Whether an authority which has been established to promote development of 'urban area’ and vested with powers to hold, acquire, dispose of property or frame schemes, can be considered as 'Municipality' within Sec 2(14) - YES: HC

THE issues before the Bench are - Whether an urban area developed by Haryana Urban Development Authority forms part of the Municipality - Whether land acquired by notification issued under the Land Acquisition Act, which falls within 5 kms of Haryana Urban Development Authority, can be considered as capital asset; Whether an authority which has been established to promote and secure the development of all or, any of the areas comprised in an ‘urban area’ and vested with all powers to hold, acquire, dispose of property or frame schemes, can be considered as 'Municipality' within Section 2(14) of the Act; Whether the expression 'Municipality' in Section 2(14) of the Income Tax Act is restricted to a Municipality constituted under the relevant Municipal Laws and cannot include any other area known by any other name; Whether local authority in terms of Section 3 (31) of the General Clauses Act means a 'Municipality' - Whether the nature of land whether it is agriculture or not is not relevant, if the
land is within municipal limits and Whether the expression 'by any other name' appearing in Item (a) of clause (iii) of Section 2 (14) has to be read ejusdem generis with the earlier expressions i.e. municipal corporation, notified area committee, town area committee, town committee. And the verdict goes in favour the Revenue.

Facts of the case

The assesses had lands located in two Villages namely Bana Madanpur and Jhuriwala respectively. The land was intended to be acquired by way of a notification dated 04.05.1995 issued under Section 4 of the Land Acquisition Act, 1894. The assessee received compensation on account of acquisition of land. The AO assessed interest on the said compensation as taxable in the year under consideration. Such order was set aside by the CIT(A) by holding that since the litigation in respect of compensation was pending finalization, therefore, the amount of interest was not taxable in the hands of the assessee. The said order of the CIT (A) was upheld by the Tribunal vide order 28.8.2008. Still aggrieved, the Revenue filed an appeal before the High Court. The High Court in its order dated 27.10.2010 relied upon the judgment of Supreme Court in Commissioner of Income Tax Vs. Ghanshyam (HUF) to hold that irrespective of the fact whether litigation with regard to award of compensation had attained finality or not, in terms of amended Section 45(5)(b), the taxability of income shall be in the year of receipt. Thus the appeal of the assessee was dismissed and the matter remanded to the Tribunal to pass an order in accordance with law.

The assesses filed a special leave petition before the Supreme Court. An argument was raised that the judgment in Ghanshyam’s case was not applicable to the present case, as the land in question was an agricultural land. The Supreme Court directed the Tribunal to give finding on such question. The Tribunal Vide a detailed opinion dated 07.06.2012, returned a finding that the land was not agricultural. Thereafter, the matter came up for final hearing before the Supreme Court on 07.12.2012, when the Special Leave Petition was dismissed. However, the Supreme Court did not express any opinion on the correctness of the report arrived at by the Tribunal.

The assesses contended that the opinion of the Tribunal was not accepted by the Supreme Court, therefore, such opinion cannot be taken into consideration for returning a finding, whether the land acquired was an agricultural land or not. It is argued that the opinion of the Tribunal was based upon an order passed by this court in Income Tax Appeal No.276 of 2004 titled “Commissioner of Income Tax, Chandigarh Vs. Smt. Anjana Sehgal” wherein an erroneous finding was returned that prior to constitution of Municipality of Panchkula on 25.01.2001, there was a Notified Area Committee. Therefore, neither the judgment of this Court in Anjana Sehgal’s case nor the opinion of the Tribunal were relevant to determine; whether the land was agricultural or not on the date of notification.

Having heard the parties, the High Court held that,

++ a perusal of the evidence led by the assesses before the Reference Court shows that the land for developing Sector 24 to 28 was acquired vide notification dated 26.06.1989, which included the land of the assessee. The plots in Sector 25, Panchkula, i.e. the land of the assessee earlier acquired were allotted in June 1994 at the tentative price of Rs.974/- per square meter by Haryana Urban Development Authority. The outer boundary of Sector 28, Panchkula, which was acquired in the year 1989 is 7 ½ Km from Majri Chowk, Panchkula, whereas the acquired land is situated between the developed sectors i.e. Sectors 24 to 28 on the one side and Sectors 21 and 3 on the other side and is 1 km. from the District Headquarters. The land in question abuts National Highway 73 and that the acquired land is extensively developed area and is near to Government College, Saket Hospital, District Headquarters/Mini Secretariat, General Hospital, Panchkula than Sectors 24 to 28, Panchkula for which land was acquired in the year 1989. Thus, the land acquired in 1995 was an urban land in close proximity with District Headquarter and much closer to the District Headquarter than the land of the assessee itself acquired in the year 1989;

++ with the above factual back ground, the argument of counsel for the assessee is required to be examined. It is argued that in terms of Section 2 (14) of the Income Tax Act, 1961, an agricultural land is excluded from the capital asset, if it is not a land situated in an area, which is comprised within the jurisdiction of Municipality (whether known as Municipality, Municipal Corporation, Notified Area Committee, Town Area Committee or “by other name”). Sub Clause (b) of Section 2(14) of the Act contemplates that Central Government may specify the distance of not more than 8 Km from the local limits of Municipality to be excluded from agricultural land. It is in terms of the said provision; the Central Government has published a notification dated 06.01.1994 contemplating that the area up to a distance of 5 Km from the municipal limits of Panchkula in all directions shall not be an agricultural land;

++ counsel for the assessee has vehemently argued that the Municipal Council Panchkula was constituted for the first time vide notification dated 25.01.2001 and there was no Municipality or Notified Area Committee constituted for Panchkula prior to the said date. The argument is that there was no Municipality of Panchkula in the year 1994, therefore, the said notification in respect of land within 5 Km of Panchkula Municipality is vague, ineffective and cannot be made basis for determining the nature of land in question. The notification constituted Municipal Council was published only on 25.01.2001, therefore, the notification of the Central Government cannot be taken into consideration for determining the nature of the land acquired vide notification issued in the year 1995. Therefore, the land acquired for development of Panchkula has been wrongly treated to be capital asset in Anjana Sehgal’s case and that the said judgment does not lay down correct law for returning a finding that the land acquired is not a capital asset. Counsel for the assessee has referred to the judgments of Supreme Court in Commissioner of Wealth Tax, Andhra Pradesh Vs. Officer-in- Charge (Court of Wards), Paigah and Commissioner of Income Tax Vs. Gemini Pictures Circuit Private Ltd. as well as judgments of Bombay High Court and Kerala High Court in Commissioner of Wealth-Tax, Poona Vs. H.V. Mungale and Commissioner of Income Tax Vs. Murali Lodge respectively;

++ from the perusal of the affidavits filed by the assessee in proceedings relating to the previous assessment year, the part of the land owned by the assessee was acquired in the year 1989 i.e. for development of Sectors 24 to 28, Panchkula. Sector 28 is at a distance of seven and half kilometers from the District Headquarter i.e. Majri Chowk, which has been treated as a zero point by the assessee themselves in the matter pertaining to determination of compensation. The land acquired, the present subject matter, is at a distance of 1 Km from such zero point. In land acquisition cases, the assessee have projected that the land has a potential for being developed as a residential and commercial area located in close proximity of developed Panchkula city;

++ the ‘Municipality’ as defined in clause (e) of Article 243P of the Constitution means an institution of self-government constituted under Article 243Q. Article 243Q provides for the constitution of the municipalities provided it may not be constituted in such urban area or part thereof as the Governor may having regard to the size of the area and the municipal services being provided or proposed to be provided by an industrial establishment in that area and such other factors as he may deem fit to be a Municipality. Haryana Urban Development Authority is a local authority in terms of Section 3 of the Haryana Urban Development Authority Act, 1977. Such authority has been established to promote and secure the development of all or, any of the areas comprised in an ‘urban area’ and for that purpose the Authority shall have the power to acquire by way of purchase, transfer, exchange or gift, held, manage, plan, develop and mortgage or otherwise dispose of land and other property to carry on by itself or through any agency. The Haryana Urban Development Authority is a corporate body, which has a right to hold, acquire, dispose of property or frame schemes there under. It has been authorized to develop property, make plots, allot plots, carve out zones in planning, construct plots and delegate its authority of construction to other agencies. The Supreme Court in Union of India & others Vs. R.C.Jain & others examined the question whether Delhi Development Authority (DDA) is a local authority within the meaning of Section 3 (31) of the General Clauses Act, 1897;

++ the Supreme Court held that such an authority to be local authority must have separate legal existence as corporate body. It must not be a mere governmental agency, but must be legally independent entities. The Court held that DDA is empowered to levy betterment charges on the owners of the properties and the arrears of betterment charges can be recovered as arrears of land revenue. There is an element of popular representation in the constitution of DDA and the functions of the DDA are more akin and similar to the functions of the Municipality including the power of zonalisation prescribed the use to which each zone is to be put, demolition of constructions made contrary to zoning regulations. Though in the aforesaid case, the DDA was found to a local authority though there was no specific provision declaring the DDA to be as local authority in the Statute. But in the case of Haryana Urban Development Authority, Section 3 of the Haryana Urban Development Authority Act itself declares Haryana Urban Development Authority to be a local authority. Still further, such authority is a separate corporate entity. Though the members of the Authority are not elected, but they are non official members as well in terms of Section 3 of the Act. The functions and duties of the Haryana Urban Development Authority are akin to a Municipal Committee. The development is carried out by authority in an urban area alone, which is to be developed by such authority is a Municipality and would fall within the expression known ‘by any other name’. The local authority in terms of Section 3 (31) of the General Clauses Act means a Municipality. Therefore, conversely, the expression ‘Municipality’ in Section 2 (14) of the Act would include a local authority;

++ the expression ‘Municipality’ in Section 2(14) of the Act is very wide. It is not restricted to a Municipality constituted under the relevant Municipal Laws such as Haryana Municipal Act, but it would include any other area known by any other name. Sub-clause (a) of clause (iii) of Section 2 (14) deals with an area which falls within the jurisdiction of a Municipality, whereas clause (b) enable the Central Government to declare an area situated within 8 kms from the local limits of any Municipality referred to in clause (a) to notify having regard to extent and scope for urbanization of that area. The notification dated 06.01.1994 takes into its ambit an area within 5 kms of the Municipality in the expression ‘capital asset’. Therefore, the urban area developed by the Authority forms part of a Municipality;

++ in Anjana Sehgal’s case, the Court has taken into consideration the notification dated 06.01.1994 specifying the area of 5 Km outside the local limits of municipalities and cantonments in all directions as the Municipal Area for the purposes of the Act. In the aforesaid case, the land in question was situated in State of Punjab, but within 5 kms of Municipality. It was held that if land is adjacent to a municipality, it is an urban land covered by Section 2 (14), even if the Municipality and the land fall in different States, the land will continue to be urban land;

++ in Officer-in-Charge (Court of Wards), Paigah case, the Supreme Court has not approved the Full Bench judgment of Andhra Pradesh High Court in Officer-in-Charge (Courts of Wards) Vs. CWT giving wide connotation as was possible to give to the words ‘agricultural land’. The Court did not approve the said wide interpretation and observed inter alia to the following effect:[“...........If we were to give the widest possible connotation to the words ‘agricultural land’, as the Full Bench of the Andhra Pradesh High Court seemed inclined to give to the term ‘agricultural land’, we would reach the conclusion that practically, all land, even that covered by buildings, is ‘agricultural land’ inasmuch as its potential or possible use could be agricultural. The object of the Wealth-Tax Act is to tax surplus wealth. It is clear that all land is not excluded from the definition of assets. It is only ‘agricultural land’ which could be exempted. Therefore, it is imperative to get reasonable limits to the scope of the ‘agricultural land’, or, in other words, this exemption had to be necessarily given a more restricted meaning than the very wide ambit given to it by the Full Bench of the Andhra Pradesh High Court......."];

++ however, in the aforesaid case, the Court was examining the definition of an ‘asset’ as contained in the Wealth-Tax Act, which expression excludes agricultural land. The aforesaid judgment deals with an ‘asset’ as to when the same can be treated to be an agricultural land. That was not a case of a land falling within the Municipality. The nature of land whether it is agriculture or not is not relevant if the land is within municipal limits. Any land would be capital asset within meaning of item (a) of clause (iii) of Section 2(14) of the Act. The location of land within municipal limits is the yardstick to determine the nature of an asset. The said judgment, therefore, does not advance the argument raised by the assessee. But as per the said judgment, the objects of the incorporation of an Act are to be taken into consideration. An agricultural land falling within Items (a) & (b) of sub-clause (iii) of Section 2 (14) of the Act would be outside the ambit of agricultural income. This is so held by the Supreme Court in Singhai Rakesh Kumar Vs. Union of India & others, when it was held to the following effect;

++ reliance of the counsel for the appellant on the Division Bench judgment of Kerala High Court in Murali Lodge’s case, wherein the land was situated within Guruvayur township constituted under the Guruvayur Township Act. With respect, we have reservation about the findings recorded. The Court has held that Guruvayur township can be a local authority, but all local authorities cannot be called Municipalities. Considering the expression ‘Municipality’ as defined in Black’s Law Dictionary, the Court observed that the tests were; the administration of the provisions of the Kerala Municipalities Act, 1960 was vested with the standing committee consisting of chairman and commissioner etc. Such members are elected by the residents of the area. The Chairman and vice-chairman of the municipality are elected by the members of the council. The Commissioner is appointed by the Government in consultation with the council;

++ we are unable to agree with the view expressed by the Kerala High Court in the aforesaid judgment. The expression ‘by any other name’ appearing in Item (a) of clause (iii) of Section 2 (14) has to be read ejusdem generis with the earlier expressions i.e. municipal corporation, notified area committee, town area committee, town committee. The Court has also not considered the scope and ambit of Section 3 (31) of the General Clauses Act defining local authority;

++ the judgment of Bombay High Court in H.V. Mungale’s case again deals with the provisions of Wealth Tax Act so as to determine; whether the asset is an agricultural asset or not. The expression ‘Municipality’ will include a local authority was not the question raised or decided;

++ in view of the above discussion, we hold that the land, subject matter of acquisition, is a capital asset falling within the scope of clause (iii) of Section 2 (14) of the Act.