Tc/139/2003 Of Sri.m.s.srinivasa Naicker v. The Incometax Officer

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HONOURABLE MR.JUSTICE P.D.DINAKARAN THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMAN Appeals against the order of Income Tax Appellate Tribunal,Madras "C" Bench, dated 09.06.2003, in ITA Nos.600/Mds/98, 64/Mds/2003and 63/Mds/2003 respectively against the order of the Commissioner ofIncome tax (Appeals) VII, (Appeals I), (Appeals-II), Madurairespectively in PAN/G1: 47-018-HT-8926, PAN/GIR No. E-7009,PAN/GIR.NO.A-7044 respectively, dt. 13.2.1998, 13.12.2002, 13.12.2002respectively against the order of the Income tax officer (Ward-I) 3,Madurai respectively in order dt. 20.3.96, 23.3.2001 and 23.3.2001respectively. (Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.) These appeals are filed at the instance of the assessees. 2. The question of law raised in T.C.Nos.139 to 141 of 2003is as follows: "Whether on the facts and in thecircumstances of the case, the Tribunal was rightin holding that the lands are not agricultural https://hcservices.ecourts.gov.in/hcservices/ lands and hence profit on sale of the lands isassessable as capital gains ?As regards T.C.No.139 of 2003, one more question is raised viz., " Whether on the facts and in thecircumstances of the case, the Tribunal was rightin partly confirming the addition to gross profits?" 3. These appeals relate to the three different assessmentsfor the Assessment Year 1993-1994. They pertain to the relief fromliability on the capital gains in respect of the three differentassessees in respect of the same property, wherein, they enjoyedundivided shares. The assessee contended that the property inquestion, which is the subject matter of sale, was an agriculturalproperty and hence, it could not be subjected to any liability underthe provisions of capital gains. 4. In his reply before the officer, the assessee claimedthat the land in question was situated within 4 ½ kms. in the limitsof Tirumangalam Municipality. The Adangal Register showed that theland was an agricultural land, wherein the assessee carried onagricultural operations till the date of the sale. The assesseefurther took the plea that the fact that the purchaser had applied forapproval for conversion as industrial plot did not have any bearing inthe matter of consideration of its character as an agricultural land.Consequently, the assessee submitted that the liability to capitalgains tax was not attracted. 5. On enquiry in the District Industries Centre, Madurai,the Assessing Authority learnt that the purchaser society had writtento the Madurai Local Planning Authority, seeking information asregards the situation of the land; that the Municipality replied thatthe area was declared as an industrial area as per Madurai Master Planfor land utility. It was also learnt from the Deputy Director, Town &Country Planning, Madurai, that the Government of Tamil Nadu inG.O.Ms.No.838, Housing and Urban Development, dated 03.07.1980, hadgiven their consent to the Madurai Local Planning Authority to thepublication of a notice of the preparation of Master Plan for Madurai,which included the said lands under industrial area. It is also statedthat in the records of Sub-Registrar's Office, Tirumangalam, the landshave been marked as industrial area. 6. With the above said facts in the background, theAssessing Authority viewed that the lands in question were notpossessing the character of agricultural lands. However, he noted thefacts in favour of the assessee that the lands were registered asagricultural lands, land revenue was paid; that there was no evidencethat the lands in question were not put to any other purposes otherthan agriculture and that there was, in fact, cultivation till thedate of sale. However, the Assessment Officer rejected the claim ofhttps://hcservices.ecourts.gov.in/hcservices/ 6. With the above said facts in the background, theAssessing Authority viewed that the lands in question were notpossessing the character of agricultural lands. However, he noted thefacts in favour of the assessee that the lands were registered asagricultural lands, land revenue was paid; that there was no evidencethat the lands in question were not put to any other purposes otherthan agriculture and that there was, in fact, cultivation till thedate of sale. However, the Assessment Officer rejected the claim ofhttps://hcservices.ecourts.gov.in/hcservices/ the assessee that the lands in question were agricultural only basedpurely on the intention of the intending purchasers that the assesseewas liable to pay tax on the gains on the sale of these lands. In thecourse of his order, the Officer also noted that there was no doubtthat the lands in question were situated outside the notified area.Yet, considering the fact that the purchaser, namely, MaduraiAutomobile Co-operative Industrial Estate Limited had purchased thesame for non-agricultural purpose at Rs.1,500/- per cent, the land hadlost its agricultural character. The Assessing Authority also notedthat the assessee was a member in the purchaser's institution.Consequently, the Authority confirmed the assessment. 7. On appeal, the Commissioner of Income-Tax noted that theAssessment Officer had agreed that there was claim that the lands felloutside the notified area. However, the character of the land had tobe determined in accordance with the provisions under Section 2 (14)(iii) (a & b), as it then stood. The Appellate Authority also found,as a matter of fact, that the Assessing Authority never stated thatthe land in question was not used for agricultural purposes. TheAppellate Authority also pointed out that the Assessment Officer notedthat the land was going to be put for non-agricultural purposes by thepurchaser and that the assessee was a member of the Purchasers'Association. Considering this and the recitals in the agreement whichwere known to the appellant and as per the decision of the SupremeCourt in Sarifabibi Mohmed Ibrahim v. Commissioner of Income-Tax,reported in (1993) 204 ITR 631, the land has to be held as anagricultural land at the time of transfer, yet, going by the purposeof its transfer, essentially, the land was non-agricultural incharacter. Consequently, the Appellate Authority sustained the orderof the AO and, thus, dismissed the appeal. 8. On further appeal, referring to the provisions containedin Section 2 (14) (iii), the Tribunal held that applying theprovisions of law and on the factual aspects, it was clear that theland in question was not agricultural land. Hence, it confirmed theview of the authorities below. Aggrieved by the same, the assesseeshave come on appeal before this Court. 9. Apart from the common issue in all the appeals, withregard to yet another issue, namely, Addition towards Gross Profits inT.C.No.139 of 2003, the Tribunal held that the addition was madetowards gross profits, on the ground that the profit margin adopted bythe assessee for a high quality of kapas was much lower in point ofreturn, compared to what had been returned on lesser quality of kapas. 10. Under the circumstances, the Tribunal rejected the claimof the assessee, on the question of gross profit addition too. Hence,the assessee has come on appeal in T.C.No.139 of 2003. As far asthis question is concerned, considering the factual finding of theTribunal and in the absence of any material to substantiate the claimof the assessee that the addition of gross profit was not supported byhttps://hcservices.ecourts.gov.in/hcservices/ any material, we do not find any ground to interfere with the order ofthe Tribunal. Consequently, the appeal on this ground standsrejected. 10. Under the circumstances, the Tribunal rejected the claimof the assessee, on the question of gross profit addition too. Hence,the assessee has come on appeal in T.C.No.139 of 2003. As far asthis question is concerned, considering the factual finding of theTribunal and in the absence of any material to substantiate the claimof the assessee that the addition of gross profit was not supported byhttps://hcservices.ecourts.gov.in/hcservices/ any material, we do not find any ground to interfere with the order ofthe Tribunal. Consequently, the appeal on this ground standsrejected. 11. On the question of treatment given to the lands as non-agricultural lands, it is an admitted case that till the date of sale,agricultural operations were carried on by the assessee. The land wasput to use only for agricultural purposes and not for anything else.The lands in question were also registered as agricultural lands andassessed to land revenue. Consequently, learned counsel for theassessee submits that going by the decision of the Supreme Court inSarifabibi Mohmed Ibrahim v. Commissioner of Income-Tax, reported in(1993) 204 ITR 631, the assessment could not be sustained. He furtherplaced reliance on the decision of the Gujarat High Court inCommissioner of Income-Tax, Gujarat-I, v. Smt.Lilavati ThakorelaiPatel, reported in (1985) 152 ITR 565, that the purposes to which thepurchase of lands was put subsequent to the sale has no relevance asregards the character of the land at the hands of the vendor as on thedate of sale. Consequently, the fact that the purchaser has put itfor a totally different purpose from that of the assessee ought not tohave weighed with the Tax Authority in the matter of denying therelief. 12. Learned counsel for the assessee has also placedreliance on the decision of this Court in Commissioner of Wealth-Taxv. E.Udayakumar, reported in (2006) 284 ITR 511 (Mad), at p.514,wherein it is held that the purpose of the purchase by the vendee istotally an irrelevant consideration for the purpose of the applicationof the provisions relating to capital gains. 13. Referring to the decision in Commissioner of Income-Taxv. P.J.Thomas, reported in (1995) 211 ITR 897, considering theprovisions of Section 2(14), learned counsel for the appellantssubmits that the authorities below ought to have taken note of therelevant facts to draw an inference that the land in question was anagricultural land. Learned counsel for the assessees referred to thedecision of the Supreme Court in Sarifabibi Mohmed Ibrahim v.Commissioner of Income-Tax reported in (1993) 204 ITR 631,to contrastthe facts and submitted that the facts prevailing in the decisionreported in (1993) 204 ITR 631 (Sarifabibi Mohmed Ibrahim v.Commissioner of Income-Tax) that on the date of sale, the land was nolonger agricultural land, since the assessee had obtained permissionto convert the said land to non-agricultural purpose; that theappellant had no intention to bring it into cultivation at any timeafter getting permission. The admitted factual position in the caseon hand was that on the date of sale, the assessee had in fact put theproperty for agricultural operations. Consequently, thedistinction in the factual situation makes all thedifference, justifying the plea of the assessee for exclusion of thelands for assessability to capital gains from taxation. https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ 14. Learned Junior Standing Counsel appearing for therevenue, however, drew support from the decision of the Supreme Courtin (1993) 204 ITR 631 (Sarifabibi Mohmed Ibrahim v. Commissioner ofIncome-Tax), and submitted that considering the fact that as on thedate of sale the assessee had knowledge that the purchaser was goingto put the lands in question to use different from what the assesseehad been using for; that it was a clear indication that the land inquestion was no longer an agricultural land. In the circumstances, hesubmitted that the Tribunal was justified in its view that the landsin question are no longer retained in its character as agriculturalland and hence capital assets attract a heavy tax under the provisionsof Section 45. 15. We have gone through the orders passed by theauthorities below, confirming the assessment on the capital gains,arising out of the sale of the lands. 16. The contention of the appellants herein meritsacceptance by this Court. It is an admitted fact that till theassessee sold the lands, agricultural operations, in fact, werecarried out by the assessee. The Assessing Authority, in its order,in paragraph 11, states that the land was actually under cultivationtill the date of sale. 17. A perusal of Section 45 shows that the requirement as onthe date of sale of transfer is that the asset must be capital asset,considering the description under the Act. The chargeability to taxunder Section 45 arises only if on the date of sale, the lands inquestion retained its character as a capital asset, which means, anasset, which does not answer the definition of a capital asset andwhich is an agricultural land falling within the definition ofSection 2 (11) would automatically be outside the scope of Section 45. 18. In the decision in M.Venkatesan v. Commissioner ofIncome-Tax (Mad.), reported in (1983) 144 ITR 886, this Court,referring to the scope of Section 45, held that "taxation or exemptionfrom taxation depends upon the subject of transfer answering or notanswering the definition of capital asset at the time of transfer andat no other point of time." In the subsequent decisions reported in(1995) 211 ITR 897 (Commissioner of Income-Tax v. P.J.Thomas) and(2006) 284 ITR 511 (Commissioner of Wealth-Tax v. E.Udayakumar), itwas held that the subsequent treatment has no relevance in the matterof considering a capital asset. It is no doubt true that the purposefor which the purchaser had purchased was totally different from whatthe transferor had intended to use the lands in question but as heldin the decisions cited above, with the admitted finding that the landsin question were under agricultural operation on the date of sale forthe purpose of considering the meaning of capital assets, it mattersvery little how the subsequent purchaser intended the land in questionto be put to use. https://hcservices.ecourts.gov.in/hcservices/ 19. In the circumstances, going by the law declared by thisCourt and the Supreme Court on the admitted facts, we do not find anyreason to accept the plea of the respondents/revenue that the asset inquestion is a capital asset and it attracts levy of capital gains tax,it having shed its character as an agricultural land on the saleeffected. 20. In the decision reported in (2006) 284 ITR 511, thisCourt held that the fact that the land is located in a commercial areaor the land having been partially used for non-agricultural purposesor that the vendee also had purchased it for non-commercial purposeswere totally irrelevant consideration for the purpose of applicationof Section 54-B. In the course of the decision reported in (2006) 284ITR 511, the Division Bench of this Court referred to the decision inCIT v. Smt.Savita Rani, (2004) 270 ITR 40, wherein under similarcircumstances it held that the vendee's use is not of relevantconsideration for the purpose of application of Section 54-B. 20. In the decision reported in (2006) 284 ITR 511, thisCourt held that the fact that the land is located in a commercial areaor the land having been partially used for non-agricultural purposesor that the vendee also had purchased it for non-commercial purposeswere totally irrelevant consideration for the purpose of applicationof Section 54-B. In the course of the decision reported in (2006) 284ITR 511, the Division Bench of this Court referred to the decision inCIT v. Smt.Savita Rani, (2004) 270 ITR 40, wherein under similarcircumstances it held that the vendee's use is not of relevantconsideration for the purpose of application of Section 54-B. 21. Going by the above decisions and on an examination ofthe facts here, as admitted by the revenue that as on the date ofsale, the agricultural operations were in fact carried on in thelands, it is difficult to accept the view of the Tribunal, consideringthe law was to proceed from the point of how the purchaser hadintended to use. It is not disputed by the revenue that the land inquestion does not fall within the restricted clause to make it as acapital asset for purposes of levy under Section 45. 22. As noticed already, the decision of the Supreme Courtrests on facts, which are totally different from the one prevailinghere. Instead of assisting the Revenue, it does favour the assesseethat in the absence of any contra indication that the assessee wasusing it or intending to use it for non-agricultural purposes, it isdifficult to accept the stand of the Department. 23. Consequently, T.C.No.139 of 2003 is partly allowed andthe first question is in favour of the assessee and the second one isheld against the assessee. As regards T.C.Nos.140 and 141 of 2003,the appeals are allowed. No costs. Consequently, the connectedT.C.M.P.Nos.99 to 101 of 2004 are closed. dixit To 1. The Income Tax Officer,Ward I (3),Madurai. 2. The Income Tax Apellate Tribunal,'C' Bench, Chennai.'C' Bench, Chennai. 3. The Commissioner of Income tax (Appeals) VII, I, IIMadurai.Madurai. 4. The Assistant Registrar, Income Tax Appellate Tribunal,Rajaji Bhavan, Besant Nagar,Chennai.Rajaji Bhavan, Besant Nagar,Chennai. 5. The Income-tax Officer,(Ward I)3, Madurai. 1 CC TO MRS. PUSHYA SITARAMAN, ADVOCATE SR 5896 1 CC TO MR.R. VIJAYARAGHAVAN, ADVOCATE SR 5594 T.C.(A).Nos.139 TO 141/2003 JSK(CO) BP/28.2