9911796707
TMI Blog1985 (7) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... ifurcated the land purchased from E.I.D. Parry & Co. as industrial area and farm section. According to the appellant, the industrial area comprises of one acre and 2362 sq. ft. and the farm section is comprised of 6 acres and 20 cents. There is no dispute regarding the liability for capital gains in respect of the industrial section. The dispute is regarding the capital gains arising on the sale of 6 acres and 20 cents alleged to be agricultural land by the appellant. The ITO came to the conclusion that-- (1) the appellant purchased the land to utilise for its business of manufacture of tiles ; (2) in the sale deed in favour of the appellant there is no mention that what was purchased by the appellant was an agricultural land ; (3) the extent of the land is about 6 acres while the claim for agricultural expenses is very meagre ; (4) no kist has been paid by the appellant; (5) the erstwhile watchman of the appellant-company, Iyyamperumal, taking the land on lease is not supported by any stamped lease agreement and enquiries reveal that he has not paid any lease amount to the appellant-company nor did he confirm categorically that he executed any lease deed ; and (6) the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and the lease deed executed by the watchman, Iyyamperumal, clearly go to establish the agricultural character of the land and in the absence of any evidence to show that the appellant has converted the land into non-agricultural land, the agricultural character of the land continues to be the same and the profits arising on the transfer of such a land are exempt from capital gains tax. 4. The contentions of the learned departmental representative can be summed up as under: (1) The appellant's predecessor in title E.I.D. Parry & Co. never held the land as agricultural land. The appellant-company was formed for manufacturing mosaic and other flooring tiles, cement pipes, store-ware and earthenware pipes, etc., and carrying on agricultural operations was not one of the objects for which the appellant-company was incorporated and since the appellant-company cannot carry on any operation not specified in the memorandum of association, it is obvious that the land in question could not have been purchased for any agricultural purpose or user and the land was never held or intended to be held by the appellant as agricultural land and the very fact that the land was sold by the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceed to apply the tests enunciated above to determine the general character of the land. 7. Environment and situation of land - The land in question is situated on the Suramangalam road outside the city limits of Salem Municipality and comes under Meyyanur Panchayat Board. On the north it is bounded by Salem junction and Yercaud road. It is now comprised in the Salem Postal Zone and has the pin code number 4. 8. Previous, present and future use to which the land is put and the intention of the appellant at the time of purchase - The land was originally purchased by E.I.D. Parry & Co. as early as 2-2-1898. E.I.D. Parry & Co., engaged in distillery and manufacture of sugar, could not have purchased the land for agricultural purpose. To a query by the ITO the company by its letter dated 19-2-1960 informed that it has sold the old 'Karkana building' to the appellant for Rs. 30,000. In the sale deed, executed by E.I.D. Parry & Co., there is absolutely no mention that the land sold by them to the appellant was an agricultural land. There is no evidence that E.I.D. Parry & Co., used this piece of land as an agricultural land or was paying any land revenue. Materials on record disclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (P.) Ltd., at survey No. 64, Meyyanur village, Suramangalam Road, Salem, comprises a compound wall, concrete roofed shed and lean to structure with asbestos sheets. The appellant has also put up a guest house near the factory. The factory building with the godowns, guest house, etc., were leased out by the appellant to another private limited company under the name and style of Meccano Floorings (P.) Ltd., for Rs. 12,000 per annum for one portion and Rs. 4,500 per annum, for another portion. Later, the appellant entered into a licence agreement with one Kandaswamy Chettiar allowing the latter the use of the crushing section in the factory for crushing magnesite, cuddapah stones and all types of other stone-lumps into chips and powder at the rate of Rs. 17 per ton of finished material. On 11-2-1959 the appellant entered into an agreement with a group of three persons (S/Shri J.R. Mehta, A. Kolandai Pillai and G. Venkataram) agreeing to sell for Rs. 2,50,0006.2 acres of land out of 6.76 acres purchased from E.I.D. Parry & Co. The questions that have to be considered are. (1) Was it sold as an agricultural land ? (2) Did the land retain the character of agricultural land at the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant, the land was cultivated with coconut and banana plants, and cholam and vegetables were grown. The expenses and income under the head 'garden maintenance' are as under : Assessment Income Expenses Year Rs. Rs. 1961-62 195 This includes Rs. 32.50 and Rs. 2.50 as building maintenance expenses and Rs. 45 as miscellaneous expenses........... 1962-63 1,109 Major part of the expenses relate to manuring and watering the plants and for gardening ........... 1963-64 2,282 This represents gardening expenses and garden supervisor's salary ........... 1964-65 1,032 This is stated to be expenses for repairs and maintenance of the garden ........... 1965-66 206 This is stated to be expenses for repairs and maintenance of the garden ........... 1966-67 Nil ........... 1967-68 Nil 275 1968-69 Nil 125 The income shown for the assessment year 1967-68 is stated to be the income received by sale of coconuts to the managing director. The income of Rs. 125 shown for the assessment year 1968-69 is alleged to be the lease amount paid by the watchman of the appellant-company. The existence of a garden, incurring of expenditure for the maintenance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh prima facie evidence of the agricultural character of the land. They cannot be taken as conclusive evidence for the agricultural character of the land. If we take the other factors and circumstances, such as its location, the user to which it was put by E.I.D. Parry & Co., the purpose for which the appellant purchased the land, the intention of the owner with regard to the purchase, user and sale of the land, singularly and cumulatively go to establish that the land in question was never held as an agricultural land or intended to be held as an agricutural land. 12. In CWT v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133, the question before the Supreme Court was whether property called 'Begumpet Palace' within the municipal limits of Hyderabad consisting of vacant lands of about 108 acres and also buildings enclosed in compound walls constituted 'agricultural land' within the meaning of section 2(e)(i) of the Wealth-tax Act, 1957. The Supreme Court observed : "... It is imperative to give reasonable limits to the scope of the 'agricultural land', or, in other words, this exemption had to be necessarily given a more restricted meaning than the very wide ambit given to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant point of time. Since the determinative factor is not the current user of the land, but the general characteristics of the land, as gathered from all the relevant circumstances, such as its situation, development and user of the lands in the adjoining areas, the intention of the owner with regard to the user of the land, the tests profounded by the Supreme Court in the case reported in Officer-in-Charge (Court of Wards)'s case can be applied in the present case. As a limited company has no power to do anything which is outside the purview of its memorandum of association and carrying on agricultural operation is not one of the objects for which the appellant-company was set up, it is obvious that the appellant could not have purchased the land in question for any agricultural purpose or user. Secondly, the land was purchased by the appellant not for carrying on any agricultural operation, but only to carry on its own manufacturing activity. As there is no evidence of appropriation or setting apart of the land for agricultural purposes and the condition of the land and the intention of the owner do not indicate connection with any agricultural purpose, we have to hold that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o encourage cultivation or actual utilisation of land for agricultural purposes. It is, therefore, imperative to give a reasonable meaning to the term 'agricultural land' and not to give an unrestricted scope for interpreting the term. 14. To sum up, the agricultural character of the land has to be determined on a consideration of not one but all the circumstances of the case. No single factor--even that of actual user for agricultural purpose--is conclusive. It is the cumulative effect of the entire circumstances that has to be considered. In doing so, we hold that the land in question does not constitute agricultural land so as to enable the appellant to claim exemption from the levy of capital gains tax. 15. Under section 45 of the Act income under the head 'Capital gains' is deemed to be the income of the previous year in which the transfer of title took place. So, capital gains can be assessed in the assessment year corresponding to the previous year in which the transfer, namely, vesting of title, took place. In the case of immovable property worth Rs. 100 and above, no title passes to the transferee until the conveyance by the executor is registered under the Indian Regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t must by taken to be the market value of the land on 23-1-1963. This contention was negatived by the Tribunal by holding that 'the cost of acquisition of the capital asset' was what it cost to the assessee to acquire the capital asset, i.e., the land, and since the land was acquired by the assessee prior to 1-1-1954, the assessee had the option under the provisions of section 55(2) of the Act to substitute the fair market value of the land on 1-1-1954. On this finding of the Tribunal, the question referred to the High Court was : "Whether in computing the capital gains, the assessee is entitled to deduct from the sale proceeds the market value of the land sold as on 1-1-1954 or the market value of the land as on 23-1-1963, when the lands were converted into non-agricultural lands ?" The High Court answered the question against the assessee in the following words : "... Section 45 says that profits or gains arising from the transfer of a capital asset shall be chargeable to tax and section 48, clause (ii), then proceeds to add that such profits or gains shall be computed by deducting from the full value of the consideration of the transfer 'the cost of acquisition of the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 48(ii) : (1) The property, which on the date of acquisition was non-capital asset and subsequently became capital asset, must be deemed to have been acquired by the assessee as a capital asset only on that date. (2) The market value of the property on that date should be deemed to be the cost of such acquisition. The contention of the assessee would also introduce yet another legal fiction in section 55(2)(i), as pointed out by the High Court, that "the property which is transferred would become the property of the assessee only at one point of time and it could not become the property of the assessee as a non-capital asset at one point of time and as capital asset at another point of time". This will introduce a legal fiction in section 55(2)(i), viz., when the property, which was non-capital asset becomes capital asset, it must be deemed to become the property of the assessee for the purposes of section 55(2). In view of these weighty observations of the High Court and since the appellant's contention has the effect of importing two legal fictions--one under section 48(ii) and the other under section 55(2)(i), the contention raised on behalf of the appellant cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended that where capital investments have been converted to stock-in-trade, in computing the commercial profits in such cases, the market value of the property on the date of conversion is taken and on the same analogy, when a non-capital asset is converted into a capital asset, the market value of the property at the date of conversion should be taken for computing the capital gains. There is no reported case in support of the plea raised on behalf of the appellant. On the other hand, the Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel clearly negatives the plea of the appellant. 21. It was sought to be contended that the Legislature would not have intended that the enormous appreciation in value, which took place when the property was a non-capital asset, should be subjected to tax and this could not be brought within the taxation net by invoking section 48 and section 55(2). The intention of the Legislature must be gathered from the words used. It is well settled that what is unexpressed by the Legislature must be taken as unintended. As pointed out by the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case, 'we cannot presume a certain intention on the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee claimed to be an agricultural land. The ITO rejected the assessee's contention and brought to tax capital gains computed on this transfer of Rs. 2,28,902. He took the full value of the consideration at Rs. 2,50,000 and deducting therefrom the original cost of acquisition of 6.2 acres worked out the figure of capital gains at Rs. 2,28,902. On appeal, the AAC upheld the ITO's order. It is, thus, that the matter is in appeal before the Tribunal. 2. The assessee has raised several grounds of appeal, the substance of which reduces itself to two, namely, that assessment to capital gains of Rs. 2,28,902 is unjustified and that what is sold being agricultural land, capital gains were not attracted on the transfer at all. 3. Before us, the learned counsel for the assessee pointed out that the land when purchased was agricultural in nature. It has been used for agricultural purposes growing therein vegetables, raising coconut and banana plants, cultivating cholam, etc. The extracts maintained from the adangal register showed that cholam was cultivated in some part of the land. A lease deed executed by one Iyyamperumal clearly went to establish that the land has been leased out to him fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put at a particular point of time...." The Gujarat High Court in Rasiklal Chimanlal Nagri's case considered the meaning of 'agricultural land' with reference to certain plots of land situated in Ahmedabad in a wholly residential area with residential buildings around the plots. The area was covered by a town planning scheme and the land had ceased to be cultivated over two decades. The following obtains: "... The intention of the owner of the land to put it to any particular use at a given point of time cannot be the determining factor. Whether a land is agricultural land or not cannot depend on the fluctuating or ambulatory intention of the owner of the land. The criterion must be something more definite, something more objective, something related to the nature or character of the land and not varying with the intention of the owner as to the use to which he wants to put the land at a particular point of time. Of course when we say this we must not be understood to mean that the intention as to user is altogether an irrelevant consideration ; it is certainly a factor which would bear on the nature or character of the land but it does not afford a sole or exclusive criterion fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gricultural land...." 7. In CWT v. Narandas Motilal [1971] 80 ITR 39, the Gujarat High Court considered the question in the context of its earlier decision in Rasiklal Chimanlal Nagri's case and held that the land was agricultural land. They held as : "... If once the assessee becomes successful in showing that the land is consistently used for agricultural purpose throughout the relevant period, then that fact can be taken as furnishing some prima facie evidence to determine the character of the land in question. However, this may not be considered as sufficient looking to other facts and circumstances of the case. For instance, if building site which is situated in the midst of a fully developed residential locality is subjected to agricultural use then the prima facie presumption about the agricultural character of the land would at once be displaced...." 8. In Sri Krishna Rao L. Balekai v. Third WTO [1963] 48 ITR 472 (Mys.), the land was requisitioned in 1944 or 1945 for the purpose of locating a military aerodrome. The land had been levelled and an airstrip constructed thereon and for over 15 years the land was being used as an airstrip. On those facts it was held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a piece of land is agricultural or not does not depend on the intention of the owner to use the land for purpose of agriculture ; the criterion must be something more definite and more objective, something related to the nature or character of the land." In Smt. Sheela Devi's case, their Lordships of the Punjab High Court, not agreeing with the 'narrow test laid down' in Syed Rafiqur Rahman's case observed : "... If the Legislature had intended that it is only such land which should be treated as agricultural land for purposes of the Act which is actually under cultivation, there would be no difficulty in making a provision to that effect. It is indeed open to the Legislature to indicate that actual user of the land on the valuation date should be the basis of the decision, but no such provision has been made. In a case where land has been admittedly put to agricultural use till a day or a month or few months before the valuation date, the land would not cease to be agricultural, merely because it does not happen to be under the plough on the valuation date. Particularly, in a case of the type before us when it is admitted or proved that the land in dispute was agricultural land f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acter. But a current user is by no means conclusive....' The test, as we have already indicated, should be whether a prudent owner would embark on an adventure in agriculture in respect of the lands concerned. The prudent owner is the common man of the common law, sane and sensible, reasonable and responsible, averse to gambling and speculative experiments, but nonetheless. prepared for normal risks and legitimate expenditure." 11. In CWT v. P. Sankaran Nair [1976] 103 ITR 366, the Madras High Court had occasion to consider the question in connection with 17 acres and odd of land in Velachery village, Saidapet Taluk, Chingleput district, which the assessee purchased for a sum of Rs. 33,600 in 1955. The lands were covered by certain cowles. The Government wanted to encourage the planting of trees. The land was to be free of rent for 20 years from the date of grant. The holder of the cowle was at liberty to grow any fruit or forest trees or plantation for fuel. There were other considerations connected with the planting of trees, payment of irrigation rates, etc., and at the relevant period there were several palmyrah trees and palm trees on the said lands and the assessee was deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut that, although a mere wild or spontaneous growth of trees not involving the employment of any human labour or skill for raising them could not be agricultural income yet when there was a forest more than 150 years old which had been carefully nursed and attended to by its owners, the income would be agricultural. Stating that this is not a direct authority upon what is 'agricultural land', the Supreme Court held in Officer-in-Charge (Court of Wards)' case that the above decision nevertheless went a long way in helping us to decide what would be agricultural land. The following obtains: "... We think that this must be land which could be said to be either actually used or ordinarily used or meant to be used for agricultural purposes. In other words, 'agricultural land' must have a connection with an agricultural user or purpose. It is on the nature of the user that the very large number of definitions and authorities discussed by this Court in Raja Benoy Kumar Sahas Roy's case [1957] 32 ITR 466 (SC) have a direct bearing. In that case, this Court held that the wider meaning given to agricultural operations, such as breeding and rearing of live-stock, poultry farming or dairy far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crops or trees or for any other purpose of husbandry ; (8) the situation of the land in a village or in an urban area is not by itself determinative of its character." was the subject matter of appeal before the Supreme Court in Officer-in-Charge (Court of Wards)' case. Holding that it is not correct to give as wide a meaning as possible to the terms used in the statute simply because the statute does not define the expression, their Lordships of the Supreme Court held that it is imperative to give reasonable limits to the scope of the expression 'agricultural land'. The Supreme Court laid down the following tests : "... We agree that the determination of the character of land, according to the purpose for which it is meant or set apart and can be used, is a matter which ought to be determined on the facts of each particular case. What is really required to be shown is the connection with an agricultural purpose and user and not the mere possibility of user of land, by some possible future owner or possessor, for an agricultural purpose. It is not the mere potentiality, which will only affect its valuation as part of 'assets', but its actual condition and intended user which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarded as returning to its earlier nature. The Supreme Court stressed the importance of the actual condition and the intended user. These two tests cannot obviously be applied simultaneously. If actual condition is agricultural on a particular date, the intended user may be of no significance. But if the actual condition is not agricultural, the intended user may be decisive, e.g., where the land is tilled, irrigated say by putting up a pumpset, etc., the intended user would be agricultural and the land would also be agricultural. The nature of the land, thus, varies not only with the time but also with the person who owns it and uses it. 15. Applying the above principles to the facts of the present case, I agree with my learned brother that what the assessee sold in 1966 was non- agricultural land, a capital asset. Capital gains were clearly attracted. 16. I do not, however, agree with my learned brother that the capital gains should be computed at a figure of Rs. 2,28,902. The assessment to capital gains is made under section 45. The mode of computation of the income is specified in section 48; sections 49 and 50 of the Act relate to the determination of cost in certain cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1922 (11 of 1922) or any Act repealed by that Act or under executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force, the provisions of sections 48 and 49 shall be subject to the following modifications: (1) The written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset. (2) Where under any provision of section 49, read with sub-section (2) of section 55, the fair market value of the asset on the 1st day of January, 1964, is to be taken into account at the option of the assessee, then, the cost of acquisition of the asset shall, at the option of the assessee, be the fair market value of the asset on the said date as reduced by the amount of depreciation, if any, allowed to the assessee after the said date, and as adjusted." 17. The income chargeable under the head 'Capital gains' should be computed by reducing the cost of acquisition of the capital asset and costs of improvement, etc., from the full value of the consideration received. The expression used is 'cost of acquisition of the capital asset'. What is the cost of acquisition of the 'capital asset' where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale here. The High Court did not create any legal fiction of a sale when it took the market value as on April 1, 1945, as the proper figure for determining the actual profits made by the assessee. That the assessee later sold the shares in pursuance of a trading activity was not in dispute ; that sale was an actual sale and not a notional sale ; that actual sale resulted in some profits. The problem is how should those profits be computed ? To adopt the language of Lord Radcliffe, the only fair measure of assessing trading profits in such circumstances is to take the market value at one end and the actual sale proceeds at the other, the difference between the two being the profit or loss as the case may be. In trading or commercial sense this seems to us to accord more with reality than with fiction." In New Jehangir Vakil Mills Co. Ltd. v. CIT [1963] 49 ITR 137, the Supreme Court considered Bai Shirinbai K. Kooka's case and since in the latter case the assessee was a dealer even earlier when the shares which he sold in the accounting year were originally purchased, the profits were computed as the excess of the sale price over the original cost price. In CIT v. Hantapara Tea Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bhai [1973] 91 ITR 393, the computation of capital gains in the case of goodwill. The concept of cost of acquisition of the 'capital asset' was examined there also. Their Lordships rejected the claim that the gains arising from transfer of goodwill is not taxable. The assessee in that case relied strongly on section 48 in support of his contention that since goodwill transferred did not cost anything to him in terms of money, it was not a capital asset the transfer of which fell within the mischief of the charging provision in section 45. Observing that "the object of the charging provision is to tax 'profits and gains' and this expression means real or net profits or gains and in order to arrive at real or net profits or gains, the cost which has been incurred by the assessee in acquiring the capital asset must be deducted from the full value of the consideration received by him", their Lordships considered the scope of the expression 'acquisition of the capital asset, and held that even in the case of a self-created asset only any cost incurred by the assessee in creating or producing it would represent the cost of acquisition of such capital asset and would be deductible from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition of the capital asset' is concerned, the earlier decision of the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case should, thus, be regarded as no longer good law. The observations of Sarkar J., in his minority judgment in Bai Shirinbai K. Kooka's case: "... If you cannot distinguish a business from its proprietor, then the cost of a thing for the purpose of the business would be its value at the time the proprietor of the business acquired it. Such value from a businessman's point of view would in my opinion be the value for which he acquired it when he did so for value, or its market value on the date of acquisition, when he paid no value for it." conforms to the decision of their Lordships of the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case. Their Lordships' view that adoption of the market value introduces a fiction runs counter to the observations in the majority judgment in Bai Shirinbai K. Kooka's case: "In a trading or commercial sense this (i.e., adoption of the market value) seems to us to accord more with reality than with fiction." In fact, their Lordships themselves in the subsequent case of Mohanbhai Pamabhai set out the object of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its transfer has to be brought to charge to capital gains tax. Such a levy will not be a tax on profits or gains but, in substance, a tax on the capital value of the asset. The capital value of goodwill is charged to tax under the Wealth-tax Act, 1957. Wealth-tax is an annual recurring tax. When there is an annual recurring tax on the capital value of goodwill, it will be unfair to levy another tax calling it as capital gains on the same value of the goodwill in the same assessment year, merely because the goodwill has been transferred for consideration." What is stated above in connection with the assessment of goodwill, a self-generated asset, would apply with equal force to the concept of 'cost of acquisition' adopted for computing capital gains in a case where agricultural land became a capital asset during the course of years. 23. Apart from the above, sections 48, 49 and 50 would also support the view taken above of adopting the market value as the cost of acquisition. In section 48(ii) the Legislature has purposely used the words 'the cost of acquisition of the capital asset'. [Emphasis supplied]. If the intention was to adopt the cost of acquisition of the particular prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere held by the assessee ; (ii) In respect of capital assets other than those mentioned in clause (i), the period for which any capital asset is held by the assessee shall be determined subject to any rules which the Board may make in this behalf ;" Reference is specifically made in the above provision to 'a capital asset held by the assessee' for a period. The expression used is not 'an asset'. If a non-capital asset is held for some time and it becomes converted into a capital asset and the assessee holds the same after such date of conversion for not more than 60 months immediately preceding the date of the transfer, this would constitute the transfer of a short-term capital asset and not a long-term capital asset. The provisions of Explanations (i) and (ii) also confirm the above. If the nature of the asset, whether capital or not, is not relevant for either computation of capital gains or even consideration of the asset as a short-term capital asset, clause (a) of Explanation (i) excluding the period subsequent to the date on which the company goes into liquidation would be meaningless. If a share is a capital asset, the assessee's interest in the company even after its liqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of land accompanying the old factory building would be a good portion of the purchase price. In the outskirts of Salem town completely barren land, useless for any purpose, would certainly not have cost this amount as was paid by the assessee- company. It is, therefore, clear that this was not barren land but cultivable or cultivated land. The price paid by the company more or less approximates to the likely cost of the agricultural land in the area during that period--that is, a few thousand rupees per acre and not a few hundreds per acre which would be the price of barren land. The assessee purchased this land with buildings in an auction. It is never denied that the assessee-company was a manufacturer of tiles, bricks, etc. But it is also indicated that at no stage clay or other materials from this land has been or could be taken or utilised for the purpose of the assessee's factory. It, thus, means that apart from the factory building and the godowns attached to it, the remaining 6 and odd acres of land was clearly not useful to the assessee for its business of the making. Why the assessee-company started its business of the making in Salem is beyond our purview. But it is cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which some sort of cultivation seems to have been continued even later. It may be to find out the extent of cultivation and the date up to which the nature of the land was continued as agricultural, the persons who have given evidence such as the village karnam, the alleged tenant Iyyaperumal, etc., would require to be examined. It could, however, be stated that by 1966 when the assessee entered into an agreement for the sale of this property, it had clearly given up all ideas of cultivation. It had also undertaken to perform the non-agricultural activities referred to in the agreement of sale. The latest date, therefore, on which an inference of conversion into non-agricultural land can be made would be the date of this agreement. The market rate on that date obviously is Rs. 2,50,000. It may be that on going into the details of the case, further evidence would be forthcoming to show that the land had been converted either by way of 'actual condition' or 'intended user' (as laid down by the Supreme Court), on a prior date. I, therefore, think in the interest of justice that the matter must go back to the AAC to find out the particular date on which such conversion took place. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "As regards the jurisdiction of the Tribunal to rectify the error in the manner in which the Income-tax authorities had proceeded, we find that the Tribunal had jurisdiction to find out how the capital gains have to be arrived at having regard to the provisions of the law. The Tribunal cannot perpetuate an error if it had crept into the orders of the authorities below." This observation and also similar observations in Abdul Rahim's case Tax Case No. 76 of 1975 dated 23-2-1977 support the view above. In the present case, grounds of appeal No. 1 in fact covers the entire ground. It is, therefore, not only correct but absolutely necessary for the Tribunal to come to a finding as to whether the assessee is taxable on an income and if so, as to the exact extent of the income so taxable. 28. For statistical purposes, the appeal is partly allowed. The members having differed, the following question is referred to the President for reference to the Third Member : "Whether, on the facts and in the circumstances of the case, the capital gains assessable for the assessment year 1968-69 would be Rs. 2,28,902 or any lesser amount ?" Per Shri D. Rangaswamy, Vice President - This appeal has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the sale of this property, it had clearly given up all ideas of cultivation and it had also undertaken to perform the non-agricultural activities referred to in the agreement of sale. According to him, the latest date on which an inference of conversion into non-agricultural land can be made would be the date of this agreement. The market rate on that date was Rs. 2,50,000. He finally found it necessary in the interests of justice to send the matter to the AAC to find out the particular date on which such conversion took place as, according to him, it may be that on going into the details of the case further evidence may be forthcoming to show that the land had been converted either by way of 'actual condition' or 'intended user'. 3. The question as referred to me and quoted above prima facie appears to be a general question rather than pinpointing the real point of difference which was with reference to the definition of the cost of acquisition. The department's case was that the Judicial Member has categorically held that the land sold was never from the inception an agricultural land. For this purpose he referred to page 6 of the Judicial Member's order where he has refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that was given for the first time and no reasons have been given as to why these documents have not been produced earlier and why they should be admitted at that stage. As against the above view of the Judicial Member with regard to the actual user of the land, the Accountant Member has taken the very same factors into consideration and wanted to remit the matter back to the AAC to find out when these activities which testify the agricultural user of the land ceased. In this connection, the question as to what the assessee purchased was an agricultural land or not is a matter that has to be firstly decided. Mr. Ramgopal, appearing for the assessee, relied on the same adangal register to show that in column 6, which refers to the name of the patta holder cultivating the land, the old vendor's name, 19, East India Sugar Factory has been mentioned. According to the assessee's counsel, that shows that the old company was having that as an agricultural land. With these evidences as well as the reference in the original agreement of sale between the assessee- company and E.I.D. Parry & Co. entered on 11-2-1959 where in paragraph No. 5 of the deed there is a specific reference to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o adopt the same arguments as advanced by Shri Mehta in that case. In the abovementioned case, by my order dated 23-1-1978 I have already taken the view that this matter should go back to the original Bench to consider the applicability or otherwise of the circular in question. Since in any case, as mentioned earlier, I am sending this appeal back to the Bench to consider remitting also consider the applicability or otherwise of the circular in question also the matter back to the AAC for examination of the evidences, they may and give their finding on that. 8. After the Bench hears on the above points and if there is still need to refer to the Third Member the same question of difference, the Bench may remit the file back to him for dealing with the point of difference. THIRD MEMBER ORDER Per Shri T.D. Sugla, President - On a difference between the learned members who heard the appeal originally, the following point has been stated : "Whether, on the facts and in the circumstances of the case, the capital gains assessable for the assessment year 1968-69 would be Rs. 2,28,902 or any lesser amount ?" The then President nominated Shri D. Rangaswamy, the then Vice President (Sout ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the questions that have to be considered are : (i) was it sold as an agricultural land, and (ii) did the land retain the character of an agricultural land at the time of sale and that in paragraph No. 16 of his order he has addressed himself to the question whether the cost of acquisition of the agricultural land is to be taken as the original cost of acquisition or its estimated cost on the date it became capital asset, that is, it became non-agricultural land, Shri Venkataraman, the departmental representative, fairly stated that he has nothing more to say and that he considered it to be his duty to point out what the learned Judicial Member had observed in the order in favour of the revenue. Be that as it may, on going through the entire order of the learned Judicial Member and having regard to the point of difference formulated by the learned Members. I am of the view that the learned Judicial Member had also proceeded on the basis that the land when purchased was an agricultural land, i.e., not a capital asset and that it was a capital asset, i.e., non-agricultural land, when sold during the previous year. Since this has also been the basis of the order of the learned Accounta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m capital gains. What is important is the date of conversion into capital asset. If the said date is important, he stated, the cost of acquisition on the date of conversion will have to be equally important. As stated earlier, the learned Judicial Member has felt that the issue was squarely covered by the decision of the Gujarat High Court. 5. There has also been controversy before me with regard to the circular issued by the CBDT dated 1-8-1969 in terms of which the cost of acquisition of the capital asset will be the market value of the agricultural land on the date of its conversion. This circular, it may be stated, has been withdrawn by the CBDT on 23-9-1971. According to the counsel for the assessee, it is not open to the CBDT to withdraw the circular retros- pectively and the effect of withdrawal of the circular will be that the earlier circular will not apply to the previous years commencing thereafter. For this purpose, the learned counsel has placed reliance on the decisions of the Kerala High Court in the cases of CIT v. B.M. Edward, India Sea Foods [1979] 119 ITR 334 (FB) and CIT v. Geeva Films [1983] 141 ITR 632. According to the departmental representative, however, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of any other High Court or the Supreme Court where a contrary view could have been taken has been brought to my notice. Having regard to this aspect of the matter, I have carefully gone through the circular issued by the CBDT on 1-8-1969 being Instruction No. 88 and Circular No. 12/10/68-IT(A-II) where following the Supreme Court's decision in the case of Bai Shirinbai K. Kooka, the CBDT has taken the view that for the purpose of computing the surplus liable to capital gains tax, the market price of the land at the point of time when the agricultural land became capital asset should be taken. There is then another circular dated 23-9-1971 being Instruction No. 324 and Circular No. 207/13/71-IT(AT-I), where following the Gujarat High Court's decision in the case of Ranchhodbhai Bhaijibhai Patel, the CBDT has withdrawn the above circular and directed that the cost of acquisition of the property originally and not the market value of the property on the date of its conversion should be taken for the purpose of computing the surplus liable to capital gains tax. The year involved before me is the assessment year 1968-69. The first circular was, thus, not in operation during the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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