TMI Blog1973 (4) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... o the share of Shri Shiv Shanker Lal (who will be hereinafter referred to as "the assessee"). On June 25, 1961, the assessee, his wife, his son and his daughter-in-law formed a company known as New Delhi Theatres Private Ltd. The assessee, his wife and his son held 10 shares each and the assessee's daughter-in-law held 5 shares in this company. On July 15, 1961, the assessee sold 6,120 sq. yards of land out of Amba Prasad Garden along with the garden house situated therein to the company for Rs. 93,450. On August 25, 1961, the assessee sold 5,678 sq. yards from out of the remaining portion of the land to M/s. Ganesh Flour Mills Company Ltd. at the rate of Rs. 60 per sq. yard. In the income-tax return filed by the assessee for the assessment year 1962-63, the relevant previous year being the year ending July 14, 1961, the assessee declared a net income of Rs. 21,270 and a capital loss of Rs. 54,060. In computing this loss, the assessee had deducted Rs. 93,440, the amount for which the property was sold to the company, from Rs. 1,50,000, which, according to the wealth-tax return of the assessee, was the value of the property. Although the assessee had claimed a capital loss in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have arisen out of the order of the Tribunal. Although the order of the Tribunal was in favour of the assessee, the latter felt aggrieved by the finding of the Tribunal that the assessee and the company to whom the assessee had sold the property were two separate entities and that the assessee had not transferred the land to himself. Therefore, the assessee also filed an application before the Tribunal under section 256(1) of the Act to refer certain questions of law to this court. On a consideration of these applications, the Tribunal has referred the following questions to this court under section 256(1) of the Act : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the land in question was an agricultural land on the date of its sale to M/s. New Delhi Theatres Private Ltd? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions contained in section 52 of the Income-tax Act, 1961, were not applicable to the facts of the case? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of fact and that the finding of the Tribunal on this question is binding on the High Court and even if the question whether a particular property is an agricultural land is referred to the High Court, the High Court should decline to answer this question. In support of his contention that the finding of the Tribunal that a particular property is an agricultural land is a question of fact, he has referred to a decision of the Kerala High Court in Krishna Iyer v. Addl. Income-tax Officer and a decision of the Punjab and Haryana High Court in Commissioner of Wealth-tax v. Smt. Sheela Devi and in support of his contention that the High Court should decline to answer questions of fact even if referred to by the Tribunal, be has cited a decision of the Supreme Court in Commissioner of Income-tax v. Smt. Anusuya Devi. In the Kerala High Court case, it was observed as follows : "Whether a piece of land is agricultural in character or a capital asset as defined in section 2(4A) of the Act is essentially a question of fact." In the case before the Punjab and Haryana High Court, it was observed as follows : " The question whether a particular piece of land is or is not 'agricultural l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich, according to the Supreme Court, the High Court should decline to answer. Capital asset as defined in section 2(14) of the Act means property of any kind held by an assessee but does not include agricultural land in India. The word "agricultural land" itself is not defined in the Act ; but "agricultural income" is defined under section 2(1) of the Act as follows : " 'agricultural income' means- (a) any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such ; (b) any income derived from such land by- (i) agriculture; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market ; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of, this sub-clause ; (c) any income derived from any buildi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a very relevant factor to be considered for the purpose of determining whether it is agricultural land. As already stated, there is voluminous case law on this subject and it would neither be necessary nor desirable to review the entire case law. It would be sufficient to take note of some of the important decisions. In two of the earlier decisions, namely, Sarojinidevi v. Sri Krishna and Megh Raj v. Allah Rakhia, the expression "agricultural land" was interpreted in its wider significance as including lands which are used or which are capable of being used for raising any valuable plants or for any other purpose of husbandry. According to these decisions, the actual user of the land would not be a relevant factor and if the land is capable of being used for agricultural purposes, it would come within the expression "agricultural land". These two decisions were noticed by the Supreme Court in Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy and the Supreme Court while recognising the force of the above opinions did not, however, press them into service for deciding the question before it, namely, the meaning of the expression "agricultural income" as defined in article 36 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the field and is restricted to cultivation of the land in the strict sense of the term, meaning thereby tilling of the land, sowing of the seeds, planting and similar operations on the land. These are basic operations and require the expenditure of human skill and labour upon the land itself. Those operations which the agriculturist has to resort to and which are absolutely necessary for the purpose of effectively raising produce from the land, operations which are to be performed after the produce sprouts from the land, e.g., weeding, digging the soil around the growth, removal of undesirable undergrowth, and all operations which foster the growth and preservation of the same not only from insects and pests but also from depredation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market, would all be agricultural operations when taken in conjunction with the basic operations. The human labour and skill spent in the performance of these subsequent operations cannot be said to have been spent on the land itself. The mere performance of these subsequent operations on the products of the land, where such products have not been rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alth-tax a Division Bench of the Gujarat High Court considered the meaning of the expression "agricultural land" under the Wealth-tax Act. The very wide interpretation put on the expression "agricultural land" in Sarojinidevi's case and the case of Megh Raj was also canvassed before the High Court, but it was held that that interpretation did not apply to agricultural land under the Wealth-tax Act. The High Court enunciated the following tests for determining whether a particular land is agricultural land : " (1) 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 : (2) Whether a particular land is agricultural land or not must depend on the general nature or character of the land, and various factors would have to be taken into account ; and (3) Development and use of the lands in the adjoining area and the surroundings and situation of the land, would be an important factor which would have a bearing on the question whether the land, is agricultural land or not." In the case of Smt. Manyam Meenakshamma's case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g it unfit for immediate cultivation ; (5) if land is assessed to land revenue as agricultural land under the State revenue law, it is a strong piece of evidence of its character as agricultural land ; (6) mere enclosure of the land does not by itself render it a non-agricultural land ; (7) the character of land is not determined by the nature of the products raised, so long as the land is used or can be used for raising valuable plants or crops or trees or for any other purpose of husbandry ; and (8) the situation of the land in a village or in an urban area is not by itself determinative of its character." In Syed Rafiqur Rahman v. Commissioner of Wealth-tax, a Division Bench of the Patna High Court agreed with the principles laid down by the Gujarat High Court in Rasiklal Chimanlal Nagri's case already referred to, and supplemented them with the following observations : " It is quite obvious that the owner may use a vacant piece of land either for cultivation or as a building site, but naturally the character of the land cannot be solely dependent on his intention to use the land as such. The question whether the land is agricultural land or not cannot depend on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a 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." From a review of the above case law on the subject, the legal position in respect of the definition of agricultural land under section 2(14) of the Act can be expressed as under : The very wide interpretation of the terms "agricultural land" put by the Madras High Court in Sarojinidevi's case and by the Federal Court in the case of Megh Raj, namely, that any land which is capable of being used for agricultural purposes even if it is not so used at any time is agricultural land, has not been accepted without reservation or qualification by any High Court, although some of the High Courts have expressed the view that it was approved by the Supreme Court in Raja Benoy Kumar Sahas Roy's case. In order to come within t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of this property showed that out of the total extent of about 15 bighas of land, vegetables were grown on some portions of the land as shown below : " October, 1954 11-3/4 bighas March, 1955 10 bighas October, 1955 10-1/4 bighas March, 1956 2 bighas October, 1956 2-1/2 bighas March, 1957 3-1/4 bighas October, 1957 3 bighas March, 1958 3 bighas October, 1958 Nil March, 1959 2-1/2 bighas October, 1959 Nil March, 1960 Nil October,1960 Nil March, 1961 2 bighas." Against the column "kind of land according to detailed previous jamabandi" the land was described as "garden of canal water and Kothi". The Khasra Girdawari also describes the various kinds of vegetables which were grown on the land. As regards the area covered by the fruit trees, the Tribunal has merely stated that the fruit trees were scattered all around the house. From this observation, it cannot be said that the fruit trees stood on a definite and a separate portion of the land. The Tribunal has also found that before the assessee sold the land in question to the New Delhi Theatres Private Ltd., he had not made any application to the concerned authorities to convert the land from agri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material to show that the portion which was sold by the assessee to New Delhi Theatres Private Ltd. was treated differently by the assessee from the rest of the land and if there is material to show that this particular portion had different characteristics from the remaining land, then perhaps there might be justification to consider the character of this portion separately. But, apart from the fact that some portion of the land was sold to M/s. Ganesh Flour Mills and another portion sold to New Delhi Theatres Private Ltd, which transactions took place almost simultaneously, there is no other factor which would justify the treatment of the portions sold by the assessee to New Delhi Theatres Private Ltd. as being different in character from the rest of the land. The learned counsel for the revenue has strongly relied upon the following two factors in support of his contention that the property in question was a capital asset, namely : (1) that in the wealth-tax returns filed by the assessee for several years, the assessee was showing this property as a capital asset and that even in the income-tax return filed by the assessee for the year 1962-63, the assessee showed this prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmining whether the transaction, assuming it to be a transfer of a capital asset, comes within the scope of sub-section (1) of section 52 of the Act. Sub-section (1) reads as under : " Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 45, the full value of the consideration for the transfer shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be the fair market value of the capital asset on the date of the transfer." There is no difficulty in holding that one of the two conditions prescribed under sub-section (1) of section 52 of the Act, namely, that the person who acquires the capital asset from the assessee is directly or indirectly connected with the assessee is satisfied in the present case. In fact, there is hardly any dispute on this point. Although the assessee and the company in which he was shareholder are two different legal entities, yet there is a close connection between the assessee and the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifference between the cost and market prices, viz., Rs. 62,404, as capital gains liable to be taxed. The Tribunal found as a faot that the sale was a real transaction which was given effect to and acted upon by the parties thereto and it was not made with the object of avoidance or reduction of tax liability but made for the purpose of benefiting the ladies and held that as the second condition for the application of the proviso to section 12B(2) had not been satisfied, the proviso could not be invoked. On a reference, the High Court held as under : " The proviso to section 12B(2) does not discourage or avoid honest transactions made out of love and affection or for other conceivable reasons on pain of being hauled up for having attempted to avoid or reduce the tax liability and on that basis made liable to tax on the difference between the consideration for the transaction and the fair market value nor does it treat what is not an actual capital gain as a deemed capital gain but it must be limited to escaped capital gain, which is so in truth and in fact, and is not intended to bring about a fictional gain on an assumption and charge the same." Although we find some difficulty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny special advantage in transferring the property for its full market value which, as a matter of fact, he did not receive from the company in terms of cash but for which he will have to incur additional expenditure by way of stamp duty and registration charges. It cannot be said on the material placed before the Tribunal that the Tribunal was not justified in coming to the conclusion that the transfer was not made with the object of avoiding the assessee's liability under section 45 of the Act. The only question now left for consideration is the effect of assessment to gift-tax of the difference between the full market value of the property and the consideration received by the assessee for the same. Certain categories of transactions are exempt from assessment under section 45 of the Act and one such category is the one covered by clause (iii) of section 47 of the Act, namely, "any transfer of a capital asset under a gift or will or an irrevocable trust". As already stated, the difference between the full market value of the property and the consideration mentioned in the document of sale has been assessed to gift-tax. In other words, this difference has been treated as a gift ..... X X X X Extracts X X X X X X X X Extracts X X X X
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