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

That the Order of the Ld. CIT(A) is erroneous on the facts, the merits of the case and provisions of Law as well and hence unsustainable.

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 C.O. No. 44/Chny/23

That the Ld. CIT(A) erred in failing to appreciate the decision of the Hon’ble Supreme Court in the case of Sarifabibi Mohammed Ibrahim & Ors. v. CIT (1993) 204 ITR 631 which is paramount on this intriguing subject, had rendered that when the intention to stop cultivation is profoundly explicit, income arising from sale of such land was chargeable to capital gains tax.

That the Ld. CIT(A) erred in failing to appreciate that the asset had lost its character as agricultural land once the partners intended to contribute it to a firm engaged in real estate business activity.

That the Ld. CIT(A) erred in failing to appreciate that the vacant land is no longer agricultural in nature when the assessee had failed to substantiate that the land was under cultivation at the relevant point of time, more particularly when way back in 2009 itself, there was a clear determination to convert it for non agricultural purposes and had also obtained the requisite permission from DTCP subsequently.

That the Ld. CIT(A) erred in failing to appreciate that by applying for conversion of agricultural land to non agricultural use, the legislative intention to encourage cultivation gets defeated and accordingly the claim of exemption of LTCG u/s 2(14) is inappropriate.

For those and other reasons that may be adduced at the time of hearing, it is prayed by the Appellant that the Hon'ble ITAT may be pleased to set aside the order of the CIT(A)-16, restore the order of the assessing officer and thus render justice.

Brief facts of the case are that the assessee has filed the return of income for the assessment year 2013-14 admitting total income of ₹.12,63,260/-. The return filed by the assessee was processed under section 143(1) of the Income Tax Act, 1961 [“Act” in short] on 17.10.2014. The case has been, subsequently, reopened under section 147 of the Act C.O. No. 44/Chny/23

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 C.O. No. 44/Chny/23

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 C.O. No. 44/Chny/23

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 C.O. No. 44/Chny/23

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 C.O. No. 44/Chny/23

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 C.O. No. 44/Chny/23

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. C.O. No. 44/Chny/23

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 C.O. No. 44/Chny/23

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 Juri ictional 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 C.O. No. 44/Chny/23

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 ITA No. 569/Mds/2016 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 C.O. No. 44/Chny/23

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.

The assessee has filed cross objection by taking various grounds of reopening of assessment under section 147 of the Act.

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 C.O. No. 44/Chny/23

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