2009 (1) TMI 358 - AT - Income Tax

Tribunal Confirms Land as Agricultural, Not Capital Asset; Dismisses Department's Appeal on Rs. 1.52 Cr Gain.

The Tribunal upheld the CIT(A)'s order, determining that the land in question was agricultural and not a capital asset under Section 2(14) of the IT Act, ... Capital asset u/s 2(14) - agricultural land - scope of word “any Municipality” used in definition - CIT(A) deleted the addition, computed by the AO under the head 'Capital gain' - AO held that the assessee had not been able to satisfy any of the tests of agricultural land as laid down in CIT vs. Siddharth J. Desai [1981 (9) TMI 48 - GUJARAT HIGH COURT] - therefore, not a capital asset within the meaning of s. 2(14) - HELD THAT:- Assessee had assigned the land to one Shri Chander Bhan, caretaker. This caretaker cultivated the land in lieu of his services as watch and ward thereof. It was, therefore, that neither the assessee earned any agricultural income from the land, nor incurred any expenditure thereon. AO did not deem it appropriate to put the assessee to proof of its contention in this regard. Rather, he wrongly tried to shift the onus on to the assessee by holding that the contention of the assessee was without evidence. In his dual role as investigator as well as adjudicator, it was for the AO to call for evidence, which was not done. The land was sold on marla basis. AO had gone wrong in observing that in Punjab, land intended for agriculture is not purchased/sold in marlas. There is no basis for this finding. On the other hand, the Jamabandi produced by The assessee before the AO itself depicts the land to be in kanals and marlas. AO has also failed to support his observation that considering the investment and the possible return on account of agricultural produce, no agriculturist could purchase this land at the rate at which it was purchased or sold by the assessee. Moreover, even if this observation is taken as correct, this sole observation is not determinative of the character of the land. Therefore, it becomes amply clear that the 'municipality' referred to in s. 2(14)(iii)(b) is the very one referred in s. 2(14)(iii)(a). To reiterate, s. 2(14)(iii)(b) is unambigious inasmuch as it uses the expression 'referred to in item (a)'. Taking any other interpretation of the section, as has been done by the AO in the present case, would amount to nothing other than gross misreading and misinterpretation of s. 2(14)(iii)(b). Word 'municipality', it may be noted, has not been defined under the IT Act. Now, where a term has not been defined in a particular Central Act, one has to turn to its definition as given in the General Clauses Act of 1897, the purpose of which Act is, as per its preamble, of avoid superfluity of language in statutes wherever it is possible to do so, and to place in one single statute provisions as regards interpretation of words and legal principles which would otherwise have to be specified separately in many different Acts and Regulations. Now, in the present case, the Central Government issued Notification No. 9447/F. No. 164/3/87 by publication in the Official Gazette. in exercise of the powers conferred by s. 2(1A)(c), proviso, cl. (ii)(B) and s. 2(14)(iii)(b) of the Act. Sec. 2(1A), incidentally, deals with 'Agricultural income'. Sub-cls. (A) and (B) of s. 2(1A)(c) proviso, cl. (ii) are identical to items (a) and (b), respectively, of s. 2(14)(iii). In the aforesaid notification, the Central Government specified areas falling outside the local limits of municipalities all over India. This included the Municipalities of Phagwara and Jalandhar separately. Now, undisputedly, the land in question lies in village Khajurala, which falls in Tehsil Phagwara, District Kapurthala and is more than two kilometres away from Phagwara Municipality. The notification specifies areas upto two kilometres in all directions, from the municipal limits of Phagwara Municipality. So, according to the notification, areas upto two kilometres away from the local limits of Phagwara Municipality stand notified as falling outside its local limits. The land in question is admittedly more than two kilo metres from the local limits of Phagwara Municipality. It would not have fallen within the exemption provided by s. 2(14)(iii)(b), were it situate within two kilometres from the local limits of Phagwara Municipality. However, it is nobody's case that the land in question is situate in an area within two kilometres from the local limits of Phagwara Municipality. Rather, the AO's case is that though admittedly, the land is beyond the municipal limits of Phagwara, it is within eight kilometres of the municipal limits of Jalandhar City and so, it is outside the exemption of s. 2(14). When the area specified in Col. (4) of the Notification stands identified by the Central Government with Phagwara Municipality, the AO could not hold de hors the notification to bring it within the governance of Jalandhar Municipality. It is thus evident that it is the parent/jurisdictional municipality, which is responsible for the areas falling within its territorial jurisdiction and for the lands situate within such areas. Such control cannot be said to vest in any other municipality. It was only thus that the purchase and sale of the land in question was made through the Phagwara Revenue authorities and not the ones of Jalandhar. In the notification itself also, the areas falling outside the Jalandhar Municipality have been separately specified from those falling outside the Phagwara Municipality. Even the areas falling outside the Kapurthala Municipality have been separately specified. though Kapurthala is the District of which Phagwara is a Tehsil. The bye-laws applicable to the area within which the land in question is situate, are the bye-laws of Kapurthala District and not of Jalandhar District. The conclusion of the AO, therefore, is a non est conclusion, arrived at in oblivion of the settled law on the subject, statutory as well as precedent. CIT(A) has, ergo, correctly dissented from the conclusion of the AO that falling within eight kilometres from Jalandhar, the land in question acquires the nature of a capital asset within the meaning of s. 2(14). Therefore, CIT(A)'s order in this regard too is upheld finding no infirmity whatsoever therein. As such, it is seen that the assessee duly satisfies all the tests of 'agricultural land', as prescribed by Siddharth J. Desai's case[1981 (9) TMI 48 - GUJARAT HIGH COURT] Hence, the order of CIT(A) is confirmed in toto, rejecting the grievance raised by the Department. In the result, the appeal filed by the Revenue stands dismissed. Issues Involved:1. Classification of land as agricultural or capital asset.2. Applicability of Section 2(14) of the IT Act, 1961.3. Interpretation of the term 'municipality' in the context of Section 2(14)(iii)(b).4. Validity of the AO's reliance on the Inspector's report.5. Jurisdictional considerations regarding the land's location relative to Phagwara and Jalandhar municipalities.Detailed Analysis:1. Classification of Land as Agricultural or Capital Asset:The primary issue was whether the land sold by the assessee was agricultural land or a capital asset. The assessee argued that the land was agricultural, as evidenced by its classification in the Revenue records and the physical cultivation of crops. The AO, however, contended that the land was not used for agricultural purposes and was instead held for potential commercial exploitation. The AO's conclusion was based on several factors, including the short holding period, lack of agricultural income, and the land's sale in marlas, which is atypical for agricultural land in Punjab. The Tribunal found that the land was indeed classified as agricultural in the Revenue records and was used for agricultural purposes at the relevant time, satisfying the tests laid down in CIT vs. Siddharth J. Desai.2. Applicability of Section 2(14) of the IT Act, 1961:Section 2(14) defines 'capital asset' and excludes agricultural land unless it falls within certain specified areas. The AO argued that the land fell within the limits specified under Section 2(14)(iii)(b) because it was within eight kilometers of Jalandhar Municipality. The Tribunal, however, noted that the land was situated in village Khajurala, Tehsil Phagwara, District Kapurthala, more than two kilometers away from Phagwara Municipality, and thus did not fall within the specified urbanized areas under the relevant notification.3. Interpretation of the Term 'Municipality':The Tribunal extensively discussed the interpretation of 'municipality' as referred to in Section 2(14)(iii)(b). It was clarified that the term 'municipality' in both Section 2(14)(iii)(a) and (b) refers to the same entity. The AO's interpretation that the land fell within the limits of Jalandhar Municipality was deemed incorrect. The Tribunal emphasized that the notification issued by the Central Government specified areas within two kilometers from Phagwara Municipality, and since the land in question was beyond this limit, it did not fall within the definition of a 'capital asset.'4. Validity of the AO's Reliance on the Inspector's Report:The AO relied on an Inspector's report to conclude that the land was not used for agricultural purposes. The Tribunal found the report to be legally invalid as it did not name any specific persons from whom enquiries were made, rendering it a nullity in law. The Tribunal criticized the AO for not providing concrete evidence to rebut the assessee's claims and for shifting the burden of proof onto the assessee without proper investigation.5. Jurisdictional Considerations:The Tribunal discussed the jurisdictional aspects, noting that the land fell under the administrative control of Phagwara Municipality and not Jalandhar Municipality. The purchase and sale transactions were conducted through Phagwara Revenue authorities, and the applicable bye-laws were those of Kapurthala District. The Tribunal upheld the CIT(A)'s finding that the land did not fall within the jurisdiction of Jalandhar Municipality and therefore could not be considered a capital asset under Section 2(14).Conclusion:The Tribunal upheld the CIT(A)'s order, confirming that the land in question was agricultural and not a capital asset. The Department's appeal was dismissed, and the addition of Rs. 1,52,38,400 on account of short-term capital gain was deleted. The Tribunal's decision was based on a thorough analysis of the legal definitions, jurisdictional considerations, and the factual evidence presented.