1981 (2) TMI 63 - HC - Income Tax

Land use determines tax liability: High Court rules in favor of assessee, exempts from capital gains tax.

The High Court determined that the lands in question were agricultural at the time of sale, therefore exempting the assessee from paying capital gains ... Agricultural land - actual user - entries in the record of rights as prima facie evidence - presumption and rebuttal - permission of the Collector under s. 65 of the Bombay Land Revenue Code - capital gains on sale of agricultural landAgricultural land - actual user - entries in the record of rights as prima facie evidence - presumption and rebuttal - permission of the Collector under s. 65 of the Bombay Land Revenue Code - capital gains on sale of agricultural land - Whether the lands in question were agricultural lands on the date of sale so as to be exempt from capital gains. - HELD THAT: - The Court accepted that the record of rights and annexures showed juvar crops raised on the five survey numbers for the agricultural years 1964-65 to 1967-68 and that the lands were actually used for agricultural purposes up to the date of sale in May and July 1969. No permission for conversion to non-agricultural user under s. 65 of the Bombay Land Revenue Code had been granted and the revenue produced no material to rebut the presumption arising from continuous actual user and the entries in the revenue records. The existence of surrounding residential development, inclusion within municipal limits, or coverage by a town planning scheme, and the fact that purchasers obtained permission under the Tenancy Act for non-agricultural purchase, did not, in themselves, displace the prima facie character of the plots as agricultural land. Applying the settled tests and precedents referred to in the judgment, the Court held that the presumption in favour of agricultural character stood unrebutted and that the lands were agricultural on the date of sale, with the consequence that the profit on their sale could not be charged as capital gains under the law as it stood at the relevant time.The lands were agricultural on the date of sale; the presumption raised by actual user and entries in the record of rights was not rebutted, and the profit on sale was not liable to capital gains tax.Final Conclusion: The referred question is answered in the negative - in favour of the assessee and against the revenue. The Tribunal erred in holding the lands to be non-agricultural; costs of the reference are awarded to the assessee. Issues Involved:1. Determination of whether the lands in question were agricultural lands.2. Liability of the assessee to pay capital gains tax on the sale of the lands.Summary:Issue 1: Determination of Agricultural LandsThe primary issue was whether the lands sold by the assessee were agricultural lands. The assessee claimed exemption u/s 2(14)(iii) of the I.T. Act, asserting that the lands were agricultural. The ITO, however, concluded that the lands were not agricultural and thus liable for capital gains tax. The AAC reversed this decision, but the Tribunal reinstated the ITO's decision, prompting the assessee to appeal.The Tribunal noted that the lands were sold to co-operative societies for residential purposes and were within the municipal limits of Ahmedabad, covered by a town planning scheme. Despite the assessee's evidence, including an affidavit from a lessee and a court fees inspector's report indicating agricultural use, the Tribunal found the lands to be non-agricultural.Issue 2: Liability to Pay Capital Gains TaxThe Tribunal's decision was based on several factors, including the land's inclusion in a town planning scheme and its location within municipal limits. However, the High Court referenced multiple precedents, including the Supreme Court's decision in Mst. Subhadra v. Narsaji Chenaji Marwadi and various High Court decisions, which emphasized that the actual use of the land and entries in the revenue records are crucial in determining its nature.The High Court found that the lands were used for agricultural purposes up to the date of sale, with no permission obtained for conversion to non-agricultural use u/s 65 of the Bombay Land Revenue Code. The revenue failed to rebut the presumption arising from the actual use and revenue records.Conclusion:The High Court concluded that the lands were agricultural at the time of sale, and thus, the profit from the sale could not be taxed as capital gains. The Tribunal's decision was reversed, and the question was answered in favor of the assessee, negating the liability for capital gains tax. The Commissioner was ordered to pay the costs of the reference to the assessee.