TMI Blog2008 (6) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... st. 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.) Amount (Rs.) --------------------------------------------------------- Sale proceeds from sale of land on cent basis 4,44, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings in the case of intimation would be covered by the main provision of s. 147 and not the proviso thereto. Only one condition has to be satisfied. Failure to take steps under s. 143(3) will not render the AO powerless to initiate reassessment proceedings when intimation under s. 143(1) has been issued." 7. In the present case, the return filed by the assessee for asst. yr. 2001-02 was accepted under s. 143(1) and then the notice under s. 148 was issued before the expiry of four years from the end of the asst. yr. on 15th Dec., 2002. Therefore, we are of the opinion that the decision of the Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd., is squarely applicable to the facts of the present case. We respectfully follow the precedent and uphold the order of the CIT(A). The ground No. 2 is accordingly rejected. Ground No. 3 "3. Agricultural land 3.1 The CIT(A) erred in holding that the land sold by the appellant was non-agricultural land at the time of transfer and grossly erred in further holding that gains arising on transfer thereof gave rise to taxable capital gains. 3.2 The CIT(A) having undisputedly held that the land was situated beyond 8 kms. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possession of the assessee AOP, a total sum of about Rs. 20,000 was shown as agricultural income. 10. We have considered the rival submissions in the light of material on record. The profits and gains arising from the transfer of a 'capital asset' effected in a previous year is chargeable to income-tax under the head 'Capital gains' under s. 45 of the IT Act, 1961. The expression 'capital asset' has been defined in s. 2(14) of the Act. It is seen that upto asst. yr. 1969-70, 'agricultural land' was only excluded from the definition of 'capital asset' and for and from asst. yr. 1970-71, a new sub-cl. (iii) of s. 2(14) was substituted bringing within the term 'capital asset' agricultural land under certain situations mentioned in cls. (a) and (b) thereof. 11. In the present case, the AO and the CIT(A) were of the opinion that the impugned land, purchased and sold by the assessee, was not 'agricultural land'. The expression 'agricultural land' is not defined in the IT Act, 1961, and therefore it has to be given the meaning as understood in ordinary parlance. In this connection, the CIT(A) has placed reliance on the decision of the Gujarat High Court in the case of CIT vs. Siddhar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -agriculturist was for non-agricultural or agricultural user? (12) Whether the land was sold on yardage or on acreage basis? (13) Whether an agriculturist would purchase the land for agricultural purposes at the price at which the land was sold and whether the owner would have ever sold the land valuing it as a property yielding agricultural produce on the basis of its yield? 11.2 The Court has, however, noted that not all of the above factors would be present or absent in any case, that in each case, one or more of these factors may make appearance and that the ultimate decision will have to be reached on a balanced consideration of the totality of circumstances. This decision of the Gujarat High Court in the case of Siddharth J. Desai was approved by the Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim Ors. vs. CIT (1993) 114 CTR (SC) 467 : (1993) 204 ITR 631 (SC). 11.3 In the case of Smt. Sarifabibi Mohmed Ibrahim Ors. the Supreme Court held that the entering into the agreement to sell the land for housing purposes, the applying for and obtaining permission to sell the land for non-agricultural purposes. and its sale soon thereafter and the fact that the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of acquisition 5.1 The CIT(A) grossly erred in restricting the claim of deduction of Rs. 1,21,18,549 to Rs. 97,12,738, towards interest payment on moneys borrowed for the purpose of acquiring the capital asset, as 'cost of acquisition'. 5.2 The CIT(A) ought to have allowed the entire claim of interest payment amounting to Rs. 1,21,18,549 5.3 The CIT(A) erred in holding that compound interest payment to M/s Ambadi Enterprises Ltd. being interest on interest, is not allowable as deduction. 5.4 The CIT(A) ought to have allowed the claim of the appellant, since the payment of interest and usage of the amount for purchase of land were not doubted, even if it is compound interest." 13. It is seen that before the AO the assessee made an alternative claim for considering, in the computation of capital gains, a sum of Rs. 1,14,10,456, representing 'development expenses', as part of the 'cost of acquisition' and also for allowing the benefit of 'indexation' thereon. The AO rejected this claim for the reasons given in paras 24 and 25 of his order, as under: 24. There is no agreement between the lenders and the recipients as to the date of repayment, rate of interest for which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd instead allowed only the expenses relating to fencing, well and borewell and road formation. Land development expenses are incurred to add fertility and value to land, without which agricultural operations are not feasible. Hence the land development expenses in toto should be considered as part of the land cost and indexation allowed thereon." 15. The CIT(A), relying on the decision of the Madras High Court in the case of CIT vs. K. Raja Gopala Rao (2002) 172 CTR (Mad) 533 : (2001) 252 ITR 459 (Mad), has held that interest on borrowed funds formed part of the 'cost of acquisition' for the purpose of computation of 'capital gains'. He has noted in his order that the interest component forming part of the aforesaid 'development charges' was Rs. 1,21,18,549, and that part of it was 'compound' interest. The corresponding 'simple' interest was worked out at Rs. 1,10,91,394, out of which he allowed Rs. 97,12,738. in proportion to the area of land sold during the year. 15.1 The CIT(A) rejected the benefit of 'indexation' in respect of the aforesaid amount of interest. 15.2 The other components of the 'development charges' represented cost of fencing of Rs. 2,57,478, cost of layi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned land then the interest actually paid as per the terms and conditions agreed between the parties has to be allowed. In our opinion the reasons given by the CIT(A) for restricting the claim to 'simple interest' has no merit. However the AO will re-examine the claim in respect of interest, in the light of the directions given in the above para, and will pass a afresh order after giving adequate opportunity of being heard to the assessee. 16.3 It is seen that some balancing amount was claimed to have been incurred on manure/fertilizer, and on other day-to-day maintenance/administrative expenses. There was neither any detail of these alleged expenses nor was there any evidence that the claim was admissible under cl. (ii) of s. 48 of the Act, and therefore, it was rightly held by CIT(A) as not allowable. We, accordingly sustain his order on this point. 17. In the result both the appeals filed by the assessee are partly allowed. ITA Nos. 1909 and 1910/Mad/2006 (by Department) Asst. yrs. 2001-02 and 2002-03 18. In both these appeals the Department has raised identical grounds as under: 1. The order of the learned CIT(A) is contrary to law and facts of the case. 2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the cost of acquisition. As the assessee had not made the purchase with his own funds he was required to pay interest for the borrowed fund and secure the borrowing by creating a mortgage. Such a mortgage could not have been created earlier as he had to first acquire title before encumbering the same. Payment of consideration for the sale having been made with the borrowed funds, the borrowing directly related to the acquisition and the interest paid thereon would form part of the cost of acquisition." 21. The Madras High Court has held in the case of K. Raja Gopala Rao that if the borrowing of funds directly related to the acquisition of the asset then the interest paid thereon would form part of the 'cost of acquisition', whereas the benefit of 'indexation' of the 'cost of acquisition' is intended to prevent the payment of tax on gains caused by inflation. If an assessee does not have his own funds to buy an asset and he has to borrow, in that case the 'cost' that he incurs increases by the amount of interest that he has to pay on borrowed funds. The logic behind the ground Nos. 3, 4 and 5, raised by the Department, are not quite clear to us. 22. In our considered opini ..... X X X X Extracts X X X X X X X X Extracts X X X X
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