Nearness of land to highway does not alter character of Agricultural land

K.P. Gopakumar, Sr. DR for the Appellant.Iype Mathew, CA for the Respondent.

ORDER

B.P. Jain, Accountant Member – This appeal of the Revenue arises from the order of the Ld. CIT (A), Kozhikode dated 10.06.2015 for the assessment year 2010-11.

2. The brief facts of the case are that the assessee filed its return of income for the assessment year 2010-11 declaring an income Rs. 4,41,496/-. The case of the assessee was selected for scrutiny through CASS by issuance of notice u/s. 143(2) of the Act. The assessment records revealed that the assessee sold property measuring 2 acres and 42.801 cents for a consideration of Rs. 3,38,63,200/-. The assessee had not shown the sale consideration in the return of income, claiming the same to be an agricultural property and not being a capital asset within the meaning of section 2(14) of the Act. The Assessing officer was of the opinion that since the assessee had not returned any agricultural income during the last 4 years, prior to the sale of property and also the fact that in the spot enquiry report of the Inspector of Income Tax, it was stated that the land in question was very close to the industrial park. The property sold by the assessee cannot be considered as agricultural property and was, therefore, liable for capital gains arising on its sale. Taking the cost in 1981 to be Rs. 35,000, the Assessing officer calculated the long term capital gain at Rs. 3,36,40,950/-.

3. Aggrieved by the assessment order dated 26.03.2013, the assessee preferred an appeal before the Ld. CIT (A) wherein the appeal of the assessee was allowed by holding that the land sold by the assessee cannot be treated as capital asset within the meaning of section 2(14) of the Act. Therefore, the sale was not liable for capital gains under the Act.

4. Aggrieved by the order of the Ld CIT (A) allowing the appeal of the assessee, the Revenue has preferred this appeal by raising the following grounds of appeal:

5. We shall take up Ground Nos. 2 to 4 at this stage. as the principal issue is that whether the land sold by the assessee can be treated as capital asset within the meaning of section 2(14) of the Act.

6. The Ld. DR submitted that the assessee had not declared the agricultural income from the land sold during the last four years preceding the relevant assessment year. It is the case of the Revenue that the intention to sell the land was commercial in nature as the transferee had built the buildings on the said land. The Ld. DR has relied upon the judgment in the case ofKalpetta Estate Ltd. v. CIT [1990] 185 ITR 318  (Ker.) to support his submission that the burden is on the assessee to show that the land was an agricultural land on the date of sale and if no agricultural operations were carried on, the land cannot be claimed to be agricultural. He has further relied upon the judgment of the Hon’ble Supreme Court in the case of CWT v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133 wherein it was held that agricultural land must be a land which could be said to be either actually used or ordinarily used or meant to be used for agricultural purposes

7. The Ld. DR has further based his submissions upon the report of the Inspector of the Income Tax stating that the land in question was very near to the industrial park. He has also relied upon the letter dated 20-01-2011 of the Secretary, Grama Panchayat. He also relied upon the order of the Assessing officer to canvass his submissions.

8. The Ld. AR on the other hand has rebutted the aforesaid arguments raised by the Ld. DR and has argued that the land in question is agricultural land. He has placed heavy reliance on the certificate of the Village Officer certifying that the property was used for coconut plantation and for growing other agricultural crops from 1981 onwards and the assessee was earning agricultural income out of the same. He has submitted that the Assessing officer erred in disregarding the certificate from the Village Officer by treating that it was obtained years after the date of transaction. As regards the report of the Inspector of Income Tax was concerned, it was submitted by the Ld. AR that only because the agricultural land was near to the highway as well as the industrial park, it would not mean that the same can be called as agricultural land. Rebutting the submissions of the Ld. DR that no agricultural income was earned, it was submitted by the Ld. AR that the net agricultural income was meagre and was therefore. not declared, as under the Income Tax Act, the same was not required to be declared if the agricultural income was below Rs. 5000. The Ld. AR has further submitted that the only because the buyer has used the land for commercial purposes, cannot mean that the land in question was not agricultural in nature.

9. The Ld. AR has strenuously argued that the case of the assessee was squarely covered by the ITAT, Cochin Bench in the case of M.J. Joseph v. Dy. CIT [IT Appeal No. 224 (Coch.) of 2011, dated 6-6-2014]. He further relied upon the order of the Ld. CIT (A) to support his submissions.

10. We have heard the rival submissions and perused the facts on record. The term ‘Capital asset’ is defined u/s 2(14) of the Income-tax Act and the same is extracted below:

‘(14) “capital asset means –

but does not include —

(Explanation,) – For the removal of doubts, it is hereby clarified that “property” includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever;’

11. Under section 45 of the Act, there cannot be any levy of capital gains unless the asset transferred is a capital asset. The only question to be considered in the present appeal is whether the land in question is “capital asset” within the meaning of section 2(14) of the Act. It is not the case of the Revenue that the assessee falls within the exceptions contained u/s. 2(14) (iii) of the Act. Therefore, what is to be decided is whether the land in question is an ‘agricultural land’ or not. It is pertinent to mention here that the term “agricultural land” or “agricultural purpose” are not expressly defined under the Act. In the case of Officer-in-charge (Court of Wards) (supra), the Hon’ble Supreme Court held that the agricultural land must be a land which could be said to be either actually used or ordinarily used or meant to be used for agricultural purpose, that is to say, it must have a connection with an agricultural user or purpose and mere potentiality of agricultural use is not enough. In view of the aforesaid judgment it is to be seen whether the land in question was used for agricultural purposes or had any connection with the agricultural purpose.

12. It is the admitted case of both the parties that the State Government had not maintained any records for cultivation of the land. The assessee has submitted that the land was used for the coconut plantation and for the same he has relied upon the certificate of the Village Officer certifying that the subject land was used for coconut plantation and for growing other agricultural crops from 1981 onwards and the assessee was earning agricultural income out of it. In the absence of any record maintained by the State Government, we see no reason to disbelieve the certificate of the Village Officer and the same cannot be rejected solely on the basis that it was issued post the sale of land by the assessee. The certificate is clear and unambiguously states that the said land was used for coconut plantation, which leaves no manner of doubt that the land was used for agricultural purposes.

13. The Cochin Bench of the ITAT in the case of M.J. Joseph (supra) held in favour of the assessee by relying upon the certificate of the Village Officer certifying that the land was used for agriculture only The ITAT, Cochin Bench has considered the fact that the State Government did not maintain any record for cultivation in the State and also the fact that agriculture as an entity was largely unorganised and held as under:

“26. Now the question arises for consideration is in the absence of records maintained by the state government for cultivation whether the material filed by the assessees would be sufficient to prove to show that the assessees were using the land for agricultural purpose/and the land in question has any connection with agricultural purpose. All the assessees are individual assessees. Agriculture in this country is unorganised. Normally illiterate citizens of this country are engaged in agricultural activities. Though the respective state governments are taking steps to sell the agricultural produce in the markets, still, the sale of agricultural produce is not regulated properly. The agricultural labourers, who are engaged for cultivation, are also illiterate. In those circumstances, expecting material evidences from the agriculturists for cultivation may be far-fetched. In respect of corporate companies that are engaged in cultivation, may maintain evidence for purchase of fertilizers, payment of wages to labourers and in respect of sale of agricultural produces. However, such kind of evidence may not be expected from individual farmers so long as the government does not regulate the cultivation of land and sale of agricultural produce in this country. This ground reality cannot be ignored by judicial authorities while adjudicating the dispute with regard to cultivation. Therefore, this Tribunal cannot blame the assessees for not maintaining records for cultivation.

27. The state government is expected to maintain cultivation account for the purpose of estimation of food production of the state and possible excess or deficit in the food production so as to make necessary arrangement for supply of food to the people. In spite of best efforts taken by this Tribunal, no evidence is coming forward from the revenue to show that the state government was maintaining any record. In fact, the assessing officer, after examining the Village Administrative Officer, Additional Tahsildar and Agricultural Officer, found that the Village Administrative Officer and Tahsildar are not maintaining any record for the purpose of cultivation. Even the Agricultural Officer is not maintaining any records for cultivation. The records available with the state government are only the register for collection of contribution towards Kerala Agricultural Workers’ Welfare Fund, Basic Tax Register and the classification of land as agricultural land. Apart from these, there is no other material available with the state government. If that is so, it is not known how the food production of the state was estimated so as to ensure sufficient supply of food to the people of the state. The fact remains is that the revenue could not produce any evidence for cultivation of land maintained by Government of Kerala. From the remand report filed by the assessing officer the food production of the state appears to have been estimated on the basis of the farmers, who were registered on the records of paddy field without considering the actual cultivation. Therefore, the state government for the purpose of food production considers the paddy fields and the agriculturists as a basis for food production. In those situations, the assessee has produced certificates from the village officer to show that the subject lands were under cultivation. This Tribunal is of the considered opinion that in the absence of any other record maintained by the state government for cultivation of the land, the certificate given by the Village Administrative Officer, who is personally acquainted with the land may be one of the factors to be taken into consideration. This Tribunal cannot ignore the certificate given by the Village Administrative Officer on the basis of his acquaintance with the field certifying that the subject lands were subjected to cultivation.

28. We have carefully gone through the judgment of the apex court in the case of Sarifabibi Mohmed Ibrahim And Others v. CIT (1993) 204 ITR 631 (SC). In the case before the Apex Court, the assessee sold a piece of land situated within the revenue limits of Navagaon village in the municipal limits of Surat municipality. In the year 1967, the assessee agreed to sell the land to a housing society. The assessee claimed the gain on transfer of such land as exempt u/s 2(14) of the Act. The Apex Court found that the assessee applying for permission to sell the land for non agricultural purpose and immediately after application for conversion of land, the land was not cultivated for a period of four year. In those factual circumstances, the Apex court found that the land in question is not an agricultural land. In the case before us, the assessee has not applied for conversion of land for non agricultural purpose. The land in question is classified as agricultural land and the village officer certified that the land was subjected to cultivation. The assessee is contributing to the Agricultural Labourer’s Welfare Fund and also paying revenue tax as agricultural land which is evidence from Basic Tax Register. In view of the material available on record disclosing the cultivation of land, this Tribunal is of the considered opinion that judgment of the Apex Court in the case of Sarifabibi Mohmed Ibrahim And Others (supra) may not be applicable to the facts of the case.

29. We have also carefully gone through the judgment of the Kerala High Court in the case of Smt. Asha George(supra). In the case before the Kerala High Court in the case of Smt. Asha George (supra), the question arose for consideration was exemptions u/s 54B and 54F of the Act. One of the pre-conditions for grant of exemptions u/s 54B and 54F is that the land should be used for cultivation immediately two years before the date of transaction. Such a condition is not available for treating the land as capital asset u/s 2(14) of the Act. Therefore, as observed earlier, what is required is the connection between the land and the agricultural purpose and if the land is cultivated in any of the earlier years, this Tribunal is of the considered opinion that the land has to be treated as agricultural land. The material evidence produced by the assessees are – (i) the certificate issued by the Village Officer; (ii) certificate issued by the Agricultural Officer; (iii) classification of land by state government as agricultural land; (iv) receipt for payment of contribution to agricultural workers’ welfare fund; and (v) Basic Tax Register. From these materials, it appears that the state government has classified the subject land as agricultural land. The government is collecting tax as agricultural land which is evident from the Basic Tax Register. The assessees are also contributing towards Agricultural Workers’ Welfare Fund. The Village Officer certified that the subject lands were subjected to cultivation. In those circumstances, this Tribunal is of the considered opinion that the subject lands were agricultural lands beyond the municipal limits or beyond 8 kms radius of the notified municipality. Therefore, the subject land cannot be treated as capital asset within the meaning of section 2(14) of the Act; hence not liable for capital gain tax under the Income-tax Act.”

14. The Ld. DR has tried to distinguish the aforesaid judgment relied upon by the assessee by submitting that in the present case, the assessee had not returned any agricultural income from the transferred property in the earlier assessment years. The Ld. AR has rebutted the same by stating that the agricultural income was meagre and was below Rs. 5000 and therefore, the same was not declared in the return. We see no reason to disbelieve the submission of the assessee in view of the certificate of the Village Officer that actual agricultural operations were carried out by the assessee.

15. The reliance placed by the Assessing officer on the report of the Inspector of Income Tax to come to the conclusion that the land was not an agricultural land is misplaced. The Inspection was done by the Inspector after the transferee had constructed the building on the land. Even in the report of the Inspector, it is observed that there were some coconut trees on the land. Just because the transferee had not used the land for agricultural purposes, the land does not loose its character of being an agricultural land when the same is sold by the assessee. Moreover, the said inspection was done behind the back of the assessee and the assessee was not given any opportunity to rebut the same. In any case, it is settled law that evidence collected behind the back of the assessee can be used as evidence against the assessee. In the case of Hitesh S. Mehta v.ACIT [IT Appeal No. 8023 (Mum.) of 2011], the ITAT Bench, Mumbai deleted the addition based on evidences collected behind the back of the assessee and held as under:—

“Per contra, the Ld. Departmental Representative submitted that since the assessee was shareholders in various companies. The assessee himself should have obtained the letter from the company directly. We do not agree with the submission of the Ld. DR. One of the basic principles of natural justice is that no evidence collected behind the back of the assessee could be used against the assessee unless an opportunity is given to the assessee to rebut the same. As the Revenue authorities have grossly erred in relying upon the evidences collected behind the back of the assessee, the additions based on such materials deserves to be deleted. We, accordingly reverse the findings of the Ld. CIT (A) and direct the Assessing officer to delete the addition of Rs. 3,79,42,133/- which have been made on the basis of the information collected from various companies behind the back of the assessee. This ground of the assessee is accordingly allowed.”

16. The nearness of the land to highway also does not alter the character of the land and appreciation in the price of land cannot be seen in isolation and if agricultural operations were carried out by the assessee, the appreciation in the price of land alone would not lead to the conclusion that the land is not an agricultural land. The objection of the Revenue that coconut plantation could not have been carried out on the soil which was present on the said land and the reliance placed on the letter of the Gram Panchayat Secretary cannot be accepted in view of the clear report of the Village Officer. The judgment of the Hon’ble High Court of Kerala in the case of Kalpetta Estate Ltd. (supra) does not help the case of the Revenue as the facts in the present case are distinguishable, more particularly the fact of the availability of the certificate of the Village Officer in the present case. Also, the land in the aforesaid judgment was forest land.

17. Thus, in view of the aforesaid, we hold that the land in question cannot be treated as capital asset u/s. 2(14) of the Act and therefore, capital gains cannot be assessed on the sale of the land. Accordingly, Ground Nos. 2 to 4 raised by the Revenue are dismissed.

18. Ground Nos. 1 and 5 are general in nature and therefore, do not require any adjudication. Thus, in view of the aforesaid findings, the appeal of the Revenue in I.T.A. No. 456/Coch/2015 is dismissed.

19. In the result, the appeal of the Revenue is dismissed.