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TMI Blog1973 (4) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... 61, 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 respect of the sale of this property to the company implying thereby that the property was a capital asset, during the course of the assessment proceeding he claimed that this was not a capital asset within the meaning of section 2(14) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), as it was in the nature of agricultural land. The Income-tax of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 47(iii) were applicable to the facts of the case? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the fair market price of the land in excess of Rs. 15 per sq. yard actually received by the assessee which would be liable to income-tax under section 45 of the Income-tax Act, 1961, and would be liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 land' within the meaning of section 2(e)(i) of the Wealth-tax Act is necessarily a question of fact to be decided in the circumstances of a given case depending on the nature and character of the land, its environment, the use to which it has been previously put or is capable of being put, sometimes possibly the intention of the owner, its assessment or non-assessment to the land rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on : Provided that the building is on or in the immediate vicinity of the land, and is a building which the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aj 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 366(1) of the Constitution and section 2(1) of the Indian Income-tax Act, 1922. Some High Courts have expressed the view that the Supreme Court had approved of the interpretation of the expression "agricultural land" given in Sarojinidevi and Megh Raj's cases, but some other High Courts have expressed the contrary view, namely, that the Supreme Court had disapproved of the interpretation of the expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 raised on the land by the performance of the basic operations, would not be enough to characterise them as agricultural operations ; in order to invest them with the character of agricultural operations these subsequent operations must necessarily be in conjunction with and in continuation of the basic operations which are the effective cause of the products being raised from the land. The subsequent ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh 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, already referred to, the Division Bench of the Andhra Pradesh High Court, while expressing the view that the Supreme Court in the case of Raja Benoy Kumar Sahas Roy had not approved of the interpretation of agricultural land given in Sarojinidevi's case and the case of Megh Raj, and applied the same test which was laid down by the Supreme Court in Raja Benoy Kumar Sahas Roy's case for determining whether a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 fluctuating or ambulatory intention of the owner of the land. The criterion must be something more definite and 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. The intention of the owner, however, is not altogether irrelevant, but is a factor which would bear on the natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 the category of agricultural land, it must not only be capable of being used for agricultural purposes but should have been actually used as such at some point of time. A temporary non-user for agricultural purposes will not affect the character of the land but a permanent abandonment of user for agricultural purposes will affect the character of the land as agricultural land. The actual conversion of the land for a non-agricul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, 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 agricultural side to abadi side. On the basis of the above facts, the Tribunal has come to the conclusion that the land sold by the assessee to the company was agricultural land on the date of the sale. We are of the view that the Tribunal, was right in coming to this conclusion on the material placed before it. The land was described in the Khasra Girdawari as a garden. There is no evidence that, prior to the land being leased out to M/s. Ganesh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 property as a capital asset ; and (2) that the sale price of the portion of the property which was sold to M/s. Ganesh Flour Mills was fixed on the basis of Rs. 60 per sq. yard and even : the sale price for which the property in question was transferred by the assessee to the New Delhi Theatres Private Ltd. indicated that the property was sold as a capital asset and not as agricultural land. So far as the description of the property in the wealth-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 company inasmuch as the only other shareholders of the company are the assessee's wife, son and daughter-in-law. We may at this stage itself dispose of the contention of the assessee which is the subject-matter of question No. 6, namely, that the assessee and the company are one and the same person and that there cannot be a transfer or sale of the capital asset by the assessee to himself. In spite of the fact that the assessee and the other shareholders of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 in agreeing with the view expressed by the Madras High Court, namely, that the first proviso to section 12B(2) does not treat what is not an actual capital gain as a deemed capital gain but that 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 we find this difficulty in view of the clear language of the section as also the interpretation put upon it by the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility 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 under section 4 of the Gift-tax Act. It the gift referred to in section 47(iii) includes a gift under section 4 of the Gift-tax Act, then it would follow that the difference between the consideration and the full market value of the property is exempted from assessment under section 45 of the Act. The learned counsel for the revenue, however, contends that it would not be proper to adopt the meaning given to gift under the Gift-tax Act and to gift under clause (i ..... 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