The main legal point established in the judgment is the importance of revenue records in determining the nature of the land for tax purposes and the need for a detailed inquiry by the Assessing Officer to determine tax liability.

Akil Abdul Hamid Kureshi, J.

1. The Revenue is in appeal against the judgement of the Income Tax Appellate Tribunal ("the Tribunal" for short) dated 18.8.2010. While admitting the appeal, following substantial questions of law were framed:

"(A) Whether the Tribunal below committed substantial error of law in holding that the land in question was an agricultural land by totally misinterpreting the provisions contained in Section 194LA of the Income Tax Act including the explanation given thereto.

(B) Whether the Tribunal below committed substantial error of law in holding that the land in question is an agricultural land by not following the principle laid down by the Division Bench of this Court in the case of Maganlal Morarbhai v. Commissioner of Income Tax reported in (1979) 118 ITR 224."

2. Brief facts are as under. The respondent Special Land Acquisition Officer, Surat, represents the State Government as an assessee. For the assessment year 2008-2009, the question of requirement of depositing tax at source under section 194LA of the Income Tax Act, 1961 ("the Act" for short) arose in the backdrop of land acquisition proceedings instituted by the State Government for acquiring certain parcels of lands for and on behalf of M/s. Essar Steels Ltd., a public limited company. The Special Land Acquisition Officer passed a common judgement and separate awards concerning different landowners whose lands were under acquisition. In one such award dated 21.1.2008, he awarded compensation to different landowners which basically included three elements. (1) compensation for land; (2) compensation for buildings situated on the land; (3) compensation for trees.

3. All lands were divided into non irrigated agricultural lands and Kharaba lands. Agricultural lands were compensated at a uniform rate of Rs. 300 per sq. mtrs., Kharaba lands received compensation at the rate of Rs. 1 per Are. In this award, Land Acquisition Officer awarded a total of Rs. 36,95,77,294/- towards compensation for land, Rs. 24,56,56,141/- towards compensation for buildings and Rs. 55,68,700/- towards compensation for trees. On such compensation, the Land Acquisition Officer awarded 30% solatium, additional compensation at the rate of 12% under section 23(1A) and awarded total compensation of Rs. 92,16,11,136/-. Like-wise, for another block of lands, the Land Acquisition Officer had awarded total compensation of Rs. 56,27,55,035/-.

4. According to the Revenue, majority of these lands under acquisition were not agricultural lands. Compensation towards such lands therefore, invited capital gains. The compensation for the building and trees also like-wise invited taxes in the hands of the recipients. In terms of section 194LA of the Act, therefore, the Land Acquisition Officer was required to deduct tax at source at the prescribed rate. Since he failed to do so, the Assessing Officer instituted proceedings against the Special Land Acquisition Officer under section 201 of the Act.

5. The Assessing Officer passed an order dated 29.1.2009 in which he held that the assessee, though required, had failed to deduct tax under section 194LA of the Act. He was therefore, to be treated as an assessee in default. He was therefore, required to pay an amount of Rs. 8,42,85,887/- which was computed as under:

6. In the said order, he observed that for a land to be considered as an agricultural land, it should be either generating such income or capable of doing so. He was of the opinion that the land could be categorised as a