The Honourable Mrs. Justice Shircy v. Thursday, The 31St Day Of August 2017/9Th Bhadra, 1939

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MRS. JUSTICE SHIRCY V. THURSDAY, THE 31ST DAY OF AUGUST 2017/9TH BHADRA, 1939 ITA.No. 154 of 2015 ----------------------- AGAINST THE ORDER IN ITA 270/2014 of I.T.A.TRIBUNAL,COCHIN BENCH DATED06-02-2015 -------- APPELLANT/APPELLANT IN ITA :----------------------------------- SYNTHITE INDUSTRIAL LTD AJAY VIHAR, M.G.ROAD, KOCHI-682 016. BY ADVS. SRI.O.K.NARAYANAN SRI.P.REJINARK RESPONDENT/RESPONDENT IN ITA :----------------------------------------- COMMISSIONER OF INCOME TAX IS PRESS ROAD, ERNAKULAM, KOCHI-682 018. R1 BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) R1 BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 31-08-2017, ALONG WITH ITA. 160/2015 & CON. CASES, THE COURT ON THESAME DAY DELIVERED THE FOLLOWING: ANTONY DOMINIC & SHIRCY V., JJ. ------------------------------------------------ I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 ------------------------------------------------ Dated this the 31[st] day of August, 2017 JUDGMENT Antony Dominic, J. 1. aThese appeals are filed by the assessee againstthe orders passed by the Income Tax Appellate Tribunal in ITA Nos.270/2014, 304/2014, 305/2014 and 192/2015,concerning the Assessment Years 2007-08, 2008-09, 2009-10 and 2010-11. 2. Since the facts and the questions of law arecommon, these cases were heard together and are disposedof by this common judgment. 3. The assessee is a company, engaged in the business of manufacture and sale of oleoresins and spicesoil. On 29.03.2005, the assessee purchased 512 cents ofagricultural land at Kadayirippu in Aikkaranadu North Village I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 which is a Panchayat and is beyond eight kilometres radiusof the nearby Municipality. The land was purchased forexpansion of the assessee's factory. However, local peopleobjected to the expansion of the factory and therefore, theassessee dropped its proposal for expansion and decided toconvert the land into residential plots with an intention todevelop and sell a residential villa project. The land wasconverted into plots and in the previous year relevant to theAssessment Year 2007-08, the assessee sold 188 cents ofland to various parties. In the subsequent years also, theremaining area of the land was sold and in some cases, theassessee entered into agreements with the buyers forconstruction of villas. The assessee claimed that gain onsale of land is exempted from capital gain on the basis thatthe land was an agricultural land situated in a Panchayat.However, the Assessing Officer brought 50% of the incomeon sale of land as capital gain and the balance 50% wasassessed as business income. This order was confirmed by I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 -3- the First Appellate Authority and the Tribunal. It is in this background, these appeals are filed and the questions of law framed for the consideration of this Court are the following: “i.Whether on the facts and circumstances of thecase the Appellate Tribunal was justified intreating the land as capital asset under Section2(14) of the Income Tax Act, 1961?case the Appellate Tribunal was justified intreating the land as capital asset under Section2(14) of the Income Tax Act, 1961? ii. Whether on the facts and circumstances of thecase the Appellate Tribunal was justified inholding that there was a “transfer” ascontemplated in Section 2(47)?case the Appellate Tribunal was justified inholding that there was a “transfer” ascontemplated in Section 2(47)? the First Appellate Authority and the Tribunal. It is in this background, these appeals are filed and the questions of law framed for the consideration of this Court are the following: “i.Whether on the facts and circumstances of thecase the Appellate Tribunal was justified intreating the land as capital asset under Section2(14) of the Income Tax Act, 1961?case the Appellate Tribunal was justified intreating the land as capital asset under Section2(14) of the Income Tax Act, 1961? ii. Whether on the facts and circumstances of thecase the Appellate Tribunal was justified inholding that there was a “transfer” ascontemplated in Section 2(47)?case the Appellate Tribunal was justified inholding that there was a “transfer” ascontemplated in Section 2(47)? iii. Whether on the facts and circumstances of thecase the Appellate Tribunal was justified in notgranting exemption to one-half of the profitsgenerated on conversion of the agriculturalland to stock in trade, while invoking Section45(2) of the Income Tax Act, 1961?”case the Appellate Tribunal was justified in notgranting exemption to one-half of the profitsgenerated on conversion of the agriculturalland to stock in trade, while invoking Section45(2) of the Income Tax Act, 1961?” 4. We heard the learned counsel appearing for theassessee and the learned Senior Counsel appearing for theRevenue. 5. The learned counsel for the assessee contended that at the time when the land was purchased, it was arubber estate. According to the counsel, the assessee I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 retained the land as agricultural land and returned incomefrom agriculture also. The acquired land being agriculturalland, according to the learned counsel, the nature of theland would continue to be agricultural land and therefore,the gain of income on the sale of land would still be incomefrom the sale of agricultural land, exempt from capital gains. 6. These contentions were refuted by the learnedSenior Counsel appearing for the Revenue and according tohim, though the land, originally, was agricultural land,assessee purchased it for non-agricultural purposes.Thereafter, converted the land into plots and brought it in asthe stock-in-trade of the assessee. According to the learnedSenior Counsel, when such land is sold, the income gainedby the assessee did not qualify to be income fromagricultural land to claim exemption from capital gains. 7. We have considered the submissions made. 8. Facts, as noticed by the statutory authorities wouldshow that, it was on 15.03.2005, the Board of Directors ofshow that, it was on 15.03.2005, the Board of Directors of I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 -5- the assessee had passed the resolution authorizing itsChairman to acquire 512 cents of land, planted with rubber,for the expansion of the factory. The land is situated next tothe assessee’s factory at Kadayirippu, falling within thePanchayat area. The land was purchased by the assessee on29.03.2005. The property was purchased for expansion ofthe factory. This proposal had to be abandoned due toobjection from local people. The proposal to convert theagricultural land into housing plots and to develop it as avilla project was placed for the consideration of the Board ofDirectors on 19.09.2006 and the resolution was passed.Subsequently, on 18.12.2006, the extraordinary meeting ofthe members of the company resolved to amend theMemorandum of Association by inserting a clause,authorizing the company for carrying on the business asproperty developers, builders, designers etc. Accordingly,land was converted into plots leaving common areas such asroads etc. and on 27.03.2007 itself, the assessee sold 188 I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 -6- I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 -6- cents of land to various parties and entered into a set ofconstruction agreements to build villas in the project “SpiceVillage”. It is in this background, we have consideredwhether the income gained by the assessee by the sale ofthe plots of land from out of 512 cents of land acquired byit, would qualify to be income from the sale of agriculturalland. 9. Section 45 of the Income Tax Act provides for levyof capital gains. Under sub-section 1, any profit or gainarising from the transfer of a capital asset effected in theprevious year shall, subject to the exemptions providedtherein, be chargeable to income tax under the head of“capital gains” and shall be deemed to be the income of theprevious year in which the transfer took place. The term“capital asset” has been defined in Section 2(14). By sub-section (iii) thereof, agricultural land in India has beenexempted, including the land situated in Panchayat.“Transfer” has been defined in Section 2(47) of the Act and I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 it includes, in a case where the asset is converted by theowner thereof into, or is treated by him as, stock-in-trade ofa business carried on by him, such conversion or treatment.Sub-section (2) of Section 45 provides that notwithstandinganything contained in sub-section (1), the profits oracquired gains arising from the transfer by way ofconversion by the owner of a capital asset into, or itstreatment by him as stock-in-trade of a business carried onby him shall be chargeable to income tax as his income ofthe previous year in which such stock-in-trade is sold orotherwise transferred by him and, for the purposes ofSection 48, the fair market value of the asset on the date ofsuch conversion or treatment shall be deemed to be the fullvalue of consideration received or accruing as a result of thetransfer of the capital asset. Therefore, if the land, whichhas been sold by the assessee, from which profit has beengained by it, is an agricultural land, the assessee isexempted of its liability to capital gains. I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 -8- 10. For the purposes of levy of capital gains, thematerial date with reference to which the question whetherthe particular asset which has been sold by the assessee isagricultural land or not, is the date of sale of the asset. Ithas been so held by a Division Bench of this Court in itsjudgment in Kalpetta Estates Ltd. v. Commissioner ofIncome Tax [1990] 185 ITR 318 (Ker). In thisjudgment, it was also held that in order to entitle theassessee to earn exemption, it is not enough to allege orshow that the land was once an agricultural land at the timeof its acquisition and that the assessee should further provethat it was agricultural land at the time of transfer. 11. This question came for the consideration of theApex Court in Smt.Sarifabibi Mohmed Ibrahim andothers v. Commissioner of Income Tax, Gujarat[1993] 204 ITR 631 (SC)]. In that case, taking intoaccount the agreements entered into by the assessee withhousing co-operative society, to sell the land for I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 construction of houses; also the permission that it hadobtained to sell the land for non-agricultural purposes, itssale soon thereafter; and also the fact that the land was notcultivated for a period of four years prior to the sale, theApex Court accepted the contention of the Revenue that theland was not an agricultural land when it was sold. 11. This question came for the consideration of theApex Court in Smt.Sarifabibi Mohmed Ibrahim andothers v. Commissioner of Income Tax, Gujarat[1993] 204 ITR 631 (SC)]. In that case, taking intoaccount the agreements entered into by the assessee withhousing co-operative society, to sell the land for I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 construction of houses; also the permission that it hadobtained to sell the land for non-agricultural purposes, itssale soon thereafter; and also the fact that the land was notcultivated for a period of four years prior to the sale, theApex Court accepted the contention of the Revenue that theland was not an agricultural land when it was sold. 12. Bearing these principles in mind, the facts of thecase are to be examined. Admittedly, the assesseepurchased the land which was a rubber estate. The land waspurchased to utilize it for the non-agricultural purpose ofexpansion of its factory. The rubber trees in the land wereslaughter tapped which is a process that immediatelyprecedes the cutting and removal of the rubber trees. Theincome returned by the assessee, is the income fromslaughter tapping of rubber trees. This income was notgained from agricultural operations, but was only fromexploitation of standing trees at the end of its useful life.Thereafter, the assessee had converted the land into I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 housing plots leaving out common areas for roads and other purposes. Before that assessee would have cut and removedrubber trees. The asset was brought in as the stock-in-tradeof the assessee. Thereafter, gradually the plots were sold toseveral people and agreements were entered into with manyof the buyers for construction of villas. This, therefore,would establish beyond any doubt that though the propertywas once an agricultural land, its acquisition was for non-agricultural purposes, the assessee did not carry on anyagricultural activity in the land and at the relevant date, viz.the date of sale, the land had ceased to be an agriculturalland. If that be so, the assessee could not have claimed thatthe income gained from the sale of the land is from the saleof agricultural land entitling it to exemption from levy ofcapital gains. This precisely is the concurrent conclusion ofthe statutory authorities. 13. Before the Tribunal, one document that was reliedon by the assessee to substantiate its contention that the I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 -11- land was an agricultural land, was the certificate dated20.10.2010 issued by the Village Officer Aikkaranadu NorthVillage. By this document, the Village Officer has certifiedthat the properties mentioned in the survey wereagricultural land as per the village records and that it isbeing used for agricultural operations. Insofar as thiscertificate is concerned, first of all, this document ispurported to have been issued based only on the villagerecords and not anything else. Even on the assessee's ownshowing, long before the certificate was issued, theassessee had cut and removed the rubber trees and hadconverted the land into plots. Therefore, the case of theassessee itself would contradict the entry in the villagerecords that the land is an agricultural land and that it wasbeing used for agricultural operations. That apart, theSurvey Numbers mentioned also do not tally with theSurvey Numbers extracted in the order of the first appellateauthority. Admittedly, at least substantial portion of the land I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 -12- was already sold for residential purposes long before the documents was issued. All these, therefore, show that theconclusion of the Tribunal that the certificate was unworthyof acceptance, cannot be said to be vitiated. 14. In the light of the above, we fully endorse theconclusions of the Tribunal. 15. Assessee has a case that the Tribunal was wrong I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 -12- was already sold for residential purposes long before the documents was issued. All these, therefore, show that theconclusion of the Tribunal that the certificate was unworthyof acceptance, cannot be said to be vitiated. 14. In the light of the above, we fully endorse theconclusions of the Tribunal. 15. Assessee has a case that the Tribunal was wrong in holding that there was transfer of the property ascontemplated in Section 2(47) of the Act. Section 2(47)which defines transfer in relation to a capital asset. Therelevant portion of Section 2(47) reads asunder: “2(47) “transfer”, in relation to a capital asset, includes,— 16. Assessee does not have a case that the land was not treated as stock-in-trade. Their business also included I.T.A. Nos.154, 160, 161 of 2015 & 83 of 2016 -13- real estate development. Therefore, Tribunal was perfectly justified in its conclusion that there was transfer of theasset. Therefore, answering the questions of law against theassessee and in favour of the Revenue, these appeals aredismissed. Sd/- JUDGE ANTONY DOMINIC Sd/- SHIRCY V.JUDGE kns/- //TRUE COPY// P.S. TO JUDGE