Income Tax Appellate Tribunal – Hyderabad

Rajender Pershad Tejprakash, … vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “A” : HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA. No. 1715/Hyd/2012 Assessment Year 2009-2010 Rajender Pershad Tejprakash vs. I.T.O. Ward 9 (2) Hyderabad Hyderabad. PAN ABIPT3968M (Appellant) (Respondent) Appellant by Shri K.Sai Prasad (A.R.) Respondent by MS. S.Padmaja (D.R.) Date of Hearing 25.06.2013 Date of Pronouncement 30.08.2013 ORDER

PER SHRI SAKTIJIT DEY, J.M.

This appeal filed by the assessee against the Order of the CIT(A)-VI, Hyderabad dated 25.09.2012 for the assessment year 2009-2010. The assessee has raised the following two effective grounds.

1. “The learned CIT(A) is not justified in holding that the land in question was not agricultural land, and thus confirming the computation of capital gains.

2. The learned CIT(A) is not justified in treating the agricultural income as income from other sources and holding as irrelevant the other issues regarding the location of the land in question.”

2. In ground No.1 the assessee has challenged the action of the revenue authorities in holding that the land transferred by the assessee is not agricultural land but a capital asset within the meaning of section 214 of the Act.

3. Briefly the facts are, the assessee is an individual. For the impugned assessment year he filed his return of income on 10.03.2010 declaring the total income of Rs.5,24,036/-. In the said return of income, the assessee though reported capital gain on sale of land at Shamshabad but at the same time claimed it as exemption under section 1-(37) of the Act by claiming it as agricultural land. Initially, the return was processed under section 143(1) of the Act. However, subsequently the assessee’s case was selected for scrutiny assessment.

In the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee had purchased ac.2.20 guntas of land in Tondapally village, Shamshabad Mandal, Ranga Reddy District on 15.07.1998 for a sum of Rs.3,25,000/- from Smt. Najamunnisa. This land was sold by the assessee along with plinth area admeasuring 1224.50 sq. ft. Constructed of RCC rooms and plinth area admeasuring 544 sq. ft. With ACC sheds to M/s. Symed Labs Limited, Hyderabad for a total consideration of Rs.1,62,50,000/- vide sale deed dated 19.12.2008. The assessee however, had not offered any capital gain to tax by claiming the property sold as agricultural land.

The Assessing Officer, however, did not accept the submissions of the assessee. The Assessing Officer taking note of the fact that the land is situated in Tondapally village of Shamshabad Mandal, which is included in the Hyderabad Air Port Development Authority (HADA) vide G.O.Ms.No. 352 M.A. dated 30.07.2001 and HADA having been constituted as Special Area Development Authority by the Government of Andhra Pradesh under section 3(A) of the A.P. Urban Areas (Development Act, 1975).

Subsequently, the Government of Andhra Pradesh have also issued G.O.Ms.No.570 M.A. and U.D. Department dated 25.8.2008 for developing the land as a Special Development Zone, it cannot be considered as agricultural land. The Assessing Officer also conducted enquiry with the purchaser of the land Shri D.Mohan Rao of M/s. Symed Labs Limited and as per the information obtained from him, it was noticed that the land was purchased by her for investment purpose. The Assessing Officer, therefore, came to a conclusion that the land was located within the jurisdiction of HADA and subsequently on the creation of Hyderabad Metropolitan Development Authority (HMDA) jurisdiction over Tondapally village, was assigned to HMDA vide G.O.Ms.No.570 & 571 dated 25.08.2008.

The Assessing Officer, however, came to the conclusion that HADA has been constituted as a Special Area Development Authority for the special development of areas in and around the International Air Port of Shamshabad having regard to the need for special planning particularly, high level of infrastructure and managerial inputs, special investment zone and other relevant considerations. Hence, HADA and HMDA is a Government notified local authority and a municipality within the meaning of section 2(14)(iii)(a) of the Act. The Assessing Officer further quoted that the land having been sold which transferred for utilisation in non- agricultural purpose.

It cannot be considered as agricultural land. With the aforesaid observation, the Assessing Officer computed capital gain on the consideration received on sale of land by determining the same at Rs.1,58,04,630/-. The assessee being aggrieved of the assessment order, preferred an appeal before the CIT(A).

4. In the course of hearing of the appeal before the CIT(A), it was contended by the assessee that the agricultural operations had been conducted on the land and the assessee had regularly disclosed agricultural income from the said land. Further, the land had been earmarked as bio- conversation use zone and could not be used of any other purpose other than non-agriculture or for greenery. It was submitted that the land used has been specified in G.O.Ms.No.111, M.A. dated 08.03.1996 and again in G.O.Ms.No. 470, M.A. dated 09.07.2008 under master-plan for Hyderabad Outer Ring Road Growth Corridor and was confirmed as such by the HMDA in its Lr.No.9194/LUC/P5/HMDA/2011 dated 20.12.2011 issued in response to a specific request by the assessee.

It was further submitted that the sale deed itself described the land as agricultural land and the land is also categorised as agricultural land in the Land Revenue Records. With regard to the Assessing Officer’s conclusion that HADA was a local authority, it was contended by the assessee that though HADA was a local authority but not a Urban Development Authority created for Urbanisation.

It was further submitted that section 2 (13)(iii)(a) refers to Municipality, Municipal Corporation, notified area committee, town area committee and town committee. HADA/HMDA are merely local authorities and not a municipality within the meaning of section 2(14)(iii)(a). It was also submitted that the assessee fulfilled all the tests laid down in the case of Sarifa Bibi Mohammad Ibrahim & Others and others relied upon by the assessee to prove the fact that the land in question is only an agricultural land.

In support of his contention, the assessee also relied upon certain judicial precedence. The learned CIT(A) after considering the submissions of the assessee, though was convinced to the fact that as per the letter dated 20.12.2011 of the HMDA, the land in question has been specified as bio- conversation zone and further the purchaser M/s. Symed Labs Limited had also submitted in response to a query made that till date the land was a vacant land which suggesting of the fact that there was no construction on the land.

The CIT(A), however, referring to the Judgment of the Hon’ble Supreme Court in the case of Sarifa Bibi Mohammad Ibrahim & Others (1993) 204 ITR 631 (SC) wherein it has been held that it is not the mere potentiality but its actual development and intended user which have to be seen for the purpose of exemption. The CIT(A) though was of the view that the vacant land has potentiality of being used for agriculture but that by itself would not make it agricultural land for the purpose of deduction under section 2(14). For qualifying it to be an agricultural land, what is required is that the land must actually have been used for agriculture. She however, held that the onus was on the assessee to establish that the land was agriculture land.

Only if the assessee discharges this onus, it would have shifted to the Assessing Officer to prove that the land was not agricultural land. The CIT(A) observed that the assessee had leased out the land to M/s. Prakash Farms and no evidence has been produced either during the assessment proceedings or during appellate proceedings to show that M/s. Prakash Farms has regularly been conducting regular operations in the land immediately prior to its sale. The CIT(A), therefore, held that in thecircumstances, the land can at best described as potential agricultural land but not actually sold. The learned CIT(A) further was of the view that even though the land was engaged in the revenue records as agricultural land which may be a relevant factor to hold the land to be agricultural land but cannot be conclusive in view of the ratio laid down by the Hon’ble Supreme Court in the case of Sarifa Bibi Mohammad Ibrahim & Others.

5. But on the contrary, the intention of the purchaser in purchasing the land and the location in a business centre were considered to be relevant factors for deciding the nature and character of the land. The CIT(A) finally concluded that applying the ratio in the case of the assessee, the location of the land being adjacent to the Shamshabad area with a new International Air Port. The intention of the purchaser to purchase the land for investment purpose and the substantial consideration for which it was sold would decide the issue against the assessee. Accordingly, the CIT(A) held that the land in question it was sold by the assessee is not an agricultural land and therefore, is a capital asset subject to capital gain tax.

6. The learned AR submitted before us that the Assessing Officer basically has come to a conclusion that the land sold by the assessee is not agricultural land basically on the ground that it is situated within the area of HADA (now HMDA) which is a local authority coming within the definition of “Municipality” as provided under section 2(14)(iii)(a) of the Act. Further, the land has been sold for non-agricultural purpose. Hence, it is a capital asset under section 2(14) of the Act. Further, it was submitted by the learned A.R. that it has now been settled by the ITAT, Hyderabad Bench in the case of Smt. T. Urmila vs. ITO 57 SOT 90 that HADA is not a Municipality.

7. It was further submitted by the learned AR that the land fulfils all the characteristics of agricultural land as not only it has been recorded as agricultural land in the revenue records but agricultural activity was actually carried-on, on the land in question up-to its sale. Also It was further submitted that the sale deed also describes the land as agricultural land. It was submitted by the learned AR that neither the assessee has applied for conversion of the property from agriculture to any other category nor has taken-up any development activity over the said land to change its nature and character to be non-agricultural land.

It was submitted that the fact that the zone where the land is situated has been declared as bio- conservation zone by the prescribed authority further proves the fact that it cannot be used for any purpose other than agriculture or greenery. The learned AR further submitted that the assessee had been regularly declaring agriculture income from the said property in the returns filed for the earlier assessment years. The learned AR submitted that applying the test laid down by the Hon’ble Supreme Court in the case of Sarifa Bibi Mohammad Ibrahim & Others (supra) as well as other judicial precedents, the land in question cannot be considered as anything other than agricultural land.

8. The learned DR on the other hand, strongly supporting the Orders of the lower authorities submitted that the findings recorded by the Assessing Officer as well as CIT(A) clearly established the fact that the land was not held for the purpose of agriculture and therefore, it clearly attracts the provisions of section 2(14) of the Act.

9. We have considered the submissions of the parties and perused the material available on record. Perusal of the assessment order reveals the fact that the Assessing Officer held the land in question to be a non- agricultural land being clearly influenced by the fact that it is within the jurisdiction of HADA (now HMDA) and as such, cannot be considered to be agricultural land as per section 2(14)(iii)(b) of the Act. The CIT(A) though does not dispute the fact that the land is recorded as agricultural land in the revenue records and has been specified within the bio conservation zone and further records the fact that the information obtained from purchaser also reveal that no development activity has been carried-on on the land in question. However, the learned CIT(A) has refused to treat the land in question as agricultural land on the following grounds :

(i) The Assessee has not produced any evidence to show that agricultural operations were conducted regularly on the said land prior to its sale.

(ii) The location of the land adjacent to the International Air Port.

(iii) The intention of the purchaser to purchase the land for investment purpose.

10. From the aforesaid discussions of the lower authorities, it becomes clear that so far as the nature and character of the land is agriculture land as recorded in the revenue records, has not been disputed. It is also not disputed that the land in question comes within the bio-conservation zone.

Only because it is within the limit of HADA (now HMDA) and further it is alleged to have been sold for non-agricultural purpose and had a considerable high value, the lower authorities have denied the assessee’s claim with regard to character of land as ‘non-agriculture land’. However, in our view, the aforecited reasons shown are neither sufficient nor adequate to hold that the nature and character of the land is not agricultural land.

From the facts on records, it is evident that not only the land has been recorded as agricultural land in the revenue records, but agricultural activity was actually carried-on on the same land, is proved from the fact that the assessee has regularly disclosed income from agriculture in the returns filed. The Co-ordinate Bench of this Tribunal while considering identical issue in the case of Smt. T.Urmila vs. ITO 57 SOT 90 (URO) applying the ratio laid down by the Hon’ble Supreme Court in the case of Smt. Sarifa Bibi Mohammad Ibrahim & Others 204 ITR 631 and various other decisions rendered by different High Courts held as under. (For clarify we reproduce the entire findings) :

41. We have heard both the parties and perused the material on record including written submission filed by the Ld. AR.

42. The question as to whether a land is agricultural land or not is essentially a question of fact. The question has to be answered in each case having regard to the facts and circumstances of that case. There may be factors both for and against a particular point of view. We have to answer the question on a consideration of all of them, a process of evaluation and the inference has to be drawn on a cumulative consideration of all the relevant facts. It may be stated here that not all the factors or tests would be present or absent in any case and that in each case one or more of the factors may make appearance and that ultimate decision will have to be reached on a balanced consideration of the totality of the circumstances.

43. The expression ‘agricultural land’ is not defined in the Act, and now, whether it is agricultural land or not has got to be determined by using the tests or methods laid down by the Courts from time to time.

44. The Hon’ble Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim (204 ITR 631) has approved the decision of a Division Bench of the Hon’ble Gujarat High Court in the case of CIT vs. Siddharth J. Desai (1982) 28 CTR (Guj) 148 : (1983) 139 ITR 628 (Guj) and has laid down 13 tests or factors which are required to be considered and upon consideration of which, the question whether the land is an agricultural land or not has got to be decided or answered. We reproduce the said 13 tests as follows :

1. Whether the land was classified in the Revenue records as agricultural and whether it was subject to the payment of land revenue?

2. Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time?

3. Whether such user of the land was for a long period or whether it was of a temporary character or by any of a stopgap arrangement?

4. Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land?

5. Whether, the permission under s. 65 of the Bombay Land Revenue Code was obtained for the non-agricultural use of the land? If so, when and by whom (the vendor or the vendee)? Whether such permission was in respect of the whole or a portion of the land? If the permission was in respect of a portion of the land and if it was obtained in the past, what was the nature of the user of the said portion of the land on the material date?

6. Whether the land, on the relevant date, had ceased to be put to agricultural use? If so, whether it was put to an alternative use? Whether such cesser and/or alternative user was of a permanent or temporary nature?

7. Whether the land, though entered in Revenue records, had never been actually used for agriculture, that is, it had never been ploughed or tilled? Whether the owner meant or intended to use it for agricultural purposes?

8. Whether the land was situated in a developed area? Whether its physical characteristics, surrounding situation and use of the lands in the adjoining area were such as would indicate that the land was agricultural?

9. Whether the land itself was developed by plotting and providing roads and other facilities?

10. Whether there were any previous sales of portions of the land for non-

agricultural use?

11. Whether permission under s. 63 of the Bombay Tenancy and Agricultural Lands Act, 1948, was obtained because the sale or intended sale was in favour of a non-agriculturist? If so, whether the sale or intended sale to such non-agriculturists was for non-agricultural or agricultural user?

12. Whether the land was sold on yardage or on acreage basis?

13. Whether an agriculturist would purchase the land for agricultural purposes at the price at which the land was sold and whether the owner would have ever sold the land valuing it as a property yielding agricultural produce on the basis of its yield?”

45. A reference could be made to the case of CWT vs. Officer-in-charge (Court of Wards) (105 ITR 138) (SC) wherein the Constitution Bench of the Hon’ble Supreme Court stated that the term ‘agriculture’ and ‘agricultural purpose’ was not defined in the Indian IT Act and that we must necessarily fall back upon the general sense in which they have been understood in common parlance.

The Hon’ble Supreme Court has observed that the term ‘agriculture’ is thus understood as comprising within its scope the basic as well as subsequent operations in the process of agriculture and raising on the land all products which have some utility either for someone or for trade and commerce. It will be seen that the term ‘agriculture’ receives a wider interpretation both in regard to its operation as well as the result of the same.

Nevertheless there is present all throughout the basic idea that there must be at the bottom of its cultivation of the land in the sense of tilling of the land, sowing of the seeds, planting and similar work done on the land itself and this basic conception is essential sine qua non of any operation performed on the land constituting agricultural operation and if the basic operations are there, the rest of the operations found themselves upon the same, but if the basic operations are wanting, the subsequent operations do not acquire the characteristics of agricultural operations. The Constitution Bench of the Hon’ble Supreme Court in the aforesaid case observed that the entries in Revenue records were considered good prima facie evidence.

46. The Hon’ble Gujarat High Court in the case of Dr. Motibhai D. Patel vs. CIT (1982) 27 CTR (Guj) 238 : (1981) 127 ITR 671 (Guj) referring to the Constitution Bench of the Hon’ble Supreme Court had stated that if agricultural operations are being carried on in the land in question at the time when the land is sold and further if the entries in the Revenue records show that the land in question is agricultural land, then, a presumption arises that the land is agricultural in character and unless that presumption is rebutted by evidence led by the Revenue, it must be held that the land was agricultural in character at the time when it was sold. The Division Bench of the Hon’ble Gujarat High Court further held that there was nothing on record to show that the presumption raised from the long user of the land for agricultural purpose and also the presumption arising from the entries of the Revenue records are rebutted.

47. The Hon’ble Bombay High Court in the case of CWT vs. H. V. Mungale (1983) 32 CTR (Bom) 301 : (1984) 145 ITR 208 (Bom) held that the Hon’ble Supreme Court had pointed out that the entries raised only a rebuttable presumption and some evidence would, therefore, have to be led before taxing authorities on the question of intended user of the land under consideration before the presumption could be rebutted. The Court further held that the Supreme Court had clearly pointed out that the burden to rebut the presumption would be on the Revenue.

The Hon’ble Bombay High Court held that the ratio of the decision of the Supreme Court was that what is to be determined is the character of the land according to the purpose for which it was meant or set apart and can be used. It is, therefore, obvious that the assessee had abundantly proved that the subject land sold by them was agricultural land not only as classified in the Revenue records, but also it was subjected to the payment of land revenue and that it was actually and ordinarily used for agricultural purpose at the relevant time.

48. We may also refer to the case of CIT vs. Manilal Somnath (1977) 106 ITR 917 (Guj), wherein the Division Bench of the Hon’ble Gujarat High Court observed that the potential non-agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land on the relevant date of sale.

49. We may also refer to the case of Gopal C. Sharma vs. CIT (1994) 116 CTR (Bom) 377 : (1994) 209 ITR 946 (Bom), in which, the case of Smt. Sarifabibi Mohamed Ibrahim & Ors. vs. CIT (supra) was referred to and relied, amongst other cases. In this case, the Division Bench of the Bombay High Court has stated that the profit motive of the assessee selling the land without anything more by itself can never be decisive for determination of the issue as to whether the transaction amounted to an adventure in the nature of trade. In other words, the price paid is not decisive to say whether the land is agricultural or not.

50. We may refer to a judgment of the Hon’ble Madras High Court in the case of CWT vs. E. Udayakumar (2006) 284 ITR 511 (Mad) where the Hon’ble Madras High Court has referred to the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Smt. Savita Rani (2004) 186 CTR (P&H) 240 : (2004) 270 ITR 40 (P&H) and has observed and held as under :

8. It is well settled in the case of CIT vs. Smt. Savita Rani (2004) 186 CTR (P&H) 240 : (2004) 270 ITR 40 (P&H), wherein it is held that the land being located in a commercial area or the land having been partially UTILIZED for non-agricultural purposes or that the vendees had also purchased it for non- agricultural purposes, were totally irrelevant consideration for the purposes of application of s. 54B.

9. In the above said case, the assessee an individual sold 15 karnals, 18 marlas of land out of her share in 23 karnals, 17 marlas land during the financial year 1990-91, relevant to the asst. yr. 1991-92, the sale was effected by three registered sale deeds. While filing her return of income, she claimed exemption from levy of capital gains under s. 54B of the Act on the ground that the land sold by her was agricultural land and the sale proceeds were invested in the purchase of agricultural land within two years.

The AO rejected the claim of the assessee holding that the land sold by the assessee was not agricultural land and this was upheld by the CIT(A). On further appeal, the Tribunal accepted the claim of the assessee holding that the transaction in question duly fulfilled the conditions specified for relief. On further appeal to the High Court, the Punjab & Haryana High Court found that the finding that the land had been used for agricultural purposes was based on cogent and relevant material. The Revenue record supported the claim.

Even the records of the IT Department showed that the assessee had declared agricultural income from this land in her returns for the preceding two years. The land being located in commercial area or the land having been partially utilised for non-agricultural purposes or that the vendees had also purchased it for nonagricultural purposes, were totally irrelevant consideration for the purposes of application of s. 54B.

10. It is seen from the aforesaid decision that the agricultural land sold by the assessee with an intent to purchase another land within two years had also been permitted to claim exemption under s. 54B of the IT Act, 1961. In the instant case, even though there was no sale as such, the assessee owned agricultural land within the limits of Tirunelveli Corporation and he had not put up any construction thereon, the assessee is entitled to claim exemption from the WT Act for the assessment of wealth-tax. That the land in question is adjacent to the hospital is totally irrelevant.”

51. Adverting to the facts of the present case, the land in question is classified in the Revenue records as agricultural land and there is no dispute regarding this issue and actual cultivation has been carried on this land and income was declared in the return of income filed by the assessee for the past several years as agricultural income. It is also an admitted fact that the assessee has not applied for conversion of this agricultural land for non-agricultural purposes and the assessee has not put the land to any purposes other than agricultural purposes. It is also an admitted fact that neither the impugned property nor the surrounding areas were subject to any developmental activities.

52. Further, we are inclined to mention herein that there is no dispute with regard to facts that the assessee has been carrying on agricultural operations on the impugned property and agricultural income was declared by the assessee in her return of income from this land from year to year. Further it is important to mention that mere inclusion of impugned property in the HADA vide GO MS No. 352 (M.A.) dated 30.7.2001 cannot change the character of the property.

According to the lower authorities HADA has been constituted as a Special Area Development Authority by the A.P. Government u/s. 3A of the A.P. Urban Areas (Development) Act, 1975 and the lower authorities observed that notification to this effect has been issued by the Municipal Administration and Urban Development (II) Department vide GO MS No. 352 M.A. dated 30.7.2001 wherein 87 villages from 7 Mandals in the vicinity and surrounding International Airport at Shamshabad have been notified as special development area.

Srinagar of Maheswaram Mandal is included in the above notification. According to the lower authorities the property loses its original character. In our opinion mere inclusion of the property in the HADA by State Government notification does not change the character of the property if the property still continues to be agricultural land at the point of sale of said property. Nothing has been brought on record to show that in this village of Srinagar (Maheswaram Mandal) any infrastructure development has taken place. Without establishing and proving the fact that the land was put to use for non-agricultural purposes, it cannot be possible to treat the agricultural land as non-agricultural land.

In the present case, during the relevant point of time of sale of the land in question, the surrounding area was totally undeveloped and mere possibility to put the impugned land for non-agricultural purposes would not change the character of the land into non-agricultural land at the relevant point of sale of land by the assessee. Further, the issue whether A.P. Agricultural Land (Conversion for Non- agricultural Purposes) Act, 2006 will prevail over A.P. Urban Areas (Development) Act, 1975, came before the Hon’ble jurisdictional High Court in the case of K. Satyananda Patnaik & Ors. Vs. HUDA in W.P. No. 26688/2007 and Ors. The Hon’ble High Court vide common judgement dated 28.4.2010 held as follows:

“The two enactments referred to above, no doubt, control the use, to which a piece of land can be put. However, their respective purposes and objectives are totally different from each other. The 1975 Act is intended exclusively for the systematic development of urban areas. It has no application for the areas outside the defined jurisdiction of the particular UDA. One of the important steps under that Act is to prepare and publish master plan for the urban development area.

The master plan in turn, would stipulate the use to which the respective areas shown in it can be put. These include commercial, residential, industrial, recreational uses, etc., and each of the areas are called zones. The types of construction that can be made in the respective zones are also enlisted. Once an area is shown in a particular zone in the master plan, it cannot be put to a different use (Section 15). For example, in the residential zone, establishment of an industry cannot be permitted.

The power to convert land use in a particular zone to a different one, is vested in the Government. Section 49 of the 1975 Act contains a provision, which directs that, if agriculture is being carried on any land within the area covered by master plan, it can be continued without any inhibition, irrespective of the zone in which it is shown.

The 2006 Act, on the other hand, is intended to regulate the conversion of an agricultural land for non-agricultural purposes. That Act operates, vis-à-vis the lands situated in rural as well as urban areas. It is different matter that the Act in its operation does not reflect the intended purposes. A perusal of the same discloses that, if a stipulated amount is paid, the concerned authority has no option, whatever, except to accord permission. In a way, the Act turned out to be a money generating devise, than the one, to prevent or curb indiscriminate conversion of agricultural lands to other uses. Once the authority under that Act accords permission to convert an agricultural land, the matter ends there, and it would not at all be concerned, whether the land is put to industrial, residential, commercial or any such other use.

It is lastly urged by the petitioners that insistence on clearance under the 2006 Act, even where a land ceased to be agricultural, prior to the enactment of that legislation cannot be sustained in law. In this regard, it needs to be observed that there is no indication to the effect that the enactment is retrospective in operation. It is only from the date on which the Act came into force, that no piece of land which was earmarked for agriculture, and is shown as such in the revenue records, can be put to non-agricultural use.

In case the land was already put to residential or other use, much before the said Act came into force, a permission under it cannot be insisted. This, however, is a matter which needs to be verified by the concerned authority. If the petitioners are able to prove that the land has been put to non-agricultural use much before the Act came into force, they cannot be required to obtain the permission under that Act.

For the foregoing reasons, the writ petitions are disposed of holding that

(a) It shall be competent for the Urban Development Authorities, or the Local Authorities, as the case may be, to insist on submission of clearance/permission under the 2006 Act as a condition precedent for releasing of layouts; and

(b) The land has been put to non-agricultural use before the 2006 Act came into force, such clearance/ permission shall not be insisted.”

53. The provisions of Andhra Pradesh Agricultural Land (conversion for non- agricultural purposes) Act, 2006 also prescribed the procedure for conversion of agricultural land into non-agricultural land. Being so, whenever the agricultural land to be treated as non-agricultural land, the same has to be converted in accordance with the provisions of Andhra Pradesh Agricultural Land (conversion for non-agricultural purposes) Act, 2006. Further, HADA was formed by the notification under Urban Area (Development) Act, 1975 with a view to promoting and securing planned development of the area in and around the proposed international Airport at Shamshabad.

The State Government have declared the areas covered by GO MS 352 (MA) dated 30.7.2001 fall under the jurisdiction of HADA which is a statutory body. HADA Board consists of Special Chief Secretary to Government, Transport, Roads and Buildings Department as the Chairman, the Principal Secretary to Government, Municipal Administration and Urban Development Department; the Managing Director of APIIC and the Vice Chairman, HUDA, as members. The Vice Chairman of HUDA is also the Vice Chairman of HADA. The jurisdiction of HADA is 458 sq. km and covers 89 revenue villages from 7 Mandals all falling in Rangareddy District.

If by GO cited supra the nature of land covered by this notification changes from agriculture into non-agriculture then there is no question of conversion of this land for non- agricultural purposes by the Revenue authorities concerned. To our understanding nature of land cannot be changed by this notification and the land owners are required to apply to the concerned Revenue authorities for the purpose of conversion of the agricultural land into non-agricultural land and there is no automatic conversion per se by this notification.

54. It is also an admitted position that mere inclusion of land in the special zone without any infrastructure development thereupon or without establishing and proving that the land was put into use for non-agricultural purposes does not and cannot convert the agricultural land into non-agricultural land. In the instant case, at the relevant point of sale of the land in question, the surrounding area was totally undeveloped and except mere future possibility to put the land into use for non-agricultural purposes would not change the character of the agricultural land into non-agricultural land at the relevant point of time when the land was sold by the assessee.

It is also an admitted position that the assessee had not applied for conversion of the land in question into non-agricultural purposes and no such permissions were obtained from the concerned authority. In the Revenue records, the land is classified as agricultural land and has not been changed from agricultural land to non-agricultural land at the time when the land was sold by the assessee. It is also not in dispute that there was no activity undertaken by the assessee of developing the land by plotting and providing roads and other facilities and there was no intention also on the part of the assessee to put the same for non-agricultural purposes.

No such finding has been given by the Department. No material or evidence in support of the fact that the assessee has put the land in use for non-agricultural purposes has been brought on record. The nature of the crop and the person who cultivated the land are duly mentioned at the relevant point of time when the lands were sold by the assessee and where nothing is brought on record to show that the land was put in use for non- agricultural purposes by the assessee. In view of the decision of the Hon’ble High Court in the case of Gopal C. Sharma vs. CIT (209 ITR 946) (Bom),

it is also clear that the profit motive of the assessee in selling the land without anything more by itself can never be decisive to say that the assessee used the land for non- agricultural purposes. We may also refer to a decision of the Hon’ble Supreme Court in the case of N. Srinivasa Rao vs. SpecialCourt (2006) 4 SCC 214 where it was observed that the fact that agricultural land in question is included in urban area without more, held not enough to conclude that the user of the same had been altered with passage of time. Thus, the fact that the land in question in the instant case is brought in special zone cannot be a determining factor by itself to say that the land was converted into use for non-agricultural purposes.

55. Recently the Karnataka High Court in the case of CIT vs. Madhukumar N. (HUF) (2012) 78 DTR (Kar) 391 held as follows:

9. An agricultural land in India is not a capital asset but becomes a capital asset if it is the land located under Section 2(14)(iii)(a) & (b) of the Act, Section 2(14) (iii) (a) of the Act covers a situation where the subject agricultural land is located within the limits of municipal corporation, notified area committee, town area committee, town committee, or cantonment committee and which has a population of not less than 10,000.

10. Section 2(14)(m)(b) of the Act covers the situation where the subject land is not only located within the distance of 8 kms from the local limits, which is covered by Clause (a) to section 2(14)(iii) of the Act, but also requires the fulfilment of the condition that the Central Government has issued a notification under this Clause for the purpose of including the area up to 8 kms, from the municipal limits, to render the land as a “Capital Asset.

11. In the present case, it is not in dispute that the subject land is not located within the limits of Dasarahalli City Municipal Council therefore, Clause (a) to section 2(14][iii] of the Act is not attracted.

12. However, though it is contended that it is located within 8 knits,, within the municipal limits of Dasarahalli City Municipal Council in the absence of any notification issued under Clause (b) to section 2(14)(iii) of the Act, it cannot be looked in as a capital asset within the meaning of Section 2(14)(iii)(b) of the Act also and therefore though the Tribunal may not have spelt out the reason as to why the subject land cannot be considered as a ‘capital asset’ be giving this very reason, we find the conclusion arrived at by the Tribunal is nevertheless the correct conclusion.”

56. Further the Kolkata Bench of the Tribunal in the case of DCIT vs. Arijit Mitra (48 SOT 544) (Kol) held as follows:

7. From the above, it is clear that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of such Municipalities or Cantonment Boards are covered by the amended definitions of ‘capital asset’, if such areas are, having regard to the extent of and scope for their urbanization and other relevant considerations, is notified by the Central Government in this behalf. Central Government in exercise of such powers has issued the above notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situation in rural areas, areas outside the Municipality or cantonment board etc.,

having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of ‘capital asset’. Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression ‘capital asset’, the agricultural land situated in rural areas continues to be excluded from that definition.

And as in the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Rajarhat Municipality and that also 2.5 KM away from the outer limits of the said Municipality, assessee’s land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. Accordingly, we quash the assessment order qua charging of capital gains on very jurisdiction of the issue is quashed. The cross objection of the assessee is allowed.”

57. It was held in the case of CIT vs. Manilal Somnath (106 ITR 917) as follows:

“Under the Income-tax Act of 1961, agricultural lend situated in India was excluded from the definition of ” capital asset” and any gain from the sale thereof was not to be included in the total income of an assessee tinder the head “capital gains”. In order to determine whether a particular land is agricultural land or not one has to first find out if it is being put to any use. If it is used for agricultural purposes there is a presumption that it is agricultural land.

If it is used for non-agricultural purposes the presumption is that it is non-agricultural land. This presumption arising from actual use can be rebutted by the presence of other factors. There may be cases where land which is admittedly non- agricultural is used temporarily for agricultural purposes. The determination of the question would, therefore, depend on the facts of each case.

‘The assessee, Hindu, undivided family, had obtained some land on a partition in 1939. From that time, up to the time of its sale, agricultural operations were carried on in the land. There was no regular road to the land and it was with the aid of a tractor that agricultural operations were being carried on. The land was included within a draft town planning scheme. The assessee got permission of the Collector to sell the land for residential purposes and sold it. On the question whether the land was agricultural land:

Held, that what had to be considered is not what the purchaser did with the land or the purchaser was supposed to do with the land, but what was the character of the land at the time when the sale took place. The fact that the land was within municipal limits or that it was included within a proposed town planning scheme was not by itself sufficient to rebut the presumption arising from actual use of the land. The land had been used for agricultural purposes for a long time and nothing had happened till the date of the sale to change that character of the land. The potential non- agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land at the date of the sale. The land in question was, therefore, agricultural land.

11. A careful reading of the aforecited extracted portion from the Order of the Tribunal, would make it clear that the Tribunal has held that whenever agricultural land is to be treated as non-agricultural, the same has to be converted in accordance with the provisions of A.P. Agricultural Land (Conversion for Non-Agricultural Purposes) Act, 2006. It has been further held that mere inclusion of the land in the special zone without any infrastructure development thereupon or without establishing and proving that the land was put into use for non-agricultural purposes, and mere future possibility to put the land into use for non-agricultural purposes, does not and cannot convert the agricultural land into non-agricultural land. Admittedly, in the present case, the land has not been converted to non-agricultural land under the provisions of A.P. Agricultural Land (Conversion for Non-Agricultural Purposes) Act, 2006.

It is also a fact on record as observed by the learned CIT(A) that the purchaser has admitted that the land has not been used for any development activity and the said land comes within the bio-conservation zone which restricts the user of the land only for agricultural or greenary purpose. In these circumstances, the conclusion arrived at by the revenue authorities that the land in question was sold for non-agricultural purposes is without any basis. Furthermore, so far as the Assessing Officer’s observation to the effect that HADA is a Municipality as defined in section 2(14)(iii)(a) of the Act, the Co-ordinate Bench held as under :

60. We find force in the argument of the AR that clarifying within the brackets in the section 2(14)(iii)(a) is for the apparent reason that the name of the local body varies based on the nature of the area for which it is constituted and also for the reason that there is a lack of uniformity all over India with reference to the nomenclature of the urban local authority. In fact, municipality is known by different names in various parts of the country. This fact is also evident fromArt.243Q of the Constitution of India, dealing with creation of municipalities. The term ‘municipality’ is not defined u/s 2(14) of the Act. However, the same is defined under article 243 P(e) of the Constitution of India, which is reproduced hereunder:

“243 P(e): “Municipality” means an institution of self- Government constituted under article 243Q. “

Since “Municipality” is defined to mean an institution constituted under Article 243Q, the same is extracted hereunder:

“243Q. Constitution of Municipalities.- (1) There shall be constituted in every State,-

(a) a Nagar Panchayat (by whatever name called) for a transitional area, that is to say, an area in transition from a rural area to an urban area;

(b) a Municipal Council for a smaller urban area; and

(c) a Municipal Corporation for a larger urban area, in accordance with the provisions of this Part:”

61. The constitution, composition, guidelines regarding elections, the eligibility and disqualification criteria to be elected as members, powers, authorities and responsibilities of municipalities etc., are contained under Part-IXA of the Indian Constitution and Art. 243Rtherein categorically states that all the members of the municipality shall be directly elected by the people of the respective territorial wards. The said article is extracted hereunder:

“243R. Composition of Municipalities.-

(1)Save as provided in clause (2), all the seats in a Municipality shall be filled by persons chosen by direct election from the territorial constituencies in the Municipal area and for this purpose each Municipal area shall be divided into territorial constituencies to be known as wards.

(2) The Legislature of a State may, by law, provide- (a) for the representation in a Municipality of- (i) persons having special knowledge or experience in Municipal administration; (ii) the members of the House of the People and the members

of the Legislative Assembly of the State representing constituencies which comprise wholly or partly the Municipal area;

(iii) the members of the Council of States and the members of the Legislative Council of the State registered as electors within the Municipal area;

(iv) the Chairpersons of the Committees constituted under clause (5) of article 243S:

Provided that the persons referred to in paragraph (i) shall not have the right to vote in the meetings of the Municipality;

(b) the manner of election of the Chairperson of a Municipality.”

Further, it is categorically provided that all the state laws dealing with the municipalities should be consistent with the provisions contained in Part- IXA.

62. We also perused the meaning of the term local authority as referred in section 10(20) of the Act.

(20) the income of a local authority which is chargeable under the head “Income from house property”, “Capital gains” or “Income from other sources” or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service [(not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area].

[Explanation. – For the purposes of this clause, the expression “local authority” means –

(i) Panchayat as referred to in clause (d) of article 243 of the Constitution; or

(ii) Municipality as referred to in clause (e) of article 243P of the Constitution; or

(iii) Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or

(iv) Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924);

63. Under the provisions of section 10(20) of the Income-tax Act, 1961, the income of a local authority which is chargeable under the head ‘Income from house property’, ‘Capital gains’ or ‘Income from other sources’ or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service not being water or electricity within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area, is exempt from income-tax.

The expression “local authority” is not defined in the Income-tax Act. Section 3(31) of the General Clauses Act, however, defines “local authority” as under: ‘Local authority’ shall mean a municipal committee, district board, body of port commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund. The test for determining whether a body is a local authority have been laid down in Union of India v. R.C. Jain‘s [1981] 2 SCR 854 (2 SCC 308) .

First, the authorities must have separate legal existence as corporate bodies. They must not be mere Governmental agencies but must be legally independent entities. Next, they must function in a defined area and must ordinarily, wholly or partly, directly or indirectly, be elected by the inhabitants of the area. Next they must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them.

The autonomy may not be complete and the degree of dependence may vary considerably but, an appreciable measure of the autonomy there must be. Next, they must be entrusted by statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services, etc. Broadly they may be entrusted with the performance of civic duties and functions which would otherwise be Governmental duties and functions.

Finally, they must have the power to raise funds for the furtherance of their activities and the fulfilment of their projects by levying taxes, rates, charges, or fees. This may be in addition to moneys provided by Government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the authority.

64.Thus, it was laid down by the Supreme Court in the case of Union of India vs. R.C.

Jain [(AIR) (1981) SC 951] the following five ingredients, which are required to be fulfilled cumulatively before an authority can be said to be a ‘local authority’, in the light of the definition of ‘local authority’ as given under section 3(31) of the General Clauses Act, 1897:

(1) The authority must have separate legal existence as a corporate body. It must be a legally independent entity.

(2) The body must function in a defined area and ordinarily, wholly or partly, directly or indirectly be elected by the inhabitants of the area. (3) The body must enjoy a certain degree of autonomy, with freedom to decide for itself questions of policy affecting the area administered by it.

(4) The body must be entrusted by statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services, etc. Broadly such body may be entrusted with the performance of civic duties and functions, which would otherwise be Governmental duties and functions. (5) The body must have the power to raise funds for the furtherance of their activities and the fulfilment of their projects by levying taxes, rates, charges, or fees. Essentially, control or management of the funds must vest in such body.

65. In the light of the above decision in the case of R.C. Jain (supra) we have to see the meaning of “Authority” as defined in section 2(b) of the Andhra Pradesh Urban Areas (Development) Act, 1975. It was mentioned in section 2(b) that “Authority” means an urban development constituted under subsection (1) of section 3 or a Special Development Authority constituted under subsection (1) of section 3A for Development Area under this Act. The HADA is constituted u/s. 3A of the Andhra Pradesh Urban Areas (Development) Act, 1975. By GO MS No. 35 MA dated 31.1.2002 is constituted by the AP State Government.

As per which the Special Chief Secretary to Government (Transport, Roads and Buildings Department) as Chairman, the Principal Secretary to Government (Municipal Administration and urban Development Department); the managing Director of APIIC, and the Vice chairman, HUDA as members.

The Vice-Chairman, HUDA is also the Vice-Chairman of HADA. Thus, all the members entrusted with carrying out the objects of the Authority were nominated by the Government of AP and none of them is directly elected member, which is against the provisions of Part- IXA of the Constitution of India read with those of AP Municipalities Act. As submitted by the AR that the above provisions of the Constitution leave no room for any doubt that ‘Municipality’ is a constitutional body concerning urban self government; the creation of which is mandatory.

The provisions governing the constitution, composition and functioning of municipalities are contained in part IX-A of the Constitution and the relevant laws laid down by the respective state governments, AP Municipalities Act,1965 in the instant case, should be in consistency with such provisions. The term ‘Municipality’ is defined u/s. 2(22) of AP Municipalities Act,1965 to mean a municipality of such grade as may be declared by the Government, from time to time, by notification in the Andhra Pradesh Gazette on the basis of income and such other criteria as may be prescribed.

Thus, in the state of Andhra Pradesh, a municipality has to be mandatorily constituted in terms of s. 3 of AP Municipalities Act,1965, as per the guidelines laid down in the constitution, and has to be so notified by the Government whereas setting up of a Development/ Special Area Authority is not mandatory. A state Government may decide to constitute such Authority for a specified purpose, depending on the specific requirements for which it is proposed to be set up, by way of a simple notification and the power to notify such Authority is drawn from an Act specially legislated for the said purpose. State Government is having power to regulate method of recruitment, conditions of service, etc, of officers so appointed u/s. 4 of the Andhra Pradesh Urban Areas (Development) Act, 1975.

The exercise of power by the Board so constituted by the State Government is not only subject to the provisions of the Andhra Pradesh Urban Areas (Development) Act, 1975 but also subject to the control of the State Government. Thus, the Board has to comply with such directions as may be issued to it by the State Government from time to time. The object and activities carried on by the HADA are also with reference to the said Act. The State Government will exercise superintendent and control over the HADA at all times. Thus, HADA is basically and essentially a creation of the Act of State Legislature consisting of persons appointed by the State Government on salary basis.

The Board Members are not elected by the people and there is no element of people choice being represented in any manner in the constitution of the Board. The Board functions strictly under the supervision and control of the State Government and does not hold or possess a “local fund”. Being so, HADA cannot be called as a local authority.

66. This is also evident from the Memorandum explaining the provisions of Finance Act, 1970, whereby s. 2(14) was amended so as to include the agricultural lands located within the jurisdiction of a municipality in the definition of the expression ‘Capital Asset’. The relevant portion of the said memorandum is reproduced hereunder:

“30. … The Finance Act, 1970 has, accordingly, amended the relevant provisions of the Income-tax Act so as to bring within the scope of taxation capital gains arising from the transfer of agricultural land situated in certain areas. For this purpose, the definition of the term “capital asset” in section 2(14) has been amended so as to exclude from its scope only agricultural land in India which is not situate in any area comprised within the jurisdiction of a municipality or cantonment board and which has a population of not less than ten thousand persons according to the last preceding census for which the relevant figures have been published before the first day of the previous year. The Central Government has been authorised to notify in the Official Gazette any area outside the limits of any municipality or cantonment board having a population of not less than ten thousand up to a maximum distance of 8 kilometres from such limits, for the purposes of this provision.

Such notification will be issued by the Central Government, having regard to the extent of, and scope for, urbanisation of such area, and, when any such area is notified by the Central Government, agricultural land situated within such area will stand included within the term “capital asset”. Agricultural land situated in rural areas, i.e., areas outside any municipality or cantonment board having a population of not less than ten thousand and also beyond the distance notified by the Central Government from the limits of any such municipality or cantonment board, will continue to be excluded from the term “capital asset”.

67. Further it is very clear that the area comprised in the jurisdiction of HADA was essentially rural in nature, the economy of which was predominantly agriculture based. Further, the GO makes it abundantly clear that HADA was entrusted with only the job of granting technical sanction or approval for any proposed construction or development in the area, in order to regulate and ensure planned development in and around the proposed airport and the role of concerned local authorities was not done away with. Thus, HADA is only entrusted with the responsibility of preparing draft Master Plans and granting technical approval for any proposed construction or development in its jurisdiction. It does not have any power or ability to collect taxes nor is it responsible for provision of civic amenities which would be within the exclusive domain of the local authorities.

68. Further a careful and comprehensive reading of S.8 and S.36 of Andhra Pradesh Urban Areas (development) Act, 1975 clearly suggests that HADA, being a Development/Special Area Authority constituted under the said Act, cannot be either equated with a distinct municipality or considered as a complete substitute of a municipality or any other local authority. S.8 provides that the Special Area Authority constituted under the Act may cover an area comprised in more than one local authority,

whether municipality or panchayat, and in such event makes it mandatory for such authority to consult the local authorities concerned while preparing Master/ Zonal Development plans both at initial stage and after preparation of draft plan, before submission to Government. Further, S.36 of the said Act, which is extracted hereunder, makes it abundantly clear that the Development/Special Area Authority created under the Act, by itself, would not constitute a distinct municipality or any other local authority.

“S.36. (1) Notwithstanding anything in any other law or regulation in force, where the government consider expedient for the effective functioning of the Authority, they may, by notification, suspend any of the powers of local authority relating to the control on development and use of land and buildings under the Hyderabad Municipal Corporations Act,1955; the Andhra Pradesh Municipalities Act,1965, the Andhra Pradesh Gram Panchayats Act,1964, the Andhra Pradesh Panchayat Samithis and Zilla Parishads Act,1959 and transfer such powers to the Authority.

(2) Where such powers are transferred to the Authority, the Authority shall be deemed to be the local authority concerned; the Chairman of the Authority shall be deemed to be the Standing Committee of the Municipal Corporation or theChairman of the Municipality or the Sarpanch of the Gram Panchayat or President of the Panchayat Samithi or Chairman of the Zilla Parishad as the case may be and the Vice-Chairman of the Authority shall be deemed to be the Executive Authority and the Authority shall strictly exercise the powers transferred to it under sub- section (1) within the area under the territorial jurisdiction of the local authority concerned. “

69. As per the above section, only in the event of suspension of any of the powers and functions of a local authority of any area and subsequent delegation thereof to a Special Area Authority, it would be deemed to be such local authority, to the limited extent of performing/exercising the functions/powers so entrusted. In the instant case, the village in which the agricultural land was located was comprised in the area within the jurisdiction of Gram Panchayat of Mankhal village and as such the Special Area Authority, being HADA, shall be deemed to be such Gram Panchayat, to the extent of execution of the delegated function of granting technical approval for constructions/ development of lay-outs.

70. Further, Hyderabad Airport Development Authority (HADA) has been constituted, under the provisions of the Andhra Pradesh Urban Areas (development) Act, 1975, as a Special Area Authority by the state Government, and notified as such vide G.O.Ms. No. 352, MA, dt. 30-07- 2001. It was neither constituted under AP Municipalities Act nor was it notified as a municipality by the state government. Further, the Development/ Special Area Authority can be dissolved, on achieving the purpose for which it is created, by way of a notification, as per S.60 of the Andhra Pradesh Urban Areas (development) Act, 1975, which is reproduced hereunder, whereas it is not possible in case of a municipality:

“S.60 (1) Where the government are satisfied that the purpose for which the Authority is constituted under this Act, has been substantially achieved so as to render the continued existence of the Authority, in the opinion of the Government, unnecessary, the Government may by notification, declare that the said Authority shall be dissolved with effect on and from such date as may be specified in the notification; and the Authority shall be deemed to be dissolved accordingly.”

71. The constitution and appointment of municipal authorities charged with the duty of carrying out the provisions of the Act were contained under Chapter-II of the AP Municipalities Act, which in turn are consistent with the provisions of Part-

IX-A of the Indian Constitution. As per the provisions of the said Act, all the members of the municipality shall be directly elected by the people of the respective territorial wards, whereas the Development/Special Area Authority may be headed by persons nominated for the purpose by the state government. This is to submit that the HADA Board consists of the Special Chief Secretary to Government, Transport, roads and buildings department as the Chairman, the Principal Secretary to Government, Municipal Administration and urban Development Department; the managing Director of APIIC, and the Vice chairman, HUDA as members. The Vice-Chairman, HUDA is also the Vice- Chairman of HADA.

Thus, all the members entrusted with carrying out the objects of the Authority were nominated by the Government of AP and none of them is directly elected member, which is against the provisions of Part-IXA of the Constitution of India read with those of AP Municipalities Act. The Hon’ble High Court of Kerala, while dealing with the similar issue, held, in the case ofCommissioner of Income-tax v. Murali Lodge 194 ITR 125, as under:

“But all local authorities cannot be called municipalities. Only those local authorities which have all the trappings of a municipality can be treated as a municipality within the meaning of the section. Therefore, to find a solution to the problematic dispute, we have to give a meaning to the word “municipality” which stands undefined in the Act. Generally understood, ‘municipality’ means a legally incorporated or duly authorised association of inhabitants of a limited area for local governmental or other public purposes. (Black’s Law Dictionary). The above definition more or less is reflected in the provisions contained in Chapter III of the Kerala Municipalities Act, 1960.

The council constituted under section 7 with the assistance of the standing committee of the council, chairman, commissioner, etc., will administer the provisions of the Act. The council consists of such number of members as are prescribed. They are called councillors. They are elected by the residents of the area coming within the jurisdiction of the municipality. The chairman and vice-chairman of the municipality are elected by the members of the council. The commissioner is appointed by the Government in consultation with the council. It is the duty of the commissioner to carry into effect the resolutions of the council unless it be that the said resolution is suspended or cancelled by the Government. The municipality contemplated under section 2(14)(iii) (a) must be one which satisfies the above requirements. All the local authorities included in the brackets must satisfy the above requirements to be known as a ‘municipality’…….

The Guruvayur township, constituted under the Guruvayur Township Act, considered in this backdrop, cannot be said to be a municipality. The Guruvayur township is not an autonomous body like a municipality. It is constituted by the Government by a notification issued under the Guruvayur Township Act. To put it differently, the members of the township committee are not elected representatives of the residents of the area”

72. Since the facts of the case are similar to those of the case cited above and the provisions of AP Municipalities Act, concerning the constitution and appointment of municipal authorities, are similar to those of the Kerala Municipalities Act, HADA cannot be treated as a ‘Municipality’ and as such the agricultural lands situated within the jurisdiction of HADA do not constitute capital asset.

73. A careful and comprehensive reading of 5.8 and 5.36 of Andhra Pradesh Urban Areas (development) Act, 1975 clearly suggests that a Development/Special Area Authority constituted under the said Act cannot be either equated with a distinct municipality or considered as a complete substitute of a municipality or any other local authority. S. 8 provides that the Special Area Authority constituted under the Act may cover an area comprised in more than one local authority, whether municipality or panchayat, and in such event makes it mandatory for such authority to consult the local authorities concerned while preparing Master/ Zonal Development plans both at initial stage and after preparation of draft plan, before submission to Government.

74. As per the above section, only in the event of suspension of any of the powers and functions of a local authority of any area and subsequent delegation thereof to a Special Area Authority, it would be deemed to be such local authority, to the limited extent of performing/exercising the functions/powers so entrusted.

In the instant case, the village in which the agricultural land was located was comprised in the area within the jurisdiction of Gram Panchayat of Mankhal village and as such the Special Area Authority, being HADA, shall be deemed to be such Gram Panchayat, to the extent of execution of the delegated functions, if any. As per Part-IX of the Indian Constitution, Panchayat refers to rural self government, as distinct from municipality, which refers to urban self-government and as such agricultural land located within the jurisdiction of a village panchayat is not covered by the definition of Capital Asset u/s 2(14).

75. It was held in the case of CIT vs. UP Forest Corporation (230 ITR 945) as follows:

“Under the provisions of section 10(20) of the Income-tax Act, 1961, the income of a local authority which is chargeable under the head ‘Income from house property’, ‘Capital gains’ or ‘Income from other sources’ or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service not being water or electricity within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area, is exempt from income-tax. The expression “local authority” is not defined in the Income-tax Act. 

Section 3(31) of the General Clauses Act, however, defines “local authority” as under: ‘Local authority’ shall mean a municipal committee, district board, body of port commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund. The test for determining whether a body is a local authority have been laid down in Union of India v. R.C. Jain‘s [1981] 2 SCR 854. First, the authorities must have separate legal existence as corporate bodies.

They must not be mere Governmental agencies but must be legally independent entities. Next, they must function in a defined area and must ordinarily, wholly or partly, directly or indirectly, be elected by the inhabitants of the area. Next they must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them.

The autonomy may not be complete and the degree of dependence may vary considerably but, an appreciable measure of the autonomy there must be. Next, they must be entrusted by statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services, etc.

Broadly they may be entrusted with the performance of civic duties and functions which would otherwise be Governmental duties and functions. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfilment of their projects by levying taxes, rates, charges, or fees. This may be in addition to moneys provided by Government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the authority.

Held, allowing the appeals, ii) that the assessee was not a local authority within the meaning of section 3(31) of the General Clauses Act. Firstly, the members of the respondent Corporation are not wholly or partly, directly or indirectly, elected by the inhabitants of the area. The second essential attribute, which is lacking in the present case, is that the respondent does not have the functions and duties which are usually entrusted to the municipal bodies such as providing civic amenities to the inhabitants of the locality like health, education, town planning, markets, transportation etc. Finally, and which is more important, the respondent does not have the power to raise funds by levying taxes, rates, charges or fees.

In the case of the respondent-Corporation, the Act does not enable it to levy any tax, cess or fee. It is the income from the sale of the forest produce which goes to augment its funds. It has no power under the Act of compulsory exaction such as taxes, fees, rate or charges. Like any commercial organisation it makes profit from sale of forest produce and it has been given the power to raise loans. Whereas municipal or local funds are required to be spent for providing civic amenities, there is no such obligation on the respondent to do so. Merely because section 17 of the U. P. Forest Corporation Act states that the fund of the Corporation “shall be a local fund” that would not make it a local fund (IS contemplated by 3(31) of the General Clauses Act. Therefore, the High Court was not correct in coming to the conclusion that the respondent was a local authority and entitled to exemption under section 10(20) of the Act.

76. Further it is nobody’s case that the property falls within any area which is comprised within the jurisdiction of a municipality or cantonment board or which has a population of not less than 10,000 according to the last preceding Census of which the relevant figures have been published before the first day of the previous year. In other words, the land does not fall in sub-clause (a) of section 2(14)(iii) of the Act as the land is outside of any municipality including GHMC.

Further we have to see whether the land falls in clause (b) of section 2(14)(iii). This section prescribes that any area within such distance, not being more than 8 km from the local limit of any municipality or cantonment board as referred to in sub-clause (a) of section 2(14)(iii) of the Act, as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.

77. We have carefully gone through the notification issued by the Central Government u/s. 2(1A)(c) proviso (ii)(B) and 2(14)(3b) vide No. 9447 (F. No. 164/(3)/87/ITA-I) dated 6th January, 1994 as amended by notification No. 11186 dated 28th December, 1999. In the schedule annexed to the notification dated 6.1.1994, Entry No. 17 is relating to Hyderabad wherein mentioned that the areas up to a distance of 8 km from the municipal limits in all directions.

In the notification 11186 dated 28.12.1999 there is no entry relating to Hyderabad. It is clear from these notifications that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of Hyderabad Municipality (GHMC) is covered by the amended definitions of ‘capital asset’.

Central Government in exercise of such powers has issued the above notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situation in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of ‘capital asset’.

Accordingly, in view of sub- clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression ‘capital asset’, the agricultural land situated in rural areas continues to be excluded from that definition. And as in the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Hyderabad Municipality and that also 8 km away from the outer limits of this Municipality, assessee’s land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section.

Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. This is supported by the order of Kolkata Bench of this Tribunal in the case of Arijit Mitra (cited supra), Harish V. Milani (supra) and M.S. Srinivas Naicker vs. ITO (292 ITR 481) (Mad). By borrowing the meaning from the above section, we are not able to appreciate that the land falls within the territorial limit of any municipality without notification of Central Government as held by the Karnataka High Court in the case of Madhukumar N. (HUF) (cited supra).

78. Further, the Visakhapatnam Bench in the case of Tadavarthy Kanakavalli w/o. T. Dasaratha Rama Rao in ITA No. 74/Vizag/2011 and CO No. 3/Vizag/2011 considered the similar issue of taxability of agricultural land on sale covered by this Notification No. GO MS 352 (MA) dated 30.7.2001. Vide order dated 4.7.2011 the Tribunal held in para 4 as follows:

“4. The grounds numbered as 1, 2 and 7 in the appeal of the revenue are general in nature and hence require no adjudication. In the grounds numbered as 5 and 6, the revenue is raising a new claim that the impugned lands fall within the limits of area declared as special development area by G.O. Ms. No. 352, MA, dtd. 30-7-2001 issued by the Municipal administration and urban development, Government of Andhra Pradesh.

However, we notice that this was not the case of the assessing officer for bringing the impugned gain on sale of land. Secondly, it was not shown that the authority concerned with the development of the areas is a municipality as defined u/s 2(14) of the Act.

As per the provisions of sec. 2(14)(iii) of the Act, the agricultural land will fall in the definition of ‘Capital asset’ only if it is situate in any area which is comprised within the jurisdiction of a municipality (whether known as municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name)…. In view of the above cited reasons, we do not find any merit in the said grounds and accordingly dismiss them.”

79. Further, we make it clear that when the land which does not fall under the provisions of section 2(14)(iii) of the IT Act and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in Revenue records, the land is not subjected to any conversion as non-agricultural land by the assessee or any other concerned person, transfers such agricultural land as it is and where it is basis, and also it is not the transfer of any share in the right in the development of such land through any joint development agreement, in such circumstances, in our opinion, such transfer like the case before us cannot be considered as a transfer of capital asset.

12. The aforesaid decision of the Coordinate Bench was challenged by the department before the Hon’ble A.P. High Court. While affirming the decision of the Co-ordinate Bench, the Hon’ble Jurisdictional High Court in I.T.T.A. No. 297 of 2013 dated 17.07.2013 has held as under :

“The learned Tribunal on fact, found that the land in question at the `time of transfer did not lose the character of agricultural one. Further, it was held on fact that the Hyderabad Airport Development Authority (HADA) is not a local body. It was further held that the land in question was not a capital asset as defined under section 2(14)(iii) of the Act.

Section 2(14)(iii)(a) and (b) reads as follows :

“(iii) agricultural land in India not being, land situate –

(a) In any area, which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or

(b) In any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.

Hyderabad Airport Development Authority, is therefore, not a Body within the meaning of clauses (a) and (b) of the said Section. Therefore, the learned Tribunal has held that the proceeds of sale of agricultural land do not form capital gain, as they do not relate to capital asset. We are of the view that the Tribunal has come to the correct conclusion. There is no element of law involved in this appeal, for which, decision of this Court is required.”

13. The ratio laid down by the Co-ordinate Bench in the case of Smt. T.

Urmila (supra), clearly applies to the facts of the present case. In aforesaid view of the matter, we respectfully following the decision of the Co-ordinate Bench in the case of Smt. T. Urmila (supra) hold that the land sold by the assessee being agriculture in nature cannot be considered to be a capital asset within the meaning of section 2(14) of the Act and accordingly. No capital gains can be computed on the sale consideration received by the assessee on sale of such land. We, therefore, set aside the Order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs. 1,58,04,630/- computed as long term capital gain.

14. In ground No.3, the assessee has challenged the Orders of the revenue authorities. In treating the agricultural income shown by the assessee as income from other sources. On perusal of the Orders of the CIT(A). It is clear that she has held the agricultural income to be income from other sources. Mainly relying upon the reasoning that the land in question is not an agricultural land. However, in view of our finding while deciding ground No.2. And considering the fact that the assessee had regularly been showing income. From agriculture in the return filed in the preceding assessment years.

We do not find any reason to treat the income shown from agriculture as income from other sources. We, therefore, allow this ground raised by the assessee by holding that the income of Rs. 30,000/- shown by the assessee has to be treated as income from agriculture.

15. In the result, appeal of the assessee is allowed.

Order pronounced in the open Court on 30.08.2013.

Sd/- Sd/- (CHANDRA POOJARI) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Date 30 t h August, 2013. VBP/- Copy to

1. Rajender Pershad Tejprakash, 22-6-85, Machilikaman, Hyderabad PAN ABIPT3968M

2. Income Tax Officer, Ward 9 (2), Hyderabad

3. CIT(A)-VI, 6A, I.T. Towers, A.C. Guards, Hyderabad – 500 004.

4. CIT-VI, Hyderabad

5. DR “A” Bench, ITAT, Hyderabad