Kapil Chit Funds Pvt. Ltd. v. Ito

ORDER

Chandra Poojari, Accountant Member - The appeals are cross appeals directed against the order of the CIT(A)-III, Hyderabad dated 13.7.2012.

2. The assessee raised the following grounds of appeal:

2.1 The Revenue raised the following ground:

"The CIT(A) erred in law and on facts in accepting the land as agricultural land. Since the assessee sold the land to its one of the group companies i.e., M/s. Shilpa Shelters Ltd., which is doing real estate activity. Case laws relied upon Devendra Pal Singh v. CIT (All) 243 ITR 127 ."

3. Brief facts of the case are that the assessee is a company engaged in the business of running chit funds and filed its return of income through e-filing for the assessment year 2009-10 on 24.09.2009 declaring total income of Rs. 5,30,90,090. The assessment was completed on 16.5.2011 u/s. 143(3) of the Act by disallowing of Rs. 12,97,908 towards defaulted subscriptions; Rs. 16,29,00,000 towards gain on sale of land; Rs. 10,00,000 towards disallowance of bid loss and Rs. 10,00,000 towards inadmissible expenditure and determined the total income of Rs. 21,92,87,998. On appeal, the CIT (A), while deleting additions towards sale of land as it is sale of agricultural land, he confirmed the action of the Assessing Officer with reference to the other additions. Against the deletion of the addition, the Revenue is in appeal before us and against sustaining the additions the assessee is in appeal before.

4. Now, we will take up each issue in dispute one by one.

5. Addition of Rs. 12,97,908 under the head "defaulted subscriptions",

5.1 Brief facts of this issue are that during the course of assessment proceedings, the Assessing Officer observed that the balance sheet of the company showed current liability of Rs. 7,87,32,188 under the head "defaulted subscriptions". The assessee was asked to explain the actual nature of the liability. The assessee contended before the Assessing Officer that though the chit is closed and amounts become payable to the subscribers, since they are standing as 'guarantor' to other subscribers, the amount payable to them is withheld for appropriation against any default in case of the principle subscriber. The Assessing Officer observed that the amounts kept as "chit lien" are not actually disbursed to the defaulters even within the time allowed by the Chit Fund Act. Default in case of other person cannot be foreseen and in such case saying that the amount of another person, who is only a guarantor is withheld, is totally incomprehensible. Accordingly, the Assessing Office rejected the assessee's explanation and treated these amounts as not paid. The Assessing Officer added an amount of Rs. 12,97,908 shown as "chit lien" to the income of the assessee. The Assessing Officer treated this amount as cessation of liability u/s. 41(1) of the Act and brought the same to tax. The contention of the assessee is that it is a liability and there is no cessation of liability to bring it to tax.

5.2 The CIT(A) confirmed the addition observing that 'chit lien' are not actually disbursed to the defaulters even with the time allowed by the Chit Fund Act. Default in case of other person cannot be foreseen and in such case saying that the amount of another person, who is only a 'guarantor' is withheld, is totally incomprehensible. He also agreed with the observation of the Assessing Officer and rejected the arguments made by the assessee. Accordingly, he sustained the addition made by the Assessing Officer. Against this, the assessee is in appeal before us.

5.3 We have heard both the parties and perused the material on record. Under section 41(1), if any allowance or deduction given to the assessee in earlier assessment year in respect of any loss, expenditure or trading liability incurred by the assessee and subsequently assessee derived any benefit in respect of such trading liability by way of remission or cessation thereof, the benefit obtained by the assessee by way of that is to be considered as deemed income of the assessee. In the present case, the assessee withheld the amount payable to certain subscribers who stood guarantee to other subscribers to secure payment from the other subscribers. In the event the subscribers failed to pay subscription, the assessee intends to exercise lien on the payment due to the guarantor in respect of guarantor's chit. This is a continuous practice; the assessee has been following to safeguard its business interests.

5.4 First of all to invoke the provisions of section 41(1), the assessee shall have got the deduction in earlier assessment year while computing the income in respect of these payments. Unless and until the assessee got deduction even if there is a cessation or remission, it cannot be considered as income of the assessee. Further, in the present case, the assessee has not claimed as a deduction in respect of these liabilities while computing the income of the assessee in any assessment year and also it cannot be said that there is cessation of liability. Being so, there is no question of invoking the provisions of section 41(1) of the Act. The addition made by the Assessing Officer is not justified and the same is deleted.

6. Addition of Rs. 10 lakhs towards bid loss:

6.1 Facts of the issue are that during the accounting year relevant for the A.Y. 2009-10 the assessee debited an amount of Rs. 83,81,399 under the head Bid Loss. During the course of scrutiny assessment proceedings the assessee furnished a detailed explanation with regard to the Bid Loss. The Assessing Officer rejected the assessee's claim by observing that the assessee was serious enough in recovery of the dues. The loss could definitely have been minimised if not totally avoided. Thus, writing off the loss is nothing but a premature act on the part of the assessee-company. Accordingly, the Assessing Officer disallowed an amount of Rs. 10,00,000 as inadmissible and added back to the income returned by the assessee.

6.2 The CIT(A) observed that the observation and reasons given by the Assessing Officer are reasonable and correct. Accordingly, the CIT(A) sustained the addition of Rs. 10,00,000 made by the Assessing Officer towards bid loss. Against this, the assessee is in appeal before us.

6.3 We have heard both the parties and perused the material on record. The assessee debited a sum of Rs. 83,81,399 to the Profit and Loss A/c. under bid loss. The assessee after conducting bidding of a chit the amount is to be paid to the successful bidder for which the successful bidder has to furnish surety and other documents in support of the security of payment of balance bid subscription of the chit. In the meantime, the foregone amount of the bid by the successful bidder will be distributed among the other subscribers of the respective chits. Sometimes, successful bidder fails to furnish the surety and necessary documents during the stipulated time. In that event the bid claim of the bidder would be forfeited and the assessee has to conduct fresh auction of the respective chit. In the course of fresh auction, the assessee incurs certain loss i.e., the assessee receives lesser amount than the original bid amount. This amount has been claimed by the assessee as bid loss. This loss arose in the course of assessee's normal business and incurred wholly and exclusively for the purpose of its business and it cannot be considered as non-business expenditure and it is to be allowed u/s. 37 of the Act, as the amount is incurred wholly and exclusively for the purpose of its business. This ground of the assessee is allowed.

7. Disallowance of Rs. 10 lakhs towards inadmissible expenditure

7.1 The assessee claimed an amount of Rs. 6,47,68,153 under the head Miscellaneous Expenditure. When the information is gathered and verified, the Assessing Officer observed that the above amount included Rs. 57,73,909 under the sub-head "Miscellaneous Expenditure". The claim includes certain inadmissible expenditure like donations, marriage gifts, festival expenses, Inams, etc. It also included payment of Rs. 3,04,977 and Rs. 2,36,805 to Kakatiya School and Nakkalagutta land respectively which are clearly capital expenditure. The Assessing Officer disallowed an amount of Rs. 10,00,000 and added back to the income returned.

7.2 The CIT(A) observed that the Assessing Officer clearly mentioned his observations in his order at para 28 regarding this disallowance. He also agreed with the observation of the Assessing Officer that there is no further evidence produced before him by the assessee. Therefore, the disallowance of Rs. 10,00,000 made by the Assessing Officer towards 'inadmissible expenditure' is reasonable and therefore, the addition made by the assessee is correct and accordingly, sustained the same. On these three issues the assessee is in appeal before us.

7.3 We have heard both the parties and perused the material on record. The assessee claimed an expenditure of Rs. 6,47,68,153 under the head Miscellaneous Expenditure. According to the Assessing Officer this includes expenditure of Rs. 57,73,909 under the sub-head Miscellaneous Expenditure which includes expenditures like donations, marriage gifts, festival expenses, Enams, etc. It also included payment of Rs. 3,04,977 and Rs. 2,36,805 to Kakatiya School and Nakkalagutta land, respectively, which are treated as capital expenditure and thus, the Assessing Officer disallowed Rs. 10 lakhs. In our opinion, the assessee is a business concern. In the course of its business, the assessee has to incur certain incidental business expenditures. That expenditure is to be allowed except expenditure in the nature of capital expenditure or expenditure of personal nature and the expenditure incurred which is oppose to the public policy. Considering these facts we direct the Assessing Officer to disallow donations and expenditure in the nature of capital expenditure. This ground is partly allowed.

8. In the result, assessee's appeal is partly allowed.

9. Deletion of Rs. 16.29 crores on account of sale of land (Revenue's solitary ground):

9.1 Brief facts of the issue are that during the course of assessment proceedings, the Assessing Officer observed that in the Profit and Loss A/c the assessee has admitted net gains of Rs. 16,29,00,000 under the head 'profit on sale of agriculture land' and later reduced the same from the total income claiming such income to be exempt. This gain is on account of sale of land measuring 32-32.75 acres situated in Survey No. 117 to 122 at Railapur village, Medchal Mandal, Ranga Reddy District, AP for a consideration 17,51,00,000. The land was sold to Shilpa Shelters Ltd. The assessee claimed that the land is agricultural land which is situated beyond 8 km from municipal limits.

9.2 Before the Assessing Officer, the assessee argued that the intention of the assessee is only to hold the asset as capital asset to have returns from the same and thus realisation of better price in a booming market cannot be considered as an adventure in trade. The assessee further contended that the assessee never treated the land as stock-in-trade and reflected in Profit and Loss A/c. (closing stock)_ and there was no element of trade attached to the activity of the assessee in purchase and sale of the land. It was argued that the transaction in question could not be treated as sale of capital asset so as to tax the same as 'capital gains' nor it could be treated as an 'adventure in the nature of trade'. The summary of the assessee's arguments before the CIT(A) is as under:

9.3 However, the Assessing Officer observed that the assessee sold certain property and earned a net profit of Rs. 16,29,00,000. The assessee claimed that the profit earned is exempt from tax on certain grounds. There are many cases where even "notional income" and "illegal income" also are taxed. The intention of the statute is to subject income from every source to tax. In the case on hand, the assessee earned profit and the same is taxable if not taxable under the head 'capital gains' / 'business or profession', it is still taxable under the head 'other sources'. Further the claim of the assessee that the income in question is exempted from tax also doesn't hold much water. It is evident from the provisions of the Act that income of any kind which is not to be excluded from the total income under the Act, shall be chargeable to tax under the head "income from other sources" if it is not chargeable to income tax under any of the heads specified in section 14A to 14.

9.4 The Assessing Officer further observed that the assessee is not eligible to claim any exemption of the profit derived from sale of open land at Railapur village, Medchal Mandal, Ranga Reddy District. He also observed that if at any stage of appeal proceedings, it is held that the profits are not taxable under the head 'business or profession' (being adventure in the nature of trade), this alternatively, the said profits is to be taxed under the head "other sources" should be considered. Accordingly, the Assessing Officer brought to tax the entire profit/gain earned on sale of land as income from business.

9.5 On appeal to the CIT(A), the CIT(A) observed that the Assessing Officer mainly decided this issue by discussing in his order from pages 3 to 8. As per para 10 of the assessment order, the Assessing Officer mentioned that "it may be true that the land in question is situated in a small village with population of only 1500 and the village is also beyond 8 km from the Municipal Limits and some agricultural operations were carried out in the land." That means, as submitted by the assessee, the Assessing Officer basically accepted and not considered the fact that this land is beyond 8 km and agriculture land as submitted by the assessee. The Assessing Officer observed that the theory of agricultural operations appears to be only an afterthought to circumvent the provisions of the Act and claim exemption of the profit on sale of land. To support this, the Assessing Officer has not enquired or gathered any substantial evidence and simply concluded without any basis. From the audited annual report submitted by the assessee for the Financial Year 2008-09 and the details of the land sold during this year it is clear that the assessee is in possession from the year 2004-05. The extent of the land was 32-32.75. The Assessing Officer concluded that small amount of Rs. 73,165 and Rs. 33,000 represents sale proceeds of paddy and corn disclosed by the assessee and so the agricultural operation appears to be bogus and is not acceptable. The assessee held the land holdings from the year 2004 onwards and this land was figured in the depreciation schedule of the audited accounts in the annual reports and so the assessee's submission is that the land is to be treated as agricultural land. The Assessing Officer also not disputed that this is not agricultural land.

9.6 The Assessing Officer in his order vide para 13, concluded that the transaction can be regarded as an 'adventure in the nature of trade' by saying that "one has to see the motive, intention or purpose with which the asset in question is purchased and sold." As per the detailed submissions of the assessee and after verification of annual report and depreciation schedule this conclusion seems to be wrong because the assessee shown this land from the year 2004 onwards and is in possession during the year 2008-09 and sold the land during this financial year. The assessee has not sold or purchased over a year. The assessee has not shown this land in the stock-in-trade. The assessee mainly relied on several decisions like (i) Gujarat High Court decision in the case of Commissioner Of Income-Tax, Gujarat-Ii v. Siddharth J. Desai. [1983] 139 ITR 628/[1982] 10 Taxman 1 ; (ii) Andhra Pradesh High Court decision in the case of Addl. Commissioner Of Income-Tax, A.P v. G.M Omarkhan [1979] 116 ITR 950 and (iii) Supreme Court decision in the case of G. Venkataswami Naidu & Co. v. CIT [1959] 55 ITR 594. Therefore, the CIT(A) observed that the Assessing Officer's conclusion that this transaction is 'adventure in the nature of trade' is wrong.

9.7 The CIT(A) further observed that the Assessing Officer's conclusion in para 16 of the assessment order is that the "appellant has given advance of Rs. 2,80,00,000 to M/s. Shilpa Shelters Ltd., for facilitating purchase of land." Therefore, the assessee is in the intention focused on real-estate transaction is also seems to be not supported with any evidence and not concluded logically. Since this land is not within the limit of 8 km and agriculture operations were done resulting into agriculture income was not disputed by the Assessing Officer and the Assessing Officer's findings were not supported by any evidence to prove that this land is not agriculture land and on the basis of evidences, the CIT(A) was of the opinion that this land is agricultural land. Therefore, the profit earned due to sale of agriculture land is not a subject matter of capital gains. There is no dispute that the land is not agriculture land which is not disputed by the Assessing Officer since, this land is situated beyond 8 km from municipal limits and agriculture operations were carried on. Therefore, the provisions of section 2(24) are not attracted and the case law relied on by the Assessing Officer is not applicable. Hence, the CIT(A) accepted the arguments from assessee's side during the appeal proceedings and deleted the addition on this count. Against this, the Revenue is in appeal before us.

9.8 We have heard both the parties and perused the material on record. It is an admitted fact that the land was held by the assessee as a capital asset from the date of purchase till the date of sale. This is evidenced by the entries reflected in the Balance Sheet of the assessee company. The assessee's contention is that it is intended to retain the agricultural land acquired as a capital asset. The assessee never treated the land as stock in trade. The assessee reflected the same in the Balance Sheet as a fixed asset. The assessee carried on agricultural operations. This agricultural land is situated beyond 25 km from the municipal limits. The Assessee has not taken any permission from the Government for making plots, as the assessee company never had any intention to make the land into plots and carry on real estate business in respect of the land. Thus, the assessee never created an asset as stock in trade but treated it as capital asset (agricultural land). The assessee has sold land admeasuring ac. 32-32.75 and retained the balance land of 11.07 acres. The same is reflected under the head fixed assets in the Balance Sheet as on 31.03.2009. Copies of pahanis of the above said land is brought on record by the assessee to prove the fact that the land held/sold by the assessee is agricultural land.

9.9 The AR submitted that the sale transaction effected by the assessee in respect of the above agriculture land constituted only sale of agriculture land, and by no stretch of imagination it can be treated as adventure in trade and so as to treat the same as 'business transaction' for the following reasons:

9.10 From the above, it is clear that:

10. Therefore, in the present case there is no dispute that the assessees acquired agricultural land. There is also no dispute that there was agricultural operation in this land before sale of this land.

10.1 The Assessing Officer was of the opinion that the amount received on sale of this agricultural property is nothing but on account of adventure in the nature of trade and the same was brought into income from business. In this case, the assessee held the land always as investment and not at all converted into stock-in-trade. The character of the land in the hands of the assessees has not changed. There is no material on record to show that the assessee carried on activities of buying and selling of land in a systematic manner so as to justify the action of the AO in treating the activities of the assessee as adventure in the nature of trade. The land was sold by the assessees in acreage and not by making plots.

10.2 Now the question as to whether a land is agricultural land or not is essentially a question of fact. The question has to be answered in each case having regard to the facts and circumstances of that case. There may be factors both for and against a particular point of view. We have to answer the question on a consideration of all of them, a process of evaluation and the inference has to be drawn on a cumulative consideration of all the relevant facts. It may be stated here that not all the factors or tests would be present or absent in any case and that in each case one or more of the factors may make appearance and that ultimate decision will have to be reached on a balanced consideration of the totality of the circumstances.

10.3 The expression 'agricultural land' is not defined in the Act, and now, whether it is agricultural land or not has to be determined by using the tests or methods laid down by the Courts from time to time.

10.4 The Hon'ble Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim v. CIT [1993] 204 ITR 631/70 Taxman 301 has approved the decision of a Division Bench of the Hon'ble Gujarat High Court in the case of Siddharth J. Desai (supra) and has laid down 13 tests or factors which are required to be considered and upon consideration of which, the question whether the land is an agricultural land or not has to be decided or answered. We reproduce the said 13 tests as follows:

10.5 A reference could be made to the case of CWT v. Officer-in-charge (Court of wards) [1976] 105 ITR 133 (SC) wherein the Constitution Bench of the Hon'ble Supreme Court stated that the term 'agriculture' and 'agricultural purpose' was not defined in the Indian IT Act and that we must necessarily fall back upon the general sense in which they have been understood in common parlance. The Hon'ble Supreme Court has observed that the term 'agriculture' is thus understood as comprising within its scope the basic as well as subsequent operations in the process of agriculture and raising on the land all products which have some utility either for someone or for trade and commerce. It will be seen that the term 'agriculture' receives a wider interpretation both in regard to its operation as well as the result of the same. Nevertheless there is present all throughout the basic idea that there must be at the bottom of its cultivation of the land in the sense of tilling of the land, sowing of the seeds, planting and similar work done on the land itself and this basic conception is essential sine qua non of any operation performed on the land constituting agricultural operation and if the basic operations are there, the rest of the operations found themselves upon the same, but if the basic operations are wanting, the subsequent operations do not acquire the characteristics of agricultural operations. The Constitution Bench of the Hon'ble Supreme Court in the aforesaid case observed that the entries in Revenue records were considered good prima facie evidence.

10.6 The Hon'ble Gujarat High Court in the case of Dr. Dr. Motibhai D. Patel v. Commissioner Of Income-Tax, Gujarat [1981] 127 ITR 671/5 Taxman 147 referring to the Constitution Bench of the Hon'ble Supreme Court had stated that if agricultural operations are being carried on in the land in question at the time when the land is sold and further if the entries in the Revenue records show that the land in question is agricultural land, then, a presumption arises that the land is agricultural in character and unless that presumption is rebutted by evidence led by the Revenue, it must be held that the land was agricultural in character at the time when it was sold. The Division Bench of the Hon'ble Gujarat High Court further held that there was nothing on record to show that the presumption rose from the long user of the land for agricultural purpose and also the presumption arising from the entries of the Revenue records are rebutted.

10.7 The Hon'ble Bombay High Court in the case of CWT v. H.V. Mungale [1984] 145 ITR 208/[1983] 12 Taxman 201 held that the Hon'ble Supreme Court had pointed out that the entries raised only a rebuttable presumption and some evidence would, therefore, have to be led before taxing authorities on the question of intended user of the land under consideration before the presumption could be rebutted. The Court further held that the Supreme Court had clearly pointed out that the burden to rebut the presumption would be on the Revenue. The Hon'ble Bombay High Court held that the ratio of the decision of the Supreme Court was that what is to be determined is the character of the land according to the purpose for which it was meant or set apart and can be used. It is, therefore, obvious that the assessee had abundantly proved that the subject land sold by them was agricultural land not only as classified in the Revenue records, but also it was subjected to the payment of land revenue and that it was actually and ordinarily used for agricultural purpose at the relevant time.

10.8 We may also refer to the case of Commissioner Of Income-Tax, Gujarat-Iii v. Manilal Somnath. [1977] 106 ITR 917 (Guj.) , wherein the Division Bench of the Hon'ble Gujarat High Court observed that the potential non- agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land on the relevant date of sale.

10.9 We may also refer to the case of Gopal C. Sharma v. Commissioner Of Income-Tax. [1994] 209 ITR 946/72 Taxman 353 (Bom) , in which, the case of Smt. Sarifabibi Mohamed Ibrahim (supra) was referred to and relied, amongst other cases. In this case, the Division Bench of the Bombay High Court has stated that the profit motive of the assessee selling the land without anything more by itself can never be decisive for determination of the issue as to whether the transaction amounted to an adventure in the nature of trade. In other words, the price paid is not decisive to say whether the land is agricultural or not.

10.10 We may refer to a judgment of the Hon'ble Madras High Court in the case of CIT v. E. Udayakumar [2006] 284 ITR 511 where the Hon'ble Madras High Court has referred to the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Smt. Savita Rani [2004] 270 ITR 40/[2003] 133 Taxman 712 and has observed and held as under :

"8. It is well settled in the case of CIT v. Smt. Savita Rani (2004) 186 CTR (P&H) 240 : (2004) 270 ITR 40 (P&H) , wherein it is held that the land being located in a commercial area or the land having been partially utilised for non-agricultural purposes or that the vendees had also purchased it for non-agricultural purposes, were totally irrelevant consideration for the purposes of application of s. 54B.

9. In the abovesaid case, the assessee an individual sold 15 karnals, 18 marlas of land out of her share in 23 karnals, 17 marlas land during the financial year 1990-91, relevant to the asst. yr. 1991-92, the sale was effected by three registered sale deeds. While filing her return of income, she claimed exemption from levy of capital gains under s. 54B of the Act on the ground that the land sold by her was agricultural land and the sale proceeds were invested in the purchase of agricultural land within two years. The AO rejected the claim of the assessee holding that the land sold by the assessee was not agricultural land and this was upheld by the CIT(A). On further appeal, the Tribunal accepted the claim of the assessee holding that the transaction in question duly fulfilled the conditions specified for relief. On further appeal to the High Court, the Punjab & Haryana High Court found that the finding that the land had been used for agricultural purposes was based on cogent and relevant material. The Revenue record supported the claim. Even the records of the IT Department showed that the assessee had declared agricultural income from this land in her returns for the preceding two years. The land being located in commercial area or the land having been partially utilised for non-agricultural purposes or that the vendees had also purchased it for nonagricultural purposes, were totally irrelevant consideration for the purposes of application of s. 54B.

10. It is seen from the aforesaid decision that the agricultural land sold by the assessee with an intent to purchase another land within two years had also been permitted to claim exemption under s. 54B of the IT Act, 1961. In the instant case, even though there was no sale as such, the assessee owned agricultural land within the limits of Tirunelveli Corporation and he had not put up any construction thereon, the assessee is entitled to claim exemption from the WT Act for the assessment of wealth-tax. That the land in question is adjacent to the hospital is totally irrelevant."

10.11 Adverting to the facts of the present case, the land in question is classified in the Revenue records as agricultural land and there is no dispute regarding this issue and actual cultivation has been carried on this land and income was declared from this land in the return of income filed by the assessee for the earlier years as agricultural income. It is also an admitted fact that the AO has not brought on record any evidence to show that the agricultural land was used for non-agricultural purposes and the assessee has not put the land to any purposes other than agricultural purposes. It is also an admitted fact that neither the impugned property nor the surrounding areas were subject to any developmental activities at the relevant point of time of sale of the land.

10.12 The provisions of Andhra Pradesh Agricultural Land (conversion for non-agricultural purposes) Act, 2006 also prescribed the procedure for conversion of agricultural land into non-agricultural land. Being so, whenever the agricultural land to be treated as non-agricultural land, the same has to be converted in accordance with the provisions of Andhra Pradesh Agricultural Land (conversion for non-agricultural purposes) Act, 2006. If by a Government Notification, the nature and character of land changes from agriculture into non-agriculture then there is no question of conversion of this land for non-agricultural purposes by the Revenue authorities concerned. To our understanding nature of land cannot be changed by any State Government notification and the land owners are required to apply to the concerned Revenue authorities for the purpose of conversion of the agricultural land into non-agricultural land and there is no automatic conversion per se by State Government notification.

10.13 It is also an admitted position that mere inclusion or proximity of land to any Special zone without any infrastructure development thereupon or without establishing and proving that the land was put into use for non-agricultural purposes by the assessee does not and cannot convert the agricultural land into non-agricultural land. In the instant case, at the relevant point of sale of the land in question, the surrounding area was totally undeveloped and except mere future possibility to put the land into use for non-agricultural purposes would not change the character of the agricultural land into non-agricultural land at the relevant point of time when the land was sold by the assessee. It is also an admitted position that the assessee had not applied for conversion of the land in question into non-agricultural purposes and no such permissions were obtained from the concerned authority. In the Revenue records, the land is classified as agricultural land and has not been changed from agricultural land to non-agricultural land at the relevant point of time when the land was sold by the assessee. It is also not in dispute that there was no activity undertaken by the assessee of developing the land by plotting and providing roads and other facilities and there was no intention also on the part of the assessees herein to put the same for non-agricultural purposes at time of their ownership that land. No such finding has been given by the Department. No material or evidence in support of the fact that the assessees have put the land in use for non-agricultural purposes has been brought on record. At the relevant point of time the land was used for agricultural purposes only and nothing is brought on record to show that the land was put in use for non-agricultural purposes by the assessee. In view of the decision of the Hon'ble High Court in the case of Gopal C. Sharma (supra), it is also clear that the profit motive of the assessee in selling the land without anything more by itself can never be decisive to say that the assessee used the land for non-agricultural purposes. We may also refer to a decision of the Hon'ble Supreme Court in the case of N. Srinivasa Rao v. Special Court [2006] 4 SCC 214 where it was observed that the fact that agricultural land in question is included in urban area without more, held not enough to conclude that the user of the same had been altered with passage of time. Thus, the fact that the land in question in the instant case is bought by Developer cannot be a determining factor by itself to say that the land was converted into use for non-agricultural purposes.

10.14 Recently the Karnataka High Court in the case of Commissioner Of Income Tax & Anr. v. Madhukumar N. (Huf)) [2012] 208 Taxman 394/23 taxmann.com 341 held as follows:

"9. An agricultural land in India is not a capital asset but becomes a capital asset if it is the land located under section 2(14)(iii)(a) & (b) of the Act, Section 2(14) (iii) (a) of the Act covers a situation where the subject agricultural land is located within the limits of municipal corporation, notified area committee, town area committee, town committee, or cantonment committee and which has a population of not less than 10,000.

10. Section 2(14)(m)(b) of the Act covers the situation where the subject land is not only located within the distance of 8 kms from the local limits, which is covered by Clause (a) to section 2(14)(iii) of the Act, but also requires the fulfilment of the condition that the Central Government has issued a notification under this Clause for the purpose of including the area up to 8 kms, from the municipal limits, to render the land as a "Capital Asset.

11. In the present case, it is not in dispute that the subject land is not located within the limits of Dasarahalli City Municipal Council therefore, Clause (a) to section 2(14][iii] of the Act is not attracted.

12. However, though it is contended that it is located within 8 knits,, within the municipal limits of Dasarahalli City Municipal Council in the absence of any notification issued under Clause (b) to section 2(14)(iii) of the Act, it cannot be looked in as a capital asset within the meaning of section 2(14)(iii)(b) of the Act also and therefore though the Tribunal may not have spelt out the reason as to why the subject land cannot be considered as a 'capital asset' be giving this very reason, we find the conclusion arrived at by the Tribunal is nevertheless the correct conclusion."

10.15 Further the Kolkata Bench of the Tribunal in the case of Dy. CIT v. Arijit Mitra [2011] 48 SOT 544/16 taxmann.com 66 (Kol.) held as follows:

"7. From the above, it is clear that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of such Municipalities or Cantonment Boards are covered by the amended definitions of 'capital asset', if such areas are, having regard to the extent of and scope for their urbanization and other relevant considerations, is notified by the Central Government in this behalf. Central Government in exercise of such powers has issued the above notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situation in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of 'capital asset'. Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression 'capital asset', the agricultural land situated in rural areas continues to be excluded from that definition. And as in the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Rajarhat Municipality and that also 2.5 KM away from the outer limits of the said Municipality, assessee's land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. Accordingly, we quash the assessment order qua charging of capital gains on very jurisdiction of the issue is quashed. The cross objection of the assessee is allowed."

10.16 It was held in the case of Manilal Somnath (supra) as follows:

'Under the Income-tax Act of 1961, agricultural lend situated in India was excluded from the definition of "capital asset" and any gain from the sale thereof was not to be included in the total income of an assessee tinder the head "capital gains". In order to determine whether a particular land is agricultural land or not one has to first find out if it is being put to any use. If it is used for agricultural purposes there is a presumption that it is agricultural land. If it is used for non-agricultural purposes the presumption is that it is non-agricultural land. This presumption arising from actual use can be rebutted by the presence of other factors. There may be cases where land which is admittedly non-agricultural is used temporarily for agricultural purposes. The determination of the question would, therefore, depend on the facts of each case.

'The assessee, Hindu, undivided family, had obtained some land on a partition in 1939. From that time, up to the time of its sale, agricultural operations were carried on in the land. There was no regular road to the land and it was with the aid of a tractor that agricultural operations were being carried on. The land was included within a draft town planning scheme. The assessee got permission of the Collector to sell the land for residential purposes and sold it. On the question whether the land was agricultural land:

Held, that what had to be considered is not what the purchaser did with the land or the purchaser was supposed to do with the land, but what was the character of the land at the time when the sale took place. The fact that the land was within municipal limits or that it was included within a proposed town planning scheme was not by itself sufficient to rebut the presumption arising from actual use of the land. The land had been used for agricultural purposes for a long time and nothing had happened till the date of the sale to change that character of the land. The potential non-agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land at the date of the sale. The land in question was, therefore, agricultural land.

10.17 Further the word "Capital Asset" is defined in Section 2(14) to mean property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-

"(iii) agricultural land in India, not being land situate—

10.18 It is very clear from the above that the gain on sale of an agricultural land would be exigible to tax only when the land transferred is located within the jurisdiction of a municipality. The fact that all the expressions enlisted after the word municipality are placed within the brackets starting with the words 'whether known as' clearly indicates that such expressions are used to denote a municipality only, irrespective of the name by which such municipality is called. This fact is further substantiated by the provisions contained under clause (b) wherein it has been clearly provided that the authority referred to in clause (a) was only municipality.

10.19 We also perused the meaning of the term local authority as referred in section 10(20) of the Act.

Explanation. — For the purposes of this clause, the expression "local authority" means -

10.20 It is also evident from the Memorandum explaining the provisions of Finance Act, 1970, whereby s. 2(14) was amended so as to include the agricultural land located within the jurisdiction of a municipality in the definition of the expression 'Capital Asset'. The relevant portion of the said memorandum is reproduced hereunder:

'30. ... The Finance Act, 1970 has, accordingly, amended the relevant provisions of the Income-tax Act so as to bring within the scope of taxation capital gains arising from the transfer of agricultural land situated in certain areas. For this purpose, the definition of the term "capital asset" in section 2(14) has been amended so as to exclude from its scope only agricultural land in India which is not situate in any area comprised within the jurisdiction of a municipality or cantonment board and which has a population of not less than ten thousand persons according to the last preceding census for which the relevant figures have been published before the first day of the previous year. The Central Government has been authorised to notify in the Official Gazette any area outside the limits of any municipality or cantonment board having a population of not less than ten thousand up to a maximum distance of 8 kilometres from such limits, for the purposes of this provision. Such notification will be issued by the Central Government, having regard to the extent of, and scope for, urbanisation of such area, and, when any such area is notified by the Central Government, agricultural land situated within such area will stand included within the term "capital asset". Agricultural land situated in rural areas, i.e., areas outside any municipality or cantonment board having a population of not less than ten thousand and also beyond the distance notified by the Central Government from the limits of any such municipality or cantonment board, will continue to be excluded from the term 'capital asset'.

10.21 Further it is nobody's case that the property falls within any area which is comprised within the jurisdiction of a municipality or cantonment board or which has a population of not less than 10,000 according to the last preceding Census of which the relevant figures have been published before the first day of the previous year. In other words, the land does not fall in sub-clause (a) of section 2(14)(iii) of the Act as the land is outside of any municipality including GHMC. Further we have to see whether the land falls in clause (b) of section 2(14)(iii). This section prescribes that any area within such distance, not being more than 8 km from the local limit of any municipality or cantonment board as referred to in sub-clause (a) of section 2(14)(iii) of the Act, as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.

10.22 We have carefully gone through the notification issued by the Central Government u/s. 2(1A)(c) proviso (ii)(B) and 2(14)(3b) vide No. 9447 (F. No. 164/(3)/87/ITA-I) dated 6th January, 1994 as amended by notification No. 11186 dated 28th December, 1999. In the schedule annexed to the notification dated 6.1.1994, Entry No. 17 is relating to Hyderabad wherein mentioned that the areas up to a distance of 8 km from the municipal limits in all directions. In the notification 11186 dated 28.12.1999 there is no entry relating to Hyderabad. It is clear from these notifications that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of Hyderabad Municipality (GHMC) is covered by the amended definitions of 'capital asset'. Central Government in exercise of such powers has issued the above notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situated in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of 'capital asset'. Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression 'capital asset', the agricultural land situated in rural areas continues to be excluded from that definition. And as in the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Hyderabad Municipality and that also 8 km away from the outer limits of this Municipality, assessee's land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. This is supported by the order of Kolkata Bench of this Tribunal in the case of Arijit Mitra (supra), Harish V. Milani v. Jt. CIT [2008] 114 ITD 428 (Pune) and M.S. Srinivas Naicker v. ITO [2007] 292 ITR 481/[2008] 169 Taxman 255 (Mad.) . By borrowing the meaning from the above section, we are not able to appreciate that the land falls within the territorial limit of any municipality without notification of Central Government as held by the Karnataka High Court in the case of Madhukumar N. (HUF) (cited supra).

10.23 From the facts and circumstances of the case, as narrated before us, it is important to note that what was the intention of the assessees at the time of acquiring the land or interval action by the assessee between the period from purchase and sale of the land and the relevant improvement/development taken place during this time is relevant for deciding the issue whether transaction was in the nature of trade. Though intention subsequently formed may be taken into account, it is the intention at the inception is crucial. One of the essential elements in an adventure of the trade is the intention to trade; that intention must be present at the time of purchase. The mere circumstances that a property is purchased in the hope that when sold later on it would leave a margin of profit, would not be sufficient to show, an intention to trade at the inception. In a case where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, the presence of such an intention is a relevant factor and unless it is offset by the presence of other factors it would raise as strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. The presumption may be rebutted. In the present case, considering the facts and circumstances of the case it cannot be considered as an adventure in the nature of trade. The intention of the assessee from the inception was to carry on agricultural operations and even there was no intention to sell the land in future at that point of time. It was due to the boom in real estate market came into picture at a later stage, the assessee has sold the land. Merely because of the fact that the land was sold for profit, it cannot be held that income arising from the sale of land was taxable as profit arising from the adventure in the nature of trade. The period of holding should not suggest that the activity was an adventure in the nature of trade.

10.24 Further, we make it clear that when the land which does not fall under the provisions of section 2(14)(iii) of the IT Act and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in Revenue records, the land is not subjected to any conversion as non-agricultural land by the assessee or any other concerned person, transfers such agricultural land as it is and where it is basis, in such circumstances, in our opinion, such transfer like the case before us cannot be considered as a transfer of capital asset or the transaction relating to sale of land was not an adventure in the nature of trade so as to tax the income arising out of this transaction as business income. Accordingly, the ground raised by the Revenue is dismissed.

11. In the result, Revenue appeal is dismissed and assessee's appeal is partly allowed.

USP