HC Rules AO Must Examine Section 54F Claim Raised in Assessment

Case Details: George Stanley v. Deputy Commissioner of Income-tax - [2025] 178 taxmann.com 187 (Kerala) 

Judiciary and Counsel Details

• A. Muhamed Mustaque & Harisankar V. Menon, JJ.
• Sreehari Indukaladharan, Sethu Nandakumar, Jayasankar K. & Smt. D. Smitha, Advs. for the Appellant
• P.G. Jayashankar, G. Keerthivas, Advs., V.K. Shamsudheen, Sr Govt. Pleader & Navaneeth N. Nath, CGC for the Respondent

Facts of the Case

The assessee, a non-resident, sold 94 cents of land with a residential building for consideration, claiming it to be agricultural land exempt from capital gains tax under section 10(37). The Assessing Officer (AO) rejected the claim, holding that the assessee failed to prove the agricultural use of the land for two years preceding the transfer, relying instead on contradictory statements and the absence of evidence of agricultural income or activity. The authorities further rejected the assessee’s alternative claim for deduction under section 54F on the ground that it was not made in the original return.

High Court Held

The matter reached the High Court. The High Court held that the assessee had not been able to prove that he was entitled to non-liability to capital gain tax in a manner known to law. The assessee had relied on certain photographs and a certificate from the Village Officer, which only supported the existence of rubber trees. However, the buyer of the property had certified before the AO that there were no agricultural activities in the property. He also stated that the land was commercial in nature.

The assessee was also provided with copies of the incriminating statement given by the buyer and the clarifications obtained by the AO. In addition, the documents of the Sub-Registrar’s office, where the sale deed was registered, contained no endorsement that the land was agricultural. The assessee further failed to produce any details of agricultural activities or records of agricultural income and expenses.

While it was undisputed that a capital asset had been transferred, since the exemption claim rested on the assertion that the land was agricultural, the burden of proof lay entirely on the assessee. It was incumbent upon him to demonstrate that the land was genuinely agricultural in nature, but in the absence of credible evidence, the claim could not be sustained and the benefit of section 10(37) was rightly denied.

While examining the assessee’s claim under section 54F, the Court held that even if such a claim had not been made in the return, once capital gains tax was proposed, the AO was obliged to examine it on merits rather than dismiss it on technical grounds. As the assessee had raised the claim as an alternate plea, the matter was remanded to the AO for proper adjudication of the claim under section 54F.

List of Cases Reviewed