Hiten Tulshibhai Engineer v. ITO (2024) 204 ITD 98 (Ahd)(Trib)

🏡 Hiten Tulshibhai Engineer vs. ITO – ITAT Ahmedabad on Sale of Agricultural Land Used for Industrial Purposes (2024)

📌 Background

The classification of land for capital gains taxation has caused frequent litigation. However, the ruling in the case of Hiten Tulshibhai Engineer v. ITO clarifies that what matters is the nature of the land at the time of transfer, not what the purchaser does with it afterward.

However, disputes arise when the purchaser changes the land use post-sale. The question is: Does the purchaser’s subsequent conversion of agricultural land into industrial land alter its nature at the time of sale?

In Hiten Tulshibhai Engineer v. ITO [(2024) 204 ITD 98 (Ahmedabad Tribunal)], the ITAT Ahmedabad Bench addressed this precise issue, clarifying that the character of the land at the time of transfer is decisive, and subsequent non-agricultural use by the purchaser does not affect its classification for income-tax purposes.

📂 Facts of the Case

Assessee: Hiten Tulshibhai Engineer
Assessment Year: 2016–17
Nature of Land: Agricultural land in rural Gujarat

The assessee sold land that was later converted by the purchaser into industrial land, but maintained that the land was rural agricultural land when sold.

Key Facts:

• The purchaser obtained permission for change of land use for bona fide industrial purposes under the Gujarat Tenancy and Agricultural Lands (Amendment) Act, 1997.
• The assessee, as part of the sale process, obtained a certificate of change in land use from agricultural to non-agricultural, as mandated by local land laws.
• The assessee contended that the land was rural agricultural land and, therefore, not a capital asset under Section 2(14)(iii).
• The Assessing Officer (AO) rejected this contention, concluding that the land had ceased to be agricultural and hence qualified as a capital asset, taxable under Section 45.

❓ Point of Dispute

Whether the sale of agricultural land, which was subsequently converted by the purchaser for industrial purposes, can be treated as the sale of a capital asset under Section 2(14)(iii) and thus be liable to capital gains tax under Section 45.

📑 Submissions by the Assessee

• The land was agricultural at the time of sale and located in a rural area, outside municipal limits.
• The change of land use was done only to facilitate registration and legal transfer, as required under the Gujarat Tenancy and Agricultural Lands Act, not to alter its inherent agricultural nature.
• The purchaser’s intention to use the land for industrial purposes cannot retrospectively change the nature of the land as it stood when sold.
• The certificate for change of use was a procedural formality and did not convert the land into an urban or commercial property before the date of transfer.
• Hence, the land continued to be rural agricultural land, excluded from the definition of capital asset under Section 2(14)(iii).

📑 Submissions by the Revenue

• The Assessing Officer argued that since the land use was converted to non-agricultural before registration, it lost its agricultural character.
• The AO relied on the fact that the purchaser obtained industrial permission soon after purchase, indicating that the sale was intended for commercial exploitation.
• Accordingly, the AO assessed the transaction as a transfer of a capital asset and taxed the resultant gains as long-term capital gains (LTCG).

⚖️ Legal Principles & Tribunal’s Findings

1. Definition of Capital Asset – Section 2(14)(iii)

The Tribunal emphasized that rural agricultural land is specifically excluded from the definition of a capital asset if it lies:

• Beyond the prescribed municipal limits (as per population thresholds); and
• Is used for or capable of agricultural operations at the time of sale.

Thus, the nature and location of the land on the date of transfer are the determinative factors, not the subsequent use.

2. Interpretation of Gujarat Tenancy and Agricultural Lands (Amendment) Act, 1997

The Tribunal held that the Assessing Officer misinterpreted Section 63AA of the Gujarat Act, which regulates the transfer of agricultural land for non-agricultural purposes.

• The permission for conversion is a statutory precondition to allow sale to non-agriculturists or companies, not an act that changes the nature of the land for tax purposes.
• The agricultural character continues until actual conversion and use by the purchaser.

3. Timing of Character Determination

Citing judicial precedents, the ITAT clarified that the test of agricultural nature must be applied as on the date of transfer.

“Subsequent events, including the purchaser’s use or conversion, cannot alter the status of the land at the time of sale.”

4. Error in AO’s Interpretation

The Tribunal found that the AO incorrectly equated change of land use permission with change in nature. The former is a legal compliance requirement, while the latter depends on factual and physical characteristics such as cultivation, classification in records, and location.

🏁 Held

✅ The ITAT Ahmedabad held that:

• The land sold by the assessee was agricultural and situated in a rural area beyond municipal limits.
• The purchaser’s industrial conversion or the procedural change of land use certificate did not affect its agricultural nature on the date of sale.
• The Assessing Officer erred in interpreting Section 63AA of the Gujarat Tenancy and Agricultural Lands Act.
• Therefore, the land did not constitute a capital asset under Section 2(14)(iii).

👉 Accordingly, no capital gains tax was leviable, and the addition was deleted.

✅ Practical Impact on Taxpayers

• Timing matters: The character of land must be determined at the time of sale, not based on the buyer’s future plans or subsequent conversion.
• Procedural conversion ≠ change in nature: Permissions obtained under local land laws do not automatically change the land’s classification for tax purposes.
• Legal safeguards for rural sellers: Farmers and landowners selling rural land to companies for development retain capital gains exemption if their land was agricultural when sold.
• Avoid misinterpretation: Revenue authorities must not equate legal compliance with commercial intention.

🔑 Key Takeaways

1. Agricultural status determined at sale date: Post-sale industrial use is irrelevant.
2. Conversion permission ≠ actual conversion: A procedural requirement under state law does not alter the land’s status.
3. Rural agricultural land excluded: Land outside municipal limits remains exempt under Section 2(14)(iii).
4. AO’s misinterpretation clarified: Section 63AA of the Gujarat Tenancy Act does not override the Income-tax Act’s definition of “capital asset.”
5. Substance over form: The true nature and location of land prevail over subsequent events or intentions.

📢 Why This Case Matters

The Hiten Tulshibhai Engineer v. ITO (2024) decision provides critical clarity for taxpayers selling agricultural land to industrial or commercial entities. It establishes that the taxability of capital gains depends solely on the land’s character at the time of transfer, not on future industrial use or procedural conversions.

This ruling protects genuine agriculturists from unjust taxation, ensuring that rural agricultural land transactions remain outside the capital gains tax net, even when purchased for industrial development.

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