TMI Blog1970 (9) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... sell 2 acres 2 gunthas of land to Ajay Construction Company of Baroda and the remaining 30 gunthas of land was agreed to be sold to Bapunagar Co-operative Housing Society Ltd., by the agreement of sale dated 7th July, 1962. The land was being used for agricultural purposes by the assessee and it was, therefore, apparent that by reason of section 63 of the Bombay Tenancy and Agricultural Lands Act, 1948 (hereinafter referred to as " the Tenancy Act "), the assessee would not be able to sell any portion of the land to Ajay Construction Company or Bapunagar Co-operative Society Ltd., pursuant to the agreements of sale unless the land ceased to fall within the definition of " land " in section 2(8) of the Tenancy Act. The assessee accordingly applied to the Collector under section 65 of the Bombay Land Revenue Code, 1879, for permission to make non-agricultural use of the land and such permission was granted on 23rd January, 1963. The assessee admittedly ceased to carry on agricultural operations on the land from 23rd January, 1963, and completed the sales in favour of Ajay Construction Company and Bapunagar Co-operative Housing Society Ltd., on 29th April, 1963, and 15th July, 1963, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee was obviously dissatisfied and he, therefore, moved for a reference and, on his application, the following two questions of law, namely : " (1) Whether, on the facts and in the circumstances of the case, the lands sold by the assessee were agricultural lands within the meaning of section 2(14) of the Income-tax Act, 1961 ? and (2) If the answer to question No. (1) is in the negative, whether, in computing the capital gains, the assessee is entitled to deduct from the sale proceeds the market value of the lands sold as on January 1, 1954, or the market value as on January 23, 1963, when the lands were converted into non-agricultural lands ? " were referred by the Tribunal for the opinion of this court. The first question is whether the land sold by the assessee was " agricultural land " within the meaning of section 2(14) at the date when its different portions were sold. This question becomes material because under section 45 the charge to income-tax under the head " capital gains " is attracted only in respect of profits or gains arising from the transfer of a " capital asset " and " capital asset " is defined in section 2(14) to mean property of any kind held by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to use, there is usually not much difficulty in ascertaining the nature or character of the land. If the land is used for agricultural purposes, ordinarily it would be correct to say that the land is agricultural land and vice versa. But even this test may not always furnish a correct answer, for there may be cases where land admittedly non-agricultural (such as a building site) may be used temporarily for agricultural purposes. In such cases it would not be correct to say that merely because the land is in fact being used for agricultural purposes, it is agricultural land. But as a general proposition it may be stated without any fear of contradiction that ordinarily the actual user to which the land is being put would furnish, prima facie, evidence of the true nature or character of the land and, therefore, whenever a question arises whether a particular land is agricultural land or not, primarily regard must be had to the purpose for which the land is being actually used at or about the relevant time and that would ordinarily provide a satisfactory answer to the problem .......... Whether a particular land is agricultural land or not must depend on the general nature or charac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land or not is first to ascertain what is the use to which the land is being actually put. If it is being used for agricultural purpose or even if the agricultural use has ceased but it is apparent that the land is meant to be used for agricultural purpose, it would be agricultural land. If on the other hand the land is being used for non-agricultural purpose, it would be strong circumstance to indicate that the land is not agricultural land. Where, however, the land is not being actually put to any use, the test would be not whether the land is)capable of being used for agricultural purpose but whether, having regard to the various factors referred to in the above-quoted passages from the judgment in Rasiklal Chimanlal Nagri's case, the general nature or character of the land is such that it can be regarded as agricultural land. If we examine the question from this point of view, the conclusion is inescapable that the land sold by the assessee in the present case was not agricultural land at any time when one or the other portion of it was sold. It is no doubt true that prior to 23rd January, 1963, the land was used for agricultural purpose by the assessee but the agricultural us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was agricultural land, it ceased to be agricultural land and became non-agricultural land from 23rd January, 1963, and, therefore, at the time of sale, it was not agricultural land within the meaning of section 2(14) of the Act. The first question must accordingly be answered in the negative. That takes us to the second question which raises a controversy as to how capital gain is to be computed when a capital asset which is sold was not " capital asset " at the date when it was acquired by the assessee but subsequently became " capital asset ", as for example, in the present case, where the land being originally agricultural was not capital asset but acquired the character of capital asset on 23rd January, 1963, when it ceased to be agricultural land and became non-agricultural. To determine this controversy, it is necessary to refer to a few relevant provisions of the Act. Section 45 charges to tax " any profits or gains arising from the transfer of a capital asset effected in the previous year " and provides that such profits or gains shall be deemed to be the income of the previous year in which the transfer took place. It is clear on a plain reading of this section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty which is sold must be " capital asset " at the date of acquisition by the assessee, for, otherwise, these words would be rendered inappropriate and meaningless. But, this construction cannot be accepted and for two very good reasons. One is that it would introduce an additional condition of attracting the charge to tax which is not to be found in section 45 which is the charging section. The only condition for attracting the charge to tax which is laid down in section 45 is that the property transferred must be capital asset at the date of transfer. How the profits or gains arising from the transfer of such property are to be computed is laid down in section 48. Section 48 is not intended to lay down any further condition for attracting the charge to tax. It would not, therefore, be right to construe section 48, clause (ii), as providing that the property, besides being capital asset at the date of transfer as required by section 45, must also satisfy the definition of " capital asset " at the date of acquisition by the assessee. Moreover, such a construction would stultify the charging provision by unduly restricting the ambit and scope of the charge to those cases where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing from the transfer shall be liable to tax and you shall compute such profits or gains by deducting from the consideration for the transfer, what cost you to acquire the " capital asset ", that is, the property transferred. The difference between the consideration for the transfer of the property and the cost of acquisition of the property would represent the profits or gains arising from the transfer of the property and they would be taxable as capital gain under section 45. This appears to be the plain natural construction of the words used in section 48, clause (ii), read with section 45. There are also certain inherent indications in the Act which go to show that this is the correct construction. Section 55(2), clause (i), says that where the capital asset became the property of the assessee before the 1st day of January, 1954, the cost of acquisition in relation to the capital asset means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee. The words " where the capital asset became the property of the assessee " clearly show that the expression " capital asset " is used as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a capital asset and how it would be possible in such a case to determine the cost of acquisition. There are no two different acquisitions of property, one as a non-capital asset and the other as a capital asset. The property is acquired by the assessee only once and merely its character changes in the sense that, whereas, originally it was non-capital asset, it now becomes capital asset. It would indeed be doing violence to the language of section 48, clause (ii), to read the words " the cost of acquisition of the capital asset " in the manner suggested on behalf of the assessee. We would have to introduce an unwarranted fiction, namely, that when the property, which at the date of acquisition was non-capital asset, becomes capital asset, it is deemed to be acquired by the assessee as a capital asset on that date and, furthermore, though there can be no cost of such acquisition, the market value of the property on that date should be deemed to be the cost of such acquisition. There is no warrant for imposing such legal fiction on the plain language of section 48, clause (ii). The only justification which could be put forward on behalf of the assessee for reading the section in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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