PARASMAL RAVINDRA KUMAR,CHENNAI vs. ITO NON CORP WARD 10(5), CHENNAI

The ld. AR Shri D. Anand, Advocate submits the said lands are admittedly situated at 16 kms from the notified municipalities and would be outside the ambit of capital asset in terms of section 2(14) of the Act. He drew our attention to page 78 & 79 of the paper book, the certificate issued by the Village Administrative Officer dated 14.09.2015 and submits that the disputed lands are classified as agricultural lands in the Revenue Records. Further, he submits that the earning of agricultural income is not a statutorily prescribed condition to determine the character of the land. The ld. AR challenged that the lower authorities went wrong in imposing the artificial condition of earning of agricultural income for the purpose of treating the disputed lands as an exempted category of agricultural lands.

The ld. DR Shri P. Krishna Kumar, JCIT, at the outset, submits the legal background of section 2(14) of the Income Tax Act,1961, which excludes "Agriculture land", from the definition of "Capital Asset", chargeable to capital gains on transfer of such asset. This exemption of agriculture land from taxation existed in income-tax legislation from the 1922 onwards till date, with slight modifications made to the provisions from time to time. He submits that from the year 1922 to 1961, the use of language under capital asset exclusion was "any land which the income derived is agricultural income” and from the year 1961 to 1969, the use of language under capital asset exclusion was modified to “Agricultural land in India". Further, he submits that in the year 1970, the scope of exclusion of agriculture land from the definition of 'capital asset’ was restricted by factoring provisions to exclude all agriculture land situated within the municipal limits or Boards having population of ten thousand or more and agriculture land within eight kilometres from some notified municipality limits. He further submits that there is no definition of "Agriculture" or "Agriculture Land" to be found in the Act. Hence, for the meaning of 'Agriculture' and 'Agriculture Land', reliance will have to be drawn from the judicial interpretations and accordingly, the ld. DR relied on the decision of the Hon'ble Supreme Court in the case of CWT v. Officer-in-Charge (Court of Wards), as reported in [1976] 105 ITR 133 (SC), wherein, it was held as under:  One of the objects of the exemption seemed to be to encourage cultivation or actual utilisation of land for agricultural purposes;  "Agricultural land" must be land which could be said to either actually used or ordinarily used or meant to be used for agricultural purposes;  Mere fact that property was classified in revenue records as agricultural land was not conclusive and such entries could raise only rebuttable presumption:  What is really required to be shown is the connection with an agricultural purpose and user and not the mere possibility of user of land, by some possible future owner or possessor, for an agricultural purpose;  If there is neither anything in its condition, nor anything in 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" for the purposes of earning an exemption under the Act.

He submits that while deciding the above case, the Hon’ble Supreme Court heavily relied on its earlier judgement in the case of CIT v. Raja Benoy Kumar Saha reported in [1957] 32 ITR 466 (SC), wherein, it was held that in the primary sense in which the term agriculture is understood is agar-field and cultra-cultivation, i.e., the cultivation of the field. Subsequently, while upholding a decision of Hon’ble Gujarat High Court in the case of Smt. Sarifabibi Mohmed Ibrahim v. CIT as reported in (1993) 204 ITR 631 (SC), the Hon’ble Supreme Court reiterated that exemption of capital gain on transfer of agriculture land is available only, if such land is found used for cultivation at the time of transfer and after transfer by the purchaser and not just based on the classification of the land as per the land registers maintained by the State Government. Even to this date, the above judgement of the Hon’ble Supreme Court has not been altered or modified or over turned by its subsequent decision.

The ld. DR also submits that any taxpayer, who claim their land transferred is not a capital asset, within the meaning of section 2(14), will necessarily have to demonstrate all the below mentioned aspects. a. The land is classified as an agriculture land in the records of the state; and b. The land is not situated within the area specified under item (b) of sub-clause (iii) section 2(14) of the Act; c. The land was being continuously used by the seller for the purpose of agriculture till date and time of transfer; and d. The land remained, being used for agriculture, even after the transfer, by the purchaser. e. If, even one of the above four limbs is not satisfied or not substantiated, the claim of land being an agriculture land excluded within the meaning covered under section 2(14) of come Tax Act, is not admissible.

Heard both the parties and perused the material available on record. We note that the assessee placed on the record three sale deeds all dated 06.07.2015 which are at page 40, 52 and 66 of the paper book, wherein, the assessee and two others sold three parcels of land in Survey No. 1/2B measuring an extent of 1 acre and 73 cents for a consideration of ₹.3,77,16,000/-, Survey No. 2/3B measuring an extent of 58 cents for ₹.1,26,45,000/- and Survey No. 1/2C3B measuring an extent of 43 cents for ₹.93,75,000/- totalling to ₹.5,97,36,000/- and by allowing indexed cost of acquisition, the Assessing Officer determined the long term capital gains at ₹.4,99,21,440/- and 1/3 of assessee’s share of ₹.1,66,40,480/- was brought to tax being non-agricultural land.

We find, on perusal of the section 2(14)(iii) (b) of the Act explains that in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the central government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the official Gazette, meaning thereby, land situated beyond eight kilometres from the local limits of any municipality or cantonment, is agricultural land.

In this regard, we find copy of certificate dated 14.09.2015 in native language (Tamil) issued by the Village Administrative Officer at page 78, true translation of which at page 79 of the paper book. On perusal of the same, we note that the Village Administrative Officer certified that the population of the Parthavadi village is less than 7000 and the distance between the nearby Municipalities to Parthavadi village is approximately 16 kms. Further, the assessee produced copy of unregistered lease agreement executed on 16.01.2009 for cultivation in the impugned agricultural land at page 85 to 87 and English version of the same at page 88 of the paper book. The assessee placed on record at page 81 of the paper book, the copy of Patta issued by the Deputy Tashildar, Sriperumbudur Taluk dated 12.01.2009 in favour of the assessee and two others by stating the impugned land is an agricultural land. The assessee also produced copy of Chitta Adangal issued by the Village Administrative Officer Parthavadi Village, Sriperumbudur Taluk, wherein, it has been mentioned that cultivation of groundnut has been carried out in the impugned lands. The assessee also brought on record copy of the assessment order for AY 2015-16 in respect of Smt. Nainmaljan Anitha being one of the co-parceners, wherein, the agricultural income earned in the impugned land has been accepted by the Assessing Officer at page 127 of the paper book. The assessee brought on record the copy of the ITR filed for AY 2014-15 and 2015-16, wherein, net agricultural income claimed at ₹.1,97,500/- and ₹.1,06,400/- respectively has not been disputed by the Assessing Officer at pages 141 & 142 and page 194 of the paper book.

Otherwise also, we find in the case of P. Ashok Kumar in T.C.A. No. 268 of 2011, the substantial question of law before the Hon’ble High Court of Madras was, whether on the facts and circumstances of the case, the Tribunal was right in holding that non-cultivation of piece of land does not lose its character as an agricultural land unless the user had specifically got changed the nature of the land. The Hon’ble High Court was pleased to dismiss the said question of law by holding that entries made in the certificate issued by the Tashildar is important even there is no cultivation carried on the lands as per the land records. Another decision in the case of Sakunthala Vedachalam reported in (2015) 53 taxman.com 62 (Madras), wherein, it has been held where lands were classified as agricultural land as per Revenue records and satisfy other conditions of section 2(14) of the Act, though the assessee put the lands to commercial use, was irrelevant. In the present case, as discussed above, the subjected lands are agricultural land in pursuance of section 2(14)(iii)(b) of the Act read with Notification issued by the Central Government, fortified by the decisions of the Hon’ble High Court of Madras.

Therefore, in pursuance of the provisions under section 2 of the Act read with notification above, the subjected lands are situated 16 kms approximately and in our opinion, are agricultural lands. Further in support of the arguments, the ld. AR placed copy of Google Map at pages 82 to 84 of the paper book showing the distance between Sriperumbudur to Patharvadi village at distance of 16.74 kms. and the distance between Walajabad to Patharvadi village is 15.24 kms. Therefore, on an examination of copy of Patta at page 81, chitta adangal at pages 89, 90 & 91 and copy of certificate issued by the Village Administrative Officer at page No. 78, we hold that the subjected land is an agricultural land, exempt from taxation. Under the above facts and circumstances as well as in view of the decisions of Hon’ble High Court of Madras, we set aside the order of the ld. CIT(A) in confirming the addition made by the Assessing Officer on account of long term capital gains and accordingly, the ground Nos. 3 to 8 raised by the assessee are allowed.

The next issue taken by the ld. AR is with regard to the disallowance made under section 14A of the Act and confirmed by the ld. CIT(A).

In the assessment order, the Assessing Officer noted that the assessee has debited interest of ₹.7,82,150/- towards interest on capital amounting to ₹.4,42,460/- received from his partnership firm Swasthik Industries. The assessee has joined as Partner on reconstitution of the firm Swasthik Industries during the relevant previous year and has credit balance of ₹.1,18,95,729/- in his capital account. The Assessing Officer further noted that the assessee was in receipt of exempt income of ₹.60,338/- on account of dividend & share of income from partnership firms and claimed interest expenditure of ₹.7,82,150/-. The Assessing Officer invoked the provisions of section 14A r.w.s. Rule 8D since the assessee has investment of ₹.2,14,19,435/-, which are capable of generating exempt income but no expenditure was disallowed under section 14A of the Act r.w. Rule 8D. Accordingly, the Assessing Officer determined the disallowance under section 14A of the Act r.w. Rule 8D at ₹.5,51,812/- and added to the total income of the assessee. On appeal, the ld. CIT(A) confirmed the disallowance made by the Assessing Officer.

The ld. AR, by relying upon the decision of the Hon’ble Jurisdictional High Court in the case of PCIT v. Envestor Venture Ltd. [2021] 431 ITR 221 (Mad), prayed that the disallowance may be restricted to the extent of exempt income earned by the assessee.

Having heard both the parties and perused the decision of the Hon’ble High Court of Madras in the case of PCIT v. Envestor Venture Ltd. (supra) and find that while affirming the order of the Tribunal, the Hon’ble High Court has observed and held as under: “The disallowance, under section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 of the expenditure incurred to earn exempted income has to be computed in accordance with rule 8D of the Rules, which in essence stipulates that the expenditure directly relatable to the earning of such exempted income, can alone be disallowed under section 14A of the Act. The assessing authority has to mandatorily record his satisfaction that the proportionate disallowance of expenditure under section 14A of the Act as made by the assessee is not satisfactory and therefore, the same is liable to be rejected for such cogent reasons as specified and thereafter, the computation method under rule 8D can be invoked to compute the quantum of disallowance. It is well-settled that the Rules cannot go beyond the main parent provision. Therefore, what has been provided as computation method in rule 8D cannot go beyond the roof limit of section 14A itself under any circumstances. Held, that the Tribunal was right in restricting the disallowance under section 14A of the Act to the extent of exempt income earned during the previous year relevant to the assessment year 2015-16.”

We note that by referring to various case law including the decision in the case of Joint Investments Private Ltd. v. CIT [2015] 372 ITR 694 (Delhi) and in the case of Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC), the Hon’ble Madras High Court held that the disallowance under section 14A of the Act should be restricted to the extent of exempt income earned during the previous year. Respectfully following the judgement of the Hon’ble High Court of Madras in the case of PCIT v. Envestor Venture Ltd. (supra), we direct the Assessing Officer to restrict the disallowance to the extent of exempted income earned by the assessee.