TMI Blog1981 (12) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... stion constitutes agricultural income exempt under section 4(3)(viii) read with section 2(1) of the Indian Income-tax Act, 1922 ? (iii) Whether, on the facts and in the circumstances of the case, the assessment framed under section 143(3) of the Act of 1961, is without jurisdiction and unsustainable and should, therefore, be annulled ? (iv) Whether, on the facts and in the circumstances of the case, one-half of the property situated at No. 16, Aurangzeb Road, New Delhi, has been rightly held to be assessable under the head 'Property' ? and (v) Whether, if the answer to question No. (iv) is in the negative, the claim for repairs has been rightly restricted to Rs. 2,500 and that for depreciation to Rs. 42,000 ? " In I.T.R. No. 14/73, which relates to the assessment year 1962-63, Delhi Bench (A) of the Tribunal has referred the following questions of law for the decision of this court : " (i) Whether, on the facts and in the circumstances of the case, income from one-half of the property situated at No. 16, Aurangzeb Road, New Delhi, has been rightly held to be assessable under the head 'Property' and consequent restriction of depreciation and repair expenses is justifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while submitting the return the assessee claimed that the said amount of Rs. 1,65,660 should be excluded while computing its income from business inasmuch as the same represented capital receipt/profit by sale of agricultural land and, as such, it was not assessable to income-tax. The justification furnished by the assessee for claiming exemption of this amount as set out in a note submitted to the ITO briefly, is that the assessee was under an obligation to provide a sewer drainage system for the colony known as Rajouri Gardens which was developed by it earlier. While the assessee was able to lay internal sewers by about 1956, the problem arose of connecting them to some sewer main on Najafgarh Road. However, there were no municipal or other mains on Najafgarh Road and as the colony developed the problem for disposal of sewage became acute. As directed by the Delhi Development Planning Authority (in short the " D.D.P.A. "), which was set up in 1955, the assessee constructed a big septic tank at the junction of the Ring Road and Najafgarh Road. By this arrangement the sullage was retained in the tank but the effluents had to be drained out. The D.D.P.A. would not permit the effl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mere fact that in between the date of purchase and the date of sale, i.e., acquisition, agricultural operations were carried on the land in question would not convert the land into an investment. On appeal, the AAC too rejected the stand taken by the assessee. He observed that the question whether the land was agricultural land or not and the fact that until it was sold, the land was under cultivation were not relevant so long as the income arising from it could not be described as agricultural income within the meaning of s. 2 of the Indian I.T. Act, 1922. He was of the opinion that the land had been purchased with the intention of its being developed into a residential colony and the transaction in question could be treated as an adventure in the nature of trade and the profits therefrom were assessable as such. He held that it was equally irrelevant that the amount was not taxable under s. 12B of the Act as it constituted agricultural land. The assessee appealed to the Tribunal and urged the same contentions that were put forth before the ITO and the AAC. The Tribunal has not believed the version of the assessee that the lands in question bad been acquired in order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question whether, on the basis of primary evidentiary facts, the Tribunal has come to the correct conclusion with regard to the nature of the transactions and it being a trade venture allied to its normal business. In this context, we may simply advert to the observations of the Supreme Court in G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594, to the following effect (headnote): " Where the point sought to be raised on a reference is a pure question of fact, the finding of fact recorded by the Tribunal must be regarded as conclusive in proceedings under section 66(1). If, however, such a finding of fact is based on an inference drawn from primary evidentiary facts proved in the case, its correctness or validity is open to challenge in reference proceedings within narrow limits. The assessee or the Revenue can contend that the inference has been, drawn on considering inadmissible evidence or after excluding admissible and relevant evidence; and, if the High Court is satisfied that the inference is the result of improper admission or exclusion of evidence, it would be justified in examining the correctness of the conclusion. It may also be open to the party to challenge a conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question arose whether it was a trade venture in the sense that there was a business and profits from it. Affirming the answer given by the High Court on a reference made to it, the Supreme Court observed : "No doubt, this was only a single venture; but even a single venture may be regarded as in the nature of trade or business. When a person acquires land with a view to selling it later after developing it, he is carrying on an activity resulting in profit, and the activity can only be described as a business venture. Where the person goes further and divides the land into plots, develops the area to make it more attractive and sells the land not as a single unit and as be bought it but in parcels, be is dealing with land as his stock-in-trade; he is carrying on business and making a profit." These observations, no doubt would appear to be quite apposite in the instant case, so far as the trading activities and the business of colonisation of the assessee are concerned, it being not disputed that the assessee had been purchasing agricultural lands from time to time, develop them and carving out plots therefrom for resale on profit. Even otherwise, the assessee has been showing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for income tax. What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being-Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profitmaking?" Although on facts their Lordships negatived the plea raised by the assessee in the said case, the dictum laid down has been consistently followed in various judgments by the Supreme Court and the High Courts in India. As observed by Shah J., as he then was, in Janki Ram Bahadur Ram v. CIT [1965] 57 ITR 21 (SC), the question whether a transaction is an adventure in the nature of trade must depend u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevailing in the town of Calcutta, closed its business in iron scrap and hardware. The appellant purchased the jute press and the premises appurtenant thereto subject to litigation pending in the High Court, effected certain repairs and kept the factory in running condition, but made no attempt to start or organise the business of pressing jute, and his plea that he was not able to secure labour for working the press was not true. Soon after he bought the factory, the appellant received an offer from Ranada Prasad Saba to buy the factory and he immediately accepted the offer to sell it to him. These facts, in the view of the Tribunal, indicated that the appellant purchased the jute press, subject to litigation, with the sole object of reselling at profit at the earliest opportunity and, there, the transaction was in the nature of a trading venture. The High Court substantially agreed with this view. However, the Supreme Court did not approve of the finding of the Tribunal as confirmed by the High Court. It pointed out (p. 27) : " It is true that the appellant had put the factory in a working condition, but had not organized a jute pressing business, had not obtained licence for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income set out in s. 6 of the Act. It is nobody's case that purchase and sale of agricultural land as such was the business or one of the trading activities of the assessee. Indeed, the fact that agricultural operations were being carried on in the land in question throughout would warrant the inference that it was yielding income and, as such, it was being dealt with as a capital investment. Capital is the source of income and income is the fruit of capital judging from this aspect also, it is difficult to hold that the lands in question partook of the nature of stock-in-trade. We may now examine the decided cases adverted to by counsel for the parties. In P. M. Mohammed Meerakhan V. CIT [1969] 73 ITR 735 (SC), the facts were that the appellant had agreed with one A. V. George to purchase 477.71 acres of land forming part of an estate for Rs. 6 lakhs. He paid a part of the consideration but he did not have the resources either to buy or to cultivate the estate himself. So before the payment of the full price of the land he divided the estate into 23 plots and arranged for the sale of 22 plots to different purchasers while he retained the 23rd plot measuring about 104 acres f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involved in it are of the same kind, and carried on in the same Way, as those which are characteristic of ordinary trading in the line of business in which the venture was made." ' In Tebrau (Johore) Rubber Syndicate Ltd. v. Farmer [1910] 5 TC 658 (C Exchq ), the facts were somewhat similar to the one in hand. In that case a company was formed with the object of acquiring estates in Malay Peninsula and developing them by planting and cultivating rubber trees. Power was taken in the memorandum of association to sell the property and such a sale was contemplated in the prospectus issued at the inception of the company. Two estates were purchased, but for want of adequate capital, were sold to another company for consideration in the shape, mainly, of shares in the second company in excess of the capital expanded. Before the sale, however, a considerable part of the estates had been planted with rubber trees but no rubber had been produced and the first company had not reached the production stage. The company had thus not earned any income except what it got by the sale. This was claimed to be an increase of capital. However, the Surveyor of, Taxes relying, inter alia, on the Cali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt of Appeal. On further appeal to the House of Lords it was held that the rents were profits from ownership of land and assessment under Schedule A was the proper mode and they could not be treated as trade receipts of the company for purposes of Sch. D. The following extract from the speech of Lord Warrington of Clyffe is very pertinent (p. 316) " Assuming the memorandum of association allows it, and in this case it unquestionably does, a company is just as capable as an individual of being a landowner, and as such deriving rents and profits from its land, without thereby becoming a trader, and in my opinion it is the nature of its operations, and not its own capacity, which must determine whether it is carrying on a trade or not." The Supreme Court considered both the above-mentioned English cases in Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362, and commenting on the aforesaid passage observed (p. 370) : " ...... it is clear even from this passage that the deciding factor is not ownership of land or leases but the mature of the activity of the assessee and the nature of the operations in relation to them. The objects of the company must also be kept in view to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the details of this case. CIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65 (SC), is yet another case to which reference may be made with advantage. In that case, the respondent-company was formed primarily to take over the assets, in the Federated Malay States, of a firm. Between March and July, 1939, more than 3,000 acres of rubber plantations, several houses and open plots of lands of the aggregate value of 16,50,000 dollars, which were the assets of the firm, were transferred to the company, and in consideration thereof the partners of the firm were allotted shares of the face value of 6,60,000 dollars, the balance remaining outstanding as a debt due to the firm. On March 14, 1941, the company purchased the Lee Rubber Estate and on July 9, 1941, a house in co-ownership with another firm for 5,000 dollars, and, thereafter, no fresh acquisitions were made. Large amounts of money were spent on cultivation and development of the rubber and coconut estates and substantial income was derived therefrom. Year after year the company extended its planting operations. The plantations were not a compact block, and being unable to administer the far-flung estates effectively and economically, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny to whom the textile mill belonged. It was held that (headnote) : " The loss incurred by the sale of the 400 shares was, therefore, loss of a capital nature. Neither the circumstance that the appellant-company borrowed money at interest to purchase the shares nor the fact that it was a dealer in shares and was authorised by its memorandum of association to deal in shares, was of any effect. Nor could the appellant company by entering the shares of the mills in its statement of shares in which trading transactions were carried on alter the real character of the acquisition ". (Emphasis supplied) VR. KR. S. Firm v. CIT [1966] 60 ITR 425 (SC), is yet another case on which reliance was placed by the counsel for the Revenue. However, we find on a perusal of the same that the properties belonging to the assessee which bad been damaged during the Second World War were held to constitute its stock-in-trade and, therefore, the compensation received by the assessee in replacement of those assets was treated in its entirety as profits liable to tax. Thus, the case is distinguishable on facts. The above-mentioned authorities clearly illustrate and bring forth the relevant criteria for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it was a trading asset or a venture in the nature of trade. Having regard to the fact that prices of lands both urban and rural in and around Delhi have been soaring sharply in the post-partition era, the appreciation of the investment even in agricultural land was bound to be there. There was nothing abnormal about it. Hence we answer this question in the negative. Question No. (ii) in I.T.R. No. 34172 and question No. (iii) in LT.R. No. 14/73. As stated above, Delhi Bench (C) of the Tribunal has taken the view that the gains arising from the sale of an estate can be properly considered as income arising from the estate. In this view of the matter, therefore, the Bench held that the sum of Rs. 1,65,600 received by the assessee as compensation for the land acquired by the Government being agricultural income within the meaning of s. 2(1) of the Act, was exempt from tax. However, Delhi Bench (B) of the Tribunal has taken the contrary view holding that the amount of Rs. 47,085 received by the assessee as compensation for the acquired land in the subsequent year did not constitute agricultural income being neither revenue nor was it derived from land. Under the Act, income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Act meant by the distinction between de rent " and " revenue " is not quite clear. Rent is defined in s. 105 of the Transfer of Property Act as " money, share of the crops, service, or any other thing of value to be rendered periodically or on the specified occasions by the tenant to the landlord in consideration of the enjoyment of immovable property ". In other words, " rent " implies the idea of lessor and lessee Or landlord and tenant. Admittedly, that question does not arise in the instant case. So, we have to concentrate on the true meaning and import of the expression "revenue". This term again is not defined anywhere in the Act. In the absence of a statutory definition, the courts must take its ordinary dictionary meaning so long as it does not militate against any express provision of the statute. According to the Oxford Dictionary " revenue " is : " the return, yield or profit of any lands, property or other important source of income; that which comes to one as a return from property or possessions, specially of an extensive kind; income from any source but specially when large and not directly earned ". In Wharton's Law Lexicon the meaning assigned to the word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not define. It is expanded, no doubt, into 'income, profits and gains' but the expansion is more a matter of words than of substance. Income, their Lordships think, in this Act connotes a periodical monetary return coming in with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding any thing in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as 'capital'. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production." The aforesaid observations of the judicial Committee draw a clear distinction between " income " and " capital ", in that only a periodical monetary return yielded by the capital is to be treated as " income " even though it may take varied forms, for instance, produce of land or rent from property or interest on loan, etc. This connotation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e words 'rent or income' the Provincial Government are taxing something more than is permissible by the definition in the Incometax Act." Thus, according to the Full Bench, the word " revenue " must be treated as synonymous to " income " for the purposes of the Act. Similarly in Maharaja Pratap Singh Bahadur v. Province of Bihar [1949] 17 ITR 202, the Patna High Court reiterated that (p. 203): " Although in one Act 'income' is used, and in the other, the word 'revenue' there is no real difference in the two definitions. " In CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325, the Privy Council had to consider whether interest on arrears of rent payable in respect of land used for agricultural purpose was " agricultural income " or not. Their Lordships observed that (p. 328) : "Equally clearly the interest on rent is revenue, but in their Lordships' opinion it is not revenue derived form land. " (Emphasis supplied). The words underlined above clearly suggest that the expression revenue " has been used as being equivalent to " income ". In Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11ITR 513 (PC), the question for consideration was whether the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " income " is the return on the capital which is treated as it revenue ". In view of our answer to the first question that the agricultural land in the instant case did not constitute a trading asset or venture in the nature of trade and that it was just a capital investment it will follow as a necessary corollary that the compensation received by the assessee on its acquisition by the Government cannot be looked upon as " revenue receipt " as distinguished from a " capital receipt The definition of " agricultural income " in s. 2(1) of the Act itself speaks of rent, revenue, sale by a cultivator, or receiver of rent-in-kind of the produce raised or received by him, etc. It is conspicuously silent about the sale of the land itself. Indeed, as shall be presently seen, the sale of capital asset including agricultural land would yield what is called "capital gain" and not "income" as understood in common parlance. Before concluding, however, we may allude to Seventilal Maneklal Sheth [1968] 68 ITR 503 (SC), on which reliance has been placed by Delhi Bench (C) for coming to the conclusion that the compensation received by the assessee for acquisition of the land in question constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, while in the operation of a sale, gain is produced, which is still income, but in the Process the title to the asset is Parted with. Although the processes involved in the two cases are different, the gain which has resulted to the owner of the asset, in each case, is the gain, which has sprung up or arisen from the asset. There is hence no warrant for the argument that the capital gain is not income arising from the assets, but it is income, which arises from a source which is different from the asset itself." (Emphasis supplied). In view of the foregoing observations the Tribunal came to the conclusion that the gain arising from the sale of an asset can be properly considered as income arising from that asset. We are, however, of the opinion that the Tribunal has misread and misconstrued the above case. The proper approach to the solution of the question is to concentrate on the plain words of the definition of " agricultural income which connects in no uncertain language " revenue " with the " land from which it directly springs and stray observations in a case which has no bearing upon the present question does not advance the solution of the question. It has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorporated in s. 2(4A) specifically excludes any land from which income derived is " agricultural income ". In other words, agricultural land would have been a capital asset but for its specific exclusion from the definition of the expression " capital asset ". As a necessary corollary, it would follow that capital gain arising from the sale, exchange, relinquishment or transfer of agricultural land which is not a capital asset as envisaged in s. 12B of the Act will not fall within the ambit of even the extended definition of " income " in s. 2(6C) of the Act. That apart, the language of cl. (iii) of s. 2(4A) draws a clear distinction between " land " and the " income derived therefrom " and on its plain reading it is crystal clear that before any land can be excluded from the purview of capital asset income derived therefrom must be " agricultural income " within the meaning of s. 2(1) of the Act. So, such land must be the source of " agricultural income ". Surely, if the corpus is itself disposed of by way of sale or transfer, etc., it cannot be held by any stretch of reasoning that the sale proceeds would be " income " from it. To accept this position would be to unduly extend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the appellant and the ITO should consider proportionate expenses under the head " Business ". The details of the expenses on account of the repairs were examined by him and he felt that most of the expenses were incurred on renovation and reconstruction of the two properties, viz., 14 and 16, Aurangzeb Road, especially the one occupied by the managing director of the assessee. The bills indicated extensive alterations and renovations in respect of these properties and the main purpose of these renovations was to make the property fit for occupation by the managing director. Under the circumstances, he held that the expenses amounting to Rs. 92,874 were correctly disallowed by the ITO as capital expenditure. However, he was of the view that only the expenses on the portion occupied for business purpose would be entitled to depreciation. Accordingly, in the absence of separate accounts for the said portion, he estimated the capital expenditure upon it at Rs. 10,000 only. The estimate was made on the assumption that the out-houses could not have been renovated at great cost. The Tribunal considered the deductibility of Rs. 89,710 spent on repairs and, renovations, etc., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse, it is admitted that its managing director is using a portion of the property as dwelling house and is paying rent for the same. A perusal of s. 9 of the Act would show that the computation of income from property should in the normal course be under s. 9 and not under s. 10 of the Act. Since a specific head of charge is provided for income from ownership of house property, rents or other income from the ownership of house, the property cannot be brought to tax under any other head. In a way, therefore, assessment under this head is not only proper but obligatory. It is only when a building or a portion of it or land appurtenant thereto is occupied by the owner for his business, profession or vocation and the profits of the same are assessable to tax that the annual value in respect of such property or portion of it is not taxable under s. 9 of the Act. In such an event, notional rent is not allowed to the assessee in respect of the premises in computing the profits of the business, profession or vocation. However, we, do not think that there is anything in the language of s. 9 of the Act to warrant an inference that the possession of the assessee as owner of the property must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with the business that the assessee was carrying on. " In the instant case, the assessee has failed to bring on record any material to suggest that the motivation of letting a portion of 16, Aurangzeb Road, was facility of business in the sense that it was essential for better management and control of the business. Hence, we are in complete agreement with the view taken by the Tribunal in this respect and our answer to this question is in the affirmative. Question No. (v) in I.T.R. No. 34/72: In view of our answer to the foregoing question, this question does not, on its own terms, arise. Question No. (ii) in LT.R. No. 14/73 Counsel for the parties did not address any arguments on this question. Since Delhi Bench (B) was concerned with a different assessment year, although it was subsequent to the assessment year dealt with by Delhi Bench (C), we do not think that any legal obligation was cast on the former to follow the view expressed by the latter either as a precedent or otherwise. Of course, there can be no doubt that it had persuasive value in the sense that the Bench dealing with the subsequent year should not have ordinarily departed from the view taken earlier. We ..... X X X X Extracts X X X X X X X X Extracts X X X X
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