Commissioner Of Income-Tax, Gujarat-Ii v. Sarifabibi Mohmed Ibrahim. (And Connected References)

1. Shakespeare was in the realm of poetry and was speaking of roses when he said : "What is in a name ?" In the field of taxation a lot turns on whether you call a parcel of land as "agricultural land" or not. If it answers that description it is exempt from capital gains tax. Otherwise it is exigible to such tax. That is why the dispute. The assessee says, the land in question situated at a distance of one kilometre from Surat Railway Station is agricultural land mainly because it is entered as such in revenue records and land revenue is paid on that basis. Revenue contends otherwise. In our opinion, a very vital and decisive test having been overlooked by the Income-tax Tribunal and the Tribunal having failed to take an overall view based on the totality of the relevant circumstances in rendering the decision on the mixed (and vexed) questions of fact and law as to whether or not the disputed land was "agricultural land" within the meaning of Section 2(14) of the I.T. Act, 1961, the decision of the Tribunal on this question cannot be sustained for reasons which will become manifest in the course of the judgment hereafter. '

2. The Tribunal has reversed the concurrent findings recorded by the ITO and the AAC as per annexs. A and B that the land in question was not "agricultural land" and has allowed the appeal preferred by the assessee by its order as per annex. C-4 dated July 3, 1975. It may be mentioned that initially the matter came up before a Division Bench of the Tribunal. The learned Members of the Tribunal disagreed. A reference was, therefore, made by the President to a third Member in exercise of the powers under Section 255(4) of the Act. The third Member came to the conclusion that the ITO and the AAC were in error and that he was not in a position to agree with the opinion expressed by the learned member of the Tribunal who was of the view that the decision of the ITO and the AAC was correct in law. He accordingly opined that the disputed land was agricultural land within the meaning of Section 2(14) of the Act as per his order at annex. C-3 dated June 24, 1975. Having regard to the view taken by the aforesaid Member to whom the matter was referred, in view of the difference between the two Members constituting the Bench, the Appellate Tribunal rendered its opinion in accordance with the majority opinion under Section 255(4) as per order at annex. C-4. The majority opinion being in favour of the assessee, the Tribunal has allowed the appeal of the assessee and has set aside the order of assessment passed by the ITO as confirmed by the AAC treating the profits as capital gains made by the assessee concerned in ITR No. 92 of 1976 in respect of her one-fourth share in the total sale proceeds of the entire block of 30,885 sq. yds. which was jointly owned (and jointly sold) by her along with her co-owners (co-heirs of original owner and assessees in all the three allied matters). A similar order has been passed in the case of each of the other three co-owners who have been separately assessed. Resultantly, there are four references under Section 256(1) of the I.T. Act to this court at the instance of the Commissioner. In each reference an identical question is involved on identical facts. It will, therefore, be convenient to dispose of these four allied references belonging to the group by this common judgment.

3. The question referred to this High Court for its opinion has been set out as under :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the land in question admeasuring 30,885 sq. yds. excluding 2,607 sq. yds. which was admittedly non-agricultural land, was an agricultural land within the meaning of section 2(14) of the Income-tax Act, 1961, and, therefore, on the sale thereof, tax on capital gains resulting therefrom was not leviable ?"

4. The question arises on similar facts. We will advert to the facts pertaining to Sarifabibi (asseesee concerned in ITR No. 92 of 1976 who along with other co-owners inherited the block of land admeasuring 30,885 sq. yds. in the following manner. The land situated at a distance of one kilometre from the Surat Railway Station was purchased forty years back on February 1, 1936, for a sum of Rs. 5,425 as agricultural land by the mother of the assessee, Smt. Nurunissa, and upon her death on December 14, 1939, the assessee's father, Mohmed Ibrahim, became the owner thereof as an heir. Mohmed Ibrahim died on February 12, 1966. Thereafter, the four co-owners including the assessee inherited the said land. Assessee, Sarifabibi, and her co-owners converted a parcel of 2,607 sq. yds. to non-agricultural user after obtaining the requisite permission under Section 65 of the Land Revenue Code some 20 years back on March 28, 1958. In respect of the remaining block of land the co-owners (assessees) chose not to apply for and obtain such a permission On the parcel of 2,607 sq. yds. in respect of which permission was obtained for non-agricultural user, residential chawls were constructed. The entire land inherited by the four co-owners, including the assessee, Sarifabibi, admeasuring 30,885 sq. yds. was sold during the relevant assessment year on May 30, 1969, and the assessee was assessed to capital gains arising from the sale at the rate of Rs. 23 per sq. yd. After making appropriate deductions including the basic allowance of Rs. 5,000, the net amount of capital gains was computed at Rs. 52,403. The assessee claimed before the ITO that barring the area of 2,607 sq. yds. on which the chawl was constructed the remaining portion of land was agricultural land within the meaning of Section 2(14) of the Act and consequently gains arising from the sale thereof were not capital gains under Section 45 of the Act. The view taken by the ITO, repelling this contention, was confirmed by the AAC. As mentioned earlier, in the appeal preferred by the asscssee before the Tribunal, initially, there was a difference of opinion and ultimately the appeal of the assessee was allowed as per the majority opinion which has given rise to the present reference. The facts pertaining to this land catalogued hereunder are not in dispute :

(1) The land is situated at a distance of 1 km. from Surat Railway Station.

(2) It is within the municipal limits and within a town planning scheme.

(3) It has been sold to a non-agriculturist for a non-agricultural purpose. It is sold to a co-operative housing society for constructing houses and buildings.

(4) It is sold on a per sq, yd. basis at Rs. 23 per sq. yd. on May 30, 1969.

(5) No agricultural operations such as growing of wheat, bajra, juwar, rice, groundnuts or cotton crop have been carried on for the last 4 years. Only grass for fodder is grown in the last year.

(6) An application for permission to sell the land to a housing society under Section 63 of the Land Revenue Code was made in August, 1968, some nine months before the actual sale effected in May, 1969, and it was granted on February 24, 1969, about a month prior to the actual sale.

(7) More than 15 years back a parcel of 2,607 sq. yds. out of this very land was converted to non-agricultural user by constructing a chawl on it by the owners themselves after obtaining the requisite permission to convert the land to non-agricultural user under Section 63 of the Land Revenue Code.

(8) Application to convert the land under transaction to non-agricultural user was not made before the sale deed was executed on 30th May, 1969. It was subsequently made by the purchaser-housing society much later. (But then permission could have been applied for if so desired and could not have been refused arbitrarily ; it is common experience that it is granted almost as a matter of course). In fact it is on record that the purchaser-society commenced actual construction on 2nd June, 1969, that is to say, within 3 days of the execution of the sale deed in its favour by the assessee in anticipation of the permission.

(9) No agricultural operations were carried on since 1964-65 till the sale in 1969.

5. All these facts and circumstances viewed in the light of the appropriate tests impel us to the conclusion that the lands are not agricultural lands in fact and truth (though they are labelled as such in the revenue records) for reasons which we will presently articulate. But before we do so we must advert to the propositions of law affirmed in the earliest decision of this court which have not undergone any change in the later decisions. The decision we have in mind is the one rendered in Rasiklal Chimanlal Nagri v. CWT [1965] 56 ITR 608 (Guj).

6. The following propositions emerge therefrom :

(1) The intention of the owner to put it to any particular user is one of the criterion though not the sole or exclusive criterion.

(2) The actual user may ordinarily furnish a prima facie evidence of the nature and character of the land. If it is lying idle, the question may assume more complexity.

(3) The development and situation of the lands in the adjoining area or surroundings would be an important factor for consideration.

(4) The physical characteristics may throw some light.

(5) Mere fact that the lands are assessed as agricultural lands under the Land Revenue Code or the said lands are not actually used for non-agricultural purposes does not necessarily mean that the lands are agricultural lands. Otherwise even building site lands can be considered as agricultural lands since it can always be said that they are capable of being used for agricultural purposes.

(6) A prudent and reasonable man would not purchase agricultural land (that is to say for agricultural purposes) in the midst of a highly developed residential area on an enormously high price of say Rs. 20 per sq. yd.

7. The aforesaid principles were invoked in Himatlal Govindji v. CWT [1977] 106 ITR 658 (Guj) and the land was held to be agricultural land. It was clarified that if the assessee had put the land to agricultural user by way of stop-gap arrangement till the assessee found a ready and willing buyer it would negative the plea that it was agricultural land on that account. And that, the effect of the totality of the circumstances had to be considered. This view was reaffirmed in Yaswanti R. Bhatt v. CWT [1978] 114 ITR 318 (Guj). The validity of these decisions has never been doubted so far though on the peculiar facts of some subsequent cases the lands concerned were held to be agricultural lands in Chhotalal Prabhudas. v. CIT [1979] 116 ITR 631 (Guj), Gordhanbhai Kahandas Dalwadi v. CIT [1981] 127 ITR 664 (Guj) and Ramprasad v. CIT (I.T. Ref. No. 90 of 1976 decided on October 3, 1980--See infra p. 633). In these three decisions (we repeat) the principles enunciated in the earlier judgments referred to by us have not been given a go-by (it could not have been done without referring the matters to a larger Bench). These are decisions rendered on the facts of the individual cases and make no departure from the principles settled earlier. On an analysis of these decisions and the decision rendered by the Supreme Court in CWT v. Officer-in-Charge (Court of Wards), Paigah [1976] 105 ITR 133, the following tests can be formulated in order to determine whether or not the land in question is agricultural land, as claimed by the assessee, which is immune from the provisions pertaining to tax on capital gains.

8. Circumstances which speak "for" and "against" the conclusion that the land is agricultural land.

For Against (1) That it is entered as agricultural land in revenue records and assessed as such under the Land Revenue Code.

[subject to the rider that it is a rebut-table presumption and can be destroyed by other circumstances pointing to the contrary conclusion. See Commissioner of Wealth-tax v. Ojficer-in-Charge (Court of Wards), Paigah [1976] 105 1TR 133 (SC)].

(1) When land is situated in an urban area within municipal limits in the proximity of buildings and building sites.

(2) That agricultural operations were carried on in the past or are carried on currently.

[subject to the rider that it is not a decisive factor inasmuch as agricultural crop can be raised even on building site land (even on desert land as observed in [1976] 105 ITR 133 (SC). And sometimes, a crop is grown in order not to allow the land to remain idle awaiting sale for non-agricultural purposes to a non-agriculturist by way of a stop-gap arrangement or in order to avoid payment of revenue at a higher rate or in order to avoid payment of capital gains tax) : See proposition No. 5 in Rasiklal Nagri's case [1965] 56 ITR 608 (Guj)].

(2) When land is sold to a non-agriculturist for non-agricultural purposes.

(3) It is not converted to non-agricultural user. (subject to the same rider as added to clause 2).

(3) When land is sold on a per sq. yd. basis at a price comparable to the price fetched by building sites.

(4) When price is such that no bona fide agriculturist would purchase the same for genuine agricultural operations (See proposition No. 6 in Rasiklal Nagri's case [1965] 56 ITR 608 (Guj).

(5) When price is such that no prudent owner would sell it at a price worked out on the capitalization method taking into account its optimum yield in the most favourable circumstances.

(See proposition No. 6 in Rasiklal Nagri's case [1965] 56 ITR 608 (Guj)).

9. We are of the opinion that the most vital tost which cannot be lightly brushed aside is the test adverted to in proposition No. 6 of Rasiklal Nagri's case [1965] 56 ITR 608 (Guj) (See tests at serial Nos. 3, 4 and 5 enumerated in the right side column hereinabove). We consider it necessary to elaborate this test in order to stress its great significance.

10. When the question as to the real nature of the land arises in the context of land situated in urban areas like Ahmedabad, Bombay, Delhi, Madras, Bangalore, Allahabad, Lucknow, etc., the most important test which requires to be applied in order to answer the question as to whether or not the land is agricultural land exempt from capital gains tax by reason of its being agricultural land is to ask and answer the crucial question : Would any sane and sensible agriculturist (one may even say, would any insane or insensible agriculturist) purchase the land in question in order to carry on agricultural operations having regard to the price that he would have to pay and having regard to the return he can expect in the course of the agricultural operations if the land were to be used as agricultural land ? If no sane or sensible agriculturist would purchase such a land for agricultural purposes having regard to the amount of capital that he would have to invest and having regard to the return that he might expect from the agricultural operations on such land, can it bo said to be agricultural land ? The test may be formulated in a different manner as well. Would the owner of the land in question sell it to an agriculturist for agricultural purposes at a price worked out by taking into account the maximum yield that an agriculturist can obtain by carrying on agricultural operations in the most efficient manner even on taking into account the maximum price that one can expect for the agricultural crop which can be produced at the material time ? Would he be willing to sell it to an agriculturist on a valuation made by adopting the formula of capitalization in the most liberal manner, say 20 years' purchase, computed on the expected yield, assuming that (1) the monsoon is most favourable, (2) the cultivation is made in the most efficient manner by the most modern equipment, and (3) maximum price is obtainable upon the sale of the agricultural produce ? If no agriculturist can afford to purchase the land on a per sq. yd. basis at the prevailing price for building sites (say at Rs. 23 per sq. yd.) for agricultural operations, it being an utterly uneconomic proposition, and if the owner cannot ever expect to sell it at the price worked out on the capitalisation method, even on the basis of the optimum yield and maximum sale price, can one still classify the land as agricultural land ? This dual test is one of the most tell-tale realistic down to earth commonsense test which one cannot refuse to face. And a blined eye has been turned to it by the majority members of the Tribunal. If these two tests do not warrant the conclusion that the land is agricultural land, can one say that it is agricultural land merely" because the owner of the land chooses not to seek permission (he can do so whenever he is so minded) to convert the land to non-agricultural user or for building purposes for obvious reasons ? Can we do so merely because the land is entered in the revenue records as agricultural land ? Why should he make such an application when not to do so would benefit him by reason of the fact that instead of paying non-agricultural assessment at a higher rate he would have to pay the assessment at a lower rate till the record shows it as non-agricultural land ? If unmindful of this vital dimension and in disregard of this commonsense approach an unrealistic and unpragmatic approach were to be made, land situated in New Delhi just adjoining the land on which the Supreme Court building is situated or the land situated in the heart of the city in Bombay in the Fort area near the land on which the High Court building is constructed will be required to be treated as agricultural land notwithstanding the fact that the vendor would never sell it on the hypothesis that it is agricultural land valued as such by capitalising the expected income on the maximum yield that can be expected from the agricultural operations on the land. It would have to be treated as agricultural land notwithstanding the fact that it would not be possible to find one single agriculturist anywhere in India who would purchase it, at the rate prevalent for building sites in the round about area in the locality in which the alleged agricultural land is situated, on a per sq. yd. basis, for bona fide agricultural purposes, with an eye on genuinely carrying on agricultural operations in fact and in truth. Otherwise, land situtated, say in a city like Bombay in Fort area adjoining the land on which the High Court building is construeted, which would ordinarily cost about Rs. 20,000 per sq. yd, or more, would have to be treated as agricultural land in total disregard of the fact that the valuation in respect of it arrived at on the basis of capitalization of agricultural income would hardly justify a valuation of more than Re. 1 or Rs. 2 per sq. yd. This crucial and vital perspective has been completely overlooked by the Tribunal in approaching the question as regards the real nature of the land in order to determine the question as to whether the profit earned by the sale of the said land to a non-agriculturist, in fact a housing society formed for the purpose of constructing residential houses, at a per sq. yd. basis, could have been held as agricultural land exempt from payment of capital gains tax.

11. The crucial two-fold test formulated a short while ago, viz., (1) no agriculturist would purchase for agricultural purpose, (2) the assessee would never have sold it by valuing it as a property yielding agricultural produce on the basis of its yield, applied to the present case in the perspective of the totality of facts and circumstances of the case impel us to the inevitable conclusion that it was not agricultural land on the date of its sale. Surely the mere fact that at one point in the remote past it was agricultural land or the fact that the owner chooses not to convert it to non-agricultural user cannot indicate the true character of the land at the moment of the transaction. It does not depend on the label applied by the owner or the entry in the revenue records only. We will presently elaborate the other facts and circumstances (besides the aforesaid test of utmost significance) which compel us to hold that the land was not agricultural land : (1) The sale was at Rs. 23 per sq. yd. on a sq. yd. basis which shows that it was neither being sold nor purchased as agricultural land. (2) No agricultural operations such as growing of grains, cotton, or oilseed crop were carried on during the three previous years preceding the last year. Only grass was grown in the last year. (3) In our opinion, even if a crop was grown as a fill-gap arrangement in order that the land did not remain unutilised and idle awaiting the construction of a building by the assessee himself or by a purchaser housing society, it would not have made any difference. Crop can be grown on even housing site lands. It is, therefore, not possible to view it as a circumstance pointing to the conclusion that it was agricultural land. (4) In the present case, the purchaser was a housing society who was admittedly purchasing it for building houses (was the very land agricultural land "for the assessee" and non-agricultural land "for the purchaser" at one and the same point of time ?) An application to sell to a non-agriculturist under Section 63 of the Land Revenue Code was already made by the assessees months earlier and permission was actually obtained a month prior to the actual sale. This is a sure pointer to its non-agricultural character. What is more, some 11 years earlier, the assessees themselves had converted a part of the land (about 10%) to non-agricultural user and constructed a chawl thereon. They had thus already treated 1/10th of the land as non-agricultural land more than 10 years before the sale. Their failure to convert the rest of the land presumably awaiting sale for housing at a suitable time and price cannot alter the character of the land. It was situated within one kilometre of Surat Railway Station and was situated in the midst of land on which development by way of construction of buildings had taken place. On the other side of the balance-sheet there are only a few innocuous factors which in our opinion are of little significance and cannot turn the scales, viz. :

(1) It was still entered as agricultural land in the relevant records.

(2) It was till the date of sale not converted to non-agricultual user.

(3) Application for permission to convert (for non-agricultural user) necessary under Section 65 of the Land Revenue Code was not made till the date of sale.

(4) Agricultural operations were carried on in the past.

12. In our opinion, these circumstances taken individually or collectively cannot help the assessee. As pointed out earlier the mere fact that it was entered in the relevant records as agricultural land is not of much significance. The Supreme Court in CWT v. Officer-in-Charge (Court of Wards), Paigah [1976] 105 ITR 133, had in terms declared that entries can at best raise a rebuttable presumption, and had set aside the Full Bench decision of the Andhra Pradesh High Court holding that the land in question was agricultural land, and remanded the matter for a fresh decision in the light of the observations made therein. So also the fact that it was not converted to non-agricultural user is of no value. The assessees could have done so at any time. The assessees did not do so because it was advantageous to wait till the necessity or occasion arose, because, meanwhile, they could pay land revenue at a lower rate and may not have to pay capital gains tax. Similarly, the fact that the application under Section 65 of the Land Revenue Code to convert to non-agricultural purpose was not made cannot alter the character of the land. They could have done so at any time. And ordinarily it would have been granted for the mere asking.

13. The last point, viz., that agricultural operations were carried on by the assessees in the past is neither here nor there. As observed by the Supreme Court in CWT v. Officer-in-Charge (Court oj Wards), Paigah [1976] 105 ITR 133, crop can be grown even on desert land. It would be too much to say that once an agricultural land it would always remain an agricultural land regardless of future development and basic change in the landscape. This ramification has been highlighted by the Supreme Court in the following words (p. 140) :

"We think that it is not correct to give as wide a meaning as possible to terms used in a statute simply because the statute does not define an expression. The correct rule is that we have to endeavour to find out the exact sense in which the words have been used in a particular context. We are entitled to look at the statute as a whole and give an interpretation in consonance with the purposes of the statute and;what logically follows from the terms used. We are to avoid absurd results. If we were to give the widest possible connotation to the words 'agricultural land', as the Full Bench of the Andhra Pradesh High Court seemed inclined to give to the term 'agricultural land', we would reach the conclusion that practically, all land, even that covered by buildings, is 'agricultnral land' inasmuch as its potential or. possible use could.be agricultural. The object of the Wealth-tax Act is to tax surplus wealth. It is clear that all land is not excluded from the definition of assets. It is only 'agricultural land' which could be exempted. Therefore, it is imperative to give reasonable limits to the scope of the 'agricultural land', or in other words, this exemption had to be necessarily given a more restricted meaning than the very wide ambit given to it by the Full Bench of the Andhra Pradesh High Court."

14. In the light of the foregoing discussion the conclusion is inevitable that the land in question is not agricultural land. We may mention that counsel for the assessee has sought support from Chhotalal Prabhudas v. CIT [1979] 116 ITR 631 (Guj), Gordhanbhai Kahandas Dalwadi v. CIT [1981] 127 ITR 664 (Guj) and Rampmsad v. CIT (I.T. Ref. No. 90 of 1976 decided on 3-10-80 (see p. 633 infra) in which land was held to be agricultural land. In our opinion, these cases, decided on their individual facts, cannot make us disregard the overpowering reasons articulated hereinbefore for reaching a contrary conclusion on the basis of the principles which cannot be doubted or disputed. We cannot, therefore, accede to the submission urged by counsel for the assessee.

15. Under the circumstances, we are of the opinion that the ITO and AAC were right in holding that the disputed land was not agricultural land and the Tribunal was in error in holding that the disputed land was agricultural land. The identical question referred to us in each of the four allied references which have been heard together as a group is, therefore, answered as under :

Question Answer "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the bind in question admeasuring 30,885 sq. yds. which was admittedly non-agricultural land, was an agricultural land within the meaning of section 2(14) of the Income-tax Act, 1961, and, therefore, on sale thereof, tax on capital gains resulting therefrom was not leviable ?

In the negative and against the assesses.

16. The references are answered accordingly. There will be no order as to costs.

17. A copy of this judgment shall be placed on the record of each of the four references.