SHRI RAMUBHAI NATUBHAI PATEL,,SURAT vs. THE INCOME TAX OFFICER, WARD-4(4),, SURAT

This bunch of thirty seven (37) appeals is part of Hazira Land Acquisition cases relating to different assessment years wherein one of the appeal in Ambaben J Patel in was treated as a “lead” case. This combination, after hearing the submission of both the parties, partly allowed the appeal of that assessee on various grounds. The assessee(s) in this bunch of appeals have raised similar AYs 2007-08 to 2010-11 grounds of appeal

Now adverting to the main grounds of appeal

Before us, the ld. Senior Counsel for assessee vehemently submitted that compensation received on acquisition would not be subject to capital gain, as the agriculture land is not a capital asset as not being situated in an area which comprised within the jurisdiction of any municipality having population of not less than 10000 as per last census. If the land is not a capital asset, question of paying tax on its acquisition would not arise. The assessee has to satisfy two conditions (i) the land is agriculture land and (ii) to claim exemption that agriculture land is not situated within municipal limit having population of not less than 10000. For first condition, the ld. Senior Counsel submits that from the contents of award itself it is clear that the land in question is agriculture land. The award was passed by officers of the State Govt. and the correctness of the statement made in the award cannot be doubted. The land is shown as agriculture land in the revenue record. The jurisdictional High Court in CIT Vs Sidharth J Desai (supra) has laid down thirteen test to determine the true nature and character of the agriculture land. On the second aspect that for claiming exemption to show that agriculture land is not situated within a municipality having population of less than 10000. It was submitted that Hazira is not a municipality and in order to appreciate this aspect, the process by which this area was established makes it clear that by way of notification, it would not make an area as municipality. Thus, we examined the order of lower authorities viz a viz the submission of learned senior counsel for assessee.

We are in agreement with the submissions of learned Senior Counsel for the assessee that the word “Municipality” is not defined in the Income Tax Act, it is also not defined in General Clause Act. Article-243P(e) of the Constitution of India defines the same as “an institution as self-Government constituted under Article 243Q”. Proviso to Article 243Q(1). In turn, it provides that a ‘municipality’ under this clause may not be constituted in such urban area or part thereof as the Governor may having regard to the size of area and the municipal services being provided or proposed to be provided by industrial establishments in that area and such other factors as may be deemed fit by public Notification, specified to be an industrial township. In a simple meaning that industrial township set-up under this proviso would not be “Municipality”. We also concur with the submissions of learned Senior Counsel Hazira Notified area is Industrial Township, therefore, not a municipality. On the issuance of the Notification under Section 16(1) of Gujarat Industrial Development Act, 1962, Hazira Notified area become a Notified area, thereupon the provisions of Chapter-XVI-A Gujarat Municipalities Act, would apply. Hazira Notified area would then be an ‘Industrial Township’ area under Section 264A of the said Act. We are in agreement with the submission of learned Senior counsel for the assessee that under section 264B of the said Act, the State Government has a power to apply any section of the said Act or part thereof, or the Rules in force as maybe applied to a municipal borough to such notified area. Section 264C would create a fiction that for the purposes of any section of the said Act which may be applied to a notified area, the person or committee appointed for such area under section 264B shall be deemed to be a “Municipality” under the said Act. The fiction is an unlimited fiction. Firstly, the fiction is only in relation to those sections of the said Act which are applied to the notified area and even the second part of the fiction of 15 AYs 2007-08 to 2010-11 deeming the notified area to be a “municipality” is only for the purpose of the said Act. It does not convert notified area into a “Municipality” in any way.

The Hon'ble Supreme Court in the case of Saij Gram Panchayat Vs State of Gujarat (supra) while considering the scope of section 16 of GIDA and Section 264A inserted in Gujarat Municipalities Act, in view of insertion of Part IXA in the Constitution held that industrial area under the GIDA would be a notified area under new section 264A of Gujarat Municipalities Act and would mean an ‘industrial township area’ under the proviso to clause (1) of Article 234-Q of the Constitution of India (Para-10).It was further held that GIDA operates in a different sphere from Part IX and IXA of the Constitution as well as Gujarat Panchayat Act. The latter being provision dealing with local self-government, while former being an Act of Industrial Development and orderly establishment an organization and industries in a State. The Industrial Areas which have been notified under Section 16 of the GIDA. These industrial areas have been developed by the Gujarat Industrial Development Corporation (GIDC) and they can hardly be looked upon as rural areas covered by Part IX of the Constitution. It is only such industrial areas which can be notified under Section 16 of the Gujarat Industrial Development Act, 1963. If by a notification issued under Section 16, these industrial areas are deemed to be notified areas under the Gujarat Municipalities Act and are equated with industrial townships under the proviso to Clause (1) of Article 243Q, the constitutional scheme is not violated. It was further held that under Chapter 3 of the Gujarat Industrial Development Act, 1962, the Gujarat Industrial Development Corporation, has been given power, inter alia, to develop land for the purpose of facilitating the location of industries and commercial centres. It has also been given the power to provide amenities and common facilities in such areas 16 AYs 2007-08 to 2010-11 including provision of roads, lighting, water supply, drainage facilities and so on. It may do this either jointly with Government or local authorities or on an agency basis in furtherance of the purposes for which the corporation is established. The industrial area thus has separate provision for municipal services being provided by the Industrial Development Corporation. Once such an area is a deemed notified area under the Gujarat Municipalities Act, 1964, it is equated with an industrial township under Part IXA of the Constitution, where municipal services may be provided by industries. It was further held that unless, it qualifies with the criteria prescribed under Article 243-Q of Constitution of India cannot be at par with municipality. Article 243-Q constitute three types of municipalities viz (i) Nagar Panchayat (ii) a Municipal council and (iii) Municipal corporation, it provides that a municipality under clause (1) may not be constituted under certain circumstances. In respect of any three types of areas, set out in clause (1) of Article 243-Q, having regard to the size of area, the municipal services being provided or proposed to be provided by the industrial establishment in that area and such other factor as the Governor will deem fit to consider, he may by public notification, specifies such area to be an industrial township.

Further Hon’ble Supreme Court in Solapur MIDC Industries Association Etc. Vs State of Maharashtra & Ors., JT (1996) 7 SCC 14 held that Municipal Corporation Act and an Industrial Development Act have distinct fields of operation and there is no inter se conflict between the two.

So far as reliance on the case law in G.M Omer Khan Vs Add CIT (supra) relied by ld CIT(A) as well as by ld DR for the revenue is concern, we find that the facts of that case are entirely different. In the said case the land of the assessee was situated in a village within the Municipality. The assessee in that case contended that his laid 17 AYs 2007-08 to 2010-11 was in an area which in terms meant a 'Village' and the population of that village was far below ten thousand and the mere fact that the said area fell within the municipality of a city which had a population of more than ten thousand, was of no consequence. He, therefore, claimed that the property in question was an agricultural land not covered by section 2(14). On reference, the High Court interpreting section 2(14)(iii)(a) opined that the property acquired was a 'capital asset' as the words 'which has a population of not less than ten thousand' In section 2(14) (iii) (a) would qualify only 'the municipality or cantonment and not the expression 'area', and, therefore, the capital gains arising out of the sale of the land In question could not be exempted under section 2(14)(iii)(a).

Considering the aforesaid legal position, we are of the view that by setting up of an industrial area by way of notification under section 16 of GIDA, the notified area would not be a deemed municipality, though, certain provision of Gujarat Municipalities Act are applicable for day to day affairs of the notifies area. Hence, we hold that the Hazira Notified area is not municipal area or deemed municipality therefore, the agriculture land situated in such notified area would not partake the character of agriculture land as ‘capital asset’ as defined under section 2(14) of the Act and the value of compensation received on acquisition of such land is not be taxable under Income tax Act. Thus, the appeal of assessee is liable to be succeeded on this issue alone.

Now adverting to the issue whether the land acquired is agriculture land and /or being used for agriculture purpose and assessee is eligible for exemption under section 10(37) of the Act. The assessing officer while rejecting the eligibility of section 10(37) held that the assessee has not produced any evidences regarding agriculture activities carried out on the land and that the District Agriculture officer, Zilla Panchayat Surat has written letter to 18 AYs 2007-08 to 2010-11 Collector that many part of the land is under sea water and part of land is barren. The ld CIT(A) affirmed the action of assessing officer by taking view similar view.

Before, us the learned Senior Counsel for the assessee vehemently argued that for seeking eligibility under section 10(37), the assessee has fulfilled the four conditions of this sub-section, viz., (i) such land is situated in any area referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of Section 2; (ii) such land during the period of two immediately preceding the date of transfer, was being used for agricultural purpose by such Hindu Undivided Family (HUF) or individual or a parent of assessee; (iii) such transfer is by way of compulsory acquisition under any law or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India and (iv) such income has arisen from the compensation or consideration for such transfer received by such assessee on or after the 1st day of April, 2004.

We have already held the land is not situated within a municipal area, thus, first condition is satisfied. So far as second condition, is concerned, we find it is certified by District Agricultural Officer, Surat vide his letter dated 16.06.2014 that the agricultural operation are carried in the land. Further the award was passed in financial year 2007-08, in the award the Special land Acquisition Collector on a number of stances mentioned that the land under acquisition is used for the agriculture purpose, this prove beyond doubt the land was being used for agricultural purposes, not only on date of acquisition but till the date of acquisition all throughout, but in any case for more than two years. The land in the revenue record is also shown as agriculture land. For third condition, we find that that first award is by consent; however, as held by Hon'ble Supreme Court in the case of CIT Vs Ghanashyam (HUF) (supra) it was held that consent award which has followed all steps of compulsory 19 AYs 2007-08 to 2010-11 acquisition has to be regarded as an award of compulsory acquisition. There is no dispute that the State Government before starting the acquisition proceedings, initiated under Land Acquisition Act 1894, issued notice under section 4 & 6 of that Act. So far as second award is concerned, it is undisputedly an award of compulsory acquisition. For fourth condition, there is no dispute the income arisen on compensation.

The Hon’ble Delhi High Court in Hindustan Industrial Resources Ltd Vs CIT (supra) held that when award passed by District Collector (Land Acquisition) is a document which established beyond doubt that the land in question was an agricultural land. Thus, on the date of purchase, the land in question was an agricultural land and on the date of acquisition, the character of the land continued to be agricultural.

Further, the Hon’ble Gujarat High Court in CIT Vs Siddhrath J Desai (supra) while considering the fact that the assessee had purchased a piece of agricultural land which was situated in an area not included in the municipal limits. There was no development in the surrounding area indicating any potentiality for the development of the land. For the period of three years immediately after its purchase, agricultural activity was carried on in the land. At or about the time of its subsequent sale, the land was not actually put to agricultural use. All the while, however, the land continued to be listed in the revenue record and it was assessed to land revenue. On 22-11-1968, the assessee obtained permission of the competent authority under section 63 of the Bombay Tenancy and Agricultural Lands Act, 1948, for the sale of the land to a co- operative housing society. On 1-2-1969, the assessee sold the land to the society. On 5-2-1969, the society obtained the permission for non-agriculture use of the land, under section 65 of the Bombay Land Revenue Code, 1869, from the competent authority. The 20 AYs 2007-08 to 2010-11 assessee claimed that the surplus realised by him on the sale of land was not liable to be taxed as capital gains as the land in question was agricultural land. The ITO held that since no agricultural operations were carried on immediately before the sale of the land, the land could not be treated as agricultural on the date of its sale and, therefore, the surplus realised by the assessee was liable to be taxed as capital gains. On appeal, the AAC reversed the decision of the ITO. On further appeal, the Tribunal affirmed the decision of the AAC. On reference before High Court held that having regard to the facts and findings recorded by the Tribunal, it was obvious that not only the physical characteristics of land, in the instant case, but the user also was agricultural. Even though the land was not actually put to agricultural use since about one year prior to the sale, there was no evidence to establish that it was converted to any other use. The fact that permission under section 63 of the Bombay Tenancy and Agricultural Lands Act was obtained by the assessee to sell the lands to the society for residential purposes would not, militate against the land continuing to be agricultural on the date of its sale, as the permission was obtained only about two and a half months prior to the sale. Therefore, till the land was held by the assessee its character as agricultural land was not changed either as a result of its reclassification on in the revenue records or by the actual alteration of its use. Again, there was no evidence on record to show that there was any development in the surrounding area or that the land itself was developed prior to its sale. The land was located on the outskirts of the village but it was not situate in the municipal limit. The land must, therefore, be taken as having been situate in a rural area and it continued to have an agricultural bias right up to the date of its sale. Further, there was no evidence or material on record to indicate that the price offered for the land by the society, even proceeding on the basis that" the intended user of his part was 21 AYs 2007-08 to 2010-11 non-agricultural, would not have been offered by an agriculture who wanted to purchase the land for purely agricultural user. There being no evidence on record as regard the nature of the soil, its fertility, its suitability and adaptability for raising cash crops, the irrigation facility and such or similar factors which had a great bearing on the valuation of an agricultural land, it would be hazardous to come to the conclusion that the price offered was such that no agriculturist would have paid the same if he wanted to purchase the land for purely agricultural purposes. Accordingly, the land was an agricultural land and the surplus realised on a sale thereof was not liable to be assessed to capital gains tax. The High Court laid down thirteen test to determine whether the land would be agriculture land by applying such test.

So far as reliance of revenue on the report of NRSC is concerned, which was otherwise relied by ld CIT(A) in ten cases. The ld DR for the revenue while making her submissions by referring various parts of it submitted that no agriculture activity or evidence of any crop is found on various parcel of the land from 1999 to 2012. And only shrubs were found with no sign of any crop or vegetables of the parcels of land. Further the satellite images shows that no agriculture activities were carried on the land. The ld DR also submitted that report of NRSC is scientific report and conclusive proof. We do not find merit in the submissions of the ld DR, as disclaimer, attach to the said report, NRSC, itself reported the shape file provided by CIT(A) did not match with field boundaries of the reference satellite data, with implication on accuracies of location area. Further, in absence in absence of adequate number of GCPs, rubber sheeting technique carried out also did not yield the desirable results. And that concurrent ground truth was not available for thus study and interpretation is exclusively based on the manifestation of features and experience of the interpreter, which could be subjective. 22 AYs 2007-08 to 2010-11 It is also mention in the last para in the disclaimer that results have to be corroborative in association with the ground observation, available, if any. Thus, the report itself contents vague observation and cannot be used as evidence or conclusive or expert report based of any scientific evidence against the assessee. Moreover, said report was not provided to the assessee. Thus, by applying of such test we find that the land of the assessee acquired by Special Land acquisition officer is agriculture land. In the result, the assessee is also succeeded on this issue/ ground as well.

Considering the facts that we have already held that the land of the assessee is not ‘capital asset’ as the same does not fall in municipal area, Hazira Notified area is not a municipality or deemed municipality and on alternative plea also held eligible for exemption under section 10(37), therefore, all other pleas or counter pleas of the parties and the remaining issues arising thereto have become academic.

Now adverting to the ground of appeal