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The Additional Commissioner Of Income Tax, Bihar Patna v. M/S Tarachand Jain, Ranchi Opp. Party.
Factual and Procedural Background
This opinion arises from a reference made by the Income Tax Appellate Tribunal, Patna Bench, to this Court under Section 256(2) of the Income Tax Act, 1961. The Tribunal sought the Court's opinion on the legality and propriety of excluding Rs. 18,542/- taxed under capital gains from the assessee's total income under Section 45 of the Income Tax Act.
The facts involve the sale of a portion of land by a Hindu undivided family (the assessee) during the previous year relevant to assessment year 1967-1968. The land, located at Hazaribagh Road, Ranchi in village Konka, was sold for Rs. 22,250/-. The Income Tax Officer assessed the sale as capital gains on the ground that the land had lost its agricultural character due to urban development and was sold for construction purposes. This assessment was confirmed by the appellate Assistant Commissioner.
The assessee appealed to the Income Tax Appellate Tribunal, which after conducting an enquiry, found that the land retained its agricultural character despite not being used agriculturally for 2-3 years prior to sale. The Tribunal thus excluded the sale proceeds from capital gains tax. The Department, dissatisfied with this decision, sought the opinion of this Court.
Legal Issues Presented
- Whether the exclusion of the sum of Rs. 18,542/- taxed under capital gains from the total income of the assessee by the Tribunal is legal and proper within the meaning of Section 45 of the Income Tax Act, 1961?
Arguments of the Parties
Department's Arguments
- The Tribunal erred in excluding the sum from capital gains tax as it ignored two key facts: the land was sold for construction purposes and had acquired urban character.
- The high sale price indicated that the land had ceased to be agricultural at the time of sale.
- Therefore, the land should be treated as a capital asset and the gains from its transfer should be taxable under Section 45.
Assessee's Position
- The opinion does not contain a detailed account of the assessee's arguments beyond the Tribunal's findings supporting the agricultural character of the land.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Wealth-tax, Andhra Pradesh v. Officer-in-charge (Court of Wards), Paigah [(1976) 105 I.T.R 133] | Classification and assessment of land to land revenue as 'agricultural land' is a criterion for determining land character. | The Court recognized this as one relevant criterion among others for deciding whether the land is agricultural. |
| Mustafa Ali Khan (Raja) v. Commissioner of Income-tax [(1948) 16 I.T.R 330 (P.C)] | Whether agricultural operations are carried out on the land to determine its character. | The Court accepted this as a significant test for agricultural character, focusing on actual cultivation activities. |
| Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy [(1957) 32 I.T.R 446 (S.C)] | Definition of 'agricultural operations' including tilling, sowing, planting, and similar activities. | Used to clarify what constitutes agricultural operations relevant to land characterization. |
| Syed Rafiqur Rahman v. Commissioner Of Wealth Tax, Patna [(1970) 75 I.T.R 318] | Owner's intention must be definite and objective regarding agricultural use, not fluctuating. | The Court emphasized the importance of the owner's settled intention in determining land character. |
| Commissioner of Income-tax, Gujrat-III v. Manilal Somnath [(1977) 106 I.T.R 917] | Use of land at the time is the primary test; presumption arises from current use but is rebuttable. | The Court endorsed this view that actual use is a critical factor but can be rebutted by contrary evidence. |
Court's Reasoning and Analysis
The Court analyzed the question by considering the statutory provisions under Section 45 and the definition of "capital asset," which excludes agricultural land. It recognized that the character of land as agricultural or non-agricultural is not conclusively defined by any single factor but must be determined from multiple criteria.
The Court identified several relevant criteria from precedent and facts: classification in land revenue records, actual agricultural operations, capability of agricultural use, owner's intention, temporary use changes, character of adjoining lands, and official records.
The Tribunal had relied on several valid and cogent factors including official records showing the land as agricultural, its use (or previous use) for agriculture, and the nature of adjoining lands. The Court found that the Department's reliance on the land's sale for construction and its urban proximity, while relevant, were insufficient alone to rebut the presumption of agricultural character.
The Court noted the Department failed to produce concrete evidence such as municipal limits inclusion or parceling for urban development to disprove the agricultural classification. Thus, the Tribunal's conclusion that the land retained agricultural character was upheld as valid and correct.
Holding and Implications
The Court answered the question in the affirmative and against the Department, holding that the exclusion of the sum from capital gains tax was legal and proper.
As a result, the assessee is entitled to costs and a hearing fee of Rs. 250/-. This decision directly affects the parties by confirming the non-taxability of the capital gains on the sale of the land in question. The opinion does not establish any new precedent beyond reaffirming the application of existing criteria for determining the agricultural character of land under the Income Tax Act.
S.P Sinha and Nagendra Pd. Singh, JJ.:— On being directed by this Court under Section 256(2) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal, Patna Bench, has made statement of the case on the undermentioned question of law:
“Whether on the facts and in the circumstances of this case the exclusion of sum of Rs. 18,542/- taxed under the head capital gains, from the total income of the assesee by the Tribunal is legal and proper within the meaning of Section 45 of the Income-tax Act; 1961”?
2. In terms of Section 45 of the Act any profits and gains arising from the transfer of “capital asset” is chargeable to income-tax under the head “capital gains” and is treated to be the Income of the previous year in which the transfer took place. “Capital asset” has been defined in Sub-section (14) of Section 2 of the Act as not including inter alia agricultural land in India. Subsequently, however, by an amendment made in the year 1970 “agricultural land” which is not to be included in the ‘capital asset’ has been restricted. Since, however, the restriction does not affect the assessment in question it is not necessary to mention it. All that is necessary to be stated is that ‘capital asset’ did not include ‘agricultural land in India’.
3. The question involved arises out of sale of land and that is why I have mentioned the relevant provisions of the Act before stating the facts of the case.
4. The facts relevant; as stated by the Tribunal, are that the assessee is a Hindu undivided family; which sold during the relevant previous year for the assessment year 1967-1968, seven kathas six chhatak and thirty square feet of land situated at Hazaribagh Road, Ranchi in village Konka, out of holding nos. 45, 46, 47 and 48 to one Mrs. Ela Mukherjee for a consideration of Rs. 22,250/-. The Income Tax Officer charged the transaction to capital gains tax, on the ground that in the last 2-3 years no agricultural operation had been carried on the land. According to him, although the land was agricultural in the past, but because of the development of the town, it had acquired the character of urban property. On one side of the land there was Lalpur police Out-post and some land had also been purchased by the Income Tax Department for construction of staff quarters. He also stated that the land had been sold for the purpose of construction of building. On these facts he held that the character of the land did not retain agricultural character and, therefore, it was transfer of capital assese within the meaning of Section 45 of the Act to which income tax was attracted.
5. The appellate Assistant Commissioner confirmed the action of the Income Tex Officer of charging the capital gains on the sale of land to tax. The assessee (opposite party) then appealed to the Income Tax Appellate Tribunal which found, on the basis of an enquiry, which was made at its instance, by an Inspector of Income Tax, the following facts:—
(i) the Malouzari receipts granted by the State Government indicated the character of the land as Bakast Bhati.
(ii) The entry in the record of rights showed the land as Raiyati Krishi;
(iii) It was a low land and from local enquiry it was found that it was being used for agricultural purposes previously, but for last 2-3 years it was not being so used;
(iv) The land adjoining on the southern side was being used for growing vegetable, fruits and other crops. Only on its western side some land had been purchased by the Income Tax Department and on which side also lay the Lalpur Police Out-post.
6. On the basis of these factual materials, the Tribunal came to the conclusion that the land in question was agricultural land, the transfer of which could not be subjected to tax on capital gains.
7. The Department being aggrieved by this decision has got the matter referred for opinion of this Court.
8. Mr. Rajgarhia appearing for the Department, urged that the Tribunal went wrong in its conclusion, because it had left out of consideration two of the basic facts, namely (1) the land had been sold for the purpose of construction of building; and (2) had it not obtained urban character; it could not have fetched a sum of Rs. 22,000/- and odd for sale of just a small piece of 7 kathas and odd of land. According to Mr. Rajgarhia, even if the land had been agricultural in nature; admittedly. It had ceased to have that character at the time when it was sold. He, therefore, submitted that the question must be answered in favour of the Department and against the assessee.
9. It cannot be gainsaid that if the seller sells parcels of land for the purpose of constructing house thereon, that fact can be one of the criteria for determining the character of the land; so also the location of the land. If the land is situated in the heart of the town surrounded by residential houses, the normal presumption would be that the land is not an agricultural land, although the presumption could be rebutted. All that we mean to say is that the facts stated by Mr. Rajgarhia could also be some of the criteria for determining the character of the piece of land, but by themselves they would not be sufficient for the purpose. It would all depend upon the facts and circumstances of each case and on an over at view of all the situations pertaining to the land, that the character of the land can be properly determined.
10. Agricultural land has not been defined in the Act and, there have been a series of cases on the question, relating to the criteria to determine the character of a land, claimed to be an agricultural land. The Supreme Court in the case of (1) Commissioner of Wealth-tax, Andhra Pradesh v. Officer-in-charge (Court of Wards), Paigah [(1976) 105 I.T.R 133] has said that the classification and assessment of the land to land revenue as ‘agricultural land’ is one of the criteria. The other criteria as has been laid in the case of (2) Mustafa Ali Khan (Raja) v. Commissioner of Income-tax [(1948) 16 I.T.R 330 (P.C)]; and in the case of (3) Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy [(1957) 32 I.T.R 446 (S.C)] is whether agricultural operations are carried on, on the land. ‘Agricultural operations’ in the said two cases has been defined as denoting the cultivation of the field by tilling the land, sowing of the seeds, planting and similar operations on the land. The third criteria is, whether the land is capable of agricultural operations. There may be, cases in which for one reason or the other, actual agricultural operations might not have been carried on and yet the owner has always intended to use it for agricultural purpose. The intention of the owner, as has been pointed out in one of the decisions of this Court in the case of (4) Syed Rafiqur Rahman… v. Commissioner Of Wealth Tax, Patna…Opposite Party., Patna [(1970) 75 I.T.R 318] however, should not be a fluctuating and ambulatory intention, but something definite and more objective, some thing related to the nature and character of the land and not varying from time to time.
11. We can very easily visualize a case, where a cultivator being forced by circumstances has to abandon his old house and has to construct a thatched house on some portion of his agricultural land, which although he starts using in that manner, but with an intention to go back to his old house and thereafter restore the land for his agricultural purposes. The example which we have quoted above; gives me on idea of another criteria which has to be kept in mind for determining the character of land, namely, that a mere temporary user of a land in a particular fashion, either for agricultural purposes or for non-agricultural purposes, will not be a safe criteria. What has to be determined is the intention of the owner about the purpose for which he is retaining the land.
12. In fact the Gujrat High Court in the case of (5) Commissioner of Income-tax, Gujrat-III v. Manilal Somnath [(1977) 106 I.T.R 917] has expressed the same view. It has held that in order to determine, whether a particular land is agricultural land or not, one has first to find out the use to which it is being put. If it is used for agricultural purposes, the presumption is that it is agricultural land; if it is used for non-agricultural purposes the presumption, is that it is non-agricultural land. The presumption, however, is rabuttable because there may be cases where land which is admittedly non-agricultural land is being used temporarily for agricultural purposes.
13. The fourth criteria is the character of the adjoining lands. If the surrounding lands are agricultural lands, the presumption would be in favour of holding that the land in question was also agricultural land.
14. The fifth criteria is the description of the land in the official records. It goes a long way in the direction of helping determination of the character of the land.
15. These are some of the criteria which we have been able to find out. There may be several more, but the whole point is that one criteria or two criteria by themselves will not be a safe guide to the determination of the character of the land; as to whether it is agricultural land or non-agricultural land.
16. Now as Mr. Rajgarhia suggested that there were two factors (which he has stated) which went to show that the land was a non-agricultural land. As we said earlier, those two facts, by themselves will not be a safe guide to the determination of the character of the land. For the matter of that; judging from the number of criteria on each side; whereas the number of criteria in favour of the Department are only two, in favour of the assessee are atleast double that number. Be that as it may, the question which has to be decided is whether the criteria which the Tribunal has adopted for determining the nature of the land were valid and correct. We have already quoted the various factors which the Tribunal has taken into consideration for determining the nature of the land and we must say that each one of them are very valid and cogent factors for the purpose of determining the character of the land. The two criteria; about which Mr. Rajgaria spoke, may be relevant even as supporting the view which the Tribunal has taken; the land may he near an urban area and the land may have fetched a good price may hold good in cases of agricultural land also. Since the land has been recorded in the official records as agricultural land; if the Department wanted to show that the entry was wrong; it should have given some concrete facts in that direction. For example; it could have shown that the land lay within the Municipal limits of the town of Ranchi or that the assessee had made his entire plot of land into parcels and was selling each of them for the purpose of constructing house there on. The fact that the purchaser had purchased it for the purpose of constructing his house, has no relevance, because so fat as the seller is concerned, he will be deemed to have parted with the agricultural land in the form of agricultural land, unless it is proved otherwise. The Department has not brought up any such material on the record by which it could be said that the criteria adopted by the Tribunal for determining the character of the agricultural land was wrong. In our view, on the facts as stated by the Tribunal, its conclusion that the land sold by the assessee was an agricultural land, is valid and correct.
17. In the result, the question is answered in the affirmative and against the Department. The assessee will be entitled to costs and hearing fee Rs. 250/-
Application allowed.
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