No Income Tax Exemption on Sale agriculture land after conversion into Plots : HC

By | March 27, 2019
(Last Updated On: March 28, 2019)
Key points :
Gadually the plots were sold to several people and agreements were entered into with many of the buyers for construction of villas. This, therefore, would establish beyond any doubt that though the property was once an agricultural land, its acquisition was for non-agricultural purposes, the assessee did not carry on any agricultural activity in the land and at the relevant date, viz. the date of sale, the land had ceased to be an agricultural land.
Kerala High Court
 Synthite Industrial Ltd. Vs CIT 
Appeal Number : ITA.No. 154 of 2015
Dated  : 31/08/2017
Related Assessment Year : 2007-08, 2008-09, 2009-10 and 2010-11.

These appeals are filed by the assessee against the orders passed by the Income Tax Appellate Tribunal in ITA Nos.270/2014, 304/2014, 305/2014 and 192/2015, concerning the Assessment Years 2007-08, 2008-09, 2009-10 and 2010-11.

2. Since the facts and the questions of law are common, these cases were heard together and are disposed of by this common judgment.

3. The assessee is a company, engaged in the business of manufacture and sale of oleoresins and spices oil. On 29.03.2005, the assessee purchased 512 cents of agricultural land at Kadayirippu in Aikkaranadu North Village which is a Panchayat and is beyond eight kilometres radius of the nearby Municipality. The land was purchased for expansion of the assessee’s factory. However, local people objected to the expansion of the factory and therefore, the assessee dropped its proposal for expansion and decided to convert the land into residential plots with an intention to develop and sell a residential villa project. The land was converted into plots and in the previous year relevant to the Assessment Year 2007-08, the assessee sold 188 cents of land to various parties. In the subsequent years also, the remaining area of the land was sold and in some cases, the assessee entered into agreements with the buyers for construction of villas. The assessee claimed that gain on sale of land is exempted from capital gain on the basis that the land was an agricultural land situated in a Panchayat. However, the Assessing Officer brought 50% of the income on sale of land as capital gain and the balance 50% was assessed as business income. This order was confirmed by the First Appellate Authority and the Tribunal. It is in this background, these appeals are filed and the questions of law framed for the consideration of this Court are the following:

“ i. Whether on the facts and circumstances of the case the Appellate Tribunal was justified in treating the land as capital asset under Section 2(14) of the Income Tax Act, 1961?

ii. Whether on the facts and circumstances of the case the Appellate Tribunal was justified in holding that there was a “transfer” as contemplated in Section 2(47)?

iii. Whether on the facts and circumstances of the case the Appellate Tribunal was justified in not granting exemption to one-half of the profits generated on conversion of the agricultural land to stock in trade, while invoking Section 45(2) of the Income Tax Act, 1961?”

4. We heard the learned counsel appearing for the assessee and the learned Senior Counsel appearing for the Revenue.

5. The learned counsel for the assessee contended that at the time when the land was purchased, it was a rubber estate. According to the counsel, the assessee retained the land as agricultural land and returned income from agriculture also. The acquired land being agricultural land, according to the learned counsel, the nature of the land would continue to be agricultural land and therefore, the gain of income on the sale of land would still be income from the sale of agricultural land, exempt from capital gains.

6. These contentions were refuted by the learned Senior Counsel appearing for the Revenue and according to him, though the land, originally, was agricultural land, assessee purchased it for non-agricultural purposes. Thereafter, converted the land into plots and brought it in as the stock-in-trade of the assessee. According to the learned Senior Counsel, when such land is sold, the income gained by the assessee did not qualify to be income from agricultural land to claim exemption from capital gains.

7. We have considered the submissions made.

8. Facts, as noticed by the statutory authorities would show that, it was on 15.03.2005, the Board of Directors of the assessee had passed the resolution authorizing its Chairman to acquire 512 cents of land, planted with rubber, for the expansion of the factory. The land is situated next to the assessee’s factory at Kadayirippu, falling within the Panchayat area. The land was purchased by the assessee on 29.03.2005. The property was purchased for expansion of the factory. This proposal had to be abandoned due to objection from local people. The proposal to convert the agricultural land into housing plots and to develop it as a villa project was placed for the consideration of the Board of Directors on 19.09.2006 and the resolution was passed. Subsequently, on 18.12.2006, the extraordinary meeting of the members of the company resolved to amend the Memorandum of Association by inserting a clause, authorizing the company for carrying on the business as property developers, builders, designers etc. Accordingly, land was converted into plots leaving common areas such as roads etc. and on 27.03.2007 itself, the assessee sold 188 cents of land to various parties and entered into a set of construction agreements to build villas in the project “Spice Village”. It is in this background, we have considered whether the income gained by the assessee by the sale of the plots of land from out of 512 cents of land acquired by it, would qualify to be income from the sale of agricultural land.

9. Section 45 of the Income Tax Act provides for levy of capital gains. Under sub-section 1, any profit or gain arising from the transfer of a capital asset effected in the previous year shall, subject to the exemptions provided therein, be chargeable to income tax under the head of “capital gains” and shall be deemed to be the income of the previous year in which the transfer took place. The term “capital asset” has been defined in Section 2(14). By sub-section (iii) thereof, agricultural land in India has been exempted, including the land situated in Panchayat. “Transfer” has been defined in Section 2(47) of the Act and it includes, in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment. Sub-section (2) of Section 45 provides that notwithstanding anything contained in sub-section (1), the profits or acquired gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of Section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of consideration received or accruing as a result of the transfer of the capital asset. Therefore, if the land, which has been sold by the assessee, from which profit has been gained by it, is an agricultural land, the assessee is exempted of its liability to capital gains.

10. For the purposes of levy of capital gains, the material date with reference to which the question whether the particular asset which has been sold by the assessee is agricultural land or not, is the date of sale of the asset. It has been so held by a Division Bench of this Court in its judgment in Kalpetta Estates Ltd. v. Commissioner of Income Tax [1990] 185 ITR 318 (Ker). In this judgment, it was also held that in order to entitle the assessee to earn exemption, it is not enough to allege or show that the land was once an agricultural land at the time of its acquisition and that the assessee should further prove that it was agricultural land at the time of transfer.

11. This question came for the consideration of the Apex Court in Sarifabibi Mohmed Ibrahim and others v. Commissioner of Income Tax, Gujarat [1993] 204 ITR 631 (SC)]. In that case, taking into account the agreements entered into by the assessee with housing co-operative society, to sell the land for construction of houses; also the permission that it had obtained to sell the land for non-agricultural purposes, its sale soon thereafter; and also the fact that the land was not cultivated for a period of four years prior to the sale, the Apex Court accepted the contention of the Revenue that the land was not an agricultural land when it was sold.

12. Bearing these principles in mind, the facts of the case are to be examined. Admittedly, the assessee purchased the land which was a rubber estate. The land was purchased to utilize it for the non-agricultural purpose of expansion of its factory. The rubber trees in the land were slaughter tapped which is a process that immediately precedes the cutting and removal of the rubber trees. The income returned by the assessee, is the income from slaughter tapping of rubber trees. This income was not gained from agricultural operations, but was only from exploitation of standing trees at the end of its useful life. Thereafter, the assessee had converted the land into housing plots leaving out common areas for roads and other purposes. Before that assessee would have cut and removed rubber trees. The asset was brought in as the stock-in-trade of the assessee. Thereafter, gradually the plots were sold to several people and agreements were entered into with many of the buyers for construction of villas. This, therefore, would establish beyond any doubt that though the property was once an agricultural land, its acquisition was for non-agricultural purposes, the assessee did not carry on any agricultural activity in the land and at the relevant date, viz. the date of sale, the land had ceased to be an agricultural land. If that be so, the assessee could not have claimed that the income gained from the sale of the land is from the sale of agricultural land entitling it to exemption from levy of capital gains. This precisely is the concurrent conclusion of the statutory authorities.

13. Before the Tribunal, one document that was relied on by the assessee to substantiate its contention that the land was an agricultural land, was the certificate dated 20.10.2010 issued by the Village Officer Aikkaranadu North Village. By this document, the Village Officer has certified that the properties mentioned in the survey were agricultural land as per the village records and that it is being used for agricultural operations. Insofar as this certificate is concerned, first of all, this document is purported to have been issued based only on the village records and not anything else. Even on the assessee’s own showing, long before the certificate was issued, the assessee had cut and removed the rubber trees and had converted the land into plots. Therefore, the case of the assessee itself would contradict the entry in the village records that the land is an agricultural land and that it was being used for agricultural operations. That apart, the Survey Numbers mentioned also do not tally with the Survey Numbers extracted in the order of the first appellate authority. Admittedly, at least substantial portion of the land was already sold for residential purposes long before the documents was issued. All these, therefore, show that the conclusion of the Tribunal that the certificate was unworthy of acceptance, cannot be said to be vitiated.

14. In the light of the above, we fully endorse the conclusions of the Tribunal.

15. Assessee has a case that the Tribunal was wrong in holding that there was transfer of the property as contemplated in Section 2(47) of the Act. Section 2(47) which defines transfer in relation to a capital asset. The relevant portion of Section 2(47) reads asunder:

“2(47) “transfer”, in relation to a capital asset, includes,—

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;”

16. Assessee does not have a case that the land was not treated as stock-in-trade. Their business also included real estate development. Therefore, Tribunal was perfectly justified in its conclusion that there was transfer of the asset.

Therefore, answering the questions of law against the assessee and in favour of the Revenue, these appeals are dismissed.

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