Court rules agricultural lands not capital assets despite conversion, upholds tax exemption.

Case Name:

I.T.A Nos. 176/2015, 520/2014, 175/2015, 177/2015, 178/2015, 179/2015, 298/2015 - Commissioner of Income Tax, Bengaluru vs. M.R. Anandaram (HUF) and Others (High Court of Karnataka at Bangaluru)

Key Takeaways:

- Mere conversion of agricultural land does not change its character if actual use remains agricultural. - Factors like continued agricultural operations, deriving agricultural income, and physical characteristics are crucial in determining the nature of the land. - Inclusion of land in a planning authority's jurisdiction does not automatically make it non-agricultural. **Issue:** Whether the lands in question, although converted for non-agricultural purposes, can still be considered agricultural lands exempt from capital gains tax under Section 2(14) of the Income Tax Act. **Facts:** The assessees owned various lands that were converted from agricultural to non-agricultural purposes in 2004 but continued to be used for agricultural operations. In 2007, the assessees sold these lands. The Assessing Officer treated the sale proceeds as capital gains, but the ITAT ruled in favor of the assessees, holding that the lands retained their agricultural character. The Revenue Department challenged this decision in the High Court. **Arguments:** Revenue's Arguments: - The lands were converted for non-agricultural purposes in 2004. - The sale agreements and deeds mention the lands as converted lands. - The lands fall within 8 km of Devanahalli Municipality and the Bangalore International Airport Planning Area Authority (BIAPAA), making them non-agricultural under Section 2(14)(iii). Assessees' Arguments: - Despite conversion, the assessees continued agricultural operations and derived agricultural income, which the Revenue accepted. - Mere conversion does not change the character of the land; actual use and condition are crucial. - The lands do not fall within the notified 8 km radius from Bengaluru Municipal limits as per the 1994 notification. - BIAPAA is a planning authority, not a municipality, and its jurisdiction does not determine the nature of the land. **Key Legal Precedents:** - CWT vs. Officer-in-Charge (Court of Wards) [1976 AIR 579]: Agricultural land must have a connection with agricultural use or purpose. Actual condition and intended use are relevant. - Sarifabibi Mohmed Ibrahim vs. CIT [1993 Supp (4) SCC 707]: Multiple factors may be considered, and the ultimate decision depends on the totality of circumstances. - CIT vs. Gemini Pictures Circuit (P) Ltd [2004 (5) SCC 381]: The intended future use of the land is relevant in determining its agricultural character. - CIT vs. Smt. T. Urmila (Andhra Pradesh High Court): Mere inclusion of land in a planning authority's jurisdiction does not convert it into non-agricultural land. **Judgement:** The High Court dismissed the Revenue's appeals and ruled in favor of the assessees. The key reasons were: 1. The ITAT, as the final fact-finding authority, had inspected the lands and found continued agricultural operations, including fruit-bearing trees aged 25-30 years. 2. The assessees had derived and offered agricultural income from these lands for multiple years, which the Revenue had accepted. 3. The lands did not fall within the notified 8 km radius from Bengaluru Municipal limits as per the 1994 notification. 4. BIAPAA is a planning authority, not a municipality, and its jurisdiction does not determine the nature of the land. Based on the totality of circumstances, the Court held that the lands retained their agricultural character despite conversion and upheld the ITAT's ruling that the sale proceeds were exempt from capital gains tax. **FAQs:** Q: What is the significance of this case? A: This case establishes that mere conversion of agricultural land for non-agricultural purposes does not automatically change its character for tax purposes. The actual use, condition, and intended purpose of the land are crucial factors in determining whether it qualifies as agricultural land exempt from capital gains tax. Q: Can the Revenue challenge this decision further? A: Yes, the Revenue can potentially challenge this decision in the Supreme Court of India, subject to the applicable legal provisions and procedures. Q: What is the impact of this decision on future cases involving agricultural lands? A: This decision reinforces the principle that the nature of land should be determined based on its actual use and condition, rather than solely on its conversion or inclusion in a planning authority's jurisdiction. It provides guidance on the factors to be considered in such cases and emphasizes the importance of the totality of circumstances. Q: Does this decision mean that all converted agricultural lands are exempt from capital gains tax? A: No, this decision does not create a blanket exemption. Each case will be evaluated based on its specific facts and circumstances, considering factors like continued agricultural operations, derivation of agricultural income, physical characteristics, and intended future use of the land. Q: What is the significance of the BIAPAA's jurisdiction in this case? A: The Court held that the BIAPAA is a planning authority, not a municipality, and its jurisdiction over the lands does not automatically make them non-agricultural for tax purposes. This is consistent with the legal precedent that mere inclusion in a planning authority's jurisdiction does not convert agricultural land into non-agricultural land.

These appeals by Revenue have been admitted to consider the questions of law framed in respective appeals. After hearing Shri. E.I. Sanmathi, learned Standing Counsel for the Revenue and Shri. A. Shankar, learned Senior Advocate for the assessees, we are of the opinion that only following three questions arise for consideration in all these appeals. Accordingly, we have reframed the questions of law as follows:

1. Whether the lands in question fall within the definition of 'Capital Asset' under Section 2(14) of the Act?

2. Whether the Tribunal was justified in law in holding that lands which were converted and lapsed and which have been cultivated and yielding agricultural income can be held to be agricultural lands for the purpose of Section 2(14) of the Act?

3. Whether the Tribunal was justified in holding that BIAPAA does not constitute a municipality for the purposes of Section 2(14) of the Act.

2. Brief facts of the case are, assessees are owners of different pieces of lands. They have entered into several sale transactions, the details of which are as follows:

3. Assessees filed returns of income for A.Y. 2008-09 under Section 139(1) of the Income Tax Act, 1961 ('the Act' for short) and revised returns excluding capital gains derived from the sale of their lands. The Assessing Officer completed the assessment under Section 143(3) of the Act and added taxes against each assessee, as shown herein below, on the ground that the lands sold by them are capital assets and the capital gains arising on the said assets are chargeable to tax:

4. Assessees challenged the re-assessment orders before CIT2 (Appeals) and they were dismissed. They challenged the said orders before ITAT in ITAs No.1653/BANG/2012, 1654/BANG/2012, 1652/BANG/2012, 1655/BANG/ 2012, 1656/BANG/2012, 262/BANG/2013 AND 1651/BANG/2012 the same were allowed. The cross-objections filed by the Revenue stood dismissed as 'not pressed'. Feeling aggrieved by the orders passed by the ITAT, Revenue has preferred these appeals and the same are disposed of by this common judgment.

5. Shri. E.I. Sanmathi for the Revenue, submitted that:

• Assessees in all these cases are individuals. During 2004, they got their agricultural lands converted for non-agricultural purpose;

• During 2007, assessees have sold their lands duly converted for non-agricultural purposes, in favour of M/s. ELT Corporate Services Pvt. Ltd., and others. The agreement and the sale deeds disclose that the lands sold are converted lands;

• the Assessing Officer has rightly held that the lands sold by the assessees are capital assets and the capital gains income is chargeable to tax. The CIT (Appeals) has confirmed the order passed by the Assessing Authority.

However, the ITAT, on an erroneous presumption that there was no change in the physical characteristics of the lands and that the assessees have been carrying on agricultural activity even after they got the lands converted for non-agricultural purposes, has allowed the appeals;

• Assessees lands are within 8 kms. from Devanahalli Municipality and within 8 kms. from BBMP when measured aerially. Therefore, they fall within the definition of Section 2(14)(iii) of the Act;

• the lands are situated within the limits of BIAPAA4.

6. Thus, in substance, Shri. Sanmathi contended that the lands sold by the assessees are non-agricultural lands and fall within the definition of capital assets under Section 2(14)(iii) of the Act and therefore attract tax on the Capital gains.

7. Opposing the appeals, Shri. A. Shankar, learned Senior Advocate submitted that:

• though the lands were converted in 2004, assessees have not diverted the use of land but continued their agricultural operation. 4 Bangalore International Area Plan Approval Authority They have offered huge sums of income as 'agricultural income' for the A.Y. 2004-05 to 2009-10. The Revenue has accepted the same and passed assessment orders, which have attained finality;

• Only such lands which fall within the area specified in the Official Gazette published by the Central Government, fall within the definition of 'Capital Asset' under Section 2(14) of the Act. The Notification issued in the year 1994 was in force and only the lands within a distance of 8 kms. from the Municipal limits from Bengaluru would fall within the definition;

• it is settled by various judicial pronouncements that mere conversion of land does not take away the character of the land and what is required to be examined is its actual condition and use.

8. With these main submissions, Shri. Shankar prayed for dismissal of these appeals.

9. We have carefully considered rival contentions and perused the records.

10. Undisputed facts of the case are, lands in question have been converted for non-agricultural purpose under Section 95 of the Karnataka Land Revenue Act. They have been sold on April 12, 2007. Assessees have offered their agricultural income to tax for the Accounting years from 2004-05 to 2009-10.

Re: Question No.1

11. The assessees' specific case is, lands in question do not fall within the definition of 'Capital Asset', because, though converted for non agricultural purposes, assessees have not diverted the lands and continued agricultural operation. They have offered and paid tax on agricultural income for the period between 2004-05 and 2009-10.

12. 'Capital Asset' is described in Section 2(14) of the Act. Clause (b) to Section 2(14)(iii) has been substituted with effect from 01.04.2014. Prior to substitution, it read as follows:

"(iii) agricultural land in India, not being land situate-

(a) ..; or

(b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette."

13. It was argued by Shri. Sanmathi that the lands in question fall within 8 Kms from the Municipality of Devanahalli and within 8 Kms of aerial distance from the Municipal Corporation of Bengaluru.

14. Shri. Shankar, placing reliance on the Notification No.SO 10(E) [No. 9447 (F.NO.164/3/87-ITA-I)] dated 06.01.1994 issued by the Central Government submitted that agricultural lands, which fall within a distance of 8 kms from Municipal Limits in all directions from Bengaluru only, would fall within the definition of 'Capital Asset'.

15. The Assessing Officer in para 4.3.3 of his order has recorded that assessees had filed a Certificate from the Tahasildar, Devanahalli, stating that the distance was 11 kms. A letter under Section 133(6) of the Act was issued to the Tahasildar to furnish the shortest possible distance, but there was no response. On verification of google map, it was noticed that several areas of BBMP are located within 8 kms. from the lands in question. On this premise, the Assessing Officer has held that the lands are within 8 kms. from Bengaluru Municipality(BBMP). The CIT(A) in para 4.8 of his order has upheld Assessing Officer's conclusion that BIAPAA is a Municipal body and dismissed the appeal. The ITAT has framed two issues for its consideration. The second question is with regard to treating BIAPAA as Municipality. On this aspect, ITAT has recorded in para 8.3 of its order that a BIAPAA is merely a planning authority.

A Municipality has to be necessarily an elected body and therefore, BIAPAA does not qualify to be considered as a Municipality. Further, by placing reliance on CIT Vs. Murali Lodge has held that the Assessing Authority and CIT(A) were not justified in holding that the subject land could not be treated as agricultural lands.

16. Thus, the Assessing Officer, the CIT(A) and the ITAT have considered both aspects namely, the distance from BBMP and the lands falling within the notified area of BIAPAA.

17. Section 2(14)(iii)(b) of the Act, prior to amendment, does not indicate measurement of distance aerially. We have also perused the Notification dated 06.01.1994 relied upon by Shri. Shankar. In column No.4 of the Schedule to the Notification, the distance is mentioned as 8 kms. from municipal limits in all directions.

18. It is salutary principle of interpretation of law that a provision of law must be understood in its plain meaning and the effect should be given to each and every word employed therein. Therefore, the language employed in the Act and the Notification cannot be stretched to include the word 'aerial'. As per the Certificate of the Tahasildar produced before the Assessing Officer and PWD Engineer's Certificate produced before the CIT(A), the distance between the lands in question and BBMP is more than 8 kms. Therefore, Shri. Sanmathi's contention with regard to the distance from the Municipal area fails.

Re: Question No.2

19. It was argued by Shri. Sanmathi that admittedly, the lands have been converted. Therefore, Tribunal was not justified in holding them as agricultural lands.

20. In CWT Vs. Officer-in-Charge (Court of Wards)6, relied upon by Shri Shankar, it is held as follows:

"...It is true that this case is not a direct authority upon what is “agricultural land”. Nevertheless, it goes a long way in helping us to decide what could be agricultural land. 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 Roy case have a direct bearing".

(Emphasis Supplied)

21. In the above case, the Apex Court has also held that it is not the mere potentiality, which will affect its valuation as part of the assets but its actual condition and intended use which has be seen for purposes of exemptions from wealth tax.

22. In Sarifabibi Mohmed Ibrahim Vs. CIT7 13 factors/indicators recorded by the Gujarat High Court have been quoted and it is held that all those factors would not be present or absent in any given case and that in each case one or more of the factors may make appearance and the ultimate decision will have to be reached on the balanced consideration of totality of circumstances.

23. Shri. Sanmathi has relied upon CIT Vs. Gemini Pictures Circuit (P) Ltd and contended that the lands in the case on hand cannot be considered as agricultural lands. In the case of Gemini Pictures, the Assessing Officer had held that the property known ahs Spencers Hotel on the Mount Road in Chennai comprising of 70 acres and 16 grounds was not an agricultural land and the same was affirmed by the first appellate authority. There was difference of opinion between the members of the ITAT and it was referred to the Vice President and he agreed with the Judicial Member holding that it was not an agricultural land. Assessee challenged the same before the High Court and High Court held the land as agricultural land. The revenue challenged High Court’s decision in the Supreme Court of India. Allowing Revenue’s appeal, the Apex Court has held as follows:

".. that for ascertaining the true character and nature of the land, it must be seen whether it has been put to use for agricultural purposes for a reasonable span of time prior to the date of sale and further whether on the date of sale the land was intended to be put to use for agricultural purposes for a reasonable span of time in future. Examining the case from the said point of view, the High Court held that the fact that the agreement of sale was entered into by the assessee with a housing society is of crucial relevance since it showed that the assessee had agreed to sell the land for admittedly non-agricultural purposes. The ratio of the said decision was approved in Sarifabibi [1993 Supp (4) SCC 707 : (1993) 204 ITR 631] ".

(Emphasis Supplied)

24. As held in Sarifabibi, ultimate decision will have to be reached based on balanced consideration of the totality of circumstances.

25. In the case of Gemini Pictures, the property was situated on the Mount Road in Chennai and Spencer hotel was situated in the land.

In contradistinction, in the case on hand, the Tribunal has recorded in para no. 7.2.4 that though the land was converted, the assessee had continued agricultural operations which was evident from the fact that the income derived from the agricultural operations declared by the assessees were accepted by the revenue. Further, no evidence was brought on record by the revenue to suggest that the lands in question were used for any other purpose other than cultivation after conversion. The Tribunal has also recorded a finding of fact in para 7.2.5 that the land was inspected by the Tribunal on 10.04.2014 and during the inspection the Tribunal had noticed that the subject property was a part of large tract of land having agricultural operations. There were fruit yielding trees. The Tribunal has also adverted to the certificate of Senior Assistant Director of Horticulture certifying that there were fruit yielding mangoes, sappota, coco, cashew, jackfruit, rose apple, guava trees aged 25 to 30 years.

26. It is settled that ITAT is the last fact finding authority. It has inspected the lands on 10.04.2014 and recorded a finding that agricultural operations were undertaken by the Assessees and there were trees aged 25-30 years on the land. Further, as per the Notification issued by the Central Government, the lands do not fall within 8 kms. from Municipality of Bangalore. Above all, assessments for the accounting years for the period from 2004-05 to 2009-10 have attained finality except for the period 2008-09.

27. In view of the above, we are of the considered opinion that the order passed by the ITAT is based on evidence on record and does not call for any interference.

Re: Question No.3

28. In reply to Shri. Sanmathi's argument that the lands cannot be treated as agricultural lands as they fall within the notified area under BIAPAA, Shri. Shankar submitted that inclusion of lands in Special Zone cannot be a determining factor. Shri. Shankar has placed reliance on thedecision of Andhra Pradesh High Court in CIT Vs. Smt. T. Urmila dismissing Revenue’s appeal.

He has also placed the order passed by the ITAT in that case for perusal. In that case the land in question was notified by the Government declaring that the area would fall within the jurisdiction of HADA which is a statutory body. The ITAT held that mere inclusion of land without any infrastructure development does not convert the land into non-agricultural land. On appeal, the High Court has held that HADA is not a body within the meaning of clauses (a) and (b) of Section 2 (14) (iii) of the Act and affirmed the decision of the ITAT that the sale of said land did not form part of capital gains. Thus the argument of Shri. Sanmathi that the lands in these cases fall within the BIAPAA and therefore the sale of lands attract capital gains tax also fails.

29. In the light of the above discussion, questions raised in these appeals by the Revenue are answered in favour of the assessees and against the Revenue. Accordingly these appeals are dismissed.

No Costs.

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JUDGE

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JUDGE