Kalpetta Estates Ltd. v. Commissioner Of Income-Tax.

Income-tax References Nos. 9 of 1986 and 112, 132 of 1989

Decided on December 8, 1989

The Judgment of the Court was delivered by

K.S Paripoornan, J.:— These are connected cases. The same assessee is the applicant in these three connected cases. The respondent is the Revenue in all the cases. We are concerned with the assessment years 1969-70, 1970-71 and 1971-72. At the instance of the assessee/applicant, the Income-tax Appellate Tribunal has referred the following questions of law in these three cases for the decision of this court:

I. T.R No. 132 of 1989:

Whether the Tribunal was right in law in holding that 130 acres of lands sold during the previous year relevant to the assessment year 1969-70 are not agricultural lands and, therefore, liable to be assessed to capital gains tax?

I. T.R No. 9 of 1986:

Whether the Tribunal was right in law in holding that 343.35 acres situated in Vellarmala and 271.39 acres situated in Charity Estate sold during the previous year relevant to the assessment year 1970-71 are not agricultural lands and, therefore, liable to be assessed to capital gains tax?

I. T.R No. 112 of 1989:

Whether the Tribunal was right in law in holding that 343.35 acres situated in Vellarmala and 271.39 acres situated in Charity Estates sold during the previous year relevant to the assessment year 1971-72 are not agricultural lands and, therefore, liable to be assessed to capital gains tax?

2. The assessee/applicant is a limited company mainly dealing with rubber.

3. They are owners of an estate known as Chulika Estate. Vellarmala Estate is an adjacent estate. It was owned by a company which went into liquidation. The assessee-company acquired the Vellarmala Estate from the owners. The resolution of the board of the assessee-company approving the purchase of the estate is dated October 11, 1949. After October 1, 1956, Vellarmala Estate was not subject to land revenue. The estate consisted of timber from forest of spontaneous growth. The forest came under the Madras Preservation of Private Forests Act. During the relevant previous years, the assessee sold portions of the land in Vellarmala Estate. In 1970-71, it sold a portion in Chulika Estate and in 1971-72 a portion of land in Charity Estate also. The common question that is posed in these references is whether the lands sold by the assessee-company, during the respective accounting periods, attracted capital gains tax. The Income-tax Officer laid emphasis on the resolution of the assessee-company dated October 11, 1949, and concluded that the presence of valuable timber, estimated at Rs. 5 lakhs, prompted the purchase of the Vellarmala Estate, that the assessee used the land merely to extract timber and did not plant any tree and that no subsequent development was made in the estate. In certain areas, it was covered by wild bushes. He concluded that the capital assets sold during the relevant accounting periods was only forest land. Tax on capital gains was levied. In appeal, the Appellate Assistant Commissioner held that no agricultural operation was carried on by the assessee on the lands sold during the relevant previous years. It was not subject to land revenue after the formation of the State of Kerala. The land was not shown to be necessarily as a fallow land for agricultural operations. The above facts were not controverted before the Tribunal. The Tribunal held that the purchase of Vellarmala Estate which consisted of a thousand acres was influenced by the presence of valuable timber valued at Rs. 5 lakhs by the manager of the assessee-company and in the light of the principles laid down by the Supreme Court in CED v. V. Venugopala Varma Rajah, [1976] 105 ITR 593, it should be stated that the forest land containing trees of spontaneous growth are not agricultural lands and the lands sold by the assessee, in the previous years, are clearly forest lands coming under the Madras Preservation of Private Forests Act. In this view of the matter, the onus is on the assessee to show that the lands are agricultural lands and the assessee failed to do so. In this view of the matter, the decision of the Appellate Assistant Commissioner that the lands sold during the previous years are not agricultural lands but continued to remain waste lands and it was never used for any agricultural purposes, was confirmed. The lands were found to be capital assets exigible to capital gains tax. Thereafter, at the instance of the assessee, questions of law for the three years have been separately formulated and referred for the decision of this court by the Income-tax Appellate Tribunal.

4. The appellate order of the Tribunal from which Income-tax Reference No. 132 of 1989 arises is dated May 23, 1980. Similarly, the appellate order of the Tribunal, relevant for Income-tax Reference No. 9 of 1986, is March 26, 1981, and the appellate order, relevant for Income-tax Reference No. 112 of 1989, is dated March 26, 1981. In the latter cases, the earlier decision rendered for the assessment year 1969-70 in Income-tax Application No. 59 (Coch) of 1978-79 dated May 23, 1980, was followed. Similarly, in this court, counsel for the assessee argued all the three cases on the basis of the relevant appellate order passed by the Appellate Tribunal in the appeal for the assessment year 1969-70 (Income-tax Reference No. 132 of 1989).

5. We heard counsel for the assessee, Mr. C.N Ramachandran Nair of Menon and Pai, as also counsel for the Revenue, Mr. P.K.R Menon. Counsel for the assessee highlighted the fact that the assessee/applicant purchased the nearby estate, known as Vellarmala Estate, in 1949 from a plantation company in liquidation. The resolution of the board dated October 11, 1949, as also the attendant circumstances will show that the Vellarmala Estate was acquired to extend the plantation area of the assessee-company. The assessee-company was engaged in rubber and cardamom plantations. The intention of purchasing the Vellarmala Estate was only to use the land after clearance for agricultural operations. Due to certain subsequent factors, the land was not immediately put to agricultural operations. The Appellate Tribunal was not justified in discarding these aspects. The Appellate Tribunal was in error in holding that the purchase of the estate was very much influenced by the presence of valuable timber worth Rs. 5 lakhs. So also, the Appellate Tribunal failed to infer the actual intention of the assessee-company in acquiring the adjacent Vellarmala Estate. The purchasers from the assessee-company had carried out agricultural operations. These aspects, if properly looked into, will show that the capital assets sold during the previous years, which formed part of Vellarmala Estate or part of Chulika Estate or part of Charity Estate were agricultural lands and levy of capital gains tax is unauthorised. On the other hand, counsel for the Revenue stressed the fact that the questions referred for the three years are really questions of fact and that no question of law arises out of the appellate order of the Tribunal. It was also submitted that the assessee used the land merely to extract timber and that it did not plant any tree. It was originally a private forest and it remained as such throughout without any development. In certain areas, it was covered by wild bushes and no agricultural operations were carried on by the assessee on this land. These salient features found by the Income-tax Officer and the Appellate Assistant Commissioner were not disputed. What is more, the Appellate Tribunal was justified in drawing the inference from the resolution of the board of the assessee-company dated October 11, 1949, that the purchase of the estate by the assessee was very much influenced by the presence of valuable timber which was worth Rs. 5 lakhs then and the lands sold during the previous years are clearly forest lands coming under the Madras Preservation of Private Forests Act. In the light of the decision in V. Venugopala Varma Rajah's case, [1976] 105 ITR 593 (SC), the forest lands containing trees of spontaneous growth are not agricultural lands. The assessee has totally failed to show that the character of the lands changed at any time and they turned out or became agricultural in character. Counsel for the Revenue also stressed the fact that the findings of fact arrived at by the Appellate Tribunal to the effect that the assessee used the land merely to extract timber and that it did not plant any tree, that it was a private forest originally and remained as such without any development, that no agricultural operations were carried out subsequently on the land, that the purchase of the estate was influenced by the presence of valuable timber which was valued at Rs. 5 lakhs and since the lands sold were forest lands coming under the Madras Preservation of Private Forests Act, they cannot be said to be agricultural lands, are all findings of fact and in so far as the assessee has not challenged these findings of fact as such, the conclusion on the basis of the above findings is inevitable that the forest lands containing trees of spontaneous growth are not agricultural lands.

6. On an evaluation of the rival pleas put forward before us, we are of the view that the Appellate Tribunal was justified in holding that the assessee failed to prove its case, namely, that the lands sold in the previous years are agricultural lands. If that be so, the levy of capital gains tax is justified for all the three years. A mere look at the questions of law referred for the three years will show that various factual findings have not been questioned by the assessee by framing appropriate questions in that behalf. Whether a piece of land is agricultural in character or a capital asset is largely a question of fact that should be determined by the cumulative effect of all facts and circumstances in a given case. The above proposition is well settled. [Krishna Iyer v. Addl. ITO, [1966] 59 ITR 145 (Ker)]. The only question that is posed is whether, on the basis of the findings entered by the Appellate Tribunal, the conclusion that what was transferred in the relevant previous years is a capital asset attracting levy of capital gains tax is tenable. Even assuming that the question posed is a mixed question of fact and law, in so far as the factual findings are not assailed by framing an appropriate question, we have to hold on the facts found that the conclusion arrived at by the Appellate Tribunal is legal, rational and tenable.

7. Admittedly, the transfer of the capital assets took place during the relevant previous years. If gains accrued as a result of the transfer of an asset, certainly capital gains tax is exigible. The assessee pleaded that the assets transferred are agricultural lands and so exempt from the levy of capital gains tax. The burden of proof, on this score, is on the assessee, who claimed exemption, to substantiate the plea. The question is whether the assessee has discharged the onus cast on it. As already seen, the assessee used the land merely to extract timber and it did not plant any tree. Originally it was a forest. It remained as such without any development subsequently. Certain areas were covered by wild bushes. No agricultural operations were carried on by the assessee on the lands transferred during the relevant previous years. They were not subject to land revenue after the formation of the Kerala State. These were undisputed facts before the Appellate Tribunal. The resolution of the board of directors of the assessee-company dated October 11, 1949, showed, as stated by the Tribunal, that the purchase of the estate was very much influenced by the presence of valuable timber which was then valued at Rs. 5 lakhs. The Appellate Tribunal held that the land sold is clearly forest land coming under the Madras Preservation of Private Forests Act. On these findings, the conclusion is irresistible that the forest lands containing trees of spontaneous growth are not agricultural lands. The Supreme Court has held so in V. Venugopala Varma Rajah's case, [1976] 105 ITR 593. The onus is on the assessee to show that the character of the lands changed, after the acquisition of the capital asset by the assessee, and that the lands were agricultural lands at the time of transfer of the asset. The Appellate Tribunal held that the assessee totally failed to substantiate the said plea. We are of the view that the approach and conclusion of the Appellate Tribunal to hold that the asset transferred during the relevant previous years is a capital asset and not an agricultural land and so exigible to capital gains tax, is valid, legal and reasonable.

8. One aspect deserves notice at this stage. The material date with reference to which the question whether the particular asset (land) which has been sold is agricultural land or not, is to be decided with reference to the date of sale. In other words, in order to entitle the assessee to earn the exemption, it is not enough to allege or show that the land was once agricultural land, at the time of acquisition. The assessee should further prove that it was agricultural land at the time of transfer. (See Wilfred Pereira Ltd. v. CIT, [1964] 53 ITR 747 (Mad) and Ranchhodbhai Bhaijibhai Patel v. CIT, [1971] 81 ITR 446 (Guj). The fact that the assessee intended to use the land for agricultural purposes at the time of acquisition or as agricultural land is immaterial. The question is, at the time of transfer of the capital asset, was the land agricultural in character? It must be so at the time of transfer. This crucial aspect has not been alleged, much less proved, by the assessee in these cases. The main thrust of the argument, even before us, was that the resolution of the board of directors dated October 11, 1949, would show that the assessee-company wanted to purchase the adjacent Vellarmala Estate, which was owned by a plantation company, and that itself will show that the “intention” was to use the land, after clearance, for agricultural operations. Even conceding for argument's sake that the assessee acquired the adjacent extensive property, known as Vellarmala Estate, with an intention to use the same for agricultural operations, in the absence of plea and proof that the capital asset was agricultural lands at the time of transfer, the assessee will not be entitled to the exemption pleaded. The findings of the Appellate Tribunal to the effect that the assessee used the land merely to extract timber, that they did not plant any tree, that it was at all times a private forest and no development was effected therein, that no agricultural operations were carried on in the lands purchased, all will go to show that, at the time of transfer of the capital assets, it was forest land exigible to capital gains tax. The lands transferred were only forest lands containing trees of spontaneous growth and not agricultural lands.

9. In the light of the above reasoning, we have no hesitation to hold that the Appellate Tribunal was justified in holding that the transfer of the capital assets (sale of lands) attracted capital gains tax, since they were not proved to be agricultural lands at the time of transfer of the said capital assets.

10. We answer the questions referred to us, in all the three cases, in the affirmative, against the assessee and in favour of the Revenue.

11. A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.