Ita/238/2012 Of The Commissioner Of Income Tax v. M/S. Harrisons Malayalam Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON THURSDAY, THE 06TH DAY OF DECEMBER 2018 / 15TH AGRAHAYANA, 1940 I.T.A.No.238 of 2012 AGAINST THE ORDER IN I.T.A.No.77/COCH/2010 DATED 29.06.2012OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN. APPELLANT/APPELLANT: THE COMMISSIONER OF INCOME TAX,COCHIN. BY ADV. SRI.JOSE JOSEPH, SC FOR GOI (TAXES). RESPONDENT/RESPONDENT: M/S. HARRISONS MALAYALAM LTD.,BRISTOW ROAD,WILLINGTON ISLAND, KOCHI-682003. BY ADVS.SRI.JOSON MANAVALANSRI.K.JOHN MATHAISRI.KURYAN THOMASSRI.M.GOPIKRISHNAN NAMBIARSRI.PAULOSE C. ABRAHAMSRI.P.GOPINATH (SR.) OTHER PRESENT: SRI P.K.R. MENON, SR COUNSEL FOR GOI (TAXES)SRI RAJA KANNAN (FOR APPELLANT)SRI. JOSEPH MARKOS (SR.) AMICUS CURIAE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06.12.2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Vinod Chandran,J. JUDGMENT The following questions arise from the order of the Tribunal in the assessment year 2006-07: (i) Whether licence fee paid to RPG Enterprises Limitedis allowable as a deduction under Section 37 of theIncome Tax Act, 1961 [for brevity “the Act”]?is allowable as a deduction under Section 37 of theIncome Tax Act, 1961 [for brevity “the Act”]? (ii) Whether the dis-allowance of delayed payments madeto Employees' Provident Fund and Employees' StateInsurance, etc., amounting to Rs.4 Crores, isallowable as a deduction under Section 37 of theAct?to Employees' Provident Fund and Employees' StateInsurance, etc., amounting to Rs.4 Crores, isallowable as a deduction under Section 37 of theAct? (iii) Whether the Tribunal was correct in havingaffirmed the action of the Assessing Officer [forbrevity “AO”] in taking 30% of the sale proceedsof Grevellea trees as cost and balance saleproceeds brought to tax as capital gains?affirmed the action of the Assessing Officer [forbrevity “AO”] in taking 30% of the sale proceedsof Grevellea trees as cost and balance saleproceeds brought to tax as capital gains?(iv)Whether the Tribunal was correct in having foundthe sale of two estates as going concerns, theproceeds of which was claimed as agriculturalincome was disallowed treating as slump sale andtaxing it as income under Section 50B? the sale of two estates as going concerns, theproceeds of which was claimed as agriculturalincome was disallowed treating as slump sale andtaxing it as income under Section 50B? (v)Whether the Tribunal was correct in having affirmedthe action of the AO in having added back theprovision for gratuity in computing the incomeunder Section 115JB?the action of the AO in having added back theprovision for gratuity in computing the incomeunder Section 115JB? These questions are first taken up for consideration, sincemost of the issues are covered by the decision of thisCourt itself. 2. On question No.(i) the learned Senior Counsel, Government of India (Taxes) submits that the Department hasinstructed him to not press the same. In suchcircumstances, the order of the Tribunal remains untouchedon that aspect. We decline to answer the said question. 3. On the question of dis-allowance of delayedpayments under the EPF and ESI, since they relate toemployees' contributions which the assessee had deductedfrom the monthly salary payable to them, the issue standscovered against the assessee and in favour of the Revenueby our decision reported in Popular Vehicles & ServicesPvt. Ltd.v. The Commissioner of Income Tax, Ernakulam[(2018) 406 ITR 150 (Ker.)]. Hence, we answer question No.(ii) in favour of the Revenue and against the assessee. TheTribunal's order to that extent stands deleted and the AO'sdis-allowance stands restored. 3. On the question of dis-allowance of delayedpayments under the EPF and ESI, since they relate toemployees' contributions which the assessee had deductedfrom the monthly salary payable to them, the issue standscovered against the assessee and in favour of the Revenueby our decision reported in Popular Vehicles & ServicesPvt. Ltd.v. The Commissioner of Income Tax, Ernakulam[(2018) 406 ITR 150 (Ker.)]. Hence, we answer question No.(ii) in favour of the Revenue and against the assessee. TheTribunal's order to that extent stands deleted and the AO'sdis-allowance stands restored. 4. On the sale of Grevellea trees, we haveconsidered the issue in the Revenue's appeal, inI.T.A.No.1776 of 2009 vide judgment dated 17.09.2018 [CIT,Cochinv. Harrisons Malayalam Ltd.]. We extract paragraph18 of the judgment: “18. The further question raised is on thejustification in treating the consideration receivedon sale of shade trees as long term capital loss entitled to be carried forward from the earlier years.We see that the Tribunal had considered the facts andhad held that the order of the CIT (Appeals) directingdeletion of such deduction in the capital gains has tobe set aside, on facts. The Tribunal has also heldthat it being long term capital loss, is entitled tobe carried forward. We do not see any question of lawarising from the order of the Tribunal and, hence,uphold the order to that extent”. Hence, question No.(iii) is answered in favour of the assessee and against the Revenue. 5. On the question of slump sale, again in the Revenue's appeal for another year, was considered inI.T.A.No.1782 of 2009 in common judgment dated 17.09.2018.In paragraphs 11 and 12, we found on a reference to theagreement of sale that there was a transfer as a goingconcern and it does not change by the mere fact that theemployees were taken over by the purchasing company as ameasure to avoid any retrenchment compensation being paid.We had specifically referred to the terms of the agreementand the Tribunal too in the present case does refer to thefacts here, which we find to be similar to the earliersale. The fact finding authorities also notice that theterms of the agreement are identical with that entered intoin the earlier year. The issue being on facts as to thespecific terms of the agreement and not giving rise to a question of law we refuse to answer question No.(iv). Theorder of the Tribunal to the extent of deleting the levyunder Section 50B is confirmed. 6. On the next question of adding back theprovision for gratuity in computing income under Section115JB, we have found in I.T.A.No.1 of 2007 vide commonjudgment dated 09.10.2018 [The Fertilizers & ChemicalsTravancore Ltd.v. CIT, Kochi] that the same would be anascertained liability and, hence, would be capable of beingdeducted from computation of the Minimum Alternate Tax(MAT) under Section 115JB. We, answer question No.(v) infavour of the assessee and against the Revenue. 7. Now, we have to deal with three other questionsraised by the Revenue in the appeal. The first of the saidquestions as seen from the appeal memorandum is on thedis-allowance of proportionate interest under Section 14Aon loans given to the subsidiary companies finding thatthere is no commercial expediency. The learned SeniorCounsel for Government of India (Taxes) would, however,point out that neither in the assessment order nor in theTribunal's order Section 14A is referred to and, hence,this Court would have to consider whether the dis-allowancewas proper dehors Section 14A. The following questions oflaw also arise in the assessment year: “(vi) Whether, on the facts and in the circumstancesof the case,--of the case,-- 7. Now, we have to deal with three other questionsraised by the Revenue in the appeal. The first of the saidquestions as seen from the appeal memorandum is on thedis-allowance of proportionate interest under Section 14Aon loans given to the subsidiary companies finding thatthere is no commercial expediency. The learned SeniorCounsel for Government of India (Taxes) would, however,point out that neither in the assessment order nor in theTribunal's order Section 14A is referred to and, hence,this Court would have to consider whether the dis-allowancewas proper dehors Section 14A. The following questions oflaw also arise in the assessment year: “(vi) Whether, on the facts and in the circumstancesof the case,--of the case,-- a)In the light of S.A.Buildings reported in 288 ITR 1, the Tribunal is right in law and facts in deleting the addition of Rs.3.18 crores made on account of interest dis-allowance madeby the assessing Officer;ITR 1, the Tribunal is right in law and facts in deleting the addition of Rs.3.18 crores made on account of interest dis-allowance madeby the assessing Officer; b)Whether on the facts and in the circumstancesof the case did the assessee prove 'commercialexpediency' to advance the amount;of the case did the assessee prove 'commercialexpediency' to advance the amount; c) If the answer is in the negative is not theorder of the Tribunal on the issue perverseand wrong?order of the Tribunal on the issue perverseand wrong? (vii) Whether, on the facts and in the circumstancesof the case and also in the light of Rules 7 and7A of the Income Tax Rules is not theconsideration obtained on sale of old rubberexigible to tax under the Income Tax Act?of the case and also in the light of Rules 7 and7A of the Income Tax Rules is not theconsideration obtained on sale of old rubberexigible to tax under the Income Tax Act? (viii) (a) Whether on the facts and in thecircumstances of the case, the Tribunal is right in its order/direction to exclude the profit on sale of two estates from computingbook profit for the purpose of Section 115JB as agricultural income?circumstances of the case, the Tribunal is right in its order/direction to exclude the profit on sale of two estates from computingbook profit for the purpose of Section 115JB as agricultural income? (b) Whether, on the facts and in thecircumstances of the case rubber incomebeing partially taxable should not capitalgain be viewed and decided similarly?”circumstances of the case rubber incomebeing partially taxable should not capitalgain be viewed and decided similarly?” 8. The learned Senior Counsel, Government of India (Taxes) would contend that the assessee while claimingexpenditure under Section 36(1)(iii) should come squarelywithin the ambit of the aforesaid provision. The businessfor which the funds have been utilised is the business ofthe sister concerns and not the business of the assesseeitself. Hence, there could be no claim raised under Section36(1)(iii) on the portion as dis-allowed by the AO. 9. We look at Annexure-A order to better (b) Whether, on the facts and in thecircumstances of the case rubber incomebeing partially taxable should not capitalgain be viewed and decided similarly?”circumstances of the case rubber incomebeing partially taxable should not capitalgain be viewed and decided similarly?” 8. The learned Senior Counsel, Government of India (Taxes) would contend that the assessee while claimingexpenditure under Section 36(1)(iii) should come squarelywithin the ambit of the aforesaid provision. The businessfor which the funds have been utilised is the business ofthe sister concerns and not the business of the assesseeitself. Hence, there could be no claim raised under Section36(1)(iii) on the portion as dis-allowed by the AO. 9. We look at Annexure-A order to better understand the disallowance made. The assessee had claimedas Head Office expenditure Rs.9,75,12,638/- as interest onoverdrafts, term loans, etc. Those overdrafts and termloans were used for the purpose of the business of theassessee itself. Hence, the assessee maintained that thethree conditions under Section 36(1)(iii) were satisfiedthat the assessee had borrowed capital for which there wasinterest liability which was paid, and the said borrowedcapital was used for business purposes. However, the AOfound that there were interest free loans granted tosubsidiary companies and the average of such loans grantedwas found to be Rs.13,035.04 lakhs which was stated to bediverted funds. The AO also found from the accounts of theassessee that the assessee had both interest bearing fundsand non-interest bearing funds, which was in the proportion of 9775.94 : 30168.70. Hence, the AO, in that proportion,apportioned the total average loans given to the assesseeCompanies as being from interest bearing funds andnon-interest bearing funds. We are of the opinion thatthere can be no such device employed of apportionment onground of it being not permitted by the statute or byprescription in the Rules. Definitely, such an additioncould have been made if the non-interest bearing fundsavailable with the assessee was lesser than the loans givento its subsidiary Companies on interest free basis. Here,we notice that the assessee was flushed with non-interestbearing funds as found by the first appellate authorityalso. Looking at the manner in which the proportion wascomputed by the AO itself, we find that the assessee hadmore than Rs.30,000 lakhs of non-interest bearing funds.The loans which were said to be interest free, granted toits subsidiary Companies came to only Rs.21,221.04 lakhs.Hence, the assessee is deemed to have granted the interestfree loans to its subsidiary Companies from itsnon-interest bearing funds available with it, which wasalso in excess of the total loans granted by the assesseeto the subsidiary companies. There was absolutely nowarrant for applying the proportion between interestbearing funds and non-interest bearing funds to make a dis- allowance of the interest liability satisfied by theassessee for the assessment year which was claimed as anexpenditure in the said year. Question No.(vi) is, hence,answered in favour of the assessee and against the Revenue.The deletion of Rs.3,18,21,074/- as affirmed by theTribunal is sustained.10. The next question is as to whether Rule 7Aapplies to the sale of old and unyielding rubber trees. Weneed only to refer to (2011) 203 Taxman 63 [Commissioner ofIncome Taxv. Thiruvambadi Rubber Co.Ltd.], wherein aDivision Bench of this Court had clearly found that sale ofold and unyielding rubber trees would not give rise to anagricultural income. If there is no agricultural income,then there is no question of application of Rule 7A. Insuch circumstances, question No.(vii) is answered in favourof the assessee and against the Revenue. The order of theTribunal to that extent is sustained. 11. In answering question (viii), we cannot butnotice that in the earlier order of the Tribunal, referredto in the order impugned here, there is no finding as tothe consideration received on sale of estate being anagricultural income as such. The question decided there wasonly whether there was a slump sale involved or not. On thequestion of slump sale all the authorities had followed the earlier orders and found the facts to be identical,in thesale of estate carried out in this particular year also.There is however considerable argument raised on the otherissue as to the sale consideration being agriculturalincome. Considering the importance of the issue, werequested Sri.Joseph Markos, learned Senior Counsel toassist us in the matter. The learned Counsel for therespondent would contend that sale of agricultural land notcoming within item (a) or (b) of sub-clause (iii) of Clause(14) of Section 2 would be "agricultural income" as definedunder Section 2(1A) of the Act and is also exempted underSection 10. Hence applying Clause (2) of Explanation 1 toSection 115JB, the same has to be reduced from the profitsas seen from the books of accounts, is the agrument.12. The learned Counsel for the assessee wouldrely on the decision of the Andhra Pradesh High Court inS.Muthiyam Reddy, Commissioner of Income Tax v. All IndiaTea and Trading Co. Ltd. [(1996) 219 ITR 544] andSinghaiRakesh Kumar v. Union of India[(2001) 247 ITR 150].However, immediately it is to be noticed that the judgmentof the Andhra Pradesh High Court in S. Muthiyam Reddy[supra] was overruled by the Hon'ble Supreme Court in Unionof Indiav. S.Muthiyam Reddy[(1999) 240 ITR 341 SC]. Then,it was argued that the proposition insofar as consideration on sale of agricultural land being agricultural income aspropounded by the Andhra Pradesh High Court has been leftuntouched by the Hon'ble Supreme Court. The Division Benchof the Andhra Pradesh High Court has been overruled only onthe question of assessment of capital gains on agriculturallands coming under item (a) & (b) of sub-clause (3) ofClause (14) of Section 2 of the Act is the argument. Theother decision of the Hon'ble Supreme Court cited hereinabove would also advance the said argument, according tothe assessees Counsel. 13. The learned Senior Counsel Sri.Joseph Markoswould refer to an unreported decision of the Madras HighCourt in TCA No.359 of 2008 dated 09.11.2016, wherein anidentical issue was considered and relying on sub-section(5) of Section 115JB, it was held that though capital gainsform part of the net profit in the case of the assesseetherein, the assessee was specifically eligible forexemption under Section 54AC of the Act. The learned SeniorCounsel would not support the contention raised by theassessee that the sale of agricultural land within ruralareas, not included under Section 2(14)(iii)(a) & (b), ofthe Act would be agricultural income. But the sale ofagricultural land being specifically excluded from thedefinition of capital gains under Section 2 (14), sub-section (5) of Section 115JB; has to be given effectand the same excluded from computation of book profitsunder Section 115JB, since it is not exigible to tax atall, is the argument. sub-section (5) of Section 115JB; has to be given effectand the same excluded from computation of book profitsunder Section 115JB, since it is not exigible to tax atall, is the argument. 14. The learned Senior Counsel, Government ofIndia [Taxes] would point out that though not exigible tocapital gains, the consideration received on sale ofestate, will be reflected in the profits as per the booksof accounts. There is no provision for exemption as suchfrom income tax, since there is no charge on the sale ofagricultural land, not included under Section 2(14)(iii)(a)& (b). The Madras High Court decision hence would notapply, since therein there was a specific exemptionprovided to capital gains and the Court was alsoconsidering the question as to whether the capital gains,which form part of the net profit in the profit and lossaccount of the assessee, should be taken into account forcomputing tax and book profits under Section 115JB of theAct. Here, the consideration of sale of agricultural land,admittedly within rural area would not be exigible toincome tax, nor would it come under the definition ofcapital gains as provided under Section 2(14) of the Act.That the consideration received has to be credited to theprofit and loss account is beyond any pale of doubt. However, since reduction of the amount so reflected in theprofit and loss account is not enabled by the statute,there could be no reduction of the amounts receivedas consideration on sale of agricultural land from thebook profits, in computing the same for the purpose ofSection 115JB. The consideration 15. We notice from the judgment of the DivisionBench of the A.P. High Court in S.Muthiyam Reddy[supra]that therein the question arose as to whether theParliament was competent to levy tax on sale ofagricultural lands situated within the limits ofMunicipalities and Cantonments, as provided under Section2(14)(iii)(a) & (b) of the Act. The assessee therein alsoheld lands coming within item (a) & (b) of Section 2(14)(iii) of the Act. The Division Bench, while considering theissue, found that sale of agricultural land would beagricultural income and also held that the provisionbringing in capital gains on such agricultural landssituated within the municipal area would not be exigible totax. The provision enabling such inclusion was found to beultra vires. On appeal, the Hon'ble Supreme Court inS.Muthiyam Reddy[supra], noticed the Explanation broughtinto the definition clause; to find that it takes away the whole basis of the decision of the A.P. High Court. 16. The Hon'ble Supreme Court found the A.P. HighCourt decision to be without any legal sustenance; in sofar as the Explanation having been introduced withretrospective effect. We do not think the declaration, madeby the A.P. High Court with respect to the considerationreceived on sale of agricultural land being agriculturalincome, would survive for more reason than one. Primarilythe Supreme Court has found the decision to have no basison the introduction of the Explanation, leaving no room tofind any portion of the decision having been affirmed orleft to survive. Then the question arising before the A.PHigh Court was only on the taxability of sale considerationof agricultural lands coming within Section 2(14)(iii)(a)&(b) and the other declaration, if at all discernible,being per incuriam does not even have a persuasive effecton us. Further there is a contrary decision by a DivisionBench of our own High Court reported in Commissioner ofIncome Taxv. T.K. Sarala Devi [(1987) 167 ITR 136 (Ker)].17. Coming now to All India Tea and Trading Co.Ltd.[supra], the question arose as to whether the revenuederived as compensation received on requisition ofagricultural land is agricultural income or not. Therequisition of agricultural land made therein, was to transfer it to the refugees for the purpose of carrying onagricultural operations. The relevant facts on which thedecision came is decipherable from the following paragraph: "The claim of the respondent during theAssessment Year 1958-59, with which we areconcerned in this appeal, was that the amount ofcompensation received was exempt from levy ofincome tax as this amount represented therespondent’s agricultural income. The Income TaxOfficer did not accept this claim. On appeal,however, the Appellate Assistant Commissioner foundthat the respondent was using the requisitionedland for agricultural purposes at the time ofrequisition and also earlier to that. He,therefore, held that the compensation received bythe respondent was its agricultural income and,therefore, not liable to tax. The department thenfiled an appeal before the Tribunal, but withoutsuccess. Upholding the order of the AppellateAssistant Commissioner, the Tribunal found as afact that after requisition the Government of Assamhad given that land to refugees who continued tocultivate the same. In other words, the finding offact of the Tribunal was that the land in questionwas being used by the respondent for agriculturalpurposes in the relevant accounting year, and alsoin the earlier years, and the said land even afterrequisition, was being cultivated by the refugees.Therefore, the agricultural character of the landdid not undergo any change". The Supreme Court affirmed the view of the High Court whichaccepted the findings of the Tribunal. The subsequentevents were also noticed in the last paragraph: 14.Before concluding we may note that therespondent’s land which was requisitioned wassubsequently acquired by the State of Assam andcompensation was paid. In CIT v. All India Tea andTrading Co. Ltd.[5(1979) 117 ITR 525(Cal)] it washeld that as the land in question was agriculturalland which was being used for agriculturalpurposes, even after its being requisitioned, theamount of compensation paid on its acquisition wasnot taxable under the head “capital gains” as thesaid land was not a capital asset. It is clear,therefore, that at no point of time or at leasttill its acquisition the land lost its character ofagricultural land. Therefore, compensation paid forthe use by the refugees of the said land foragricultural purposes can only be regarded asagricultural income which admittedly is nottaxable". 18. The Hon'ble Supreme Court referred to thesubsequent events only to find that the land had not lostthe character of agricultural land after requisition andtill the acquisition was made. As to the finding of theCalcutta High Court that even on acquisition the compensation paid would not be taxable under the head'capital gains', it is in tune with the finding of the A.P.High Court, referred above. But, we have our own doubts,which we would state hereinafter and we also are bound bythe decision of a Division Bench of this Court T.K. SaralaDevi[supra] which held to the contrary. 19. Singhai Rakeshkumar[supra]also considered the issue of sale of agricultural lands, which weresituated within the municipal limits. The declaration wasas hereunder: “The position, as a result, is that incomearising from the transfer of agricultural land thatfalls within the terms of items (a) and (b) ofsub-clause(iii) of clause (14) of Section 2 fallsoutside the ambit of revenue derived from land andtherefore, outside the ambit of “agricultural income”.Such income, therefore, is liable to capital gains taxchargeable under Section 45 of the 1961 Act.” 19. Singhai Rakeshkumar[supra]also considered the issue of sale of agricultural lands, which weresituated within the municipal limits. The declaration wasas hereunder: “The position, as a result, is that incomearising from the transfer of agricultural land thatfalls within the terms of items (a) and (b) ofsub-clause(iii) of clause (14) of Section 2 fallsoutside the ambit of revenue derived from land andtherefore, outside the ambit of “agricultural income”.Such income, therefore, is liable to capital gains taxchargeable under Section 45 of the 1961 Act.” The Hon’ble Supreme Court held categorically that the saleof agricultural land coming within items (a) and (b) ofSection 2(14)(iii) of the Act would stand outside the ambitof agricultural income. We cannot draw a necessarycorollary from the aforesaid declaration that sale ofagricultural lands not coming within items (a) and (b) ofSection 2(14)(iii) of the Act would be agricultural income. 20. We also notice the Madras High Court’sdecision, which was correctly distinguished by the learnedSenior Standing Counsel, Government of India [Taxes]. Thatwas with respect to an exemption as available under Section54EC. The Division Bench found that the exemption availableunder Section 54EC has to be interpreted in the context ofthe provisions under Section 115JB, which is aself-contained code of assessment. The tax as leviableunder Section 115JB, is on the book profits after effectingvarious upward and downward adjustments as providedtherein. Sub-section (5) of Section 115JB makes applicableall other provisions of the Act to every assessee being aCompany mentioned in that section. Interestly, it is to beobserved; Section 115JB is a non-obstante clause, whereinagain sub-section (5) is incorporated. There is an overriding effect given to the provision, but by a sub-sectionthe applicability, of the other provisions of the statute,enabled to the companies covered under the provision. Insuch circumstances, the other provisions of the IT Act,would be applicable to a Company who is sought to be taxedunder the provisions of Section 115JB, only if suchprovisions do not conflict with those under Section 115JB.It is in this background we have to look at the contentionsof the Revenue as also the assessee. 21. We see from Section 10 of the Act thatagricultural income is granted an exemption under theIncome Tax Act. Sub-clause (2) of the first Explanation toSection 115JB, provides a downward adjustment of theprofits as revealed from the books of accounts, to thatincome, to which any of the provisions of Sections 10, 10A,10B, 11 or 12 applies. Hence, if any portion of the profitsas reflected in the books of accounts relates toagricultural income, then there is a clear exemptionprovided under Section 10. In view of the exemption underSection 10, any revenue from agricultural land would haveto be reduced from the profits in computing the 'minimumalternate tax' (MAT) under Section 115JB. Explanation-1 ofSection 2(1A) however specifically excludes any incomederived from transfer of land, referred to in item (a) &(b) of Section 2(14)(iii) from the definition of revenuederived from land. This exclusion brought in by way ofabundant caution, as is evident from the words employed:“For the removal of doubts...”; cannot lead to a corollarybeing drawn of inclusion of sale of agricultural land asagricultural income or as revenue derived from land.Obviously the Explanation was brought in, to render invalidthe declaration of the A.P High Court in S.Muthiyam Reddy[supra]. The question then arises as to whether the consideration on sale of agricultural land not comingwithin Section 2(14)(iii) (a) & (b) would be agriculturalincome as defined under Section 2(1A); as a revenue derivedfrom land. 22. Agricultural income as defined under Section2(1A) inter alia takes within its ambit “any rent orrevenue derived from land, which is situated in India andis used for agricultural purposes”. The question arises asto whether on sale of agricultural land, it could be saidthat there is an agricultural income derived by the ownerof the land, who sells such property. We revert back to AllIndia Tea & Trading Co. Ltd.. Therein the specific questionconsidered was whether the compensation received onrequisition of agricultural land, would come within thedefinition of capital gains. The Honourable Supreme Courthad specifically noticed that the requisition was for thepurpose of handing over the lands to the refugees, againfor the specific purpose of carrying on agriculturaloperations. The owner of the land was not divested of thetitle, till the subsequent acquisition made. Thecompensation received by the owner was only insofar as theowner being divested of the right to cultivate his lands,which right was granted to the refugees who were handedover the lands requisitioned, for carrying on agricultural operations. There, the revenue, definitely could be deemedto be an agricultural income as it is compensation fordivesting the owner from his right to cultivate the lands. 23. Again we notice the inclusion of rent orrevenue in sub-clause (a) of Section 2(1A). The words'revenue derived from land' employed in the sub-clause,according to us, would only take within its ambit theperiodic payments or revenue derived, when the owner of theproperty is not divested of the title and the land iscontinued to be used for agricultural purposes. When a saleof agricultural land is made, the purchaser is not obligedto carry on agricultural operations, nor can theconsideration received on such sale of agricultural landdeemed to be agricultural income. We hasten to add that itwill not be assessable to income-tax under the I.T. Actunless the land is covered under item (a) & (b) of Section2(14)(iii), in which event tax would be levied on thecapital gains. 24. We were also taken through the decision of aDivision Bench of this Court in (1986) 158 ITR 630[Commissioner of Income Taxv. Alanickal Company Limited].A sale of agricultural area in rural areas came up forconsideration before the Division Bench, wherein theDepartment wanted to split up the sale of land and sale of trees as separate sales. The contention of the Departmentwas that though sale of agricultural land in rural area isexempted from capital gains, sale of trees would not be soexempted. It was in this context that the Division Benchheld that there can be no splitting up of the single saletransaction when the land was sold with the trees and thesame has to be considered as a sale of agricultural land inthe rural area, which would not be included under thedefinition of capital gains. 25. We also notice the judgment of anotherDivision Bench of this Court in (1987) 167 ITR 136 (Ker)[Commissioner of Income Tax v. T.K.Sarala Devi]. This Courtin paragraph No.4 thereof held thus: trees as separate sales. The contention of the Departmentwas that though sale of agricultural land in rural area isexempted from capital gains, sale of trees would not be soexempted. It was in this context that the Division Benchheld that there can be no splitting up of the single saletransaction when the land was sold with the trees and thesame has to be considered as a sale of agricultural land inthe rural area, which would not be included under thedefinition of capital gains. 25. We also notice the judgment of anotherDivision Bench of this Court in (1987) 167 ITR 136 (Ker)[Commissioner of Income Tax v. T.K.Sarala Devi]. This Courtin paragraph No.4 thereof held thus: “4.The reasoning of the Tribunal is thatproceeds of sale of land constituted incomederived from land. If that proposition wascorrect, the Tribunal would be justified insaying that proceeds of sale of land used foragricultural purposes were income derived fromagricultural land within the meaning of Section2(1) and, therefore, not chargeable under theAct. But the fallacy of that assumption is that,when land is sold, the sale proceeds do notconstitute revenue but capital: (see Commr. ofAgrl. 2.T. v. Kailas Rubber & Co. Ltd.MANU/SC/0206/1965 : [1966]60ITR435(SC) andVishnudatta Antharjanam v. Commr. Of Agrl. I.T. MANU/SC/0217/1970 : [1970]78 ITR 58(SC). Theprofits or gains arising from the sale of landconstitute income because Section 2(24) of theAct includes as “income” capital gains chargeableunder Section 45. Such gain is, nevertheless, notincome derived from land; it is income derived bythe sale of land. Although land is the source ofthe income, income is derived not by the use ofthe land, but by the sale of the land, that is,by conversion of the land into cash. If incomeresults from the sale of agricultural land, it isnot “agricultural income” within the meaning ofSection 2(1).” We respectfully follow the dictum as laid down by theDivision Bench of this Court in T.K.Sarala Deviand findthat the consideration received on sale of agriculturalland in rural area, not coming under Section 2(14)(iii)(a)and (b) would not be income or revenue derived from land.But it has to be added to the profit and loss account andwould be reflected in the book profits, for assessmentunder Section 115JB. There is no statutory provisionenabling a downward adjustment of the said sum from thebook profits in the computation as provided in Section115JB. 26. In this context, we also notice that in therelevant year, there was The Kerala Agricultural Income Tax Act, 1991 (AIT Act) applicable to the State and there is nocontention raised by the assessee that the amounts receivedas consideration on sale of estate was offered under thatenactment. We also notice the levy under the AIT Act of theState to be 60% for the relevant year, which is a lothigher than the levy under the Income Tax Act. We, in suchcircumstances, answer question number (viii) in favour ofthe Revenue and against the assessee. The appeal is, hence, partly allowed. Parties areleft to suffer their respective costs. Sd/-K.VINOD CHANDRANJUDGE Vku/sp. Sd/-ASHOK MENONJUDGE APPENDIX APPELLANT'S ANNEXURES: ANNEXURE A COPY OF THE ASSESSMENT ORDER U/S.143(3) PASSED BY THE ASSESSING OFFICER ON 26.12.2008 FOR AY 2006-07. ANNEXURE B COPY OF THE CIT(A)'S ORDER NO.84/R-I/E/CIT-II/2008-09 DATED 30.11.2009. ANNEXURE C CERTIFIED COPY OF ITAT'S ORDER NO.ITA NO.77/COCH/2010 DATED 29.6.2012. [ true copy ]