ACIT, COCHIN vs. SRI.P.C.JOSE, COCHIN

The said lands were situated in Thrikkakara Panchayat. The area of Thrikkakara Panchayat was notified area during the period from 1984 to 1994, but denotified in the year 1994. The appellant purchased adjacent pieces of land from 8 different parties during F.Y. 2006-07. These lands were sold to different parties for a total consideration of Rs. 19,35,80,550/-. In the year of purchase of these lands, the appellant had shown the purchase consideration as advance and shown investment in the property under the head “loans and advances”. It was claimed that the lands sold were agricultural both at the time of purchase and as well as sale and the land was not situated within the notified distance from the local limit of any municipality and, therefore, the gain arising on sale of such lands to be exempt from tax, as it is not capital asset within the meaning of section 2(14)(iii) of the Act. However, the AO was of the opinion that it is a capital asset by citing the following reasons: - & 84/Coch/2012 P.C. Jose I. The land sold was situated in a highly developed residential area. The mere fact that vegetable and crops were available at the time of sale cannot make the property exempt. II. The lands purchased were sold within a short span of time to the real estate companies. Therefore the intention of the assessee behind the purchase of land is only for business purpose. III. Not only the land must be capable of use for agricultural purpose but also should have actually used. IV. The assessee was already in real estate business and there were frequent purchases and sales of land. Therefore, the lands were purchased with the intention for resale for a profit, which is “an adventure in nature of trade”. Accordingly the AO brought to tax the gains arising out of land amounting to Rs. 11,29,16,575/- as business income.

Being aggrieved, an appeal was filed before the CIT(A), who on due consideration of the submissions of the appellant that there is a prevailing legislation in the state of Kerala, which prohibits conversion of agricultural land, especially paddy fields into non- agricultural except with the prior approval of the prescribed authority on the certificate issue by Revenue Department of the State government, whereas the land in question were classified as ‘Nilam’ (paddy field) and the purchase and sale documents have clearly describes the land as ‘agricultural land’. The profits arising on sale of land classified as ‘paddy field’ are exempt from tax, while confirming taxability of gains arising on sale of balance of lands. The CIT(A) also directed the AO that out of the total disallowance of development expenditure of Rs. 42,25,059/- while computing the capital gain only Rs. 33,25,059/- is to be allowed and the balance amount of Rs. 9,00,000/- to be confirmed, as the same was claimed in respect of properties held to be agricultural land. The CIT(A) also held that the AO was not justified in disallowing the loss arising from the business of card division of Rs. 7,50,927/- and proceeded to hold that the same is to be set off against other income. Thus, the appeal of the assessee was partly allowed by the CIT(A).

The AO held such lands as non-agricultural lands for the reasons cited supra and held it be to capital asset and gains arising from sale of the lands were brought to tax as business income of the assessee. On appeal before the learned CIT(A), the CIT(A) held that part of land which were ‘nilam’, i.e. ‘paddy lands’ were agricultural & 84/Coch/2012 P.C. Jose lands and accordingly held that the gains arising on sale of such lands were exempt from tax. The gains arising on the balance of lands were held to be taxable without passing a speaking order.

Being aggrieved, assessee is in appeal before in the present appeal.

It is submitted that the judicial precedents rendered in the context of provisions of section 54B have no application in the context of provisions of section 2(14)(iii) of the Income Tax Act.

Finally, it is submitted that the appellant had discharged the onus of proving that it is agricultural land which remains uncontroverted by the Revenue.

On the other hand The contentions of the learned CIT-DR are as under: - i. The said lands were situated in area which is highly developed. ii. The lands were sold to a real estate company as a single parcel of land. iii. It is submitted that the tests laid down by the Hon'ble Supreme Court in the case of Sarifabibi Mohammed Ibrahim v. CIT [1003] 204 ITR 631 outweigh against the assessee. iv. Finally the learned CIT- DR placing reliance on the decision of the Hon'ble Jurisdictional High Court in the case of Sreedhar Ashok Kumar v. CIT (ITA No. 251/2024 dated & 84/Coch/2012 P.C. Jose 11.12.2017) to submit that mere categorization of land as agricultural in Revenue record was not sufficient to raise the presumption that the lands sold were agricultural land.

We have heard the rival contentions of both the parties and perused the material available on record. The issue that arises for our determination is whether the subject lands can be considered as agricultural land for the purpose of exemption from tax of the gains arising on sale of the said lands. On a mere reading of the provisions of sub-section (iii) of section 2(14) of the Act, it would be clear that only those lands, which come under clauses (a) & (b) of sub-clause (iii) can be considered as capital asset and the profits and gains arising from sale of such lands alone are taxable for income tax purposes. For better appreciation the relevant provisions of section 2(14) of the Act are extracted below: - “Definitions.

We notice that the term “agricultural land” was not defined under the provisions of the Income Tax Act, 1961. The term has to be understood as in a common parlance for which the assessee claiming that the lands are agricultural should adduce necessary evidence. Whether a particular land is agricultural or not is essentially a question of fact. On the facts and circumstances of the case, it is found that a particular land is agricultural land, then it cannot be included in the definition of capital asset as defined under section 2(14)(iii) of the Act. Even then, if such lands are found to be situated within the distance specified in items (a) &(b) of section 2(14)(iii), then the gains arising on sale of such lands does not qualify for exemption from tax.

In the facts of the present case, we proceed to ascertain whether the subject lands were agricultural lands or not. Undisputedly, the subject lands were not situated within the prescribed distance of any municipality or municipal corporation, notified area committee or town area committee, whatsoever it is, nor was it the case of the AO. Therefore, provisions of clause (1) & (b) and sub-cause (iii) of section 2(14) have no application to the facts of present case.

The next issue that is required to be examined in order to ascertain the true nature of the land, it must be seen whether the land has been put to use for agricultural purposes for a reasonable span of time. From the findings given by the AO in para 2.1 of the assessment order that the mere fact the mere fact that vegetables or seasonal crops were available at the time of sale cannot make the property exempt clearly indicates that the AO himself had found that agricultural operations were actually carried on the subject lands. Thus, the findings of the AO that no agricultural operations were actually carried on are ipse dixit. Thus, there is clear evidence of agricultural operations being carried on and the land is also classified as agricultural in the Revenue records of the state government. That raises presumption in favour of the assessee which has to be rebutted by the Department to deny exemption.

The Hon'ble Madras High Court in the case of M.S. Sreenivas Naicker v. ITO 292 ITR 481 also held to the same effect that is also undisputed fact that the lands were not converted to non agricultural use as per the law prevailing in the state. In the absence of conversion of land into non agricultural, the character of land continues to be agricultural as held by the Hon'ble Bombay High Court in the case of CIT v. Debbie Alimao 331 ITR 59.

The Hon'ble Karnataka High Court in the case of CIT v. M.R. Anandaram (HUF) [2023] 450 ITR 94 stretched further by holding that even if conversion of lands into nonagricultural purpose had taken place, if the assessee continues to be carry on agricultural

We also noted that the ratio of the decision of the Hon'ble Jurisdictional High Court in the case of PCIT v. Kalathingal Faisal Rahman [2019] 416 ITR 311 is clearly applicable to the facts of the assessee as the Hon'ble High Court had reiterated the ratio of the decision of the Hon'ble Madras High Court in the case of M.S. Sreenivas Naicker v. ITO 292 ITR 481 and PCIT v. Mansi Finance Chennai Ltd. [2016] 388 ITR 514. However, in that case relief was not granted to the assessee for failure of the assessee to discharge the burden of proving that the lands were agricultural lands.

The next issue that requires to be determined by us is whether there was an intention on the part of the assessee at the time of purchase of the subject land, to resale these lands for a profit. No doubt, in the preset case, the said lands were sold within a short span, i.e. less than a year from the date of purchase. This fact does not constitute ‘an adventure in the nature of trade” as held by the Hon'ble Bombay High Court in the case of CIT v. Dhable, Bobde Parose, Kale, Lute and Choudhari 202 ITR 98. The assessee also discharged the onus of proving his intention at the time of purchase is to hold the lands as investment by showing this as a part of investment in the books of account. The treatment given in the books of account gives a clear picture of the intention of the assessee whether to hold this subject land as investment or as stock-in-trade.

These facts clearly establish that the assessee had discharged onus in proving the intention at the time of purchase of land is only to hold the subject lands as investment and adduced necessary evidence on record in terms of the judgement of the Hon'ble Jurisdictional High Court in the case of Kalpetta Estates Ktd, v, CUT [1990] 185 ITR 318. Once the assessee had discharged burden of proving the intention to hold the lands as investment, then the onus to prove otherwise shifts to the Revenue. In the present case, we do not see that the Revenue had rebutted this evidence. Therefore, it cannot be said that the lands were acquired only for the purpose of resale for a profit constituting “an adventure in the nature of trade”.

Next we deal with the reasoning of the AO that the lands were situated in a highly developed area and sold to the real estate agent, therefore the subject lands cannot be considered as agricultural lands. The Hon'ble Jurisdictional High Court in the case of CIT v. Cochin Malabar Estates and Industires Ltd. [2022] 440 ITR 121 after adverting to the judgement of the Hon'ble Madras High Court & 84/Coch/2012 P.C. Jose in the case of M.S. Sreenivas Naicker (supra) and PCIT v. Mansi Finance Chennai Ltd. [2016] 388 ITR 514 and also in the case of Kalathingal Faisal Rahman (supra) held as under: -

Therefore, what can be deduced from the above decisions is that if the land is recorded as agricultural land in the Revenue records till the date of it sale and it used exploiting as agricultural land, if the owner of the land has not taken any step it, would indicate his intention to explore the land as nonagricultural land, such parcel of land shall be regarded as agricultural land, even though it is sold as arable land. The fact that the lands were situated in highly developed area and sold to a real estate developer would not alter the character of the land sold as agricultural land. There is no stipulation that the land should be used for agricultural purpose for any specified period and, therefore, in the light of the settled legal position, the CIT(A) clearly fell in error in holding that non- paddy lands were not agricultural lands and, therefore, the gain arising on sale of such lands were not exempt from tax. Therefore, the findings of the AO as well as the CIT(A) were reversed, we hold that the gains arising on sale of non-paddy lands as well, also exempt from tax. Accordingly we direct the AO to allow exemption from tax on the gains arising on sale of non-paddy lands also. The appeal of the assessee stands allowed.

In the result, appeal filed by the assessee stands allowed and Revenue’s appeal stands dismissed.