M/S WODDEGOODA ESTATE ,BANGALORE vs. INCOEM TAX OFFICER WARD-1 , CHIKAMAGALUR

The assessee has raised as many as 11 grounds. One of the grievances is regarding this aspect that as per the assessee that sale proceeds of trunk of Shade trees (leaving behind 4 to 6 inches of stem and roots for its regeneration) is agricultural income and hence, not taxable but the AO taxed it as capital gain. The second issue is about quantifying of the said capital gain which is done by the AO to the extent of 30% of sale value but as per the assessee, 40% of sale value should be considered as cost on 01.04.1981 and on that, indexation should be allowed.

Both parties were heard. I find that the first issue is covered against the assessee by the judgment of Hon’ble Karnataka High Court rendered in the case of Emerald Valley Estates Private limited vs. CIT as reported in 222 ITR 799 wherein it was held that shade trees in a coffee estate for the purpose of protection of coffee bushes are capital asset and its sale will give rise to capital gain. Respectfully following this judgment, this issue is decided against the assessee.

Regarding the second issue, I find that the AO has followed a judgment of Hon’ble Kerala High Court rendered in the case of CIT vs. Pullengode Rubber & Produce Co. Ltd., 189 ITR 580 and held that 30% of total sale value is capital gain. Relevant Para of this judgment is reproduced below for ready reference:- “The only other question is regarding the estimate of the capital gains. The ITO estimated the capital gains at 50 per cent of the sale value. The CIT (A) reduced it to 30 per cent of the sale value. He has given cogent reasons therefor. The Tribunal has concurred with the said view. The net result is that the CIT (A) as also the Tribunal have concurrently held that the capital gains is to be estimated at 30 per cent of the total sale value of timber. An estimate is always a matter of variable import. In such a case, where two statutory authorities have concurrently held that 30 per cent of the total sale value of timber represents the estimated capital gains, we are of the view that it is largely a question of fact and no question of law arises on that score. Therefore, we hold that the determination of the percentage of the capital gains is largely a question of fact and that the said question has been concurrently found in this case by the CIT (A) and the Tribunal, at 30 per cent of the total sale of timber.”

From the above judgment itself, it comes out that this decision is in respect of the facts of that case and it is not a ratio laid down on a legal aspect. As per the scheme of the act, short term capital gain is computed by deducting cost of acquisition , cost of improvement and expenses in respect of transfer. In case of long term capital gain, in respect of first two items, cost has to be indexed by taking the index of the year of sale and year of acquisition/improvement. Hence, at least in case of long term capital gain, it cannot be said that a fixed percentage of sale value is indexed cost because even if the actual cost can be estimated in that manner than also, indexation depends on the gap of period between year of acquisition and year of sale. Hence, at the best, holding 30% as capital gain can imply that 70% is cost but it cannot be said that 70% is indexed cost in all cases. It may be that in that case, such gap of period between year of acquisition and year of sale was small and therefore, in the fact of that case, 30% of sale value was considered as capital gain. But in my considered opinion, in all cases, this yardstick cannot be applied.

In the present case, the coffee estate was developed much prior to 01.04.1981 and therefore, market value as on 01.04.1981 has to be adopted as cost and thereupon, indexation has to be allowed till the year of sale i.e. f. Y. 2010 – 11. It is seen that in the present case, about 30 years has elapsed since 01.04.1981 and hence, there will be huge impact of indexation over and above the market value on 01.04.1981. As per the learned AR of the assessee, on page 13 of written submissions, even if 40% of sale proceeds Rs. 146,34,146/- is considered as fair market value as on 01.04.1981 i.e. Rs. 58,53,658/-, the indexed cost will be Rs. 416,19,511/- resulting into long term capital loss of Rs. 269,85,365/-. Reliance was placed on a judgment of Hon’ble Karnataka High Court rendered in the case of CIT vs. M/s Doddanandi Estate in dated 21.09.2015 (Copy made available and kept on record). It was pointed out that in that case, this was the question raised in the appeal of the revenue before the Hon’ble High Court that whether the tribunal was right in directing the AO to recomputed the capital gain by taking 70% of the sale proceeds as the market value as on 01.04.1981 and the appeal of the revenue was dismissed. I am of the considered opinion, as per this judgment, cost of acquisition can be estimated as a percentage of the sale price. But the crucial question is this as to what should be that percentage. In that case, it was estimated at 70% of sale price and it is noted that the sale took place in that case on 25.07.1995 i.e. after 14 years from 01.04.1981. In the present case, the sale has taken place on in the Financial year 2010 – 11 although actual date is not coming out from the orders of the lower authorities but it is certain that the sale has taken place after 29 years from 01.04.1981. Hence, the same percentage of 70% to estimate the cost on 01.04.1981 cannot be adopted in the present case. The cost inflation index for F. Y. 1995 – 96 was 281 and for F. Y. 2010 – 11, it was 711. Hence, in my opinion, in the facts of the present case, the cost as on 01.04.1981 should be estimated at 15% of sales value instead of 70% in that case and 40% proposed by the learned AR. Respectfully following this judgment and in view of this discussion, I direct the AO to recompute the capital gain by adopting 15% of sale value as cost on 01.04.1981 and than after allowing the benefit of indexation as per law. Regarding carry of long term capital loss, if any, I do not express any opinion because that is not an issue before me and this issue is left open.

In the result, the appeal of the assessee is partly allowed.