TaxTMI 
TaxTMI 
2008 (6) TMI 280
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....measuring 44.415 acres was sold during the previous year relevant to asst. yr. 2001-02 for a consideration of Rs. 4,44,15,000. The balance of land was sold in the subsequent two years. It was claimed that the impugned land was 'agricultural land' within the meaning of cl. (iii) of s. 2(14) of the Act. Also, the assessee made an alternative claim, before the AO, in respect of interest on funds, borrowed for buying the impugned land, paid to the lenders/creditors, during the previous year relevant to asst. yr. 2001-02. 3.2 The return for asst. yr. 2001-02 was filed on 31st July, 2001 showing 'nil' income, which was processed/accepted under s. 143(1) of the Act. Subsequently proceedings were initiated under s. 147 by issue of notice under s. 148 on 15th Dec., 2002, and in the return filed in response to this notice, the total income was shown as 'nil'. In the assessment order passed under s. 147 for asst. yr. 2001-02 on 31st March, 2003, the total income was assessed at Rs. 2,79,36,856 as under: --------------------------------------------------------- Particulars Amount (Rs....
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....p; 2,79,36,856 --------------------------------------------------------- 4. The CIT(A) allowed part relief and his order has been challenged by the assessee as well as by the Department in these appeals. Ground No. 1 "1. The order of the CIT(A) inasmuch as it is against the appellant, is opposed to law and contrary to the facts of the case." 5. This ground is general in nature and does not require adjudication. Ground No. 2 "2. Jurisdiction in reopening under s. 147 2.1 The CIT(A) grossly erred in upholding the reopening of assessment under s. 147. 2.2 The CIT(A) ought to have appreciated that the AO did not have the jurisdiction to reopen the assessment by invoking the provisions of s. 148. 2.3, The CIT(A) ought to have appreciated that the entire reassessment was based on a change of opinion." 6. We have considered the rival submissions in the light of material on record. It was pointed out by Shri Shaji P. Jacob, the learned Departmental Representative that this issue was squarely covered in favour of the Department and against the assessee by the decision of Supreme Court in the case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P)....
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....w: - that the land sold by the assessee was 'agricultural land' within the meaning of s. 2(14)(iii) of the IT Act, 1961. - that Chemmancherry was a village Panchayat having a population of less than 10,000 and was situated at a distance of more than 8 kms. from the local municipal limits. - that the sale deed clearly spelt out that the land which was sold was 'agricultural land'. - that the land was purchased as 'agricultural land' and the assessee had carried on agricultural activities thereon. - that the assessee had never changed the usage of the land or converted it into non-agricultural land. - that the sale consideration was not liable to capital gains tax. 9. Shri Shaji P. Jacob, the learned Departmental Representative supported the orders of the lower authorities. The submissions made by him are summarized below: - that the members of the assessee AOP belong to one family, were engaged in business and were not a family of agriculturist. - that the land purchased by the assessee was barren land, having no irrigation facilities and was not fit for agricultural operation. - that in such a vast piece of land, there was only one borewell that too ha....
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....hether, the permission under s. 65 of the Bombay Land Revenue Code was obtained for the non-agricultural use of the land? If so, when and by whom (the vendor or the vendee)? Whether such permission was in respect of the whole or a portion of the land? If the permission was in respect of a portion of the land and if it was obtained in the past, what was the nature of the user of the said portion of the land on the material date? (6) Whether the land, on the relevant date, had ceased to be put to agricultural use? If so, whether it was put to an alternative use? Whether such cessor and/or alternative user was of a permanent or temporary nature? (7) Whether the land, though entered in revenue records, had never been actually used for agriculture, that is, it had never been ploughed or tilled? Whether the owner meant or intended to use it for agricultural purposes? (8) Whether the land was situate in a developed area? Whether its physical characteristics, surrounding situation and use of the lands in the adjoining area were such as would indicate that the land was agricultural? (9) Whether the land itself was developed by plotting and providing roads and other facilities? ....
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....not fit for irrigation, that the land was situated in a developed area where industries and colleges were coming up, that the land was sold by the assessee AOP to a co-operative housing society for construction of houses, that during a period of nine to ten years that the land was in possession of the assessee AOP, a total sum of about Rs. 20,000 was shown as agricultural income. In view of above discussion, we are of the considered opinion that the decision of the Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim & Ors. is squarely applicable to the facts of this case. Therefore, we follow the precedent and uphold the order of the CIT(A). The ground No. 3 is, accordingly, rejected. Ground Nos. 4 and 5 "4. Indexation in computation of capital gains 4.1 The CIT(A) erred in holding that the appellant is not entitled for benefit of adding the interest on borrowals for acquiring the land and for carrying out necessary improvements on the land, in the cost of acquisition for the benefit of indexation, while computing capital gains. 4.2 The CIT(A) ought to have held that the appellant is entitled for benefit of replacing the cost of acquisition in the form of intere....
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....es to be disallowed. 25. Further, s. 43(1) as quoted by the AOP is only applicable for capital assets brought into business for earning revenue income and the expenditure incurred in the initial year of acquisition before putting the asset into use is capitalized and depreciation allowed. But the purchase cost is subject to cost indexation principle under the head capital gains. Principle of indexation is a modern and novel concept brought into account the element of inflation while computing cost. Even after indexing the cost of land for inflation, allowing further capitalization of interest payable would amount to artificially inflating the cost and therefore disallowed. 14. The AO's action was challenged by the assessee before the CIT(A) through the ground Nos. 21 and 22. as under: "21. The AO cannot suo motu conclude that since the benefit of indexation is allowed to the asset, the interest paid on loans taken to acquire such asset cannot be capitalized, is grossly unjust and unfair. It is agreed that indexation of an asset is to take care of the inflation in the cost of the asset over a period of time. But, correlating it with interest on borrowing to bring the asset ....
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....egard to the rate of interest, and the date of repayment. The AO has expressed serious doubts about the genuineness of the arrangement of the raising of funds on which interest was allegedly paid. The order of the CIT(A) is silent on the deficiencies pointed out by the AO. It has to be noted that the payment of interest to the lenders of funds allegedly took place after about ten years in the year of sale of land. In view of these facts we are of the considered opinion that the matter needs to be remitted back to the file of the AO. He has to examine the genuineness of the payment of interest. 16.1 The CIT(A) has noted in his order that the entire interest of Rs. 1,21,18,549 was claimed to have been paid during the previous year relevant to asst. yr. 2001-02. In other words the 'cost of acquisition' in this case had two components-one was paid to the owners of the impugned land at the time of its purchase and the other, representing interest on borrowings, was allegedly paid in the year in which the sale took place. The benefit of 'indexation' of the 'cost of acquisition' is intended to prevent the payment of tax on gains caused by inflation. Therefore, the above interest compon....
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....ould not form part of cost of acquisition for the purpose of indexation". 5. The CIT(A) has failed to appreciate the fact that the principle of indexation is a modern and novel concept and therefore even after indexing the cost of land for inflation, allowing further capitalization of interest would amount to inflating the cost which is against the concept. 6. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the AO restored. 19. The Department has challenged the order of the CIT(A), insofar as it relates to his decision that interest allegedly paid, on funds borrowed for buying the impugned land, would form part of 'cost of acquisition' for the purpose of the cl. (ii) of s. 48 of the Act. 20. It is seen that the CIT(A), while holding that interest paid on funds borrowed for buying the impugned land was part of the 'cost of acquisition', placed reliance on the decision of the Madras High Court in the case of CIT vs. K. Raja Gopala Rao. In this case the Court held as under: "Held, that the cost of acquisition to the assessee was not merely the amount that he had paid t....