnished by the assessee and has proceeded on assumptions unsupported by law. The Ld.AR submitted that the compensation received on compulsory acquisition of the agricultural land situated at Paiyanur is exempt u/s.10(37) of the Act and the addition of Rs.83,70,119/- deserves to be deleted. Similarly, the land situated at Poonchery does not constitute a capital asset within the meaning of Section 2(14)(iii) of the Act and the addition of Rs.5,09,709/- is also liable to be deleted. The Ld.AR thus prayed to allow the appeal.
26. Per contra, the Ld.DR supported the orders of the lower authorities and prayed to confirm the order of the Ld.CIT(A) by dismissing the appeal of the assessee.
27. We have considered the rival submissions advanced by the parties, carefully perused the assessment order, the impugned order of the Ld.CIT(A), the material available on record and the judicial precedents cited before us. The issues arising for our adjudication pertain to the assessee’s claim of exemption u/s.10(37) of the Act in respect of compensation received on compulsory acquisition of land situated at Paiyanur Village and the taxability of gains arising from the transfer of land situated at Poonchery Village.
28. The undisputed facts reveal that the assessee received compensation of Rs.83,70,119/- consequent to compulsory acquisition of land situated at Paiyanur Village for expansion of National Highway No.49. The assessee claimed exemption u/s.10(37) of the Act on the ground that the land acquired was agricultural land and that all statutory conditions prescribed therein stood satisfied. The Revenue authorities, however, denied the claim primarily on the ground that the assessee failed to establish that the land was used for agricultural purposes during the two years immediately preceding the date of transfer.
29. On a careful examination of the records, we find that the assessee has produced Patta, Chitta and Adangal extracts evidencing the classification of the land as agricultural land in the revenue records maintained by the State Government. The compulsory nature of acquisition and receipt of compensation are not in dispute. The controversy is confined only to the fulfilment of the condition relating to agricultural use of the land during the prescribed period. The AO as well as the Ld.CIT(A) have proceeded mainly on the basis of communications received from the Village Administrative Officer and the Tahsildar stating that no cultivation had been carried out on the land from the year 2007 onwards and that the land remained vacant. We find from the records that such reports have been relied upon without affording the assessee any effective opportunity to confront or cross-examine the concerned officials whose statements formed the sole basis for denial of the exemption. The Hon’ble Supreme Court in Andaman Timber Industries v. CCE [2015]   (SC) has held that where an adverse finding is founded upon statements of third parties, denial of an opportunity of cross-examination constitutes a serious violation of principles of natural justice and renders the evidence unreliable.
30. Further, the mere absence of disclosure of agricultural income in the returns of income cannot, by itself, lead to the conclusion that the land was not agricultural in nature or that no agricultural operations were carried on. Agricultural income may be insignificant, exempt from tax, or may not necessarily result in substantial surplus. The Hon’ble Bombay High Court in Smt. Debbie Alemao (supra) has held that exemption relating to agricultural land cannot be denied merely because agricultural income was not declared by the assessee. The character of the land has to be examined on the basis of revenue records and surrounding circumstances.
31. In the present case, the revenue records produced by the assessee consistently classify the land as agricultural land. No material has been brought on record by the Revenue to demonstrate that the land was converted for non-agricultural purposes, subjected to plotting activity, or put to any commercial or residential use. The authorities below have also not disputed the agricultural classification of the land. Their conclusion is founded solely upon the alleged absence of cultivation, which itself rests on untested reports of local authorities. Having regard to the totality of facts and circumstances and respectfully following the decision of the Hon’ble Bombay High Court Court in Smt. Debbie Alemao (supra), we are of the considered view that the material relied upon by the Revenue is insufficient to dislodge the evidentiary value attached to the statutory revenue records produced by the assessee. In the absence of any cogent material establishing conversion or non-agricultural user of the land, the benefit of doubt must necessarily enure to the assessee. We therefore hold that the assessee has substantially established compliance with the conditions prescribed u/s.10(37) of the Act. Consequently, the compensation received on compulsory acquisition of the Paiyanur land is entitled to exemption and the addition sustained by the Ld.CIT(A) is directed to be deleted.
32. The next issue relates to the addition of long-term capital gains arising from sale of land situated at Poonchery Village. The assessee contends that the land is agricultural land situated beyond the scope of the definition of “capital asset” contained in section 2(14)(iii) of the Act and therefore no capital gains are chargeable to tax. The Revenue authorities have treated the land as a capital asset mainly on the basis that the Sub-Registrar had classified the property as “Residential Class-I, Type-I” and that it was situated within the limits of Mamallapuram Town Planning.
33. We find considerable force in the contention advanced on behalf of the assessee. For the assessment year under consideration, section 2(14)(iii)(b) required that the agricultural land should be situated within the specified distance from a municipality or cantonment board notified by the Central Government through a Gazette Notification. The applicability of the provision is therefore dependent not merely upon distance but also upon the existence of a valid notification covering the concerned municipality.
34. The assessee has specifically contended that Mamallapuram does not find place in Notification No. S.O.10(E) dated 06.01.1994 issued u/s.2(14)(iii)(b) of the Act. Neither the AO nor the Ld.CIT(A) has brought any material on record to establish that Mamallapuram was a notified municipality for the purposes of the said provision during the relevant period. In the absence of such foundational evidence, the mere observation that the land falls within Mamallapuram Town Planning limits cannot automatically bring the land within the ambit of a capital asset.
35. We further find that the assessee has produced revenue records including Chitta and Adangal demonstrating the agricultural character of the land. The classification adopted by the Sub-Registrar for registration purposes cannot override statutory revenue records maintained by the revenue authorities. The settled legal position is that the true character of the land must be determined on the basis of its actual nature, classification and surrounding circumstances and not merely on the nomenclature adopted in registration records. The Jaipur Bench of the Tribunal in Khetilal Sharma (HUF) (supra) has held that unless the municipality concerned is specifically covered by the Central Government notification, agricultural land situated beyond the notified limits cannot be treated as a capital asset merely on the basis of proximity to an urban area. The ratio of the said decision squarely supports the assessee’s case.
36. In the present case, the Revenue has failed to establish that the land falls within the notified jurisdiction contemplated u/s.2(14)(iii)(b) of the Act. Consequently, the statutory condition necessary to treat the land as a capital asset remains unfulfilled. We therefore hold that the land situated at Poonchery Village does not constitute a capital asset within the meaning of section 2(14) of the Act and, accordingly, no capital gains are chargeable to tax on its transfer. The addition sustained by the Ld.CIT(A) is therefore directed to be deleted.
37. In view of the foregoing discussion, we hold that the additions sustained by the Ld.CIT(A) on both issues are directed to be deleted.
38. Accordingly, the appeal filed by the assessee is allowed.