Non-taxable income cannot be classified as 'undisclosed income' on technical grounds, ITAT holds

Income tax

The Delhi bench of Income Tax Appellate Tribunal in May had set aside an   order of an Assessing Officer (AO) on the ground that the they brought income from sale of agricultural land into purview of income tax, because the assessee did not show it as an income in his return the year it was sold.

Income from sale of agricultural land, especially those situated in rural areas in India, is not considered a capital asset. Therefore any gains from its sale are not taxable under the head Capital Gains, irrespective of whether the sale was in cash or by account transfer.

Revised returns

In the instance case, the assessee was an individual on whom a
search and seizure operation was conducted by the income tax authorities in 2015.  The department initiated proceedings after the operation. Pursuant to the proceedings, the assessee filed his return of income in April 2016, declaring income of Rs 54 lakh for the assessment year 2013-14 and Rs 79 lakh for the assessment year 2014-15.

Subsequently, in December 2016, the assessee filed revised returns, which included the sale consideration of agricultural land for Rs 1.3 crore and Rs 3.18 crore for assessment years 2013-14 and 2014-15, respectively.

In the proceedings, the AO sent a notice to the assessee, asking him to explain why the cash on sale of land should not be treated as his undisclosed income, as he had not revealed in the return in the relevant year. The assesee responded to the notice saying that the land sold is an agricultural property, located in a rural area, therefore exempting him from capital gains tax.

Order upheld

The AO, however, was not convinced with the submissions of the assessee and proceeded to tax the consideration received on sale of land as undisclosed income and brought it under the purview of income tax. However, on appeal, the commissioner of appeals set aside the order of AO, holding that money from sale of agriculture land is not taxable. However, the department filed an appeal against the appeals commissioner's order.

The ITAT upheld the order of appeals commissioner noting that AO in his order has not contested the fact that the land sold is agricultural land or not, thus the tribunal rule was of the opinion that AO accepted that the land was indeed an agricultural land.

The appellate tribunal also observed "the only reason on which Assessing Officer has added back the sale consideration as undisclosed income of the assessee is because the assessee has not disclosed the sale proceeds of the land sold in the original return of income."

It thus concluded that order of the AO is neither sustainable in law nor sustainable in facts.