2008 (6) TMI 280 - AT - Income Tax

Tribunal Rules on Land Classification, Indexation, and Interest Expenses for Capital Gains

Income-Tax Officer. Versus Chemmancherry Estates Company.

The Tribunal upheld the reopening of assessment under s. 147, classified the land as non-agricultural for capital gains taxation, denied indexation for ... Reassessment Issues Involved:1. Jurisdiction in reopening under s. 147.2. Classification of land as agricultural or non-agricultural.3. Indexation in computation of capital gains.4. Interest on borrowed funds as cost of acquisition.Summary:Issue 1: Jurisdiction in reopening under s. 147The CIT(A) upheld the reopening of assessment u/s 147. The Tribunal agreed, citing the Supreme Court's decision in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd., which clarified that taxing income escaping assessment under s. 143(1)(a) is covered by the main provision of s. 147. The Tribunal upheld the CIT(A)'s order, rejecting the assessee's ground.Issue 2: Classification of land as agricultural or non-agriculturalThe CIT(A) held that the land sold was non-agricultural at the time of transfer, making the gains taxable as capital gains. The Tribunal considered various factors, including the land's classification, usage, and surrounding development. The Tribunal referenced the Supreme Court's decision in Smt. Sarifabibi Mohmed Ibrahim & Ors., which established that land not used for agriculture and sold for non-agricultural purposes is not agricultural land. The Tribunal upheld the CIT(A)'s order, rejecting the assessee's ground.Issue 3: Indexation in computation of capital gainsThe CIT(A) denied the benefit of adding interest on borrowals for acquiring the land to the cost of acquisition for indexation purposes. The Tribunal noted that the interest component paid in the year of sale cannot be considered for indexation, as indexation is meant to account for inflation over time. The Tribunal upheld the CIT(A)'s decision on this point.Issue 4: Interest on borrowed funds as cost of acquisitionThe CIT(A) allowed part of the interest on borrowed funds as part of the cost of acquisition but restricted it to simple interest. The Tribunal remitted the matter back to the AO to examine the genuineness of the interest payments, including compound interest, and to pass a fresh order after giving the assessee an opportunity to be heard. The Tribunal upheld the CIT(A)'s decision to disallow expenses on manure/fertilizer and other maintenance/administrative expenses due to lack of evidence.Department's Appeals:The Department challenged the CIT(A)'s decision to allow interest on borrowed funds as part of the cost of acquisition. The Tribunal upheld the CIT(A)'s decision, citing the Madras High Court's ruling in CIT vs. K. Raja Gopala Rao, which held that interest on borrowed funds directly related to the acquisition of an asset forms part of the cost of acquisition. However, the Tribunal's decision is subject to the AO's examination of the genuineness of the interest payments.Conclusion:The Tribunal partly allowed the assessee's appeals and dismissed the Department's appeals, directing the AO to re-examine the genuineness of the interest payments and pass a fresh order accordingly.