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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND SHRI MANOJ KUMAR AGGARWAL
आदेश आदेश /O R D E R आदेश आदेश
PER MAHAVIR SINGH, VP:
This appeal by the Assessee is arising out of the order of the Commissioner of Income Tax (Appeals)-15, Chennai in I.T.A.
No.189/2018-19/CIT(A)-15, dated 27.06.2019. The assessment was framed by the Income Tax Officer, Non-Corporate Ward – 15(2), Chennai for the Assessment Year 2016 - 2017, u/s.143(3) of the Income Tax Act, 1961, (hereinafter ‘the Act’) vide order dated 29.12.2018.
2. The only issue in this appeal of the Assessee is against the order of the Commissioner of Income Tax (Appeals) in confirming the action of the Assessing Officer in treating the agricultural land as capital asset, leviable as capital gains tax. For this, the Assessee has raised the following two grounds.
“1. The Commissioner of Income Tax (Appeals) erred in holding that conversion of agricultural land into stock in trade resulted in capital gain, inspite of holding that the Assessee has earned agricultural income from the rubber plantation in the current year and as well as the earlier years.
The Commissioner of Income Tax (Appeals) failed to see that the land in question falls within the definition of agricultural land 2(14)(iii) is consequently excluded from capital asset.”
The brief facts are that the Assessing Officer during the course of the assessment proceedings, assessed the agricultural income from rubber plantation amounting to Rs.6,56,347/- as income from unexplained sources, as no documentary evidences was produced that the agricultural operations were carried on by the Assessee to earn this income. The Assessing Officer had also assessed the sale consideration of 37.99 cents of land amounting to Rs.11,39,700/- as capital gains, taxable as against the claim of the Assessee on the exempt capital receipt. Admittedly, the Assessee has sold 37.99 cents of land out of the total land admeasuring 399 cents of land
:: 3 :: Rs.11,39,700/-. The Assessing Officer assessed this land as long term capital gain and taxed accordingly.
Aggrieved, the Assessee preferred appeal before the Commissioner of Income Tax (Appeals).
The Commissioner of Income Tax (Appeals) also confirmed the action of the Assessing Officer by observing in paragraph nos.4.3.5 and 4.3.6, as under:
“4.3.5. I have considered both the points of view. Although, the Appellant claimed the land as agricultural land, as a matter of fact, it was declared as a capital asset in the Appellant’s balance sheet. The Appellant has not proved that it is an agricultural land as defined u/s.2(14)(iii) of the Income Tax Act, 1961 after submitting documentary evidence with regard to population and location of land and fulfillment of the conditions stipulated under the Act. Since, the Appellant has failed to prove that the land sold was in fact an agricultural land, his claim of exemption from LTCG is not acceptable and therefore, the corresponding ground is dismissed.
4.3.6. Now, I come to the Appellant’s claim that the capital gains is not attracted on conversion of capital asset to stock-in-trade in this relevant Assessment Year followed by a sale of 38 cent of land. As per the provision of section 45(2) r.w.s.2(47)(iii), it is very clear that the conversion of capital asset into stock-in- trade and subsequent sale of 38 cent of land will definitely attract capital gains tax. In view of the above remarks, I am convinced that the sale of 38 cent of land after conversion of capital asset to stock- in-trade to the extent of Rs.11,39,700/- is to be brought to capital gains tax. However, I do not agree with the AO’s assessment of the entire 399 cent of land as only 38 cent was actually sold in this relevant assessment year. Therefore, the AO’s assumption that the entire land of 399 cent was sold is not :: 4 :: factually correct. The AR’s contention that the Appellant had declared a business income of Rs.5.63 lakhs on sale of land is immaterial in view of the provisions mentioned above. After considering both the points of view, the AO is directed to restrict the addition of Rs.65.17 lakhs to Rs.11,39,700/-. The Appellant’s grounds are partly allowed on this issue.”
Aggrieved, the Assessee is in second appeal before the Tribunal.
We have heard the rival contentions and had gone through the facts and circumstances of the case. Before us, the learned Counsel for the Assessee argued that even though the Assessing Officer has elaborately discussed the statutory provisions contained in Section 45(2) of the Act, she has failed to correctly understand the legal position vis-à-vis the facts in the Assessee’s case. Sub-section 45(2) of the Act applies to a case, where a person converts his ‘capital asset’ into ‘stock-in-trade’.
Further, the learned Counsel for the Assessee stated that in the Assessee’s case, what was converted was a land that was continuously used as agricultural land for the past many years.
Agricultural land is not a capital asset as per Section 2(14) of the Act. Therefore, when the agricultural land is converted into stock-in- trade, Section 45(2) of the Act can have no application. When the land had got converted into stock-in-trade, the asset becomes a business asset and when it is sold, the income derived from it is :: 5 :: profits and gains from the business and is not capital gains.
Consequently, there is no question of cost as on 01.04.1981 or indexation of the cost as per Section 48 of the Act. In other words, where an agricultural land is held by an Assessee and is converted into stock-in-trade, there would be no capital gains which will arise under Section 45(2) of the Act. The difference between the fair market value of the asset after conversion and the market value of the agricultural land on the date of conversion will escape tax, since capital gains tax is not leviable on transfer of agricultural land. The learned Counsel for the Assessee further stated that it is in the above background, it will have to be considered as to how the profits will be computed when the land is subsequently sold, either after development or without any development. In such a case, the decision of the Hon’ble Apex Court in the case of the Commissioner of Income Tax Vs. Groz Becket Safboo Limited reported in 116 ITR 125 (SC) would apply. The profits would be computed after deducting from the sale proceeds and the market value of the land on the date of conversion into stock-in-trade would not be the original cost of acquisition. Further, the learned Counsel for the Assessee cited that in the case of the Commissioner of Income Tax Vs. B.B. Vyas reported in 261 ITR 73 (Guj), wherein the Hon’ble Gujarat High Court upheld the contention of the Assessee that where the agricultural land purchased by him in the year 1961 was :: 6 :: 1962, the cost of acquisition will be taken to be the market value of the asset in 1962.
Further, the learned Counsel for the Assessee also argued that the Commissioner (Appeals) has admitted in this order vide paragraph no.4.3.1, that it is the agricultural income from the land in question, wherein the Commissioner (Appeals) has observed as under:
“After perusing the Appellant’s submission, I am convinced that the Appellant has been consistently declaring agricultural income. The fact that, he had rubber plantation in Kerala and declared agricultural income, supported by documentary evidence and return of income. In view of the above remarks, the Appellant’s declaration of agricultural income is accepted and the AO’s addition is deleted.”
Accordingly, the learned Counsel for the Assessee stated that the land in question is not situated in an area which comprised within the jurisdiction of a municipality, municipal corporation, notified area committee, town area committee or town committee. It is situated in a village, namely Pathanapuram Village, Kollam District of Kerala State. As per the Certificate dated 07.02.2022, issued by the Village Officer, Pathanapuram, the population of the Pathanapuram Village is 32,339. The nearest municipality to the subjected land is Punalur municipality and the subject land is situated at a distance of ten kilometers from the boundaries of Punalur municipality. The learned Counsel further stated that on reading with the conditions stipulated
:: 7 :: Section 2(14)(iii), it can be seen that the land in question cannot be a ‘capital asset’ as on the date of conversion into stock-in-trade.
Further, to put it more precisely, the land which was converted by the Assessee into stock-in-trade was not a ‘capital asset’ and consequently the provisions of Section 45(2) cannot have any application.
On the other hand, the learned Senior Departmental Representative relied on the assessment order and that of the order of the CIT(A).
After hearing the rival contentions and on going through the facts and circumstances of the case, we are of the view that the Assessee now has produced the Certificate from the Village Administrative Officer [VAO] stating that the land situated is at ten kilometers from the boundaries of Punalur Municipality. In this Certificate, it is mentioned that the population of this village named as Pathanapuram Village is 32,339 as per census record prevailing during the year 2011-2012.
We noted that the facts brought out by the Assessing Officer in his Assessment Order and that of the CIT(A) are contradictory, reason being that the CIT(A) admits that the Assessee from this very land has earned agricultural income which needs verification. Hence,
:: 8 :: Assessing Officer, as consented by both the sides.
Thus, the said orders of the lower authorities are set aside and we remand the matter back to the file of the Assessing Officer for adjudicating afresh in the light of the facts and circumstances.
In the result, the appeal of the Assessee is allowed for statistical purposes.
Order pronounced in the court on 20th April, 2022 at Chennai.