Deb, J.:— This reference under s. 66(2) of the Indian. I.T Act, 1922, relates to the assessment year 1960–61, the relevant previous year ending on 31st December, 1959.
2. We will briefly state the relevant facts stated and/or found by the Tribunal. The assessee was the owner of about 5,374 bighas of land in Assam and used them for agricultural purposes and derived agricultural income therefrom. In 1949, those lands were requisitioned by the Assam Government under the Assam Land (Requisition and Acquisition) Act, 1948, and the assessee was paid compensation for such requisition. Those lands were allotted to the landless people in 1949 and since then those people used those lands for agricultural purposes and derived agricultural income from those lands. In 1959, the assessee was paid compensation for the acquisition of those lands by the Assam Government under the aforesaid Act. In Income-tax Reference No. 109 of 1969 [CIT v. All India Tea & Trading Co. Ltd., [1978] 113 ITR 545 (Cal)] it has been held by this court that the compensation for the aforesaid requisition received by the assessee was agricultural income and was not includible in the computation of its total income.
3. We are now concerned with the question as to whether Rs. 1,39,208.41, being the compensation paid to the assessee for the acquisition of those lands minus Rs. 4,749, being the cost of those lands, is assessable in the hands of the assessee as capital-gains under s. 12B of the Indian I.T Act, 1922, read with s. 2(4A) of that Act.
4. The ITO assessed the aforesaid sum of Rs. 1,34,459 under the head “Capital gains”. The assessee appealed. The AAC found that the lands were agricultural lands and the income derived therefrom was agricultural income. He accordingly held that those lands were not capital assets and excluded Rs. 1,34,459 from the assessment. The department appealed. In view of the aforesaid facts found by the Tribunal, it agreed with the AAC and sustained the deletion.
5. The Commissioner then raised the following question in his application under s. 66(1) of the Act:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,34,459 was derived from land used for agricultural purposes and accordingly exempt from tax?”
6. As the Tribunal rejected the aforesaid application, a Division Bench of this court acting under s. 66(2) of the Act and at the instance of the Commissioner reframed the question as follows:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,34,459 was exempt from tax?”
7. Hence, this reference is now before us and Mr. Ajit Sengupta, learned counsel for the revenue, argues as follows:
(i) The word “held” in s. 2(4A) of the Indian I.T Act, 1922, connotes the idea of physical or actual possession and does not include constructive or symbolic possession;
(ii) The assessee was not in physical or actual possession of those lands and, therefore, those lands were not held by the assessee as agri cultural lands at the time of acquisition in view of the said requisition in 1949 and, accordingly, the aforesaid receipt is liable to be taxed under s. 12B of the Act;
(iii) Under s. 12B of the Act tax is payable under the head “Capital gains “in respect of profits and gains from sale, exchange, etc., of a capital asset. The assessee was the owner of those lands and such ownership was a capital asset held by the assessee and, therefore, by its acquisition, profits and gains accrued to the assessee, and, accordingly, the aforesaid amount is liable to be taxed under the head “capital gains”;
(iv) Only those lands from which the income derived is agricultural income are excluded from the definition of the term “capital asset”. Therefore, agricultural income must be derived by the assessee in the previous year from those lands and not by any other person, because the income-tax is concerned only with the previous year and with the assessee only. There is no finding that the assessee has derived any income from those lands and, therefore, it should be held that those lands are not agricultural lands;
(v) Even if the income derived earlier to the previous year in question is a relevant factor which the Tribunal has followed in this case, the compensation paid for requisition of those lands was not agricultural income and, therefore, the Tribunal should not have followed its earlier order in concluding that the compensation for acquisition was exempt from capital gains; and
(vi) The Tribunal has said “what is material is whether the lands give rise to agricultural income” but the material factor is whether the assessee derived any agricultural income from those lands. Therefore, the Tribunal having proceeded on a wrong view of law, this matter, in any event, should go back to the Tribunal for its decision afresh on the basis of a finding as to whether the assessee had derived any agricultural income from those lands in the relevant previous year and also on the basis of the law to be laid down by this court.
8. In support of his contention noted in point (v), Mr. Sengupta repeated the arguments made before us in the aforesaid Income-tax Reference No. 109 of 1969 [CIT v. All India Tea & Trading Co. Ltd., [1978] 113 ITR 545 (Cal)] and also cited the cases which were cited in that reference. But in view of our judgment dated September 9, 1977, in the said reference, the contention of Mr. Sengupta must fail and it is unnecessary for us to discuss his arguments including the cases already discussed by us in that judgment.
9. Mr. Pranab Pal, learned counsel for the assessee, contends that this court is bound by the finding of the Tribunal, namely, that those lands were agricultural lands and the income derived from them was agricultural income. Alternatively, he argues that there is nothing on the record to show that those lands were used by the assessee for non-agricultural purposes at any time and, therefore, it should be held that those lands were agricultural lands. He submits that it is not necessary for the assessee to show that it had derived any agricultural income from those lands in the year of acquisition, because, according to him, the nature or character of those lands in the relevant year should determine the question as to whether those lands were agricultural lands for the purposes of capital gains. And if the lands were agricultural lands and were used for agricultural purposes by any person, whoever he may be, an income derived by such person from those lands will be an agricultural income within the meaning of s. 2(4A)(iii) read withs. 2(1) of the 1922 Act and accordingly those lands will not be capital assets and no capital gains will be payable on the transfer or acquisition of those lands. He argues that, in view of the aforesaid findings of the Tribunal, it should be held that no capital gain_is payable on the aforesaid amount.
10. It may now be noted here that it is the submission of Mr. Sengupta that he is entitled to argue that the finding of the Tribunal, namely, that Rs. 1,34,459 was derived from lands used for agricultural purposes was erroneous. But the Division Bench did not allow that question and no appeal to the Supreme Court has been filed from it by the revenue. Therefore, his plea is now closed by the order of the Tribunal and we must proceed on the basis that the aforesaid amount was derived from lands used for agricultural purposes.
11. Since Mr. Sengupta has rightly accepted the contention of Mr. Pal, namely, that the nature and the character of any land on the date of its sale, transfer, acquisition, etc., should ordinarily determine the question as to whether such land is a capital asset for the purposes of capital gains, it is unnecessary for us to refer to the cases cited at the Bar in this behalf. We will now deal with the other cases cited on behalf of the parties.
12. In Mohamed Othuman Sahib, Melapalayam…Applicant; v. Commissioner Of Income-Tax, Madras…., [1957] 31 ITR 480 (Mad), the assessee purchased a piece of agricultural land and built a house on a part of the said land. He did not use the remaining land for agricultural purposes nor derive any agricultural income from it. He sold the house with the remaining land at a profit. As the said land ceased to be an agricultural land, it was held by the Madras High Court that the profit arising from its sale was assessable to tax under the head “Capital gains”. This case, however, does not apply to the instant case before us, for it was decided on different facts.
13. In Wilfred Pereira Ltd. v. Commissioner Of Income-Tax, Madras., [1964] 53 ITR 747 (Mad), the assessee was paid compensation for the acquisition of a fallow land which was purchased by the assessee. The compensation exceeded the price of the said land and it was held by the Madras High Court that the assessee was liable to pay capital gains, because the said land was not an agricultural land at the time of its acquisition. This case was also decided on different facts and, therefore, reliance on it was also misplaced by Mr. Sengupta.
14. Mr. Sengupta, however, placed reliance on certain observations made in the earlier case of Mohamed Othuman Sahib, [1957] 31 ITR 480 (Mad), in support of his contention that those lands were not agricultural lands inasmuch as it has not been shown by the assessee that any agricultural income was derived by the assessee from those lands in the accounting year. But those observations were explained by their Lordships of the Madras High Court in Wilfred Pereira Ltd.'s case, [1964] 53 ITR 747, in the following terms (p. 750):
“We are unable to say that the Division Bench took the view that, unless the assessee were to show actual perception of profits in the year, in question, the land could not be treated as agricultural land.”
15. That apart, in our opinion, an agricultural land does not cease to be an agricultural land merely on the ground that in the accounting year an assessee is unable to derive any agricultural income from it due to some causes beyond his control. Drought or flood may stand in the way of an assessee from earning any income from his agricultural land in the accounting year and, therefore, it cannot be said that in each and every case the assessee must show that he has actually derived agricultural income in the accounting year from the land to establish that the land held by him was an agricultural land at the relevant time.
16. In Krishna Iyer v. Addl. ITO, [1966] 59 ITR 145 (Ker), the petitioner was the owner of a compound with a building on it. He derived some income from the fruit bearing trees standing on the said compound which he sold at a profit and was assessed to capital gains. He contended that the said land was an agricultural land and was not a “capital asset” as defined in s. 2(4A) of the Indian I.T Act, 1922. Bat the Kerala High Court rejected those contentions and held that though the petitioner derived some income from those fruit bearing trees, the said land was not used by the petitioner for agricultural purposes and, therefore, the tax was rightly levied under the head “capital gains”.
17. Clause (a) of sub-s. (1) of s. 2 of the Indian I.T Act, 1922, clearly shows that unless the land in question is used for agricultural purposes, an income derived from, it does not become an agricultural income. As Krishna Iyer did not use the said land for agricultural purposes the income derived by him from those fruit bearing trees was not an agricultural income, whereas the finding of the Tribunal before us is that those lands were at all material times used for agricultural purposes and, therefore, Krishna Iyer's case, [1966] 59 ITR 145 (Ker) does not assist the revenue in this reference.
18. In CIT v. Chhotanagpur General Trading Co. Ltd., [1971] 79 ITR 161 (Cal), the assessee was a lessee of certain agricultural lands and used them for agricultural purposes and derived agricultural income from them. Some portions of those lands were compulsorily acquired by the Government of Bihar. The assessee also transferred its leasehold interest in some other portions of those lands. It was held by this court that the surplus arising from those transactions was not taxable under the head “Capital gains”, because those lands were used for agricultural purposes and the income derived therefrom was agricultural income.
19. In the aforesaid case, the assessee was in possession of those lands at the relevant time as a lessee. Those lands were also held by the assessee as such lessee at the relevant time. It is beyond dispute that where compensation is paid for acquisition of a non-agricultural leasehold land both to the lessor and lessee in accordance with their respective interests in such land, such compensation is assessable to capital gains in their respective lands, although the actual or physical possession remained with the lessee and the constructive possession remained with the lessor at the time of such acquisition. Accordingly, the word “held” in s. 2(4A) of the 1922 Act must necessarily include physical or actual possession and also constructive or symbolic possession.
20. And if constructive or symbolic possession is not included, it would lead to an anomalous situation, namely, that the compensation for acquisition of a non-agricultural land would not be taxable under the head “Capital gains” in the hands of the lessor, whereas it would be assessable under that head in the hands of the lessee.
21. Moreover, if we accept the contention of Mr. Sengupta that those lands were not held by the assessee at the time of the aforesaid acquisition, we must necessarily hold that those lands were not capital assets, because, briefly speaking, s. 2(4A) of the 1922 Act says that “capital asset “means property of any kind “held by an assessee”.
22. In the premises, the contention of Mr. Sengupta, namely, that the word “held” in s. 2(4A) is confined to physical or actual possession and excludes constructive or symbolic possession must fail.
23. In Commissioner Of Income-Tax v. Ananthan Pillai, [1974] 94 ITR 122 (Ker), a garden land within the municipal limits of Trivandrum was purchased by the assessee's father who used it for agricultural purposes and derived agricultural income from it. Thereafter, the said garden was transferred by the assessee's father to the assessee and his younger brother and before they could use it for agricultural purposes and derive any agricultural income from it, it was acquired by the State Government and they were paid compensation for such acquisition. The Kerala High Court held that the compensation was not taxable under the head “Capital gains” as the land did not cease to be an agricultural land at the time of its acquisition.
24. In Shiv Shankar Lal v. CIT, [1974] 94 ITR 433 (Delhi), the assessee was the owner of an agricultural land. He did not use it for agricultural purposes for some time and thereafter sold it. It was held by the Delhi High Court that a temporary non-user of that land for agricultural purposes did not affect its character as an agricultural land and that the profit arising from that sale was not taxable under the head “Capital gains”.
25. In CWT v. P. Sankaran Nair, [1976] 103 ITR. 366 (Mad), it has been held by the Madras High Court that the absence of any agricultural income in one or more years from an agricultural land would not make it a non-agricultural land and that no wealth-tax was' payable on those lands which were found to be agricultural lands although they were situated in the Madras City and were surrounded by factories and buildings.
26. Having discussed all the cases cited at the Bar, we will now summarise our opinions in the following terms;,
(i) The words “held by an assessee” in s. 2(4A) of the 1922 Act include physical, actual, constructive and also symbolic possession of a property of any kind;
(ii) A land is an agricultural land if it is used for agricultural purposes and, briefly speaking, an income derived from such land by agriculture is an agricultural income;
(iii) Though ownership is a property, any land from which the income derived is an agricultural income is not a capital asset;
(iv) If no agricultural income can be derived by an assessee from an agricultural land in the accounting year or for some time for any reason beyond his control, such land does not automatically cease to be an agricultural land;
(v) Where the assessee is the owner of an agricultural land and he uses it for agricultural purposes and derives agricultural income from it, any profits or gains arising from the sale, transfer, acquisition, etc., of such land is not taxable under the head “Capital gains”, for such land is not a capital asset.
(vi) Even where any person other than the assessee uses an agricultural land belonging to the assessee for agricultural purposes with or without the consent of the assessee and such person derives agricultural income from it, any profits or gains arising from the sale, transfer, acquisition, etc., of such land is not taxable under the head “Capital gains” in the hands of the assessee; and
(vii) The land is a capital asset where it is not used for agricultural purposes, for there cannot be any question of deriving any agricultural income from it, and any surplus arising from its sale, transfer or acquisition, etc., is taxable under the head “Capital gains”.
27. We will now restate only those facts which are relevant for our purposes. The assessee used those lands for agricultural purposes and derived agricultural income from those lands at the time of their requisition in 1949. Those lands were being used by the landless people after requisition for agricultural purposes who were also deriving agricultural income from those lands at the time of their acquisition in 1959.
28. Therefore, at all material times those lands were agricultural lands and they were held by the assessee as their owner although it lost their physical possession in 1949 by requisition. Though the assessee was prevented from earning any agricultural income from those lands due to the aforesaid requisition, those landless people by using those lands for agricultural purposes actually derived agricultural income from those lands in 1949.
29. In these circumstances, at no point of time those agricultural lands became capital assets in the hands of the assessee and, accordingly, the contentions of Mr. Sengupta must fail. In the premises, we answer the question in the affirmative and in favour of the assessee. There will be no order as to costs.
C.K Banerji, J.:— I agree.