THE issues before the Bench are - Whether the transactions of
purchase and sale of five pieces of agricultural land with standing crop, by way
of separate conveyance deeds, beyond the prescribed distance from any municipal
council, amounts to transactions on capital account or adventure in the nature
of trade and Whether the surplus arising on sale of agricultural land gives rise
to agricultural income within the meaning of section 2(1A) read with Explanation
(1)/Section 2(14)(iii)(a) and (b) and consequentially exempt under section 10(1)
of the Act. And the answers go against the Revenue.
Facts of the
case
The assessee purchased certain agricultural land and sold in the previous year relevant to assessment year under consideration. The case of the assessee was that the income arises from the transaction of agricultural land and hence it was exempt under section 10(1) r.w.s. 2(lA)(a) of the Act. Even otherwise the income arising therefrom is not assessable to capital gains tax in view of the provisions of section 2(14)(iii)(a)(b). On the other hand, the case of the Revenue was that it was an adventure in the nature of trade and the income from the impugned land was business income. The AO as well as the CIT(A) were of the opinion that the amount received by the assessee on sale of the impugned land deserved to be treated as profit from adventure in the nature of trade and assessable as business income.
When the case was heard by the Division Bench at ITAT Jodhpur, the Judicial Member observed that the impugned land was purchased on 07.02.2006 and it was sold on 23.03.2007 and it was situated beyond the prescribed municipal limits in a village and being agricultural land the sale proceeds thereon were not assessable to tax as business income. The Judicial Member recorded that the impugned land was purchased and sold alongwith standing crops and the Department accepted the return of income wherein agricultural income on sale of standing crops was shown. He also took into consideration the plea of the assessee that at no point of time the assessee sought for conversion of land use by making an application with the respective authorities. Though the assessee was dealing in sale and purchase of plots in urban areas, so far as this land was concerned, the intention was not to convert into plots and in fact the agricultural land with standing crops was sold to single party.
The Judicial Member observed that the assessee purchased five pieces of agricultural land adjoining each other through different sale deeds and the land was registered on different dates from - 7th February, 2006 to 5th April, 2006. The assessee showed the purchase of agricultural land as 'fixed asset'. In the preceding year the assessee earned Rs.70,000/- on sale of crops which was shown as agricultural income in the return filed by the assessee, which was accepted by the Revenue. In this year Rs.22,000/ was declared on sale of standing crop and accepted by the AO. In fact, another crop was standing at the time of sale which was passed on to the purchaser of the land and hence no agricultural income from this crop was shown in the return as the land was sold along with the crop though the same was declared for rate purposes, for computing tax liability. If the intention of the assessee was to carry on an adventure in the nature of trade she would have applied for conversion of land use and drawn up the requisite plotting scheme, engaged professional architects for preparing site plan approval and would have commenced preliminary development works whereas no such activity was undertaken by the assessee which shows that the intention of the assessee at the time of purchase of land was only to retain the land and it was not purchased for the purpose of resale as an adventure in the nature of trade. He also observed that undoubtedly the land is situated beyond 8 kms from the municipal limit and hence the land has to be considered as agricultural land. So long as the land is capable of agricultural operations, the sale of agricultural land by itself would not make it business income. He also relied upon several precedents apart from analysing the facts of the case to come to the conclusion that the impugned land is Barani land admeasuring only seven Bighas with standing crop which in itself prove that it was not purchased with an intention to utilise the land for any other purpose. He thus concluded that the impugned land is out of the purview of the definition of "capital assets" and hence income therefrom cannot be assessed to tax by treating it as adventure in the nature of trade.
The Accountant Member was not agreeable with the view taken by the Judicial Member. He concluded that the assessee sold the land to make profit. He observed that the assessee was not having any agricultural background since she was deriving income by way of salary. She purchased five pieces of contiguous agricultural land from five different persons. Some amount was spent on levelling the land and also on fencing the land. The land was purchased alongwith standing crop and the said standing crop was sold in the earlier year. It was claimed that two crops were raised in this year and the first crop was sold resulting in agricultural income. The Accountant Member stressed upon the fact that both the lower authorities have given concurrent findings that the transactions of purchase and sale of agricultural land constitute adventure in the nature of trade mainly on account of the fact that the assessee never intended to carry on agricultural operations on the land; the lands were neither irrigated nor any tube well facility was available earlier or installed by the assessee and in fact they were sold within a period of 12 to 13 months of purchase deriving a huge return of 558 percent. He also observed that the land is situated at a distance of more than 500 kms from the place where the assessee usually resides and therefore he drew a conclusion that these lands were not purchased for the purpose of cultivation. Since she was engaged in the business of real estate development the impugned purchase was with the full knowledge that the values are likely to appreciate rapidly as these fall within the new town of National Capital Region (NCR), the global city, on national highway No.8. He also observed that the investment was made out of borrowed funds. Accountant member was of the view that if assessee had not carried on any agricultural operation it would reflect that he is not interested in obtaining any return from these lands and on sale thereof it could be considered as adventure in the nature of trade. The Accountant Member observed that the assessee had not earned any income out of her labour as she was staying in Jodhpur. The land was also not given to any other person for cultivation. She does not have any past record of carrying on agricultural operations. It was observed that the land was situated on the border of Rajasthan and it had been characterised as NCR since 1985, i.e. prior to the date of purchase and a global city was expected to come up in the vicinity which gives great opportunities of making profit. The fact that the assessee borrowed funds to make investment and sold at a very high price, i.e. 6 times more than the purchase price also showed that it was an adventure in the nature of trade. He thus concluded that the entries in the books of account was not really material and at any rate not conclusive of the matter. The Accountant Member was of the opinion that the assessee was a dealer in land and the intention was to make more profit though in the books a different nomenclature was given to it.
With regard to the pleas of the assessee that some expenditure was incurred on levelling and fencing, the Accountant Member observed that the expenditure was too small compared to the investment. Accountant Member observed that no attempt was made by the assessee to install facilities for irrigating the land and borrowed funds were utilised for purchasing various pieces of land. The assessee is otherwise engaged in the business of real estate and hence the impugned purchases were not with the intention of carrying on agricultural operations.
Since there was difference of opinion among the Judicial and Accountant members regarding the nature of piece of land sold, the matter was referred to the third member.
The assessee submitted that the land was situated beyond the prescribed municipal limit and it was also recorded as agricultural land in the Revenue records. The assessee purchased the agricultural land with standing crops thereon and income on sale of the standing crops was shown as agricultural income in the immediately preceding year, which was accepted by the tax authorities. Even in the year of sale of land the first standing crop was sold by the assessee and income therefrom was shown as agricultural income and the AO having accepted the nature of income it cannot now be said that it is not agricultural land and the assessee intended to earn business income thereon. He also submitted that the land being agricultural in nature sale thereof gives rise to agricultural income within the meaning of section 2(1A) read with Explanation 1/2(14)(iii)/10(1) of the Act. It was submitted that only such land which falls within the description of agricultural land under section 2 (14)(iii), upon sale thereof, gives rise to income which cannot be considered as agricultural income within the meaning of section 2(1A) whereas upon sale of agricultural land which is situated beyond eight kilometres from the local limits of any municipality, the sale proceeds thereof had to be considered as 'agricultural income', in which event section 10(1) comes into play, i.e. whether it was on capital account or revenue account, agricultural income cannot be included in the total income. It was also submitted that the assessee had also included the impugned sale proceeds for rate purposes.
CIT-DR relied upon the order passed by the Accountant Member and submitted that whether the transaction is an adventure in the nature of trade or not essentially depends on various facts and it is a mixed question of facts and law and the metaphor "one swallow does not make a summer" cannot be extended to a single trade transaction. His main contention was that the assessee knew, at the time of purchase, that the land falls in the NCR zone and the surrounding circumstances, as stated by the Accountant Member, would highlight that the transaction was with an intention to make maximum profit and hence it may be treated as an adventure in the nature of trade.
Having heard the parties, the tribunal held that,
++ the Apex Court as well as various High Courts have reiterated the basic principle and observed that it is impossible to evolve any formula which can be applied in determining the character of an isolated transaction and a holistic view has to be taken, by taking into consideration the circumstances of the case;
++ if it is not considered as an adventure in the nature of trade the next issue that arises for consideration is whether sale of agricultural land gives rise to 'agricultural income' or it is assessable to tax under the head 'capital gains'. Admittedly, the expression "agricultural income" is not comprehensively defined in the Income Tax Act, though it was explained, under section 2(1A), that any revenue derived from land, which is situated in India, can be considered as agricultural income. Section 2(14) of the Act defines capital asset, which was substituted by Finance Act, 1970 and thereafter in 1989 whereby only such agricultural land which is located within eight kilometres from the municipal limit should be treated as capital asset. In other words, agricultural land situated beyond eight kilometres from the nearest municipal limit cannot be treated as capital asset and sale proceeds thereof may be treated as revenue derived from land which is situated in India and is used for agricultural purposes;
++ it has to be inferred that land situated beyond eight kilometers from the municipal limits has to be excluded from the expression 'capital asset', consequently upon sale of such land, it has to be treated as agricultural income;
++ The fact that the land was falling outside the municipal limit was never disputed by both the Members and in fact a specific ground was raised before the Tribunal that the revenue received on sale of land is exempt under section 2(1A) of the Act. The counsel filed a detailed written submission wherein he pointed out that the assessee treated the sale proceeds as agricultural income under section 10(1) and offered the same for rate purpose. On an appeal the CIT(A)observed that the income which results from sale of agricultural land is not: agricultural income as per sec. 2(1A) of the Act overlooking a specific ground before him that income arising on transfer of agricultural land used for cultivation (subject to land revenue and located beyond eight kilometers of municipal limits) cannot be assessed to tax under the Income Tax Act, 1961. The counsel referred to the amendments brought out by the Finance Act, 1970 and by the Finance Act, 1989 with retrospective effect to highlight that the intention of the Legislature was to tax income from transfer of agricultural land situated in the specified area only and cautiously excluded such land from the scope of agricultural income. He also relied upon the decision of the Bombay High Court in the case of Manubhai A. Sheth vs. Income Tax Officer 128 ITR 87 in support of his contention that profits or gains on sale of agricultural land will be revenue within the meaning of section 2(1) (now 2(1A) of the Act) This principle was reiterated by the Bombay High Court in the case reported in 208 ITR 98. By virtue of the amendments to section 2(14)(iii) of the Act, only agricultural land situated within the municipal limits gets excluded from the definition of agricultural land. Per contra, agricultural land situated outside the municipal limits, upon sale, gives rise to agricultural income only;
++ the impugned land cannot be treated as capital asset since it is situated beyond eight kilometers from the municipal limits and it was purchased as agricultural land and sold accordingly without making any changes such as conversion in the land records, plotting of land, etc. In fact the counsel for the assessee stated that even at the time of purchase of the land it cannot be inferred that the assessee intended to make enormous profit by selling the land within a short span. He also submitted that National Capital Region master plan was prepared in 2002 and notified in 2010 and it was to come into effect from 2031 whereas the land was purchased in 2006 by which time even the master plan was not notified. It is also not in dispute that the assessee earned agricultural income in the immediately preceding year on sale of standing crop and the same was offered as agricultural income. The AO accepted the same for rate purposes. Similarly, for the year under consideration, i.e. year of sale of land, the assessee earned agricultural income for the first part of the year which was also offered for rate purpose and accepted by the Revenue. There is nothing on record to suggest that the assessee has done any act to convert the land for non-agricultural use. It is not even the case of the Revenue that the assessee advertised for sale of the land. The case of the assessee, on the other hand, was that the Vedic Village Developers Pvt. Ltd. offered tempting price and the assessee decided to take the benefit out of it though there was no intention to carry on trade. The Accountant Member observed that the land was situated within the land already acquired by the Vedic Village Developers Pvt. Ltd. At the time of hearing, the counsel for the assessee submitted that it is a concocted fact and it was never admitted by the assessee. It is not even the case of the Revenue that the land purchased by the assessee is situated within the land acquired by the Vedic Village Developers Pvt. Ltd. It cannot thus be inferred that the assessee purchased the land with an intention to convert the same for non-agricultural purposes. It is thus clear that it is a case of sale of agricultural land and the land being situated beyond eight kilometres from the municipal limit, it cannot be subjected to tax under the Income Tax Act either as business income or capital gains. Though the Kerala High Court in the case of T.K. Sarala Devi 167 ITR 136 and the High Court of Punjab and Haryana in the case of Tula Ram 199 ITR 450 dissented from the decision of the Bombay High Court in the case of Manubhai A. Sheth , in the light of the latest decision of the Apex Court in the case of Singhai Rakesh Kumar vs. Union of India 2002-TIOL-545-SC-IT-LB , which in my opinion clarifies the issue subsequently, the only interpretation permissible is that the land situated outside the municipal limits stands excluded from the expression 'capital asset' from the inception and the sale proceeds have to be treated as revenue received from agricultural land. At any rate, the view taken by the Bombay High Court, in my opinion, can be said to be an appropriate view, on an analysis of provisions of section 2(1A)/2(14)(iii) (a) & (b)/ 10(1). When two views are possible a view which is in favour of the assessee has to be taken in the light of the decision of the Apex Court in the case of Vegetable Products Ltd. 2002-TIOL-574-SC-IT-LB . Under these circumstances I answer question No.2 in the affirmative by holding that the surplus arising on sale of the impugned agricultural land gives rise to agricultural income and not assessable to tax. Thus the view of the Judicial Member, on this issue, reflects the correct legal position;
++ the assessee purchased the land with standing crops thereon and it was shown in the Khasra Girdawari records as a land cultivated throughout the period of holding by the assessee. No efforts have been taken by the assessee to change the nature of land. Income from the standing crops was offered for rate purpose as agricultural income. It is not in dispute that the transaction of purchase and sale of agricultural land is not part of a regular business activity of the assessee and it cannot also be treated as expansion of regular business of the assessee. It was an isolated transaction of purchase of agricultural land and sale thereof within a period of 13 months. Though the land is situated in the National Capital Region and there was a plan to develop Shahajanpur - Nimrana area of Alwer district as a global city but the fact remains that the master plan was finalised in the year 2010 and as per the master plan the area will be developed by the year 2031. The case of the assessee is that if the assessee's intention was to carry on an adventure in the nature of trade she has to wait at least till the master plan is finalised as otherwise she cannot expect substantial profit. On the contrary, the land was sold within a short span, seizing the opportunity of offer of better price which shows that the assessee intended to purchase the land as an investment only. It was also submitted by the counsel that the land was covered in NCR area since 1985 and hence this fact, in isolation, can never be considered as a key factor to decide the intention of the assessee since it is a long term project. At any rate, the government policy and the concrete master plan of 2031 was notified in the year 2010, which is a date falling after the sale of the agricultural land and hence it was contended on behalf of the assessee that any inference taken by such fact would be improper since the date of purchase of the land and the date of sale can at best be taken into consideration in appreciating the intention of the purchase of the land. The Apex Court in the case of G. Venkataswami Naidu & Co. vs. CIT 2002-TIOL-179-SC-IT-LB , which in turn was followed by various other courts, observed that merely because a property was sold for a profit it cannot be assumed that it is an adventure in the nature of trade. It is not a case that the purchaser, subsequent to the purchase, tried to improve the quality of the land thereby making it more readily saleable. No single plunge in the waters may partake of the character of an adventure in the nature of trade but the emphasis is given to the fad that the single plunge must be in the waters of trade, i.e. the intention of the assessee should be treated as paramount to consider as to whether it was a sale of agriculture land simplicitor or it was an adventure in the nature of trade. The Judicial Member rightly observed that the land was actually cultivated throughout the period of holding by the assessee, which is evident from the fact that the agricultural income was offered for rate purpose and accepted by the Revenue. It is, therefore, difficult to appreciate the observation of the Accountant Member that the assessee did not take any active step to get returns from the land. The Accountant Member has given emphasis to the fact that the assessee sold the land within a short span out of free will. In my considered opinion whether the land was sold out of compulsion or out of free will, will not alter the character of the transaction. Every assessee would like to make profit on a transaction, given an opportunity. In the instant case the assessee purchased the land with standing crops but ultimately sold the land tempted by the offer made by the Vedic Village Developers Pvt. Ltd. but mere sale of land on a profit cannot be a factor to conclude that the intention of the assessee was to carry on an adventure in the nature of trade. In other words, the subsequent making of profit cannot be a decisive factor. Thus, taking a holistic view of the matter, I am of the view that the Judicial Member had correctly come to the conclusion that the transaction was not an adventure in the nature of trade. The Judicial Member rightly observed that the impugned land will not fall within the purview of capital asset, being the land situated beyond the prescribed municipal limits and thus the sale proceeds thereof are not assessable to tax. For the above reasons question No.1 is answered accordingly;
++ the difference of opinion between the A.M and the J.M. was regarding the nature of piece of land sold. As per the ld. J.M. this land was agricultural one and not a 'capital asset'. The A.M. has taken a different view and has held this land sold as a 'capital asset'. The ld. Third Member has agreed with the view of the J.M. and, therefore, in majority view the piece of land sold is not a 'capital asset';
++ hence, according to the opinion of majority of the Members of the Appellate Tribunal, we answer this ground [issue] in the favour of the assessee.
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