SUB-CLAUSE (iii)-AGRICULTURAL LAND
Section 2(4A)(iii) of the 1922 Act excluded from the ambit of “capital asset”, any land from which income derived is agricultural income. The term “agricultural income” was defined in section 2(1) of the said Act. Thus the statutory criterion prescribed for exclusion of the land was nature of income derived from the land. The situation of land, whether in India or outside India, was not relevant under said Act and deriving of agricultural income was the relevant factor [See Tea Estates India Pvt. Ltd. vs. CIT 1976 CTR (SC) 256 : (1976) 103 ITR 785 (SC) : TC20R.498]. On the other hand, under section 2(14)(iii) of the 1961 Act, as originally enacted, exclusion is confined to land situated in India and the criterion is whether said land is “agricultural land”. Agricultural land situate outside India would be capital asset.
As observed in Shivshankarlal vs. CIT (1974) 94 ITR 433 (Del) : TC20R.499, the change in language is not of any special significance because under both the Acts, there are common tests to determine whether a particular land is agricultural land and hence even under the 1961 Act in order to determine whether particular land is agricultural land, the question whether income derived was “agricultural income” as defined in the Act would be relevant and the use to which the land is put would be a very relevant factor to be considered for determining whether it is an agricultural land.
The tests laid down for determining what constituted agricultural land under section 2(e) of the WT Act, 1957, apply also for determining what is agricultural land under section 2(14)(iii) of the IT Act, 1961 [Ranchhodbhai Bhaijibhai Patel vs. CIT (1971) 81 ITR 446 (Guj) : TC20R.514]. Under the 1961 Act if a land is used for cultivation, it would be agricultural land irrespective of the fact whether any agricultural income is derived or not [CIT vs. Sulton & Sons Ltd. (1981) 127 ITR 57 (Cal) : TC20R.523]. Even under the 1922 Act, if the land did not yield agricultural income for some temporary period for reasons beyond the control of assessee, it did not lose exemption [CIT vs. All India Tea and Trading Co. Ltd. (1978) 117 ITR 525 (Cal) : TC20R.433].
In CIT vs. Minguel Chandra Pais & Anr. (2006) 200 CTR (Bom) 152 it was held that land classified as agricultural land in land records and subjected to land revenue and treated as agricultural land by Land Acquisition Officer when part of it was acquired was agricultural land.
The expression “agricultural land” has given rise to considerable judicial controversy. Various criterions have been laid down in judicial decisions and it has been emphasised again and again that they are not exhaustive but only indicative and ultimate decision would rest on all the varying circumstances taken together in proper perspective.
(ii) Amendment by Finance Act, 1970-Agricultural lands in municipal areas and outskirts
Upto asst. yr. 1969-70, the exclusion from capital asset under sub-cl. (iii) of section 2(14) was in respect of “agricultural land in India”. This exclusion was narrowed down from asst. yr. 1970-71 as a result of substitution of new sub-cl. (iii) from asst. yr. 1970-71 by the Finance Act, 1970. As a result of this substitution, all agricultural lands in India are no longer outside the purview of “capital asset”. Only those agricultural lands in India are outside the purview of “capital asset” as do not fall either under paragraph (a) or paragraph (b) of sub-cl. (iii) of section 2(14). In other words, out of agricultural lands in India, lands falling in these two paragraphs would fall within the capital assets.
These lands are (a) agricultural land situate within the jurisdiction of a municipality or a cantonment board and which has a population of not less than ten thousand according to last preceding census of which the relevant figures have been published before the first day of the previous year. (The municipality referredto here is a body whether known as municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name); (b) agricultural land situate in any area within such distance, not more than eight kilometres, from the local limits of any municipality (by whatever name called) or cantonment board as the Central Government may specify by a notification in the Official Gazettee. (The Central Government in specifying this area, has to take into account the extent of and scope for urbanisation of that area and other relevant considerations).
Thus as far as the lands situated within the jurisdiction of municipality or cantonment board are concerned, all of them whether agricultural or not would now come within the ambit of capital assets. [See CIT vs. Smt. Parkash Lata Goel (2002) 177 CTR (P&H) 357 in which, following decisions in Tuhi Ram vs. Land Acquisition Collector & Anr. (1992) 105 CTR (P&H) 378 : (1993) 199 ITR 490 (P&H) : TC 20R.585, Union of India vs. S. Muthyam Reddy (1999) 156 CTR (SC) 361 : (1999) 240 ITR 341 (SC)] it was held that capital gains arising from transfer of agricultural land located within the municipal limit is not exempt from tax.
See also CIT vs. Laxman (2002) 178 CTR (Del) 118 in which it was held that capital gains arising from the transfer of agricultural land in a village in Delhi situated within the jurisdiction of a municipality is chargeable to tax. See also CIT vs. Surjan Singh & Ors. (2002) 178 CTR (Del) 547 in which decisions in S. Hidhayathullah Sahib vs. CIT (1985) 44 CTR (Mad) 178 : (1986) 158 ITR 20 (Mad), G.M. Omer Khan vs. Addl. CIT (1992) 106 CTR (SC) 288 : (1992) 196 ITR 269 (SC), CIT vs. Pyare Lal (1999) 151 CTR (Del) 310 : (1998) 231 ITR 785 (Del) and CIT vs. Deep Chand Etc. (2002) 176 CTR (Del) 239 : (2002) 257 ITR 756 (Del) were followed and it was held that it is the population of the municipality as a whole and not any part area of it that has to be taken into account for the purpose of s. 2(14)(iii)(a) to determine whether the property in a particular area is exigible to capital gains. Similarly all such lands situated within specified distance, as is notified, in local limits of municipality or cantonment board would also come within the ambit of capital assets. The agricultural lands situated in “rural” area alone would stand excluded from the category of capital assets. It has been held in CIT vs. Bolla Ramaiah & Ors. (1988) 74 CTR (AP) 64 : (1988) 174 ITR 154 (AP) : TC20R.529A that being situate within municipal limits or within eight kilometres of the municipal limits (as may have been specified), the lands would constitute capital assets and it was unnecessary to enquire whether they were agricultural lands or not. This is because even if they are agricultural land they would still be regarded as capital assets on account of their situation within the above referred limits
[See also CIT vs. Thomas Kurien (1992) 103 CTR (Ker) 300 : (1992) 195 ITR 531 (Ker) : TC20R.534 and CIT vs. Shree Hanuman Sugar and Industries Ltd. (1992) 195 ITR 625 (Cal) : TC20R.535, CIT vs. Ravinder Kumar (2002) 174 CTR (P&H) 357 in which decision in Tuhi Ram vs. Land Acquisition Collector & Anr. (1992) 105 CTR (P&H) 378 : (1993) 199 ITR 490 (P&H) : TC 20R.585 and Union of India & Ors. vs. S. Muthyam Reddy (1999) 156 CTR (SC) 361 : (1999) 240 ITR 341 (SC) were followed. CIT vs. Hatinder Kumar (2002) 174 CTR (P&H) 358]. However, since in the Notification, dt. 6th Feb., 1973, Puri town has not been specified transfer of agricultural lands situate in outskrit of Puri town would not attract provisions of section 45 [CIT vs. Gouri Shankar Agarwalla (1993) 110 CTR (Ori) 265 : (1993) 201 ITR 550 (Ori) : TC20R.525]. Further, when the agricultural land was in fact sold in 1970 or 1971 and sale deed was also registered in 1971, but the Govt. notification was issued on 6th Feb., 1973, the land could not be held to be capital asset and no capital gains under chargeable [CIT vs. Jitendra Ramniklal (1986) 162 ITR 371 (Guj) : TC20R.573 and CIT vs. Smt. Mamta Narottamdas (1986) 57 CTR (Guj) 62 : (1986) 162 ITR 365 (Guj) : TC20R.1175].
In CIT vs. P. Balasubramaniam (2000) 241 ITR 790 (Mad), the matter was remanded, observing that no material, worth the name is available, relatable to the situation of the so-called agricultural land, either within the municipal area or a cantonment having a population of not less than ten thousand or in any area not more than eight kilometres of any municipality or cantonment board in relation to which the Central Government has specified in that behalf by any notification in the Official Gazette. Without such factual matrix, it is not possible to decide as to whether the sale value of the so-called agricultural land is liable to be taxed, on capital gains.
It is to be noted that exemption of agricultural land in India from scope of levy of tax on capital gains was not due to any bar in the Constitution on the competence of the Parliament to legislate for such levy. Such exemption had only a historical origin. Due to progress of urbanisation and industrialisation, agricultural land situated in municipal and other urban areas was essentially similar to non-agricultural land in its potentialities for use. This was the reason for amendment in section 2(14)(iii) of 1961 Act for bringing such agricultural land within the sweep of capital asset. The reasons for amendment made by the Finance Act, 1970 are explained in Circular No. 45, dt. 2nd Sept., 1970 TC20S.1251.
(iii) Population of ten thousand
Several constituent parts of a municipality are often known as wards, villages, etc. and what is to be seen under the amended provisions is not whether population of such village is less or more than ten thousand but whether the population of municipality or cantonment board as a whole was less or more than ten thousand. If such population is more than ten thousand, the agricultural land situated in any ward or village forming part of the municipality or cantonment board would be “capital” asset and would not enjoy exemption
[Addl. CIT vs. G.M. Omarkhan (1979) 116 ITR 950 (AP) : TC20R.539 and S. Hidhayathullah Sahib vs. CIT (1985) 44 CTR (Mad) 178 : (1986) 158 ITR 20 (Mad) : TC20R.542]. The first decision is affirmed in appeal and the second has been approved by the Supreme Court in G.M. Omar Khan vs. Addl. CIT (1992) 106 CTR (SC) 288 : (1992) 196 ITR 269 (SC) : TC20R.536. In CIT vs. M.L. Mahajan (2002) 175 CTR (SC) 298 : (2002) 255 ITR 272 (SC) the Supreme Court, relying an earlier decision in Singhai Rakesh Kumar vs. Union of India (2000) 164 CTR (SC) 483 : (2001) 247 ITR 150 (SC), held that capital gains arising from sale of agricultural land situate within municipal limits were taxable under s. 45 r/w s. 2(24)(iii) of the Act. See also CIT vs. Deep Chand (2002) 176 CTR (Del) 239.
The decision of the Supreme Court in G.M. Omar Khan vs. Addl. CIT (1992) 106 CTR (SC) 288 : (1992) 196 ITR 269 (SC) : TC20R.536 has been followed in CIT vs. Pyare Lal (1998) 231 ITR 785 (Del). See also CIT vs. Shiv Chand Satnam Paul (1997) 142 CTR (P&H) 441.
The word “municipality” has not been defined in the Act. Municipality would generally mean a legally incorporated or duly authorised association of inhabitants of a limited area for local Government or other public purposes. The language employed in section 2(14) makes it clear that the intention of the legislature is not to treat every local authority as a municipality. Only those local authorities which have trappings of a municipality can be said to be within the meaning of was held in this case that Guruvayar Township was not section [CIT vs. Murari Lodge (1991) 97 CTR (Ker) 72 : (1992) 194 ITR 125 (Ker) : TC20R.543]. On the above principle it was held in this case that Guruvayur Township was not a municipality in view of the fact that it was not an autonomous body like a municipality and had been constituted under a special Act and members of Township Committee were not elected representatives of the residents of the area. In CIT vs. P.J. Thomas (1995) 211 ITR 897 (Mad) : TC20R.574, it has been held that a ‘Panchayat’ is not a ‘municipality’, and therefore the agricultural land situated within the limits of a ‘Panchayat’ is not capital asset.
In CIT vs. Shiv Chand Satnam Paul (1997) 142 CTR (P&H) 441, the land was situated within the municipal limit and the High Court write answering the question in favour of Revenue directed the Tribunal to satisfy itself regarding the remaining two ingredients mentioned in s. 2(14)(iii)(a) regarding population not being less than ten thousand according to the last preceding census of which the relevant figures had been published before the first day of the previous year relatable to the assessment year in question. If these two ingredients are satisfied, then the assesse shall be liable to pay capital gains tax and not otherwise.
Agricultural land situated in an area comprised within the jurisdiction of municipality of Delhi having a population of over 10,000 as also within the jurisdiction of Gaon Sabha of Nangal Dewat having population of less than 10,000 was liable to be treated as agricultural land within the meaning of s. 2(14)(iii). [CIT vs. Sheoram (2001) 169 CTR (Del) 180].
Section 2(14)(iii)(a) of IT Act was applicable to rural areas of Union Territory of Delhi and hence capital gain arising on transfer of such agricultural land was chargeable to tax [CIT vs. Ranjit Singh & Ors. (2004) 265 ITR 680 (Del)]
(iv) Constitutional validity of amendments in section 2(14)(iii)
There was difference of opinion amongst High Courts on the point whether amendment by Finance Act, 1970 was intra vires.
(a) Provisions held to be valid
The Constitutional validity of amendment in section 2(14)(iii) was challenged in Ambalal Mangilal vs. Union of India (1975) 98 ITR 237 (Guj) : TC20R.547 on two grounds; the first was that it was not within the legislative competence of the Parliament to enact section 2(14)(iii) as amended and the second was that at any rate the amended provision was violative of Art. 14 of the Constitution. As regards the first ground, the High Court referred to Entry 46 in List II, Seventh Schedule (State list)which mentions “Taxes on agricultural income” and Entry 82 in List I, Seventh Schedule (Union list) which mentions “Taxes on income other than agricultural income” and observed that in view of Article 366, “agricultural income” in those Entries would have the same meaning as is given in the IT
Act, 1961 and when the meaning given in amended section 2(1) [now section 2(1A)] was considered, profits and gains arising out of sale of agricultural land would not be “agricultural income” and hence would not fall under Entry 46 or any other Entry in State List regarding which only State Legislature would have exclusive power to legislate but would be a tax on income other than agricultural income and hence would fall under Entry 82 List I within the exclusive competence of the Parliament. As regards the second ground, it was observed that it is only when the same class of property similarly situated is differently dealt with that question of violation of Art. 14 would apply and that in the instant cases what is sought to be done by impugned provision in section 2(14)(iii) is to provide for classification between land in rural areas and land within the area of municipalities and adjacent areas and the whole idea is that lands in the close vicinity of urban areas, (though agricultural operations for the time being may be carried on such lands), stand in a different category from land in villages where similar agricultural operations are being carried on and though the property is similar or same class of property it is not similarly situated and hence Art. 14 would not be attracted.
This view was accepted by Karnataka High Court in B.S. Jaychandra vs. ITO (1986) 54 CTR (Kar) 342 : (1986) 161 ITR 190 (Kar) : TC20R.558 and similar view has been taken in CIT vs. B.S. Rajendrappa (1987) 59 CTR (Kar) 47 : (1986) 162 ITR 666 (Kar) : TC20R.572A; CIT vs. Smt. T.K. Sarala Devi (1986) 63 CTR (Ker) 310 : (1987) 167 ITR 136 (Ker) : TC20R.576; Venkatesan vs. CIT (1983) 144 ITR 886 (Mad) : TC20R.581; Jagwansh Kumar vs. Union of India (1987) 59 CTR (All) 140 : (1987) 167 ITR 283 (All) : TC20R.584; Tuhiram vs. Land Acquisition Officer & Anr. (1992) 105 CTR (P&H) 378 : (1993) 199 ITR 490 (P&H) : TC20R.585; Vineet Khanna vs. WTO (1993) 199 ITR 660 (P&H); CIT vs. S. Sivaramakrishnan (1992) 106 CTR (Ker) 319 : (1993) 200 ITR 418 (Ker) : TC20R.600; CIT vs. Thomas Kurien (1992) 103 CTR (Ker) 300 : (1992) 195 ITR 531 (Ker) : TC20R.534; CIT vs. Glory Paul (1990) 186 ITR 496 (Ker) : TC20R.601; CIT vs. Muledath Mohmmed (1989) 186 ITR 498 (Ker) : TC20R.602; CIT vs. A.S. Iqbal (1989) 186 ITR 499 (Ker) : TC20R.602A; CIT vs. George Verghese (1990) 186 ITR 736 (Ker) : TC20R.602B; CIT vs. Mrs. Teresa Joseph (1991) 189 ITR 627 (Ker) : TC20R.603A; CIT vs. K. Damodaran Pillai (1991) 189 ITR 414 (Ker) : TC20R.603; A.S. Guna Shenoy (HUF) vs. CIT & Ors. (1991) 191 ITR 63 (Ker) : TC20R.604.
The Madhya Pradesh High Court has also held in Singhai Rakesh Kumar vs. Union of India & Ors. (1996) 134 CTR (MP) 280 : (1997) 227 ITR 81 (MP) that under Art. 366, the definition of agricultural income as given in the IT Act is adopted in the Constitution and the Parliament is competent to make suitable amendments in the definition of agricultural income-Further, what is exempt as agricultural income is only income from agricultural operations and not from sale of agricultural land. This was followed in CIT vs. Singhai Rakesh Kumar (1996) 134 CTR (MP) 287.
See also CIT vs. P. Krishnarjunan (1996) 135 CTR (Ker) 374 : (1997) 225 ITR 510 (Ker), CIT vs. Shiv Chand Satnam Paul (1997) 142 CTR (P&H) 441, CIT vs. M. Subaida Beevi (1996) 131 CTR (Ker) 107. Refer also CIT vs. Unnikrishnan (1998) 229 ITR 574 (Ker) and CIT vs. Narayana Murthy (1998) 145 CTR (AP) 186, CIT vs. Smt. Subhlata (1998) 144 CTR (P&H) 73, CIT vs. Jagdish Singh (1998) 144 CTR (P&H) 72, CIT vs. Gurcharan Singh & Sons (1998) 144 CTR (P&H) 76 and CIT vs. Daulat Ram Chhog Mal (1998) 148 CTR (P&H) 387.
(b) Reading down the amended provision-Bombay High Court view
However, a different view has been taken by the Bombay High Court in Manubhai Sheth vs. N.D. Nirgudkar, Second ITO (1981) 22 CTR (Bom) 41 : (1981) 128 ITR 87 (Bom) : TC20R.604A, in which it has been held that the capital gains on sale of agricultural land would be “rent or revenue derived from land” and would thus fall within the ambit of agricultural income under section 2(1)(a) and hence Parliament could not, under Entry 82 List I which empowers the Parliament to legislate in respect of “taxes on income other than agricultural income”,
levy tax on transfer of land situate in India and used for agricultural purposes and hence scope of sub-cl. (iii) cl. 14 of section 2 (as amended) should be read down so as not to operate in respect of such land with the result that the clause would be rendered otiose in respect of land used for agricultural purposes in urban areas and not in respect of land not used for agricultural purposes. There is difference between “agricultural land” and “land used for agricultural purposes”.
All lands used for agricultural purposes would be agricultural lands but all agricultural lands would not necessarily be used for agricultural purposes at a given point of time. It is possible to use agricultural land for non-agricultural purposes also and often it is so used. Hence, according to this decision sub-cl. (iii) should be so read that lands used for agricultural purposes, even when they are situated within areas mentioned in paragraphs (a) or (b) of sub-cl. (iii) would not be regarded as capital assets, transfer of which would give rise to capital gains tax under section 45 but would be regarded as assets exempted from the purview of “capital assets” and it is only agricultural lands not used for agricultural purposes and situated in the areas mentioned above which would come within the ambit of capital gains. It was further held therein that section 2(14)(iii) when read in that manner was not beyond legislative competence of of Parliament and it was not a piece of colourable legislation and it was not void either on the ground of infringing Art. 14 of the Constitution or on the ground that it delegates to the Executive authority unguided and excessive legislative power. It was also held that tax on profits and gains arising on transfer of agricultural land in India was not a tax on land but a tax on income and hence it was not within exclusive power of State Legislature but was within exclusive power Parliament. This decision was followed in Nadirshah Rustamji Mulla vs. ITO (1985) 154 ITR 629 (Bom) : TC20R.644; Sulekha Sandip Parikh vs. ITO (1986) 52 CTR (Bom) 82 : (1986) 159 ITR 775 (Bom) : TC20R.645; J. Raghottama Reddy vs. ITO (1988) 68 CTR (AP) 99 : (1988) 169 ITR 174 (AP) : TC20R.646 and CIT vs. Dhable, Bobde, Parose, Kale, Lute & Choudhary (1992) 202 ITR 98 (Bom) : TC20R.541.
(c) Supersession of Bombay High Court view by retrospective amendment by Finance Act, 1989
It may be mentioned here that in order to supersede the view taken in Manubhai A. Sheth vs. N.D. Nirgudkar, ITO (1981) 22 CTR (Bom) 41 : (1981) 128 ITR 87 (Bom) : TC20R.604A an Explanation was added by the Finance Act, 1989 with retrospective effect from 1st April, 1970. By this Explanation it was declared (for removal of doubts) that the revenue derived from land shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-cl. (iii) of cl. (14) of section 2. Thus the only ground on which Bombay High Court had held in the case of Manubhai Sheth that amended provisions in section 2(14)(iii) should be read down so as not to include land used for agricultural purposes within the ambit of section 2(14) although such land was situate in urban areas mentioned in items (a) and (b) of section 2(14)(iii) was statutorily removed with the result that decision of Bombay High Court was rendered ineffective. After the insertion of this Explanation an application for reference came for consideration before Bombay High Court in CIT vs. Mrs. Kamla S. Asrani (1991) 93 CTR (Bom) 36 : (1991) 189 ITR 359 (Bom), seeking in substance (though not in form) reference of the question whether the Tribunal was justified in holding that land used for agricultural purposes situate within local limits of a municipal corporation would not come within the ambit of capital asset under section 2(14) on the basis of decision in the case of Manubhai Sheth and the High Court took into account the above Explanation which came into existence after the Tribunal had rejected the application for reference under section 256(1) on the ground that matter was governed by decision of jurisdictional High Court, and granted reference and directed the Tribunal to refer the question.
The Rajasthan High Court in CIT vs. Gorja Devi Lila (1995) 129 CTR (Raj) 395 : (1995) 216 ITR 638 (Raj) has held that in view insertion of Expln. to s. 2(1A) with retrospective effect from 1st April, 1970, capital gains tax is leviable on the sale of garden land situated within the municipal limits of a town. The decision in Munabhai A. Sheth & Ors. vs. N.D. Nirgudkar, ITO (1991) 191 ITR 63 (Ker) : TC20R.604 was held to be no longer a good law.
In DLF United Ltd. vs. (1995) 129 CTR (Del) 33 : (1996) 217 ITR 333 (Del), the Delhi High Court has held that Expln. to s. 2(1A) inserted by Finance Act, 1989, with retrospective effect from 1st April, 1970, cannot have further retrospective effect and, therefore, has no relevance and is not applicable to asst. yrs. 1967-68, 1968-69 and 1969-70.
The Supreme Court has now held in Union of India vs. S. Muthyam Reddy (1999) 156 CTR (SC) 361 : (1999) 240 ITR 341 (SC) that Expln. to s. 2(1A) inserted retrospectively w.e.f. 1st April, 1970 clearly declares that the revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in s. 2(14)(iii)(a) or (b). Therefore, income derived from sale of such agricultural lands cannot be treated as ‘agricultural income’ and is subject to tax as capital gains. The decision in J. Raghottama Reddy vs. ITO/S. Muthyam Reddy vs. ITO (1988) 68 CTR (AP) 99 : (1988) 169 ITR 174 (AP) : TC20R.646 was thus set aside by the Supreme Court. Inasmuch as there was no challenge to the validity of the Expln. to s. 2(1A) inserted into the Act by Finance Act, 1989, the Court did not and could not examine the correctness of the said submission.
(cc) Constitutional validity of the retrospective insertion of Expln. to s. 2(1A)
The Madhya Pradesh High Court has up held the constitutional validity of retrospective insertion of Expln. to s. 2(1A) in Singhai Rakesh Kumar vs. Union of India & Ors. (1996) 134 CTR (MP) 280 : (1997) 227 ITR 81 (MP). According to the Court under Art. 366(1), the Constitution has adopted the definition of ‘agricultural income’ as has been defined in the Indian IT Act. Therefore, the amendment which is made by the Parliament in the IT Act by inserting the Explanation is within the competence of the Parliament and by no stretch of imagination,
it can be said that such amendment could not be inserted. It is recognised that whatsoever definition has been given in the IT Act shall be deemed to have been adopted under the Constitution also. The agricultural income which has been defined in the IT Act does not include any other income than the income derived from the agricultural operation or rent or revenue from the land and not from the sale of the land. Therefore, the Parliament is competent under Entry 82, List I of Seventh Schedule to legislate any amendment to the IT Act.
The said decision of M.P. High Court has been affirmed in appeal by the Supreme Court in Singhai Rakesh Kumar vs. Union of India & Ors. (2000) 164 CTR (SC) 483 in which it was held that in view of amendments of cls. (1A) and (14) of s. 2 made w.e.f. 1st April, 1970, capital gains arising from the sale of agricultural lands within municipal area are liable to capital gains tax. It was observed in this decision as follows : ‘Agricultural income’ under cl. (1) of Art. 366 of the Constitution means “agricultural income as defined for the purposes of the enactments relating to Indian Income-tax”.
The definition does not say that ‘agricultural income’ means “agricultural income as defined in the 1922 Act”. It does not even say that it means “agricultural income as defined for the purposes of the enactment relating to Indian Income-tax”. It says that it means “agricultural income as defined for the purposes of the enactments relating to Indian Income-tax”. The use of the plural ‘enactments’ is very relevant. It means that agricultural income for the purposes of the Constitution means agricultural income as it is defined at the relevant time in the enactment that then relates to income-tax.
Under the terms of the Constitution, Parliament is empowered to legislate to say what ‘agricultural income’ means. What Parliament says in this regard in the statute then current relating to income-tax is the definition of ‘agricultural income’ for the purposes of the Constitution. Clause (14) of s. 2 defined ‘capital asset’ to mean property of any kind held by an assessee in India…………..but does not include agricultural land in India……..”. The words ‘agricultural land in India’ were substituted by the Finance Act, 1970, w.e.f. 1st April, 1970.
An Explanation was also added by the Finance Act 1989, w.e.f. 1st April, 1970 to cl. (1A) of s.2. The position, is that income arising from the transfer of agricultural land that falls within the terms of items (a) and (b) of sub-cl. (iii) of cl. (14) of s. 2 falls outside the ambit of revenue derived from land and therefore, outside the ambit of ‘agricultural income’. Such income, therefore, is liable to capital gains tax chargeable under s. 45. Parliament has, as aforestated, the power to define what agricultural income is in the 1961 Act; the amendment of sub-ss. (1A) and (14) of s. 2 thereof in the manner aforestated are, therefore, good in law. The effect is that the assessee is liable to pay capital gains tax on the sales of his lands within the municipal limits.
In CIT vs. Lakhee (2003) 185 CTR (Del) 665, following earlier decision in CIT vs. Surjan Singh & Ors. (2002) 178 CTR (Del) 547 : (2003) 260 ITR 351 (Del) it has been held that agricultural land in village Haiderpur in rural area of Delhi constituted capital asset within the meaning of s. 2(14)(iii)(a) and is exigible to capital gain tax on its transfer.
In CIT vs. Kumari K. Anita Reddy & Ors. (2001) 165 CTR (SC) 675 a Bench of two Judges of Supreme Court expressed the view on 15th Nov., 2000 that earlier judgment of Supreme Court by a Bench of two learned Judges in Union of India vs. S. Muthyam Reddy (1999) 156 CTR (SC) 361 required reconsiderations.
It may be noted here that a three member Bench of the Supreme Court in Singhai Rakesh Kumar vs. Union of India (2000) 164 CTR (SC) 483, vide its decision dt. 28th Nov., 2000 has already held that in view of amendments of cls. (1A) and (14) of s. 2 made w.e.f. 1st April, 1970, capital gains arising from the sale of agricultural lands within municipal area are liable to capital gains tax. This is also the view taken by two Judges Bench in Union of India vs. S. Muthyam Reddy (1999) 156 CTR (SC) 361 : 1999 (7) SCC 545, though it was not referred to in the case of Singhai Rakesh Kumar vs. Union of India (supra). In the case of Singhai Rakesh Kumar vs. Union of India (supra) which is decided subsequent to present decision, there is no mention of this fact also regarding reference of the matter to larger Bench.
(d) Invoking of writ jurisdiction on the basis of Bombay High Court view
In Sulekha Sandip Parikh & Ors. vs. S.N. Nadkarni, ITO (1986) 52 CTR (Bom) 82 : (1986) 159 ITR 775 (Bom) : TC20R.645 the Bombay High Court held that writ petition would lie against the decision of Tribunal to the effect that all agricultural lands situated within local limits of municipal corporation would be regarded as capital assets in view of the decision of Bombay High Court in the case of Manubhai A.
Sheth rendered subsequent to decision of the Tribunal, in which it was held that amended provisions should be read down so as to hold that lands actually used for agricultural purpose would not be regarded as capital assets and delay in filing the writ petition was liable to be condoned and it was immaterial that the assessee did not resort to remedy of filing of reference application. This decision is of academic interest only because efficacy of decision in Manubhai A.
Sheth (1981) 22 CTR (Bom) 41 : (1981) 128 ITR 87 (Bom) : TC20R.604A has been destroyed by subsequent amendment of section 2(1A) by the Finance Act 1989 with retrospective effect from 1st April, 1970. The decision in Manubhai A. Sheth & Ors. vs. N.D. Nirgudkar, ITO & Anr. (1991) 191 ITR 63 (Ker) : TC20R.604 has been held to be no longer good law in CIT vs. Pooranchand (1994) 121 CTR (Raj) 479 : (1995) 212 ITR 88 (Raj) : TC20PS.5A in view of insertion of Explanation in section 2(1A) by Finance Act, 1989, w.e.f. 1st April, 1970. In CIT vs. Smt. Kaziamunnisa Begum & Anr. (1995) 126 CTR (AP) 460 : (1995) 213 ITR 172 (AP) : TC20PS.6, the Andhra Pradesh High Court has also taken a similar view and held Manubhai A.
Sheth and J. Raghottama Reddy vs. ITO (1988) 68 CTR (AP) 99 : (1988) 169 ITR 174 (AP) : TC20R.646 as no longer good law. The Madras High Court in CIT vs. L.S. Manickam & Anr. (1995) 215 ITR 591 (Mad) : TC20PS.6A held that reference has to be answered in accordance with amended law and, therefore, sale of agricultural land within municipal limits in previous year relevant to asst. yr. 1974-75 gives rise to capital gains in view of Explanation to section 2(1A) inserted by Finance Act, 1989, w.e.f. 1st April, 1970.
(v) Agricultural land-Meaning
The expression “agricultural land” has not been defined in the 1961 Act. It was also not defined in the 1922 Act. Nor has it been defined either in the WT Act, 1957, GT Act, 1958 or the ED Act, 1953.
List I of the Seventh Schedule contains Entries relating to matters on which Parliament may legislate while List II of said schedule contains Entries regarding which exclusive powers to legislate have been given to State Legislatures.
Entry 86 of List I mentions “Taxes on the capital value of the assets exclusive of agricultural land, of individuals and companies; taxes on the capital of the companies. Similar exclusion of “agricultural land” is mentioned in Entries 87 and 88 of Sch. I which deal with estate duty and duties on succession to property. There is mention of “agricultural land” in Entry 18 of List II which reads : “Land, that is to say, rights in or over land, land tenures including the relation to landlord and tenan,and the collection of rents, transfer and alienation of agricultural land; land improvement and agricultural loans; colonization.”
The expression “agricultural land” should be given the meaning as is generally understood in the common parlance and as it ordinarily bears in plain English language.
(b) Connection with agricultural user or purposes
In CIT vs. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC) the question before the Supreme Court was whether income from forest lands derived from sal and piyasal trees “not grown by human skill and labour” could constitute agricultural income and the test applied was whether there was some integrated activity which could be described as agricultural operation yielding income. It was pointed out that, a mere wild or spontaneous growth of trees, not involving the employment of any human labour or skill for raising them, could not be agricultural income. Although this case is not a direct authority upon what is “agricultural land”, it goes a long way in giving assistance to decide what could be agricultural land. On the basis of what is observed in this case, it can be stated that land, in order to come in the category of “agricultural land”, must be land which can be said to be either actually used or meant to be used for agricultural purposes. In other words, agricultural land must have a connection with an agricultural user or purpose. It is on the nature of the user that the very large number of definitions and authorities discussed by the Supreme Court in said decision have a direct bearing. In that case it was held that wider meaning given to agricultural operations such as breeding and rearing of live-stock, poultry farming or dairy farming will not be applicable and that the correct test to apply would be to find out whether human labour had been applied to the land itself, in order to extract from its natural powers, added to, or aided by other natural or artificial sources of strength to the soil, a product which can yield income. The Court also held that the dictionary meanigs of the word “agricultural” were wider than what was meant by “agricultural income” as that term was used in the IT Act and that essential requirement was that there should be cultivation of the land in the sense of filing the land, sowing the seeds, planting and similar work done on the land itself.
(c) Mere potentiality not enough-Cumulative effect to be considered
The above principles laid down in Raja Benoy Kumar’s case (1957) 32 ITR 466 (SC) case were referred with approval by the Supreme Court in CWT vs. Officer-in- Charge (Court of Wards), Paigah 1976 CTR (SC) 404 : (1976) 105 ITR 133 (SC) in which question to be decided was whether 108 acres of vacant land enclosed in compound walls of a palace situated by the side of a lake and classified and assessed to land revenue, which were neither cultivated nor had been put to non-agricultural use in the past could be regarded as “agricultural land” within the meaning of that expression which occurred in the definition of “asset” in section 2(e) of the WT Act, 1957. The Court observed that it is not correct to give as wide a meaning as possible to terms used in a statute simply because the statute does not define an expression and that if widest possible connotation were given, as had been done by the Full Bench of Andhra Pradesh High Court in Officer-in-Charge (Court of Wards) vs. CWT (1969) 72 ITR 552 (AP), to the term “agricultural land”, practically all land, even that covered by buildings would be “agricultural land” inasmuch as its “potential or possible” use could be agricultural. The Supreme Court overruled said decision of Andhra Pradesh High Court and disapproved the view of Madras High Court in Sorojini Devi vs. Srikrishna AIR 1944 Mad 401 in which it had been held that it was enough to show that land under consideration was capable of being used for agricultural purposes. According to the Supreme Court much weight cannot be given to mere “potentiality” of the land for use for agricultural purposes and what is really required to be shown is the connection with an agricultural purpose and user and not the mere possibility of user of the land, by some possible future owner or possessor, for an agricultural purpose. It is not mere potentiality, but its actual condition and intended user which has to be seen. One of the objects for exemption is to encourage cultivation or actual utilisation of land for agricultural purposes and hence if there is neither anything in its condition, nor anything in the evidence to indicate the intention of its owners or possessors so as to connect it with an agricultural purpose, the land could not be “agricultural land”.
In the case before the Supreme Court the following circumstances were emphasised viz. (i) area was very large (108 acres) and was abutting a lake, (ii) there were two wells on it (iii) it was capable of being used (though not actually used) for agricultural purposes, (iv) it had not been put to any use which could change its character by making it unfit for immediate cultivation; and (v) it was classified and assessed to land revenue as “agricultural land” under the relevant revenue enactment. The Supreme Court held that first four circumstances relating to absence of non-agricultural user were neutral circumstances and only fifth circumstance was good prima facie evidence of land being agricultural land but presumption arising therefrom could be rebutted by other circumstances. In that case the assessee had not led any evidence about intended user because assessee was under mistaken impression that it was not necessary to do so in view of existence of prima facie evidence in the form of entries in the Revenue record and therefore the Supreme Court restored the matter to Tribunal to record a finding on the question of intended user and then decide the point whether the land in question was agricultural land. The Supreme Court disapproved the view that that land which is left barren but which is capable of being cultivated can also be agricultural land unless the said land is actually put to some other non-agricultural purpose like construction of buildings, or an aerodrome runway, etc. thereon which alters the physical character of the land rendering it unfit for immediate cultivation and observed that minimal test of agricultural land was credible evidence of at least appropriation or setting apart of the land for a purpose which could be regarded as agricultural and for which land was used without an alteration of its character.
The decision of Supreme Court in the case of Officer-in-Charge (Court of Wards) was analysed by the Gujarat High Court in CIT vs. Sarifabibi Mohmmed Ibrahim (1981) 24 CTR (Guj) 171 : (1982) 136 ITR 621 (Guj) : TC20R.669 and the legal position was summed up as follows :
(i) The fact that land is entered as agricultural land in revenue records and is assessed as such under the Land Revenue Code would be a circumstance in favour of conclusion that it is an agricultural land. However, this would raise only a prima facie presumption and said presumption can be destroyed by other circumstances pointing to the contrary conclusion.
(ii) The fact that agricultural operations were carried on in the past or are carried on currently is a circumstance in favour of conclusion that land was agricultural land. However, this is not a decisive factor inasmuch as agricultural crop can be raised even on building site land (even on desert land as observed by the Supreme Court in said case) and sometimes, a crop is grown in order not to allow the land to remain idle awaiting sale for non-agricultural purposes to a non-agriculturist by way of a stop-gap arrangement or in order to avoid payment of revenue at a higher rate or in order to avoid payment of capital gains tax.
(iii) The fact that land is not converted to non-agricultural user would be a circumstance indicating that it is an agricultural land. However this is subject to same rider as is mentioned in (ii) above.
(iv) The following facts would indicate that land was not agricultural land :
(a) The land is situated (even in the year prior to asst. yr. 1970-71 when amendment came in force) in an urban area in the proximity of building sites. (From asst. yr. 1970-71, agricultural lands situate within municipal limits are not outside the ambit of “capital assets”).
(b) The land is sold to a non-agriculturist for non-agricultural purposes.
(c) The land is sold on a per square yard basis at a price comparable to the price fetched by building sites.
(d) The price is such that no bona fide agriculturist would purchase the same for genuine agricultural operations.
(e) When the price is such that no prudent owner would sell it at a price worked out on the capitalisation method taking into account its optimum yield in the most favourable circumstances.
It may be emphasised that all the circumstances are to be considered as a whole and an overall view is to be taken in deciding whether the land was an agricultural land. In a given case large number of circumstances may be indicative of agricultural character but one circumstance may outweigh all of them and on its basis the land would be held to be a non-agricultural land. In the above decision of Gujarat High Court, circumstances to indicate agricultural character were that the land had continued to be entered as agricultural land in revenue records, it had not been converted to non-agricultural user till the date of sale, no application for permission to convert to non-agricultural user had been made till date of sale under the relevant land revenue enactment and agricultural operations had been carried on in the past and all these circumstances were outweighted by the facts that land was situate in urban area surrounded by buildings an had been sold to a society for construction of a residential building and rate at which it was sold was fixed as per square yard, which was the prevalent rate for non-agricultural land.
The above decision of Gujarat High Court has been affirmed in appeal by the Supreme Court in Sarifabibi Mohmed Ibrahim vs. CIT (1993) 114 CTR (SC) 467 : (1993) 204 ITR 631 (SC) : TC20R.660 in which the Supreme Court emphasised that all the circumstances were required to be weighted and that High Court has reached a correct conclusion.
Prior to decision of Supreme Court in the case of Officer-in-Charge Court of Wards almost the same approach for determining the character of land as agricultural land had been advocated by the Gujarat High Court in Rasiklal Chimanlal Nagri vs. CWT (1965) 56 ITR 608 (SC) in which case also land situate in urban area assessed as agricultural land was involved and it was held that whether the land is agricultural land or not cannot depend on the fluctuating or ambulatory intention of the owner of the land and that the criterion should be more definite and more objective, something related to the nature or character of the land. If the land is used for agricultural purposes, ordinarily it would be correct to say that land was agricultural and vice versa. But even this test may not always furnish a correct answer, because there may be cases where land admittedly non-agricultural (such as building site) may be used temporarily for agricultural purposes. Where the land is not put to any use, the true test to be applied is not whether the land is capable of being used for agricultural purpose, but having regard to the various relevant factors, the general nature or character of the land is such that it cannot be regarded as agricultural land. In that case plots in dispute were situated in wholly residential areas of a town, surrounded by numerous residential buildings in an area to which a town planning scheme was in force for some years and these plots had ceased to be actually cultivated without any reason and it was held that the plots could not be regarded as agricultural lands although they were assessed as agricultural lands in revenue records and the assessee had not applied for and obtained permission to put them to non-agricultural use, which factors constituted relevant considerations but they were outweighted by other factors.
In CIT vs. Krishan Kumar Kapoor (2001) 169 CTR (Del) 70 : (2001) 251 ITR 150 (Del) it was held that land which was used for agricultural purposes and was assessed to land revenue and which was subject to statutory regulations prohibiting the change of character of land, was rightly treated as agricultural land and surplus arising on sale of land was not chargeable to tax as capital gains.
In CIT vs. Siddharth J. Desai (1982) 28 CTR (Guj) 148 : (1982) 138 ITR 628 (Guj) : TC20R.670 after considering earlier decisions the High Court identified thirteen factors which would require consideration in order to decide whether land was agricultural land. They are as follows :
(i) Whether the land was classified in the revenue records as agricultural and whether it was subject to payment of land revenue.
(ii) Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time.
(iii) Whether such user for the land was of a long period or whether it was of a temporary character or by way of a stop-gap arrangement.
(iv) Whether the income derived from agricultural operations carried on in the land bore any rational proportionate to the investment made in purchasing the land.
(v) Whether the permission under the relevant provisions of Land Revenue Code was obtained for non-agricultural use of the land; if so, when and by whom (vendor or 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.
(vi) Whether the land on the material date had ceased to be put to agricultural use; if so, whether it was put to an alternative use; whether such cessor and/or alternative user was of a permanent or temporary nature.
(vii) Whether the land, though entered in the revenue records had never been actually used for agricultural, that is it had never been ploughed or tilled; whether the owner meant or intended to use it for agricultural purposes.
(viii) 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.
(ix) Whether the land itself was developed by plotting and providing roads and other facilities.
(x) Whether there were any previous sales of portions of the land for non-agricultural use.
(xi) Whether permission for sale or intended sale had been obtained in favour of a non-agriculturists; if so, whether sale or intended sale to such non-agriculturist was for non-agricultural user or agricultural user.
(xii) Whether the land was sold on yardage or acreage basis.
(xiii) 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.
In the above case the land was classified as agricultural land in revenue records and was cultivated by purchaser for about three years after the purchase. The land was not situated within municipal limits but outside on the outskirts and the price was not such as could not have been paid for an agricultural land. Hence, although the land had been sold to a housing society, it was held to be agricultural land on consideration of entire circumstances.
There are, however, several decisions relating to assessment years prior to asst. yr. 1970-71 in which the lands were held to be agricultural lands when it was found that crops had been grown on them till the date of transfer and they were classified as agricultural lands in revenue records although such lands were situated in urban area and the facts that (i) they were situated in residential areas to which town planning scheme applied, or (ii) they were divided into plots, or (iii) permission was obtained for conversion for non-agricultural use, or (iv) sold to persons who intended to use them for construction of houses, or (v) sold on yardage basis, or (vi) agricultural income was very small were not considered sufficient to rebut the presumption that they were agricultural lands. These decisions are CWT vs. Narandas Motilal (1971) 80 ITR 39 (Guj); CIT vs. Manilal Somnath (1977) 106 ITR 917 (Guj) : TC20R.682A; Chandravati Atmaram Patel vs. CIT 1978 CTR (Guj) 211 : (1978) 114 ITR 302 (Guj) : TC20R.693; CIT vs. Prakash Industries 1978 CTR (Guj) 194 : (1978) 114 ITR 316 (Guj) : TC20R.695; Chhotalal Prabhudas vs. CIT (1979) 10 CTR (Guj) 69 : (1979) 116 ITR 631 (Guj) : TC20R.695A; Manibhai Motibhai Patel vs. CIT (1981) 22 CTR (Guj) 168 : (1981) 131 ITR 120 (Guj) : TC20R.714; Sercon Pvt. Ltd. vs. CIT (1981) 23 CTR (Guj) 303 : (1982) 136 ITR 881 (Guj) : TC20R.715 [Special leave granted by Supreme Court : 147 ITR (St) 5]; Chandulal Lallubhai vs. CIT (1983) 139 ITR 642 (Guj) : TC20R.721; Ramprasad C. Dalal vs. CIT (1982) 136 ITR 633 (Guj) : TC20R.722; CIT vs. Borhat Tea Co. Ltd. (1982) 26 CTR (Cal) 320 : (1982) 138 ITR 783 (Cal) : TC20R.725; Gopal C. Sharma vs. CIT (1993) 116 CTR (Bom) 377 : (1994) 209 ITR 946 (Bom) : TC20R.404; CIT vs. Lilavati Thakorelal Patel (1985) 45 CTR (Guj) 77 : (1985) 152 ITR 565 (Guj) : TC20R.726 and CIT vs. P.C. Joshi and B.C. Joshi (1993) 111 CTR (Bom) 226 : (1993) 202 ITR 1017 (Bom) : TC20R.723.
In order to come within the category of agricultural land, it must not only be capable of being used for agricultural purposes but should have been actually used as such at some point of time. A temporary non-user for agricultural purposes will not affect the character of the land but a permanent abandonment of user for agricultural purposes will affect the character of the land as agricultural land. The actual conversion of the land for a non-agricultural purpose will also affect the character of the land as agricultural land. Whether such conversion has taken place or not would depend upon the facts of each case [Shiv Shankar Lal vs. CIT (1974) 94 ITR 433 (Del) : TC20R.499]. When an agricultural land, after being cultivated for several years remains fallow for some years and no permission for non-agricultural use had been sought, it would continue to be agricultural land [CWT vs. H.V. Mungale (1983) 32 CTR (Bom) 301 : (1984) 145 ITR 208 (Bom)].
The Supreme Court in CIT vs. Gemini Pictures Circuit (P) Ltd. (1996) 132 CTR (SC) 256 : (1996) 220 ITR 43 (SC), reversing the Madras High Court’s decision in Gemini Pictures Circuit (P) Ltd. vs. CIT TC20R.735 observed that it must, be remembered that facts of no two cases will be identical. The tests evolved by the Courts are in the nature of guidelines. No hard and fast rules can be laid down in the matter, for the reason that it is essentially a question of fact. It is well to remember that the question whether a particular land is an agricultural land has to be decided on a totality of the relevant facts and circumstances. There may be circumstances for and against. They have to be weighed together and a reasonable decision arrived at. One has to take a realistic view and see how were the persons selling and purchasing it understood it.
(d) Present characteristics relevant
In Sri Krishna Rao L. Balekai vs. WTO (1963) 48 ITR 472 (Mys) it was held that present characteristics and not potentialities of a land are the proper criterion. If a land is ordinarily used for the purposes of agricultural or allied to agriculture, it would be agricultural land. If it is not so used, it would not be an agricultural land. The question how a land is ordinarily used would be one of fact depending on the evidence in each case. For instance, an agricultural land, as interpreted above, is left fallow in a particular year owing to adverse seasonal conditions or to some other special reason, it would not cease to be agricultural land [Smt. Manyam Meenakshamma vs. CWT (1967) 63 ITR 534 (AP)]. These decisions were approved by the Supreme Court in CWT vs. Officer-in-Charge, Court of Wards 1976 CTR (SC) 404 : (1976) 105 ITR 133 (SC).
(e) Land remaining fallow or not cultivated for a long period
It follows from above decisions that if land was not ordinarily used for agricultural purposes for several years, presumption would arise that it is not agricultural land and if the land remains fallow thereafter and non-user is for temporary period for special reasons, the land would not cease to be agricultural land [CWT vs. Smt. Sheela Devi (1970) 77 ITR 694 (Punj)].
Where lands were not cultivated by the assessee for thirteen years when they were acquired by the Government for construction of buildings, it was held that the lands did not retain the character of agricultural lands because of the facts that area was covered by town planning scheme and was surrounded by residences all around and the circumstances indicated that assessee never intended for thirteen years to utilise the land as agricultural land [M. Ranganatha Sastri vs. CIT (1979) 13 CTR (Mad) 269 : (1979) 119 ITR 488 (Mad) : TC20R.771]. In Raja D. Seshayyamma Garu vs. CIT (1987) 59 CTR (Mad) 133 : (1985) 156 ITR 820 (Mad) : TC20R.777, there was total absence of agricultural operations on the land and it was observed that in such circumstances mere intention to utilise land for agricultural purposes was not sufficient to invest character of agricultural land [See also Ramanamma vs. CWT (1986) 157 ITR 555 (AP); and Fazalbhoy Investment Co. Pvt. Ltd. vs. CIT (1989) 75 CTR (Bom) 201 : (1989) 176 ITR 523 (Bom) : TC20R.682].
In Kalpaka Oil Mills vs. CIT (1985) 44 CTR (Ker) 68 : (1986) 160 ITR 604 (Ker) : TC20R.781 mere presence of coconut and areca trees on the land were not considered sufficient to hold that land was agricultural when no actual agricultural operations were found to have been carried out. Similarly, in CWT vs. Mary Rockie (1987) 63 CTR (Ker) 120 : (1987) 167 ITR 153 (Ker) presence of few trees was not considered enough to hold the land to be agricultural land when there was no agricultural activity in the nature of weeding, filling, sowing, planting, watering etc. In Jagwansh Kumar vs. Union of India (1987) 59 CTR (All) 140 : (1987) 167 ITR 283 (All) : TC20R.584 the lands were purchased by the assessee at the Court auction and he sold them after some years and during the interim period no agricultural operations had been carried on and as such the lands were not held to be not exempt from the ambit of capital assets.
In Tarunchandra Barua vs. CIT (1988) 72 CTR (Gau) 190 : (1988) 174 ITR 420 (Gau) : TC20R.785, the assessee conceded before the ITO that the land which had been acquired by the Government and regarding which assessee had received compensation at market price was not agricultural land but retracted at the first appellate stage and the Tribunal in second appeal found that there could not have been any agricultural operations on the land and as such the land was not agricultural land and this finding was accepted by the High Court.
If the land is non-agricultural in character, as evident from circumstances, mere fact that agricultural operations were carried on for temporary stop gap period would not convert it, into agricultural land [CWT vs. Sitaram N. Desai 1976 CTR (Bom) 274 : (1977) 109 ITR 13 (Bom)].
(f) Land plotted out as building site
Where permission was obtained to convert land to non-agricultural use and then land was divided in plots and sold it was held that profits from sale would constitute capital gains [Jayraj Madeppa Kadadi vs. CIT (1990) 186 ITR 161 (Bom) : TC20R.681]. See also Fazalbhoy Investment Co. Ltd. vs. CIT (1989) 75 CTR (Bom) 201 : (1989) 176 ITR 523 (Bom) : TC20R.682.
In Himatlal Govindji vs. CWT (1977) 106 ITR 658 (Guj) though agricultural operations had been carried on and land was assessed as agricultural land yet it was held to be non-agricultural land because of the fact that the land had been plotted out as building site and had been sold after obtaining permission for non-agricultural use and agricultural operations were mere stop-gap arrangement. Similar view was taken in Yaswanti R. Bhatt vs. CWT (1978) 114 ITR 318 (Guj) in which surrounding areas had been well-developed and the land was in area to which town planning scheme applied. In CIT vs. Laxmi Development Co. (1987) 66 CTR (MP) 63 : (1988) 171 ITR 124 (MP) : TC20R.572 the land had been purchased with a view to develop it was neither developed nor cultivated. It was held that capital gains were taxable as it had not been used for agricultural purpose.
(g) Mere application for permission to convert does not change the character
When assessee enters into an agreement to sell an agricultural land to a housing society and applies to revenue authorities for permission to sell to non-agriculturist (i.e. the society) there is no conversion to non-agricultural use on the date of such application or on the date when permission is granted. Hence on the date when sale is effected after obtaining of such permission, the land would continue to retain its character as agricultural land. The fact that vendee society obtained permission for non-agricultural user after the sale would be irrelevant for determining the character of the land on the date of sale. The fact that vendee society paid price on yardage basis would, in the circumstances, show the potential value of the land as building site but would not lead to conclusion that said land had lost its character as agricultural land on the date of sale particularly when the land continued to be cultivated, as before, till date of sale [Maganlal Morarbhai vs. CIT (1979) 11 CTR (Guj) 108 : (1978) 118 ITR 224 (Guj) : TC20R.727; CIT vs. Vajulal Chunilal (HUF) (1979) 10 CTR (Guj) 79 : (1979) 120 ITR 21 (Guj) : TC20R.728]. See also Gordhandas Kahandas vs. CIT (1981) 21 CTR (Guj) 177 : (1981) 127 ITR 664 (Guj) : TC20R.729 where potential for non-agricultural use and development in the vicinity were held to alter the agricultural character of the land.
A temporary user of land either for agricultural or non-agricultural purpose is not important. Where the land is classified as agricultural land in revenue records and agricultural operations are carried on said land and further the adjoining land on one side is also an agricultural land, such land would be regarded as agricultural land although it has been sold to a vendee who intended to construct building thereon [Addl. CIT vs. Tarachand Jain (1980) 123 ITR 567 (Pat) : TC20R.730; CIT vs. Tarachand Jain (1986) 55 CTR (Pat) 104 : (1987) 164 ITR 516 (Pat); CIT vs. Tarachand Jain (1986) 55 CTR (Pat) 106 : (1987) 164 ITR 520 (Pat) : TC20R.734.
(h) Land used for cultivating sample seeds
Where the assessee carrying on business of growing vegetables and flower seeds and selling the same utilised a plot of land in a metropolitan city as a trial ground for cultivating sample seeds purchased by the assessee for re-sale with a view to keep control over the quality of the seeds and in that connection used the plot for experimental or trial cultivation by carrying out operations such as preparing the land, manuring, tilling and sowing vegetable seeds, etc., it was held that said plot was agricultural land as the basic factor of carrying out of agricultural operations was present and hence in the year prior asst. yr. 1970-71 (in which year amendment came in force), such land would not be regarded as capital asset [CIT vs. Sutton & Sons Ltd. (1981) 127 ITR 57 (Cal) : TC20R.523].
(i) Land registered as urban land and surrounded by commercial buildings
In CIT vs. Gemeni Pictures Circuit (P) Ltd. (1996) 132 CTR (SC) 256 : (1996) 220 ITR 43 (SC), the Supreme Court, reversing the Madras High Court’s decision in Gemini Pictures Circuit (P) Ltd. vs. CIT TC20R.735 held that land situated within municipal limits, registered as urban land, bearing municipal door number and subject to urban land tax sold on yardage basis surrounded on all sides by industrial and commercial buildings on which assessee itself constructed two buildings after its purchase could not be treated as agricultural land, for the mere reason that part of the land lying vacant was subjected to agricultural operations.
(j) Entries in revenue records
Entries in the record of rights would constitute prima facie evidence about agricultural character of the land. CWT vs. Mungale (1984) 145 ITR 283 (All). However lands which are classified in revenue records as agricultural lands may subsequently lose that character on account of non-agricultural user and lands recorded as non-agricultural or forest land may subsequently acquire agricultural character. The presumption arising out of entries in record of rights can be rebutted by producing evidence about agricultural character [CIT vs. Dumraon Cold Storage Refrigeration Service (P) Ltd. (1981) 35 CTR (Pat) 7 : (1983) 141 ITR 700 (Pat) : TC20R.736; N.K.S. Rengeswaran vs. Commr. of Agrl. IT & Ors. (2000) 242 ITR 344 (Mad)]. When it is admitted that land is agricultural land, some act of assessee to convert it into non-agricultural land or some events or circumstances indicating such conversion would be required to be established in the absence of which continuation of agricultural character would be presumed. Proximity to or situation in the midst of developed residential area would be indicative of the fact of loss of agricultural character although none of these factors is conclusive [Combined Industries (P) Ltd. vs. CIT 1978 CTR (Mad) 326 : (1978) 115 ITR 358 (Mad) : TC20R.741; DLF United Ltd. vs. CIT (1986) 161 ITR 714 (Del) : TC20R.742].
Following CIT vs. Minguel Chandra Pais & Anr. (2006) 200 CTR (Bom) 152 : (2006) 282 ITR 618 (Bom), it was held in CIT vs. Smt. Debbie Alemao (2011) 239 CTR (Bom) 326 : (2011) 331 ITR 59 (Bom) that land which was shown as agricultural land in the revenue records and never sought to be used for non-agricultural purposes by the assessee till it was sold has to be treated as agricultural land, even though no agricultural income was shown by the assessee from this land and, therefore, no capital gain was taxable on the sale of the said land.
(k) Agricultural land requisitioned by the Government for non-agricultural use
Agricultural land requisitioned by the Government and used as parade ground for police authorities did not cease to be agricultural land during the period of requisition in view of the fact after de-requisition the assessee was entitled to use the said land for agricultural purpose and under the terms of requisition the Government, at the time of de-requisition, was bound to restore to land at its own cost in the same condition in which it was at the time of requisition [Avtarsingh Rangwala vs. CIT (1972) 84 ITR 96 (Punj)]. One of the reasons given in this case was based on the decision of Madras High Court in Sorojini Devi vs. Sri Krishna AIR 1944 Mad 401 to the effect that if the land is capable of being used for agricultural purposes, it would be an agricultural land would not be a valid reason in view of the fact that afore-mentioned test of land being capable of being used for agricultural purposes has not been approved by the Supreme Court in CWT vs. Officer-in-Charge (Court of Wards) 1976 CTR (SC) 404 : (1976) 105 ITR 133 (SC) but the said decision can be supported on the ground that an agricultural land would not cease to be an agricultural land if the requisitioning authority over which the owner has no control chooses to use it for non-agricultural purpose during the period when requisition is in force and said authority is bound to restore land to its original condition of an agricultural land after coming to an end of requisition period.
Mere intention of the assessee to convert the agricultural land into non-agricultural land would not rob such land of its agricultural character. Hence where although the assessee had acquired agricultural land with intention of development but before, that intention could be put into action, the land was acquired by the Government, the land would be regarded as agricultural land. This is on the principle that the character of land on the date of transfer is to be ascertained and not its future character [D.L.F. Housing & Construction (P) Ltd. vs. CIT (1982) 29 CTR (Del) 199 : (1983) 141 ITR 806 (Del) : TC20R.744; D.L.F. United Ltd. vs. CIT (1985) 49 CTR (Del) 126 : (1986) 158 ITR 342 (Del) : TC20R.744A and D.L.F. United Ltd. vs. CIT (1986) 161 ITR 714 (Del) : TC20R.742 DLF United Ltd. vs. CIT (1995) 129 CTR (Del) 33 : (1996) 217 ITR 333 (Del)].
A garden land of about nine acres on which there were two wells and a tank and facility of electricity and tap water and large number of coconut and fruit bearing trees which were being watered and tendered was held to be agricultural land (for assessment years prior to asst. yr. 1970-71) although situate within municipal limits after taking into consideration the fact that assessee had purchased at a price which could be attributed to agricultural land; and the fact that the Government, after acquisition, intended to construct houses thereon was not considered significant in CIT vs. Ananthan Pillai (1974) 94 ITR 122 (Ker) : TC20R.742A.
In CIT vs. Smt. Jijibai Shinde (1996) 135 CTR (MP) 271 : (1996) 218 ITR 101 (MP) it was held that the land used for agricultural purposes does not come within the definition of capital asset under s. 2(14)(iii) and therefore, no capital gain tax was chargeable on the compensation amount paid to the assessee, on acquisition of such land.
(l) Land sold to non-agriculturists
However, where the agricultural income was negligible and the land was situated in the midst of developed lands and sold to non-agriculturist the land was held to be non-agricultural although classified as agricultural land in revenue records [See Arundhati Balkrishna vs. CIT (1982) 29 CTR (Guj) 85 : (1982) 138 ITR 245 (Guj) : TC20R.745 and Z.M. Merchant vs. CIT (1989) 75 CTR (Bom) 130 : (1989) 177 ITR 512 (Bom) : TC20R.747]. The lands, though shown as agricultural in revenue records but not cultivated sold to business concern were held to be non-agricultural lands in CIT vs. S.N. Desai (1989) 75 CTR (Bom) 53 : (1989) 177 ITR 151 (Bom) : TC20R.749. See also CIT vs. Universal Cine Traders Pvt. Ltd. (1986) 52 CTR (Bom) 169 : (1986) 161 ITR 696 (Bom) : TC20R.756, CIT vs. V.A. Trivedi (1988) 72 CTR (Bom) 199 : (1988) 172 ITR 95 (Bom) : TC20R.761, Lilavati M. Amin vs. CIT (1993) 201 ITR 293 (Bom) : TC20R.524; CIT vs. Refugee Co-op. Housing Society Ltd. (1992) 107 CTR (Del) 260 : (1993) 201 ITR 382 (Del), T.S.M.O. Mohamed Othuman Sahib vs. CIT (1957) 31 ITR 480 (Mad) : TC20R.711.
When the assessee spent human skill and labour for making the land fit for cultivation of tea prior to its sale, the land was held to be agricultural land in CIT vs. Borhat Tea Co. Ltd. (1982) 26 CTR (Cal) 320 : (1982) 138 ITR 783 (Cal) : TC20R.725.
In CIT vs. Madhabhai H. Patel (1993) 114 CTR (Guj) 453 : (1994) 208 ITR 638 (Guj) : TC20R.595 the land was inherited by assessee from his ancestors and was cultivated by him till the date of transfer in asst. yr. 1967-68 and he had never applied for permission for non-agricultural use. It was held that no taxable capital gains arose and the fact that land was of co-operative housing society, the rate calculated per metre and the fact that it was situated within municipal limits would not make any difference.
(m) Non-agricultural land purchased for agricultural purpose
In CWT vs. T.N.K. Govindraju Chettiar (1984) 149 ITR 588 (Mad) the assessee had purchased lands which were absolute rock and rocky ground on some part of which there were thickly grown bamboo clusters as well as mixed type of forests. The assessee claimed that the entire lands were agricultural lands because of the fact that they were assessed to land revenue and in a distant past the estate was a flourishing coffee plantation which had fallen into utter disuse and that they had a plant to convert them into agricultural land. The High Court observed that “agricultural land” would be confined to denote land which is either actually under cultivation or which is appropriated or set apart for a purpose which could be regarded as agricultural and for which it could be reasonably be used without any alteration of its existing character. Hence when there was no evidence that forest land had been cleared and prepared or earmarked for agricultural purpose, it would be too unreal or too soon to hold that it had become agricultural land and that since the assessee had not discharged the burden which was on him to prove that forest land covered with wild and natural growth had been converted into land which is actually used for agricultural purpose or had been prepared or set up for such purpose, the lands could not be treated as agricultural lands.
(n) Forest lands
The Forest land covered by trees of spontaneous and wild growth cannot be held to be agricultural land. Forest land can be agricultural land only when it is in some way, set apart or earmarked for or linked up with an agricultural purpose by its owner or occupier [CED vs. Venugopala Verma Rajah 1976 CTR (SC) 423 : (1976) 105 ITR 593 (SC)] [See also CWT vs. T.N.K. Govindaraju Chettiar (1984) 149 ITR 588 (Mad) and Smt. Manyam Meenakshamma vs. CWT (1967) 63 ITR 534 (AP)]. The reason is “agricultural” in its root sense means “ager”, a field, and culture, cultivation; cultivation of field which implies expenditure of human skill and labour upon the land [See CIT vs. Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC)].
Where the only operations performed by the assessee were subsequent operations in regard to forest trees of spontaneous growth, trees which sprung into existence unaided by any human skill and labour and without any basic operations, there is no cultivation of spoil and there is no agriculture [Maharajadhiraj Sir Kameshwar Singh vs. CIT (1957) 32 ITR 587 (SC)].
In Raja Mustafa Ali Khan vs. CIT (1948) 16 ITR 330 (PC) the Privy Council has observed that income from the forest trees growing on land naturally and without the intervention of human agency, even if the land is assessed to land revenue, is not agricultural income.
In Tea Estates India Pvt. Ltd. vs. CIT (1986) 59 ITR 428 (Cal) the Court observed that land must be connected with cultivation and must involve expenditure of human labour and skill for the purpose of cultivation or for keeping it in cultivable state and when the lands are not under actual tillage or cultivation it must be found whether the land sought to be exempted is essentially connected with or an integral part of primary or basic agricultural operations. On these principles agricultural land would include water tanks and roads as they not only comprise land but also are necessary ingredients of and virtually connected with the assessee’s tea garden operations and for the same reason the bridges and water pipes cannot be agricultural and unless there is clear finding to the effect that the agricultural activity in the particular garden is not feasible without/them in that particular locality. It was held that that part of the tea-estates in which the forest grows spontaneously and which was not used for growing bushes and which in its existing state was not capable of being used for agricultural purposes was not “agricultural land” [See also Kalpetta Estates Ltd. vs. CIT (1990) 185 ITR 318 (Ker) : TC20R.706, Krishna Iyer vs. Addl. ITO (1966) 59 ITR 145 (Ker) : TC20R.529; Venu Gopala Varma Rajah vs. CED (1967) 64 ITR 358 (Ker)].
(o) Trees standing on agricultural land
The principle that all that is attached to land belongs to land does not strictly apply in India. However, where trees standing on an agricultural land are transferred alongwith the land as its integral part in one transaction, they would be regarded as “agricultural land” and not a separate capital asset [CIT vs. Alanickal Co. Ltd. (1986) 52 CTR (Ker) 247 : (1986) 158 ITR 630 (Ker) : TC20R.274]. This decision was based on Venugopala Varma Rajah vs. CIT (1970) 76 ITR 460 (SC) in which it was pointed out that trees until they are cut and removed, from an integral part of the land. When trees which are planted on agricultural land are removed from roots and then sold they would be regarded as capital assets and not as agricultural land [A.K.T.K.M. Vishnudatta Antharjanam vs. Commr. of Agrl. IT (1970) 78 ITR 58 (SC)]. See also Travancore Tea Estate Co. Ltd. vs. CIT (1974) 93 ITR 314 (Ker) : TC20R.270; Beverley Estates Ltd. vs. CIT (1979) 117 ITR 302 (Mad) and Clen Leven Estates Ltd. vs. CIT (1973) 91 ITR 391 (Ker) : TC20R.769].
After rubber trees planted on the land for the purpose of deriving income in the shape of latex cease to yield any further and become useless and are cut and sold, they would be regarded as capital assets and sale proceeds therefrom would be capital receipt and not agricultural income [Commr. of Agrl. IT vs. Kailas Rubber & Co. Ltd. (1966) 60 ITR 435 (SC). See also CIT vs. Trophical Plantations Ltd. (1992) 196 ITR 755 (Ker) : TC20R.285B].
When estate with yielding rubber trees are sold, capital gains cannot be assessed, treating trees as an asset separate from and independent of the land [CIT vs. Travancore Rubbers Ltd. (1990) 183 ITR 417 (Ker) : TC20R.284A; CIT vs. M. Ramaiah Reddy (1986) 56 CTR (Kar) 121 : (1986) 158 ITR 611 (Kar) : TC20R.786].
(p) Whether “owelty” is interest in agricultural land
A member of joint family receiving a larger piece of agricultural land in a partition may agree to pay to another member who has received a smaller share, an “owelty” (an equalisation charge) in the shape of part of agricultural produce grown by him. In one of such cases a question arose whether such “owelty” was “interest” in agricultural land and this question was answered in the negative in Dr. K. Anand Rao vs. CWT (1980) 18 CTR (Kar) 138 : (1980) 126 ITR 719 (Kar).
(q) Leasehold rights in agricultural lands
Leasehold rights in agricultural lands would come within the ambit of agricultural land and as such would be outside the purview of capital assets and hence their transfer would not give rise to capital gains [CIT vs. Chhotanagpur General Trading Co. Ltd. (1971) 79 ITR 161 (Cal) : TC20R.215; CIT vs. Alanickal Co. Ltd. (1986) 52 CTR (Ker) 247 : (1986) 158 ITR 630 (Ker) : TC20R.274].
(r) Presumption-Burden of proof
The initial burden to prove that land in question was being used for agricultural purpose at the relevant time is on the assessee [Syed Rafiqur Rahman vs. CWT (1970) 75 ITR 318 (Pat)]. In an estate duty case; CED vs. Venugopala Verma Rajah 1976 CTR (SC) 423 : (1976) 105 ITR 593 (SC), the Supreme Court observed that the burden of establishing exemption on the ground that the lands are agricultural lands lies upon the accountable person claiming exemption, and that when it is admitted by the accountable person that the land in question is a forest land covered with natural or wild growths, the burden lies on him to prove that it has changed its character into an agricultural land as there is no presumption that all forest lands are agricultural lands because they can be prudently or profitably exploited for agricultural purposes and accountable person has to prove actual or intended use for which the land may have been prepared or set apart. Where the assessee has produced evidence to prove that land was agricultural land, Department has to lead evidence to controvert it [CWT vs. Officer-in-Charge (Court of Wards) 1976 CTR (SC) 404 : (1976) 105 ITR 133 (SC); CIT vs. Fagoomal Lakshmichand 1977 CTR (Ker) 285 : (1978) 112 ITR 9 (Ker) : TC20R.789]. When the land is classified as agricultural land in revenue papers and agricultural operations are found to have been carried on the date of transfer, there is a presumption that land is an agricultural land and the burden is then on the Department to rebut it [Dr. Motibhai D. Patel vs. CIT (1981) 27 CTR (Guj) 238 : (1981) 127 ITR 671 (Guj) : TC20R.791A].
(s) Question of fact or law
Whether a particular land was an agricultural land and as such outside the ambit of “capital asset” is a question of fact to be decided by cumulative effect of all relevant factors [Fazalbhoy Investment Co. (P) Ltd. vs. CIT (1989) 75 CTR (Bom) 201 : (1989) 176 ITR 523 (Bom) : TC20R.682; CIT vs. P.T. Thomas (1995) 211 ITR 897 (Mad) : TC20R.574; CIT vs. S.N. Desai (1989) 75 CTR (Bom) 53 : (1989) 177 ITR 151 (Bom) : TC20R.749; Z.M. Merchant vs. CIT (1989) 75 CTR (Bom) 130 : (1989) 177 ITR 512 (Bom) : TC20R.747]. However, in CIT vs. MLM. Mahalingam Chettiar (1977) 107 ITR 236 (Mad) it was held that the question as to whether certain lands were agricultural lands from which the assessee was deriving agricultural income during the year was a question of fact and the finding of the Tribunal that the lands in question had not ceased to be agricultural lands during a particular year could not be interfered with.
In CWT vs. P. Sankaran Nair 1976 CTR (Mad) 265 : (1976) 103 ITR 366 (Mad), it has been observed that question as to whether any land is agricultural land cannot be taken to be such a question of