ITO, INTERNATIONAL TAXATION WARD1(2), CHENNAI vs. RAJAMANICKAM ARULSELVAN, CHENNAI

This appeal filed by the Revenue is directed against the order of the ld. Commissioner of Income Tax (Appeals)-16, Chennai, dated 22.02.2023 passed in relevant to the assessment year 2013-14. The Revenue has raised following grounds:

During the course of assessment proceedings, the Assessing Officer noticed that during the financial year relevant to the assessment year 2013-14, the assessee has contributed capital asset being vacant land admeasuring 6.07 acres as capital contribution in the firm M/s. Fidelity Agro Farm in which he is one of the partners. The value of the said land was recorded in the books of partnership firm of ₹.6,99,79,150/-. Since the transfer of asset by a partner into partnership firm vis-a-vis is a transfer as defined under section 45(3) of the Act, the Assessing Officer called upon the assessee to file necessary evidence and to explain as to why capital gain tax should not be charged for transfer of capital asset being vacant land as capital contribution to the partnership firm. In response, the assessee has submitted that partnership deed has been 4 & C.O. No. 44/Chny/23 reconstituted on 06.04.2012 and as per the said deed, the assessee has contributed capital asset in the form of vacant land valuing ₹.6,99,79,150/- and the said land at the time of capital contribution on06.04.2012 was an agricultural land as per revenue records. Although the said land was intended for non-agricultural purposes and also filed an application for approval of DTCP, but, the said approval was granted by authorities on 20.02.2013, which falls under the assessment year 2013- 14. Thus, when the land has been contributed as capital asset on 06.04.2012, it was an agricultural land and is outside the scope of definition of capital asset in terms section 2(14) of the Act. However, the Assessing Officer was not convinced with the submissions of the assessee. The Assessing Officer has observed that the intention of the assessee was to use the impugned land for non-agricultural purposes, which is evident from the application filed by the assessee on 24.04.2009 to the DTCP authorities for conversion of said land into residential layout. The Assessing Officer further noticed that the land was not used for agricultural purposes by the assessee although the revenue records shows the said land was agricultural land when the land was transferred to partnership firm. On perusal of various details filed by the assessee including application filed by the assessee to the DTCP authorities, certificate issued by the VAO, etc. apparently clear that the said land is 5 I.T.A. No.479/Chny/23 & C.O. No. 44/Chny/23 not an agricultural land and the impugned land was used for non- agricultural purposes and thus, rejected the explanations of the assessee and held that the assets transferred to the partnership firm as capital contribution do not qualify as agricultural land within the meaning section 2(14)(iii) of the Act and thus, the transfer attracts the provisions of section 45(3) of the Act. As such, the Assessing Officer has computed the long term capital gains by taking into consideration of the amount as recorded in the books of the partnership firm amounting to ₹.6,99,79,150/- as full value of consideration after considering indexed cost of acquisition and assessed the long term capital gains at ₹.6,77,17,117/- and added back to total income.

Being aggrieved by the assessment order, the assessee preferred an appeal before the ld. CIT(A). Before the ld. CIT(A), the assessee has challenged reopening of assessment on the ground that the assessment has been reopened on change of opinion without there being any fresh tangible material came to the possession of the Assessing Officer after completion of original assessment order under section 143(1) of the Act. The assessee also challenged computation of long term capital gain by invoking the provisions of section 45(3) of the Act, even though the assessee has filed necessary evidences that the said land was an 6 & C.O. No. 44/Chny/23 agricultural land as per revenue records and was used for agricultural purposes when the land has been transferred to partnership firm. The ld. CIT(A), after considering the submissions of the assessee, rejected the legal ground challenging reopening assessment on the ground that when the original assessment was completed under section 143(1) of the Act and further when the assessment was reopened within four years from the end of the relevant assessment year, the question of change of opinion does not arise and consequently, there is no error in the reasons recorded for reopening of assessment. Therefore, the ld. CIT(A) rejected the ground raised by the assessee with regard to reopening assessment and upheld the reopening of assessment under section 147 of the Act.

The ld. CIT(A), further held that the addition made by the Assessing Officer towards long term capital gain from transfer of land to a partnership firm as capital contribution is not on sound footing because the evidences filed by the assessee including revenue records disclosing of land and application filed before the DTCP authorities for conversion of land and also subsequent approval granted by the authorities for using non-agricultural purposes clearly shows that the land transferred to the partnership firm, it was an agricultural land and is outside the scope of capital assets as per section 45(3) of the Act. Therefore, the monetary contribution recorded in the books of partnership firm as capital introduced by the partner for transferring land to the books of account cannot be taxed in terms of section 45(3) of the Act and therefore, directed the Assessing Officer to delete the addition made towards long term capital gain.

Aggrieved by ld. CIT(A)’s order, the Revenue is in appeal before us. The assessee also filed Cross Objections.

The ld. DR, Shri P. Sajit Kumar, JCIT has submitted that the ld. CIT(A) erred in failing to appreciate that when the assessee had applied for conversion of the vacant land into a plotted residential layout and had also made an application to DTCP on 24.04.2009, the intention of the assessee to stop cultivation and hold it as a trading asset is manifest and the said land cannot be classified as an agricultural land. The ld. DR, further referring to the provisions of section 2(14) of the Act, submitted that if land has been used for non-agricultural purposes if the intention of the owner of the land is for commercial exploitation of land, then the said land cannot be considered as an agricultural land even if the impugned land is shown as agricultural land in the revenue records. If we go by the intention of the assessee, it is undisputedly clear that the assessee wanted to convert the land into plotted layout and for that purpose, filed an application before the DTCP authorities on 24.04.2009. For the purpose of reckoning the land as agricultural land, the date of application filed by the assessee for conversion of land should be considered. The ld. DR, further referring to various judicial pronouncement including the decision of the Hon’ble Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466, submitted that the term agricultural land to mean that the said land should be used for cultivation by the owner of the land and in case the land is not used for agricultural purposes, even though said land is classified as agricultural land in revenue records, the same cannot be considered as agricultural land as per section 2(14) of the Act. The ld. DR has further submitted that the Assessing Officer, after considering relevant provisions rightly held that the land transferred to the partnership firm as capital contribution do not qualify as agricultural land within the meaning section 2(14)(iii) of the Act and thus, the transfer attracts the provisions of section 45(3) of the Act and without appreciating the same, the ld. CIT(A) has simply deleted the addition is not correct.

On the other hand, the ld. counsel for the assessee Shri N.V. Balaji, Advocate has submitted that the documents submitted before the ld. CIT(A) clearly shows that the impugned land was an agricultural land.

We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. There is no dispute with regard to the fact that the assessee has transferred the vacant land admeasuring 6.07 acres located at Appur village as capital contribution in the firm M/s. Fidelity Agro Farm by way of reconstituted partnership deed dated 06.04.2012. It is also an undisputed fact that the impugned land has been classified as wet agricultural land as per Chitta, Adangal, etc. The assessee had also furnished various other evidences to prove that the said land has been used for carrying out agricultural operation before the land was transferred to the partnership firm. Further, there is no dispute with regard to the fact that the assessee has filed an application before the DTCP on 24.04.2009 for conversion of land and the said application has been finally approved by the authorities on 20.02.2013 only. Therefore, in the light of the above facts, it is necessary to decide whether the impugned land was an agricultural land or a capital asset when the said land was transferred to partnership firm on 06.04.2012 as capital contribution.

Admittedly, various Courts have categorically held that once the land has been classified as an agricultural land as per revenue records, which are evident by Chitta, Adangal and letter of the Tehsildar, that land should be considered as an agricultural land and not capital asset as per section 2(14) of the Act and this principle is supported by Hon’ble Jurisdictional High Court in the case of Mrs. Sakunthala Vedachalam, Mrs. Vanitha Manickavasagam v. ACIT [2014] 369 ITR 558 (Mad). Further, the Hon’ble Madras High Court in the case of CIT v. P. Mahalakshmi 276 Taxman 224 (Madras) has also considered an identical issue and held that when the land was used for agricultural operation and the said land was also situated beyond the specified limit of the 11 & C.O. No. 44/Chny/23 municipality, then the said land should be treated as an agricultural land as defined under section 2(14)(iii) of the Act. The Hon’ble Supreme Court in the case of Sarifabibi Mohammed Ibrahim & Ors v. CIT (1993) 204 ITR 631 (SC) has set out various parameters to ascertain the nature of particular land whether it is an agricultural land or capital asset. If we apply the parameters set out by the Hon’ble Supreme Court to the facts of the present case, there is no dispute with regard to the fact that the impugned land of the assessee transferred to the partnership firm is an agricultural land because as per the revenue records, the said land was classified as an agricultural land. The assessee and his family members used the impugned land for agricultural purposes. Although, the assessee had an intention to use the impugned land for non-agricultural purposes, but, based on the intention, a particular land cannot be treated as capital asset when other evidences pointing to the fact that the impugned land is an agricultural land. Therefore, in our considered view, the Assessing Officer has erred in considering the impugned land as capital asset based on the intention to convert the land into non-agricultural purposes by filing an application before the DTCP, even though the application of the assessee has been approved by the authorities on 20.02.2013. No doubt, the land may be a non-agricultural land when the authorities had given permission to go ahead for development of land, but, that instance was 12 I.T.A. No.479/Chny/23 & C.O. No. 44/Chny/23 happened after transfer of land as per section 45(3) of the Act. When the land was transferred on 06.04.2012 by way of capital contribution to the partnership firm by the assessee, the said land was an agricultural land and further, the impugned land was used for agricultural purposes. The ld. CIT(A), after considering relevant facts, rightly deleted the addition made by the Assessing Officer towards computation of capital gain on transfer of land into partnership firm as capital contribution.

In so far as various case law relied on by the ld. DR including the decision of the ITAT in the case of ACIT v. G. Shanmuganathan in dated 04.11.2016 and also the decision of the Hon’ble Madras High Court in the case of PCIT v. A. Lalichan [2019] 104 taxmann.com 30(Madras), we find that in order to ascertain a particular land is an agricultural land or capital asset, various parameters needs to be considered including the land revenue records, location of the land duration of holding the land, utilization by owner of the land, etc. Therefore, based on the findings of a particular case law or judgement, it cannot be ascertained that a particular land is an agricultural land or capital asset. Going by the facts of the present case it is undisputedly proved that the impugned land is an agricultural land when it was transferred into partnership firm. In our considered view, the case law relied on by the ld. DR has no application to the facts of the present case.

In view of the matter and considering the facts and circumstances of this case, we are of the considered view that there is no error in the reasons given by the ld. CIT(A) to delete the addition made by the Assessing Officer towards computation of capital gain on transfer of land into partnership firm as capital contribution. Thus, we are inclined to agree with the findings of the ld. CIT(A) and dismiss the appeal filed by the Revenue.

We have heard both the parties and considered relevant grounds taken in the cross objections and find that the original assessment order in the present case was passed under section 143(1) of the Act and assessment has been reopened within four years from the end of the relevant assessment year. Therefore, once the assessment has been reopened within four years from the end of the relevant assessment year, where original assessment was passed under section 143(1) of the Act, the only condition to be seen is with regard to the legality of reopening based on the tangible material on which reasons recorded that there is an escapement of income was formed by the Assessing Officer. In the present case, reasons for reopening assessment was on the basis of fresh material which came to the Assessing Officer subsequent to the completion of original assessment order under section 143(1) of the Act dated 17.10.2014. The reasons recorded for reopening of assessment and formation of belief was based on the legally valid document and hence the Assessing Officer’s belief and consequent reasons are on a sound footing. Therefore, we reject the legal ground taken by the assessee challenging the reopening of assessment under section 147 of the Act and accordingly, dismiss the cross objection filed by the assessee.

In the result, the appeal filed by the Revenue and the Cross Objections filed by the assessee are dismissed.