ASST.C.I.T., BANGALORE vs. SHRI. M.R. ANANDARAM (HUF), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER

ITA Nos.1169 to 1172/Bang/2015 Assessment year : 2007-08

The Assistant Commissioner of Vs. Shri M.R. Anandaram (HUF) Income Tax, PAN: AABHM 9819G Circle 6(3)(1), Shri M.R. Kodandaram (HUF) Bengaluru. PAN: AABHM 9893E Shri M.R. Pattabhiram (HUF) PAN: AACHM 7618G Shri M.R. Seetharam (HUF) PAN : AAHHS 7324J ‘Gokula House, Gokula, Bengaluru - 560 054. APPELLANT RESPONDENTS

CO Nos.220 to 223/Bang/2015 [in ITA Nos.1169 to 1172/Bang/2015] Assessment year : 2007-08

Shri M.R. Anandaram (HUF) Vs. The Assistant Commissioner of PAN: AABHM 9819G Income Tax, Shri M.R. Kodandaram (HUF) Circle 6(3)(1), PAN: AABHM 9893E Bengaluru. Shri M.R. Pattabhiram (HUF) PAN: AACHM 7618G Shri M.R. Seetharam (HUF) PAN : AAHHS 7324J ‘Gokula House, Gokula, Bengaluru - 560 054. CROSS OBJECTORS RESPONDENT

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 2 of 29

Revenue by : Shri Sanjay Kumar, CIT-III(DR) Assessees by : Shri V. Chandrashekar, Advocate

Date of hearing : 31.03.2016 Date of Pronouncement : 27.05.2016

O R D E R Per Bench

These appeals are preferred by the Revenue against the respective order of CIT(Appeals)-2, Bengaluru inter alia on the following common grounds:-

“1. The order of the CIT(Appeals) is opposed to law and the facts and circumstances of the case. 2. On the facts and in circumstances of the case, whether the CIT(A) was right in deleting the additions made placing reliance upon the judgment of the Co-ordinate Bench of the ITAT which has not been accepted by the Department and the issue is open in appeal filed by the Department before the Hon'ble High Court of Karnataka? 3. For these and such other ground that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 4. The appellant crave leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 3 of 29

are the HUFs and have filed respective returns of income for the A.Y. 2007-

Assessing Officer that assessees have not offered income from long term

capital gain arising from the transfer of respective shares of the immovable

property near Bangalore to a builder at Mumbai. Having noted that the

assessee entered into Joint Development Agreement (JDA) on 22.3.2007

with Pingyao Developers & Traders Pvt. Ltd., a builder at Mumbai for

development of 190 acres of land belonging to them, the AO reopened the

assessments u/.s 147 of the Income-tax Act, 1961 [hereinafter referred to

as “the Act”] by issuing notices u/s. 148 of the Act. Accordingly,

reassessments were framed in which the AO determined the long term

capital gain for the assessees’ share and brought it to tax, in addition to

income disclosed in the returns.

CIT(Appeals) with the submission that the land which was subject matter of

the JDA was held to be agricultural land and not capital asset u/s. 2(14) of

the Act in assessees’ own case by the Tribunal in ITA Nos.1652/Bang/2002

dated 21.11.2014 for A.Y. 2008-09, in which the Tribunal having relied

upon several decisions of different coordinate Benches and following the judgment of the jurisdictional High Court in the case of Leelavati in 21

taxman.com 148 (Kar), has held that the land owned by the assessees are

agricultural lands, despite the fact that they stand converted in view of the

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 4 of 29 fact that conversion was resorted only for the purpose of either selling lands or for developing the same and the assessee has not done anything by itself to change the physical characteristics of the land from agricultural to non-agricultural. It was also contended that the possession of land was not given to developers and finally the JDA was cancelled and the refundable money was also refunded to the Developer.

“4.6 I have carefully considered the appellant's submissions and perused the assessment order. In the course of the hearing, the AR for the appellant filed written submissions from which the following portions are extracted and reproduced below: “The appellant submits that the lands which are the subject matter of the Joint Development Agreement (JDA) are held to be Agricultural Lands & not Capital Assets u/s 2(14) of the Act in the appellant’s own case by the Hon’ble Income Tax Appellate Tribunal [ITAT] in ITA No.1652/Bang/2012, dated 21/11/2014 for the A.Y. 2008-09. The Hon’ble ITAT has, apart relying upon several other decisions of different co-ordinate benches on the same issue, followed the decision of the Jurisdictional Karnataka High Court in the case of Leelavathi in 21 Taxmann.com.148 (Kar) in coming to the conclusion that the lands owned by the appellant are agricultural lands, despite the fact that they stand converted, in view of the fact that the conversion was resorted to only for the purpose of either selling the lands or for developing the same & the fact that the appellant had not done anything by itself to change the physical characteristics of the land from Agricultural to Non agricultural. The issue before the Hon'ble ITAT was whether certain Lands belonging to the appellant which were converted & sold were Capital assets exigible to Capital gains or not. The Hon'ble ITAT held that these

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 5 of 29 lands were not Capital Assets u/s 2(14) of the Act, despite the fact that they stood converted as on the date of sale in view of the fact that the appellant had not done anything by itself to change the physical characteristics of the land from Agricultural to Non agricultural. The Lands which are the subject matter of JDA are contiguous to those lands which were subject matter of the decision of the ITAT and enjoy the same physical characteristics as them. In fact the ITAT members who decided the matter conducted a physical inspection of all these lands & have satisfied themselves that there was no development on any of the lands even as on the date of inspection in the year 2014 and that these lands continued to be Agricultural lands as far as the physical characteristic were concerned in as much as these lands had fruit bearing coconut & mango groves on them. These findings are also brought out by the ITAT in para 7.3.7 of the said order. It is further submitted when the Income arising out of sale of lands was held as not taxable u/s 45 of the Act by the ITAT in the above cited case of the appellant, the question of taxing any income arising out of the mere signing of this JOA, when no activity of development is carried out, as Capital Gains also does not arise. In view of these incontrovertible facts & the position in law that the lands which formed the subject matter of the JDA do not constitute Capital Asset u/s 2(14), the question of determining any income by way of Capital Gains u/s 45 of the Act does not arise. Hence the addition of Rs.6,88,23,857/- by way of LTCG as determined by the AO needs to be deleted. 4.7 The appellant has also filed a copy of the decision of the Hon’ble ITAT in the appellant’s own case vide ITA No.262/Bang/2013 dated 21/11/2014 wherein it has held as under: “10.7 In the order of the co-ordinate bench in the case of M.R.Seetharam (HUF) (supra) [i.e. ITA.No.1654/Bang/2012 dated 13/6/2014], the co-ordinate bench of this Tribunal at paras 7.3.8 to 7.3.10 of its order has also found merit in the arguments put forth by the learned Authorised Representative therein that owing to the peculiar features of law prevailing in the state, an agriculturist in the state of Karnataka has to necessarily get his agricultural land

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 6 of 29 converted if he has to sell the same to a non-agriculturist and hence is placed at a disadvantage as compared to an agriculturist in Tamil Nadu, Andhra Pradesh, etc. who can directly sell their agricultural lands to non-agriculturists without getting the same converted. In this regard the co-ordinate bench of the Tribunal at paras 7.3.8 to 7.3.10 of its order has observed and held: ‘ 7.3.8 Finally, the most important aspect which requires to be considered is that agriculture is a State subject and different States have different reforms (laws) as to who can purchase/own agricultural lands in the respective States. To illustrate further, in Karnataka, non-agriculturists and industrial companies are prohibited from purchasing of lands which are classified as 'agricultural' in the revenue record". If an agriculturist intends to sell his agricultural lands to a company/non- agriculturist for the use of non-agricultural purposes, he must possess a conversion order obtained from the revenue authorities to utilise the subject land for non-agricultural purposes. However, the same law/rule is not prevalent in the neighbouring States of Tamil Nadu, Andhra Pradesh or in Maharashtra, Delhi, etc. In other words, the agriculturists of the said States are free to sell their lands as shown in the revenue records to non-agriculturists/Corporates without obtaining a conversion order. 7.3.9 Thus, it is evident from the fact that the agriculturists in other States can sell their agricultural lands without getting the same converted whereas the agriculturists in Karnataka cannot do so due to the Land Reforms Act prevailing in the State. As such, an agriculturist in Karnataka is on a different footing from his counterparts in other States. If one were to conclude that since the present assessee had obtained a conversion order to enable it to sell its lands to a non-agriculturist and, thus become a Capital asset, though the subject land remains an agricultural land, the assessee then stands discriminated in the eyes of law vis-a-vis its counter-parts in other States. Had the State Reforms Act permitted the assessee to sell its agricultural lands without conversion to a Corporate as in the case of other States (supra), the assessee would not then be required to get the land converted merely to facilitate its sale to a corporate and the gains arising from such sale would not have been exigible to Capital Gains tax which is the subject of a Central Act (Income-tax Act). In the

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 7 of 29 instant case as mentioned earlier even after conversion, assessee was carrying on agricultural operation and conversion was done only to facilitate sale of subject property to a corporate entity/non-agriculturist. In substance, the Income-tax Act - a Central Act - is to be administered in such a manner to ensure that an assessee is not subjected to suffer due to different State laws. 7.3.10 Taking into account all the aspects as discussed in the fore-going paragraphs and also in conformity with the judicial pronouncements on the issue (supra), we are of the view that though the subject land was converted into non-agricultural purposes, cultivation of the land for agricultural purposes till the date of sale was continued unabated and as such, the land should have been treated as agricultural land and, thus, exempt from capital gains in view of s. 2(14) of the Act. It is ordered accordingly.' The extracted portion at paras 7.3.8 to 7.3.10 of the order in the case of M.R.Seetharam (HUF) (supra) indicates that the co- ordinate bench of the Tribunal came to the conclusion that mere conversion of land from agriculture to non-agriculture could not be taken as the sole criteria to hold it as a capital asset under section 2(14) of the Act and that if that land is used for agricultural purposes till the date of sale, despite the fact that it is converted to non-agricultural use are agricultural lands and not capital assets under section 2(14) of the Act." 4.8 On going through the submissions and also the evidence produced in support of the submissions, I find that they are factually correct. Further the appellant has also placed on record the fact that these very lands were assessed to wealth tax as capital assets belonging to the appellant by a wealth tax assessment order passed u/s 16(3) r.w.s. 17 dated 9/01/2013 just two months prior to the passing of this impugned assessment order. In fact the proceedings under the Wealth Tax Act and the Income Tax Act were going on simultaneously and both these were re-opened proceedings u/s 17 of the WT Act & u/s 147 of the IT Act respectively. In the Wealth Tax assessment order (a copy of the same has been filed by the appellant), the Assessing Officer has taken a stand that these lands are owned and possessed by the appellant and are exigible to wealth tax in its hands. The AO has also assessed the Wealth arising out of the valuation of these lands as Wealth escaping assessment and has brought the same to tax. The stand taken by the AO

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 8 of 29 for the very same assessment year in the Wealth Tax Assessment is diametrically opposed to the stand taken in the Income Tax Assessment. In the Wealth Tax assessment the AO has held that the impugned lands are owned and belonging to the appellant. In such an event it surpasses one's comprehension as to how the AO has held' that these lands are no longer owned and possessed by it for purposes of Income Tax assessment and that these very lands stand transferred to the developer. This kind of a dichotomy is not permitted in law and it is thus clear that the Wealth Tax assessment order supports the appellant and is opposed to the stand of the AO in the Income Tax Assessment for the very same assessment year. 4.9 It is significant to note from the decision of the Hon'ble ITAT that the mere act of obtaining a conversion order from the competent authority of the State Government does not render the land non- agricultural in view of the mandatory condition laid down by the State Government that the land not only ceases to be non-agricultural but remain agricultural as before if the land for which conversion was sought was not put to use for any purpose other than agriculture within a period of two years from the date of the order of conversion. 4.10 In view of the above decision of the ITAT, Bangalore Bench in the appellant's own case, which is binding, the land in question, which is the property to be developed as per the JDA, has to necessarily be held to be agricultural land and not a capital asset and hence cannot be assessed to tax by the application of section 45 of the Act, which provides for taxing an income arising out of the sale or transfer of a capital asset. The appellant has also placed on record a copy of the Partition Deeds dated 18/11/2005 and 28/6/2006 and also Gift Deeds executed by Smt.Gowramma and Shri M.R. Ramaiah. These documents confer and explain the title of the appellant to the impugned lands and further demonstrate that these impugned lands are contiguous to the agricultural lands, which are the subject matter of the decision of the Hon'ble ITAT referred to above and enjoy the same physical characteristics and also located in Akkalenahalli and Mallenahalli villages, Kasaba Hobli, Devanahalli Taluk. In view of this fact, it is clear that the impugned lands are identical in physical properties and under cultivation as the lands, which are the subject matter of the decision of the Hon'ble ITAT. In fact, it is also noticed in the said Tribunal order that the Hon'ble Members of the Tribunal have personally inspected the physical characteristics of these lands in the year 2014, which is a good seven years after the date of JDA, and found

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 9 of 29 that these lands are under cultivation with fruit-bearing and coconut trees in abundance. 4.11 In fact, as submitted by the appellant, the Hon'ble ITAT has held in ITA NO.1654/Bang/2012 that no capital gains will arise from the sale/transfer of land, which is an agricultural land and not a capital asset u/s 2(14) of the Act. This being the case, even if one were to hold take the position that the lands stand transferred upon entering into JDA, what is transferred is only agricultural land and there cannot be any levy of capital gains tax on transfer of agricultural lands. Further these lands have been treated as lands owned and belonging to the appellant for wealth tax purposes even as on 31/03/2007, after the date of entering into of the JDA, the question of assessing any LTCG from the same on mere signing of a JDA does not arise. 4.12 The appellant has made additional submissions as under: "Further to the Written Submissions filed earlier, the appellant would like to place a decision of the Jurisdictional ITAT Bangalore Bench in support of its legal contentions. The Appellant relies on the decision of the Hon'ble ITAT Bangalore Bench in the case of K.N.Nagaraj & Smt.Sathya Prema in ITA NO.136 & 137/Bang/2012 by an order dated 14/8/2014, where the Hon'ble ITAT in para 20 observes "The CIT accepts that as per the JDA dated 26/10/1994 as well as Agreement dated 11/11/2000 there was no clause regarding delivery of possession, at the time of agreement and that possession was to be delivered only at the time of registration of sale deed. The CIT however ignores these clauses as according to him the substance of the transaction has to be seen over the form of transaction. In our view these conclusions are without any basis. First the CIT cannot rewrite the agreement between the parties just by making a casual observation that the substance of the transaction has to be seen over the form of transaction. The legal consequences flowing out from the written agreement cannot be brushed aside by the CIT just because it suits the interest of the revenue".

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 10 of 29 In para 24 they observe that "The condition necessary for application of section 53A of the Transfer of Property Act cannot be presumed to exist and the Tax authorities cannot blindly apply these provisions by merely relying upon the fact that there was an agreement for sale and delivery of possession by the transferor/seller to the transferee/ purchaser. If such a course is permitted to be adopted and tax authorities are allowed to levy & collect tax on Capital gains & later it turns out that the transaction is rescinded, there is no mechanism under the Act by which the assessee can claim refund of the taxes levied and collected". It would be relevant to mention here that in the above said case the CIT had ordered reopening u/s 263 relying upon the decisions of T.K.Oayalu & Chaturbhuj Kapadia. The Fact that the Tribunal has held that the agreement between the parties would decide as to when Possession is intended to be given is of great importance to determine the year of taxability of Capital gain. In the present instance the parties have clearly agreed that the developer will get possession only upon completion of the construction of the Owners share of the Constructed area & handing over of the same to the Appellant & not any time before. In view of this clear legal contract between the two interested parties it would be grossly wrong to suggest that possession stands transferred immediately upon the signing of the JDA." 4.13 Considering the facts and the JDA placed on record, I find merit in the additional submissions as made above by the appellant. 4.14 Hence, respectfully following the decision of the jurisdictional Bangalore Bench of the Hon'ble ITAT in the appellant's own case, where these lands have been treated as agricultural lands, I delete the addition of Rs.6,88,23,857/- made by way of LTCG to the income returned by the appellant in the reassessment proceedings."

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 11 of 29

The ld. DR, besides placing reliance upon the assessment order, has

contended that in view of the judgment of the jurisdictional High Court in the case of CIT v. Dr. T.K. Dayalu [2011] 14 taxmann.com 120 (Kar.), the

capital gain has to be charged on transfer of the land to the developer. He

further contended that once the consideration was received and

possession was handed over to the developer, transfer of the immovable

property takes place and the capital gain has to be charged on the

assessee.

of rival submissions, we find that the assessees owned shares in the

agricultural land with regard to which JDA was executed by the assessees

with Pingyao Developers & Traders Pvt. Ltd. of Mumbai, who was later on

called as the “developer”. In this JDA, it was agreed upon that the

developer would pay an interest-free refundable security deposit of a sum

of Rs.45 crores as per the terms stipulated in the JDA.

favour of the developer to facilitate execution of the work, but unfortunately

this JDA was not materialized and construction was never started and the

JDA was cancelled through a Deed of Cancellation dated 5.5.2015 and on

cancellation of JDA, the refundable security deposit was refunded to the

developer. It is also noticed that out of total stipulated amount of

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 12 of 29

refundable security deposit of Rs.45 crores, the assessee has received

only Rs.36 crores, which was refunded on cancellation of the JDA.

Therefore, this JDA was never materialized. It is also evident from the JDA

that assessee has received refundable security deposit and not the sale

consideration on account of transfer of land to the developer. Possession

of the land has never been transferred to the developer. In these

circumstances, provisions of section 2(47)(v) of the Act cannot be invoked.

in that case, the agreed sum was received by the assessee as a non-

refundable deposit and in addition to the same, he was also entitled for

structures to be constructed by the developer at free of cost on the basis of

such agreement. Thus, in that case, the assessee has received the

amount on 26.1.1996 and possession was handed over on 30.5.1996 and

the project was completed in the year 2003-04. The controversy in that

case was with regard to the year of taxability of the capital gain. In that

case, it was held by Their Lordships of the Hon'ble High Court of Karnataka

that since the possession was finally transferred in the A.Y. 1997-98, the

capital gain is to be taxed in the year in which the non-refundable money

was received or the project was completed.

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 13 of 29

chargeability of the capital gain on the impugned transaction. Our attention

was drawn to the order of the Tribunal in the connected cases i.e., Shri

M.R. Seetharam v. ACIT in ITA No.1654/Bang/2012 dated 13.6.2014, in

which the Tribunal has held that the agricultural land was transferred to

buyer and the issue was raised, whether capital gain has accrued on such

transactions. The Tribunal has held that though the subject land was

converted into non-agricultural land purpose, but cultivation of land

continued till the date of sale. Thus, the land should have been treated as

agricultural land and exempt from capital gains in view of section 2(14) of

the Act. While holding so, the Tribunal has also observed that had the

State Reforms Act permitted the assessee to sell its agricultural lands

without conversion to a corporate as in the case of other States, the

assessee would not then be required to get the land converted merely to

facilitate its sale to a corporate and the gains arising from such sale could

not have been exigible to capital gains tax which is the subject of a Central

Act. The Tribunal has also observed in that case that, even after

conversion the assessee was carrying on agricultural operation and

conversion was done only to facilitate sale of subject property to a

corporate entity/non-agriculturist. The relevant observations of the

Tribunal rendered in that case are extracted hereunder for the sake of

reference:-

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 14 of 29 7.2. We have carefully considered the rival submissions, perused the relevant materials on record and also the various judgments of judiciary on a similar issue relied on by either of the party. The assessee-HUF had sold lands situated at Akklenahalli and Mallennahalli villages of Devanahalli Taluk to an extent of 6 acres and 1 gunta for a total consideration of Rs.45,58,12,500/- vide a registered Sale Deed dated 12.4.2007 and, accordingly, admitted an income of Rs.14,17,87,795/- as Capital Gains from the above transaction in its original return of Income furnished to the Department. Subsequently, in its revised return of Income dated 15.6.2009, the assessee had admitted income of Rs.22,90,570/-, on the ground that the capital gains which arose on the sale of the said lands was wrongly offered in the original return in as much as the same was exempt from tax being agricultural lands and hence excluded from the definition of 'capital asset' as per the provisions of s. 2 (14)(iii) of the Act. 7.2.1. The prime issues for consideration before us are two-fold, namely: (i) Whether the land can be treated as agricultural land even after conversion of agricultural land for non- agricultural/residential purpose? (ii) Whether the authorities below were justified in treating 'BIAAPA' as a municipality? 7.2.2. Before analysing the arguments of the assessee on the issue, we shall now proceed to deal with the sequence of events which apparently took place, chronologically, as under: 7.2.3. The assessee had in its possession certain acres of agricultural lands, out of which, lands to the extent of 6 acres and 1 gunta situated at Akkalenally and Mallenahally converted as non- agricultural vide Conversion order No.ALN(D) SR 30/2004-05 dated 19.7.2004 [source: Page 88 to 92 of PB AR] were sold to M/ s. ETL Corporate Services Private Limited for a sum of Rs.45.58 crores. The subject property was a part of around 600 acres of lands known as 'Gokula Farm' which was originally purchased by Late Sri M.S.Ramaiah, the father of Sri M.R. Seetharam - HUF - way back in 1951 [Source: Page 6 of Sale Deed dt.12.4.2007]. The same has been jointly cultivated by the family, comprising of 10 children of Late M.S.Ramaiah. These lands were, subsequently, partioned in 1970 and after the death of Sri M.S. Ramaiah, the lands were further portioned

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 15 of 29 [Refer: Para 3.2. of the Asst. order]. Even though, the subject property, among others, was converted as non-agricultural lands way back in 2004, agricultural activities, deriving agricultural income from the said lands, were continued unabatedly by the assessee and incomes admitted by it from such operations were accepted by the revenue from the AYs 2004-05 to 2009-10, the details of which are as under:

Asst. year Agrl. Income [in Rs.] 2004-05 22,00,000 2005-06 22,00,000 2006-07 16,50,000 2007-08 16,50,000 2008-09 16,50,000 2009-10 16,50,000

7.2.4. Though the said land was converted into non-agricultural purposes in the year 2004-05 and one of the mandatory conditions specified in the conversion order dated 19.7.2004 was that if the converted land was not used for the purpose for which it was converted within a period of two years from the date of conversion, the order of conversion stands cancelled. Apparently, the assessee had continued the agricultural operations in the converted lands also which is evident from the fact that incomes derived from such agricultural operations on the said lands declared by the assessee in its returns of Income were accepted by the revenue for the AYs 2004-05 to 2009-10 (supra). No evidence was brought on record by the Revenue to suggest that the subject lands were utilized for any other purposes other than that of cultivation after conversion. This is evident from the fact that the incomes derived from such lands duly declared by the assessee which were accepted by the revenue. 7.2.5. Incidentally, the subject property was inspected on 10-4-2014 by us accompanied by the learned DR, the AO and the learned AR of the assessee. During the course of inspection, we have noticed that the subject property was a part of large track of land having agricultural operations which consist of fully grown up fruits-yielding trees such as mangoes, sapota, coconut, jack-fruit, apple, guava etc., appear to be existing in the subject property even on the date of sale. This clearly attributes the assessee's assertion that even on the date of transfer, the subject land was held to be agriculture. In this regard, we would like to refer to the Certificate of Senior Assistant Director of Horticulture

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 16 of 29 (Zilla Panchayat) Devanahalli, Government of Karnataka, dated 23.4.2014 wherein it has been certified as under: "This is to certify that M.R.Seetharam, s/o (of) Late M. S. Ramaiah residing at Gokula House, Dr M. S. Ramaiah Road, Gokula, Bangalore, have, in their land situated in Akkelenahalli - Mallenahalli Village, Kasaba Hobli, Devanahalli Taluk bearing Sy Nos. 29, 30/1, 30/2, 37/1p, 37/4p, 37/6p, 37/7p, 37/10p, 37/13p, 37/ 16p, fruit yielding mango, sapota, coconut, cashew, coco, jack-fruit, rose apple, guava trees aged 25 - 30 years." 7.2.6. Ostensibly, neither the AO nor the CIT (A) had disputed the fact in clear terms that even after the conversion of the land for non- agricultural purposes, the assessee has been carrying on agricultural operations and also admitting incomes from such lands in its returns of income. The AO's stand that once the agricultural lands were converted into non-agricultural, even though agricultural activities continued; the lands cannot be termed as agricultural land is, in our view, not the correct proposition of law. This is apparent from the fact that one of the mandatory conditions contained in the conversion order that "10. The land should be used for the said purpose within two years from the date of this order [Refer: Pages 88 to 92 (including English translation) of PB AR]". 7.2.6. As a matter of perception, s. 2(14) defines 'capital asset'. Capital asset does not include agricultural land. However, agricultural land situated within any municipality, notified area committee, town area committee, town committee will cease to be an agricultural land. Whether the subject land is agricultural or otherwise is essentially a question of fact. In coming to a definite conclusion, a number of tests will have to be undertaken as laid down by the Hon'ble Supreme Court in the case of Sarifabibi Mohamed Ibrahim v. CIT reported in 204 ITR 631 (SC). The tests prescribed by the Hon'ble Supreme Court as under: (i) Whether the land was classified in the revenue records as agricultural and whether it was subject to the payment of land revenue? (ii) Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time?

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 17 of 29 (iii) Whether such user of the land was for a long period or whether it was of a temporary character or by any stop gap arrangement? (iv) Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land? (v) Whether the permission under Land Revenue Code was obtained for the non-agricultural used of the land, if so, when and by whom [the vendor or the vendeej; whether such permission was in respect of the whole or a portion of the land; if the permission was in respect of a portion of the land and if it was obtained in the past, what was the nature of the user of the said portion of the land on the material date;

(vi) Whether the land, on the relevant date, had ceased to be put to agricultural use, if so, whether it was put to an alternative use; whether such ceaser and / or alterative user was of a permanent or temporary nature; (vii) Whether the land, though entered in the revenue records, had never been actually used for agriculture, that is, it had never been ploughed or tilled; whether the owner meant or intended to use it for agricultural purposes? (viii) Whether the land was situated in a developed area; whether its physical characteristics, surrounding situation and use of the lands in the adjoining area were such as would indicate that the land was agricultural? (ix) Whether the land itself was developed by plotting and providing roads and other facilities; (x) Whether there were any previous sales of portions of the land for non-agricultural use? (xi) Whether permission under Tenancy and Agricultural Lands Act was obtained because the sale or intended sale was in favour of non-agriculturist, if so, whether the sale or intended sale to such non-agriculturist was for non-agricultural or agricultural user?

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 18 of 29 (xii) Whether the land was sold on yardage or on acreage basis? & (xiii) Whether an agriculturist would purchase the land for agricultural purposes at the price at which the land was sold and whether the owner would have ever sold the land valuing it as a property yielding agricultural produce on the basis of its yield?"

7.2.7. In view of the norms prescribed by the Hon'ble Supreme Court in its judgment (supra), we are of the view that the facts making in the present case, the issue requires to be decided as to whether the subject land was an agriculture land. The land in question was inherited by the assessee (HUF), among others, as the same having been purchased by his father as an investment. As could be seen from earlier documents of purchase which explicitly exhibit that the subject land had put to exclusive use for agricultural purposes only and in fact a grove [orchard] had been grown with fruits-yielding trees such as mangoes, sapota, coconuts, jack-fruits, etc., Incidentally, the surrounding lands were also subjected to agricultural activities as in the case of the property under dispute. Though the present assessee became the legitimate owner of the subject property on inheritance/in a partition/family arrangement as the case may be, the nature of the land use had not, however, undergone any change.

Whether the lands which were used as agricultural lands even after its conversion loose its character of agricultural lands? 7.3. The stand of the AO was that once the agricultural lands were converted into non-agricultural, even though agricultural activity continues, the lands cannot be considered as agricultural lands. Countering the AO's assertion, the learned AR had argued that as per the mandatory conditions mentioned in the Certificate of conversion, if the subject land was not put to non-agricultural use within a period of two years from the date of conversion order, the conversion itself will become null and void. In this connection, the learned AR had placed strong reliance on the judgment of the Hon'ble Jurisdictional High Court in the case of CIT v. Smt. K.Leelavathy (supra).

7.3.1. It is a fact that the land which was hitherto agricultural land does not automatically become a capital asset upon a mere fact of its

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 19 of 29 conversion to non-agricultural purpose. The land even though converted for non-agricultural purpose, continues to be agricultural land and does not become a capital asset u/s 2 (14) of the Act, if agricultural activities were being carried out on such a land as on the date of its sale despite a fact that the land stands converted for non-agricultural purpose. 7.3.2. In the present case, as already discussed, even though the subject property was converted for non-agricultural purpose vide Conversion Order dated 19.7.2004, the assessee continued the agricultural operations in the converted lands which was evident on our site visit and also from the fact that incomes derived from such agricultural operations on the said lands declared by the assessee in its returns of income which were accepted by the Revenue for the AYs 2004-05 to 2009-10. 7.3.3. At this juncture, we would like to refer to the findings of the earlier Bench of this Tribunal in the case of H.S.Vijaya Kumar v, ACIT, Hassan in ITA No.108/Bang/05 dated 28.11.2006. After taking into account the rival submissions of an almost identical issue to that of the present issue under dispute, the Tribunal has held as under: "6.4. In this case also various conditions imposed by the Deputy Commissioner, Hassan were not fulfilled by the assessee prior to the sale of the said land. It is observed that permission has been accorded for residential purposes and whereas the sale has been made to Indian Oil Corporation for putting up a service station. This contradiction itself goes to show that the permission accorded does not militate against the land becoming non- agricultural land. The first appellate authority also went by the fact that the land was sold on yardage basis to Indian Oil Corporation. This single circumstance in our considered opinion does not change the character of the land for the reason that no layout plan was obtained, nor the land had been subject to any change in physical characteristics. A person can obtain higher amount by adopting a particular methodology of valuation and this by itself does not result in an asset becoming a capital asset. Non-payment of land revenue for a period of one month and 10 days from 8.2.99 to 20.3.99 cannot also be a circumstance which can be held against the assessee. This is too short period and it is not the case of the revenue that land revenue has (have) not consciously levied agricultural land tax. No adverse inference can be drawn. The ld. Counsel for the assessed tried to

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 20 of 29 demonstrate that as per the Karnataka Land Revenue Act, 1964, section 83(2) read with sec. 95(2) mandates that the land holder should continue to pay the land revenue even after conversion. We need not go into this aspect for the reason that the period is too short a period and it is not a case where the revenue authorities have refused to levy land revenue by showing the reason. of conversion or for the reason that the assessee has refused to pay such land revenue. The AO has recorded a finding that the land revenue records to show that ragi and horse gram were grown on the said land. The reasons recorded by the assessing officer as well as the CIT (A), to our mind, are not relevant for coming to the conclusion as to whether a particular asset is a capital asset within the meaning of sec. 2 (14) of the Income-tax Act. The issue whether a particular land is agricultural land or not has been the subject matter of dispute in many a cases. In each of the judgments broad outlines have been given and it is suffice to say that the unanimous view of all the Hon'ble Courts is that the issue should be decided on the facts and circumstances of the case. As we find that the facts of the case clearly point out that the land in question continued to be agricultural land and was put to use as such, prior to sale to Indian Oil Corporation, despite the permission obtained from the concerned authorities, we accept the contention of the assessee and hold that agricultural land in question are not a capital asset and, thus, the levy of capital gains is bad in law. 6.5. Before parting, we feel that mere evidences of Government Notification or orders on a likely use of a particular land would not ipso facto affect or on the same day change the character of the land. For example, the Government has notified many areas for setting up of special economic zones or industrial parks or for infrastructural developments such as road ways and railways. After identifying particular areas, the Government notifies that a particular area would be used for non-agricultural purposes. It is thereafter only that the acquisition start and accordingly the land of farmers are acquired. It would be travesty of justice, if a view has to be taken that when once a Notification is given by the Government, the agricultural land becomes non- agricultural land i.e., even prior to the issue of acquisition notices. As long as there is no change in the physical characteristics of the land in question, we cannot be held that there is a conversion. "

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 21 of 29

7.3.4. The jurisdictional High Court in the case of CITG v. Smt K. Leelavathy reported in (2012) 21 taxmann.com 148 (Kar) dated 2.1.2012 had an occasion to analyse the provisions of s. 2 (14) read with sections 45 and 48 of the Act. Briefly, the substantial questions of law raised by the Revenue before the Hon'ble Court was that - "1. Whether the appellate authorities were correct in holding that the land which is the subject-matter of sale is agricultural land as on the date of sale without taking into consideration the conversion of land to non-agricultural purpose and consequently recorded a perverse finding? &

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 22 of 29

Conversion Notification No. Sy.No. Extent of Date of Sale and date area sale consideration No.ALNSR/ 94/ 98-99 75 3A 38G 7.4.200 Rs. 50,00,000 DT.29.4.1999 77 3A 00G 4 No.ALNSR/ 8/ 2004-05 15.15 OA 10G Rs.1,82,50,000 DT.10.5.2004 16 4A 14G 2.6.200 17 2A 17G 4 86.1 5A 31G 87 5A 12G 23A 22G

Total Rs.2,32,50, 000

In respect of the sale transaction dated June 2,2004, it was taken as a sale of capital asset as this sale was after the date of permission for non-agricultural use granted by the Asst. Commissioner, viz., after May 10,2004, whereas the earlier sale transaction dated April 7, 2004, is held to be in respect of an agricultural land. We do not find the reasoning and the principle enunciated by the Tribunal for making a distinction as to whether the land was agricultural land or otherwise in the case of T. Suresh (supra) apply to the present case to be obnoxious or violating any statutory provisions and, therefore, we do not find any illegality in the finding recorded by the Appellate Commissioner and the Tribunal." . 7.3.6. In the case of M. ThimmeGowda [(i) Sri M. ThimmeGowda, (ii) Sri M.N. Manjunath, (iii) Sri Dasappa, (iv) Sri T. Suresh Gowda, (v) Sri T. PrasannaGowda v. Department of Income-tax, the earlier Bench of this Tribunal, in its findings in ITA 1464, 1465/B/08; 177,178,262 & 305/B/09 dated 30.12.2009, had dealt with an identical issue to that of the present issue under consideration. The main issue before the earlier Bench was: Whether the land sold by the assessee was agricultural in nature or not? .After duly analysing the rival submissions and also various judgements of judiciary as mentioned in its findings and also deliberating upon the sections 80 and 84 of the Karnataka Land Reforms Act, 1961, the earlier Bench had recorded its findings as under: "37 ................................................................................................... .......... (On page 22) ............................................................ Coming to the instant case of the assessee, it is not disputed that in the revenue records, the entry is not changed, it continues as agricultural land. According to the revenue, the intention and

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 23 of 29 purpose of the sale is for the use of Tibetan Childrens' Village for the setting up of educational institutions and other related purposes. According to the assessee, the land in his hands had retained the agricultural ITA 1464, 1465/ B/ 08; 177,178,262 & 305/B/09 Page - 47 character till the date of sale, for the reason that the assessee was doing agricultural activity. We have hereinabove in para 34 mentioned that the department had estimated the agricultural income at Rs.53 lakhs for 2004-05 and estimated agricultural income of the group at Rs.56 lakhs. Therefore, it is difficult to come to the conclusion that in the hands of the assessee, the character of the land had changed. Merely because the original owners had made application to change the character of the land from agricultural to non- agricultural and certificate was issued to that effect. Even for the revenue, there is no case that the land has been used for the intended purpose. 38. In the decision of Gujarat High Court relied upon by the DR, in the case of Gordhanbhai Kahandas Dalwadi v. Commissioner of Income-tax (1981) )27 ITR 664, the Hon'ble High Court held that the potential non-agricultural use does not alter the character of the land. This was a case wherein the land was purchased in 1954 and, subsequently, sold in 1969. The entries in the revenue records showed that the land was agricultural continued to be so. The land revenue paid was for agricultural use, but permission for non- agricultural use was obtained but not before the date of the sale. In these circumstances, the Hon'ble High Court upheld the presumption that ITA 1464, 1465/ B/ 08, 177, 178, 262 & 305/ B/ 09 Page - 48 the land is agricultural. The Hon'ble High Court came to the above conclusion in spite of the fact that this land was situated in an industrially developed area where the potential use of the land as non-agricultural land was very high but the Hon'ble High Court held that the use of the land as non-agricultural is totally immaterial. Entries in the record of rights are good prima facie evidence regarding land being agricultural and if the presumption raised either from actual user of the land or from entries in revenue records is to be rebutted, there must be material on the record to rebut the presumption. The approach of the fact-finding authorities, namely, the income-tax authorities and the Tribunal, should to consider the question from the point of view of presumption arising from entries in the record of rights or actual

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 24 of 29 user of the land and then consider whether that presumption is dislodged by other facts in the case. While coming to the above conclusion, the Hon'ble High Court considered the following facts. The presumption for non-agricultural used was obtained by the assessee before the sale of the land. Coming to the facts in the instant case, the previous owner made an application for conversion, obtained the permission, but with the condition that the land should be used for the intended purpose within two years, otherwise the original character of the land, i.e., agricultural nature, would be restored. Then the assessee or the subsequent purchased has ITA 1464,14651 El 08, 177, 178, 262 & 3051 El 09 Page - 49 to pay penalty and make a further application to obtain permission to revive the land for intended purpose. The assessee has not done this even according to the revenue. This was done by the subsequent purchaser i.e., Tibetan Childrens' Village, which compels to conclude that what the assessee held at the time of sale was agricultural land. It is true the facts is on border line, but the evidence produced before us in the form of RTC showing agricultural income etc., is in assessee's favour. Secondly, the Hon'ble Gujarat High Court considered the land revenue paid was for agricultural use of the land. In the instant case of the assessee also what was paid by the assessee was agricultural revenue. The non-agricultural revenue was paid by the subsequent purchaser after making an application for the second time to revive the nature of the land which is evidenced by the letter dt 1.3.2005 which was written to the Secretary, Manchanayakanahally Gram Panchayat by the Tibetan Childrens' Village. In the case decided by the Hon'ble High Court, it was held that the correct test to be applied was whether on the date of sale of the land whether the land was agricultural or non- agricultural and not the intended purpose and how the purchaser was going to use land. …………………………………………………………………..

ITA.305/Bang/2009 - By the Revenue in the case of T. Suresh Gowda A Y 2005-06 53. The revenue had taken an additional ground that is with regard to taking fresh additional evidence filed by the assessee

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 25 of 29 without giving opportunity to the assessing officer. In this case, the assessing officer noticed that the assessee had sold land measuring 40 acres and 20 guntas at Seshagirihalli for Rs. 4, 50, 00, 000/ - on 7.4.04 to Tibetan Childrens' village and claimed exemption from capital gains which worked out to Rs.3,68,01,771/- on the ground that the land situated in a rural area i.e., 8 Kms away from the limits of Bangalore Mahanagara Palike and the land is located as notified u/ s 2 (14)(iii)(b) of the Act as the transaction relates to sale of ITA 1464,1465/ B/ 08, 177,178,262 & 305/ B/ 09 Page 55 agricultural land. The assessing officer observed that the land was converted for residential purpose before the sale and, therefore, it is immaterial whether the land was situated outside the city limits or beyond 8 KMs. He further held that the cultivation of land till disposal is also irrelevant. He further held that no documentary evidence was produced to the effect that the land converted was treated as agricultural land within the meaning of s. 2 (14)(iii)(b). ......................................................................................................... 54. On similar issues in the connected case, we had held that the evidence produced by the assessee before the assessing officer and Commissioner of Income-tax (A) to the effect that assessee was doing cultivation of ragi etc., was sufficient to treat the land as agricultural land in the hands of the assessee, particularly because in the document, the nature of the land has been recorded as non-agricultural under the Karnataka Land Reforms Rules, 1966. While coming to the above conclusion we also held that this is a document maintained by the Government officials and treating the same as not valid in the absence of strict evidence to the contrary cannot be upheld. ITA 1464,1465/ b/; 177,178,262 & 305/ b/ 09 Page - 56. 55. On similar set of facts in the connected other cases, we have held that the land sold by the assessee is to be treated as agricultural land and the reasons given is applicable in the instant case of the assessee as the facts are identical .............”

7.3.7. The fact that the assessee had continued the agricultural operations unabated in the subject property on the date of sale even though the said land was converted for non-agricultural purposes by a Conversion Order of the State Government way back in

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 26 of 29 2004 [19.7.2004] with a rider that the land should be used for the purpose for which the conversion was granted within two years from the date of issue of the said order. However, on the date of sale i.e., on 12.4.2007,the subject land was under active cultivation for agricultural purpose only. This is evident from the fact that when we inspected the same on 10.4.2014, the said land - a part of large track of land - was having agricultural operations with fully grown up fruits-bearing trees. Thus, the conversion order dated 19.7.2004 had lost its sanctity since the said property was not put use for non-agricultural purposes within two years for which conversion was granted. 7.3.8. Finally, the most important aspect which requires to be considered is that agriculture is a State subject and different States have different reforms (laws) as to who can purchase / own agricultural lands in the respective States. To illustrate further, in Karnataka, non- agriculturists and industrial companies are prohibited from purchasing of lands which are classified as 'agricultural' in the revenue records. If an agriculturist intends to sell his agricultural lands to a company /non- agriculturist for the use of non-agricultural purposes, he must possess a conversion order obtained from the revenue authorities to utilise the subject land for non-agricultural purposes. However, the same law/rule is not prevalent in the neighbouring States of Tamil Nadu, Andhra Pradesh or in Maharashtra, Delhi etc. In other words, the agriculturists of the said States are free to sell their lands as shown in the revenue records to non-agriculturists /Corporates without obtaining a conversion order. 7.3.9. Thus, it is evident from the fact that the agriculturists in other States can sell their agricultural lands without getting the same converted whereas the agriculturists in Karnataka cannot do so due to the Land Reforms Act prevailing in the State. As such, an agriculturist in Karnataka is on a different footing from his counterparts in other States. If one were to conclude that since the present assessee had obtained a conversion order to enable it to sell its lands to a non- agriculturist (a Corporate), the subject land ceased to be a non- agricultural and, thus, become a Capital asset, though the subject land remains an agricultural land, the assessee then stands discriminated in the eyes of law vis-a-vis its counter-parts in other States. Had the State Reforms Act permitted the assessee to sell its agricultural lands without conversion to a Corporate as in the case of other States (supra), the assessee would not then be required to get the land converted merely to facilitate its sale to a corporate and the gains arising from such sale

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 27 of 29 would not have been exigible to Capital Gains tax which is the subject of a Central Act (Income-tax Act).In the instant case as mentioned earlier even after conversion, assessee was carrying on agricultural operation and conversion was done only to facilitate sale of subject property to a corporate entity/non agriculturist. In substance, the Income-tax Act - a Central Act - is to be administered in such a manner to ensure that an assessee IS not subjected to suffer due to different State laws. 7.3.10. Taking into account all the aspects as discussed in the fore- going paragraphs and also in conformity with the judicial pronouncements on the issue (supra), we are of the view that though the subject land was converted into non-agricultural purposes, cultivation of the land for agricultural purposes till the date of sale was continued unabated and as such, the land should have been treated as agricultural land and, thus, exempt from capital gains in view of s. 2 (14) of the Act. It is ordered accordingly."

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 28 of 29 has properly adjudicated the issue and we do not find any mistake therein. We accordingly confirm the order of the CIT(Appeals).

Pronounced in the open court on this 27th day of May, 2016.

Sd/- Sd/-

( A.K. GARODIA ) (SUNIL KUMAR YADAV ) Accountant Member Judicial Member

Bangalore, Dated, the 27th May, 2016.

/D S/

ITA Nos. 1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015 Page 29 of 29

Copy to:

By order

Assistant Registrar, ITAT, Bangalore.