Court upholds agricultural land exemption for land sale in Juchandra village despite being part of Vasai-Virar Municipal Corporation.

Case Name:

Pr. Commissioner of Income Tax-3, Thane v. Anthony John Pereira

**Key Takeaways:** - The court upheld the Tribunal's decision, ruling that the land sold by the assessee in Juchandra village qualified as agricultural land and was exempt from capital gains tax. - The court clarified the interpretation of Section 2(14)(iii)(a) of the Income Tax Act, which defines agricultural land exempt from capital gains tax. - The court held that for land to be treated as a capital asset, it must meet two conditions: (1) be situated within the jurisdiction of a municipality, and (2) the area must have a population of at least 10,000. - While Juchandra village became part of the Vasai-Virar Municipal Corporation in 2009, its population was below 10,000, meeting the criteria for agricultural land exemption. **Issue:** Whether the land sold by the assessee in Juchandra village should be treated as agricultural land exempt from capital gains tax under Section 2(14)(iii)(a) of the Income Tax Act, despite Juchandra becoming part of the Vasai-Virar Municipal Corporation in 2009. **Facts:** - The assessee sold land in Juchandra village during the assessment year 2011-12. - The revenue department argued that the land should be treated as a capital asset and subject to tax, as Juchandra village became part of the Vasai-Virar Municipal Corporation on July 3, 2009, through a notification issued by the Government of Maharashtra. - The Income Tax Appellate Tribunal ruled in favor of the assessee, stating that the land qualified as agricultural land and was exempt from tax under Section 2(14)(iii)(a) of the Income Tax Act. - The Tribunal found that while Juchandra village became part of the Municipal Corporation, its population was only 5,912, which is below the statutory requirement of 10,000 for the land to be treated as a capital asset. - The revenue department appealed the Tribunal's decision to the High Court. **Arguments:** Revenue Department's Arguments: - Juchandra village became part of the Vasai-Virar Municipal Corporation on July 3, 2009, through a notification issued by the Government of Maharashtra. - Therefore, the land sold by the assessee in Juchandra village during the assessment year 2011-12 should be treated as a capital asset and subject to capital gains tax. - The Tribunal erred in holding that the land qualified as agricultural land exempt from tax. Assessee's Arguments: - While Juchandra village became part of the Vasai-Virar Municipal Corporation in 2009, its population was only 5,912, which is below the statutory requirement of 10,000 for the land to be treated as a capital asset under Section 2(14)(iii)(a) of the Income Tax Act. - The Tribunal correctly applied the law and treated the land as agricultural land exempt from capital gains tax. - The revenue department's appeal raises questions of fact, not substantial questions of law. **Key Legal Precedents:** The court relied on the interpretation of Section 2(14)(iii)(a) of the Income Tax Act, which defines agricultural land exempt from capital gains tax. The court held that for land to be treated as a capital asset, it must meet two conditions conjunctively: 1. The land must be situated within the jurisdiction of a municipality or a cantonment board, and 2. The area must have a population of not less than 10,000. The court cited the following legal principles and precedents: - The use of the word "and" between the two conditions in Section 2(14)(iii)(a) indicates that both conditions must be fulfilled to treat the land as a capital asset. If either condition is absent, the land would be considered agricultural land exempt from capital gains tax. - The court disagreed with the revenue department's argument that the expression "any area" in Section 2(14)(iii)(a) should be read as synonymous with the expression "municipality." The court held that "any area" refers to a smaller area within the municipality, and the population of the municipality must be more than the population of "any area," i.e., more than 10,000. **Judgment:** The court dismissed the revenue department's appeal and upheld the Income Tax Appellate Tribunal's decision in favor of the assessee. The key reasons for the court's judgment are: 1. The court agreed with the Tribunal's finding that the population of Juchandra village was 5,912, which is below the statutory requirement of 10,000 for the land to be treated as a capital asset under Section 2(14)(iii)(a) of the Income Tax Act. 2. While Juchandra village became part of the Vasai-Virar Municipal Corporation on July 3, 2009, the second condition of the area having a population of not less than 10,000 was not met. 3. Since one of the two conditions for treating the land as a capital asset was absent, the court held that the Tribunal was justified in treating the land sold by the assessee as agricultural land exempt from capital gains tax. 4. The court found no error in the Tribunal's interpretation and application of Section 2(14)(iii)(a) of the Income Tax Act. **FAQs:** **Q1: What is the significance of the court's decision?** A1: The court's decision clarifies the interpretation of Section 2(14)(iii)(a) of the Income Tax Act, which defines agricultural land exempt from capital gains tax. The court held that both conditions – the land being situated within the jurisdiction of a municipality and the area having a population of not less than 10,000 – must be met conjunctively for the land to be treated as a capital asset. If either condition is absent, the land would be considered agricultural land exempt from tax. **Q2: What is the impact of the court's decision on the parties involved?** A2: The court's decision upholds the Income Tax Appellate Tribunal's ruling in favor of the assessee. As a result, the assessee will not be required to pay capital gains tax on the sale of land in Juchandra village during the assessment year 2011-12, as the land qualifies as agricultural land exempt from tax under Section 2(14)(iii)(a) of the Income Tax Act. **Q3: Does the court's decision have broader implications for similar cases?** A3: Yes, the court's decision provides guidance on the interpretation and application of Section 2(14)(iii)(a) of the Income Tax Act, which could have implications for similar cases involving the sale of land and the determination of whether the land qualifies as agricultural land exempt from capital gains tax. **Q4: What was the court's reasoning behind disagreeing with the revenue department's interpretation of the expression "any area"?** A4: The court disagreed with the revenue department's argument that the expression "any area" in Section 2(14)(iii)(a) should be read as synonymous with the expression "municipality." The court held that "any area" refers to a smaller area within the municipality, and the population of the municipality must be more than the population of "any area," i.e., more than 10,000. **Q5: Can the revenue department appeal the court's decision further?** A5: The court's decision appears to be final, as it has dismissed the revenue department's appeal. However, the revenue department may have the option to appeal to a higher court if there are grounds for further appeal, subject to the applicable laws and procedures.

1. Heard Mr. Tejveer Singh, learned standing counsel, revenue for the appellant and Mr. N.M.Gandhi, learned counsel for the respondent-assessee.

2. This appeal has been fled under Section 260A of the Income Tax Act, 1961 (“the Act” for short) by the revenue against the order dated 25.08.2016 passed by the Income Tax Appellate Tribunal, “A” Bench, Mumbai (“Tribunal” for short) in Income Tax Appeal No. 1103/Mum/2016 for the Assessment Year 2011-12.

3. The appeal has been preferred projecting the following two questions as substantial questions of law :

(a) Whether on the facts and in the circumstances of the case and in law, the Tribunal is justifed in holding that the land sold by the assessee was not within the jurisdiction of any municipality being an agricultural land and was not situated within 8 kms from any municipality though record clearly shows that Government of Maharashtra has constituted Vasai-Virar Municipal Corporation vide Notifcation No.MIS 2306/412/CR-223/2006/UD-24 dated 03.07.2009 and the Tribunal is wrong in holding that Vasai-Virar Municipal Corporation is constituted by Notifcation No. VVM 2009/88/CR-244/09/UD-23 dated 31.05.2011 without appreciating the fact that it only amends the notification dated 03.07.2009 ?

(b) Whether on the facts and in the circumstances of the case and in law, the Tribunal is justified in not appreciating the fact that the assessee was engaged in sale of land and therefore, the land transaction was in the nature of trade and liable to tax ?

4. To appreciate the questions proposed, it would be necessary to advert to the relevant facts.

5. In the assessment proceedings for the Assessment Year 2011-12, Assessing Officer noted that though the assessee had disclosed 17 sale transactions pertaining to the Assessment Year under consideration, 3 transactions were not disclosed. The transactions took place on 21.04.2010, 01.05.2010 and 20.08.2010. After giving notice to the assessee and after hearing the assessee, Assessing Ofcer in his Assessment Order dated 28.03.2014 took the view that assessee was making investment in land and was in the business of construction and land development. In response to the contention of the assessee that the land which were sold could not be brought within the tax regime as those were agricultural land being outside urban limits, the Assessing Ofcer did not accept such contention and relying upon Government of Maharashtra notifcations dated 03.07.2009 and 31.05.2011 held that lands which were sold fell within the Municipal Corporation of Vasai-Virar and, therefore, could not be treated as agricultural land to take the same outside the purview of the Act. It was held that the such land was to be treated as “capital asset” and the profts on sale of such land was to be included in the total income of the assessee.

6. Assessee preferred appeal before the Commissioner of Income Tax (Appeals)-3,Thane, against the aforesaid order of assessment. By the appellate order dated 21.01.2016 the first appellate authority upheld the findings of the Assessing Officer and dismissed the appeal of the assessee.

7. Aggrieved by the same, assessee preferred further appeal before the Tribunal. By the impugned order dated 25.08.2016 Tribunal allowed the appeal of the assessee by holding that the land sold was agricultural land situated at village Juchandra and became urban land only on and from 31.05.2011 being part of Vasai-Virar Municipal Corporation. Tribunal also held that the population of village Juchandra was 5,912 as per latest census. Therefore video the impugned order Tribunal allowed the appeal of the assessee on the above ground.

8. Aggrieved by the above, revenue is in appeal before us raising the above two questions for consideration.

9. In the hearing which took place on 27.01.2020, learned standing counsel was directed to produce Government of Maharashtra notifcations dated 14.09.2006, 03.07.2009 and 31.05.2011 relating to constitution of Vasai-Virar Municipal Corporation.

10. In the hearing today, Mr. Singh, learned standing counsel, revenue for the appellant has produced copies of the above three notifications.

11. Contention of Mr. Singh, learned standing counsel, revenue is that by the notification dated 03.07.2009 issued by the Urban Development Department, Government of Maharashtra 03.07.2009 was specified as the day on which Municipal Corporation of the city of Vasai-Virar was constituted. Municipal Corporation of the city of Vasai-Virar comprises of Vasai Municipal Council, Navghar-Manikpur Municipal Council, Nalasopara Municipal Council, Virat Municipal Council smaller area and 53 villages in the district of Thane. He submits that on objection raised that the 53 villages should be excluded from the Municipal Corporation of the city of Vasai-Virar, Government of Maharashtra in the Urban Development Department issued subsequent notifcation dated 31.05.2011 excluding 29 villages but the village of Juchandra was not excluded. Therefore, his contention is that village of Juchandra was part of Municipal Corporation of Vasai-Virar on and from 03.07.2009. The sale of land having taken place thereafter during the Assessment Year 2011-12, those lands cannot be treated as agricultural lands and earnings from the sale of such land would be income from capital gains.

12. On the other hand, learned counsel for the respondent submits that questions as framed relates to finding of fact by the Tribunal and, therefore, no question of law arises therefrom. He has referred to the impugned order passed by the Tribunal as well as provisions of Section 2(14)(iii)(a) of the Act to contend that there was no error or infrmity in the view taken by the Tribunal. He submits that firstly Tribunal was justifed in holding that Juchandra village became urban land as part of Vasai-Virar Municipal Council on and from 31.05.2011; secondly, Tribunal had returned a fnding of fact based on official document that the population of village Juchandra was 5,912 which is less than the statutory fgure of 10,000 and therefore land situated within Juchandra village would stand excluded from the meaning of capital asset. Third contention is that even though village Juchandra became part of the Vasai-Virar Municipal Corporation on and from 31.05.2011, the said Municipal Corporation actually started functioning as a Municipal Corporation w.e.f. the assessment Year 2012-13. Therefore, Tribunal was fully justifed in treating the sale transaction pertaining to the land in village Juchandra as sale of agricultural land and thus exempt from payment of income tax.

13. Submissions made by learned counsel for the parties have been considered.

14. Before adverting to the order passed by the Tribunal it would be apposite to refer to the relevant statutory provisions. Section 2 of the Act is the definition section. Sub-section (14) thereof defnes ‘capital asset’. Though sub-section (14) is quite longish, only that portion which is relevant for the present application would be referred to. Briefy stated, sub-section (14) defnes ‘capital asset’ to mean property of any kind held by an assessee, whether or not connected with his business or profession; and any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 but does not include agricultural land in India not being land situated in any area which is comprised within the jurisdiction of a municipality by whatever name called or a cantonment board and which has a population of not less than 10,000. This is mentioned in Clause (iii) (a) of sub-section 14 of Section 2 of the Act.

15. Therefore, what this provision i.e., Section 2(14)(iii) (a) of the Act contemplates is that capital asset does not include agricultural land. But land would not be treated as agricultural land if it is situated within the jurisdiction of a municipality or a cantonment board and which has a population of not less than 10000. Therefore, inversely speaking, a land which is outside the jurisdiction of a municipality or a cantonment board and which has a population of less than 10000 would come within the ambit of the expression “agricultural land” to be excluded from ‘capital asset’. The use of the word “and” between the two conditions i.e., frst condition being not situated within the jurisdiction of a municipality or a cantonment board and second being such area having a population of not less than 10000, to bring the land outside the purview of agricultural land, is indicative of the legislative intent that the two requirements as alluded to hereinabove would have to be read conjunctively. In other words, both the requirements or conditions would have to be fulflled to bring the land outside the scope and ambit of agricultural land to be treated as capital asset. Otherwise, even if one is not fulflled or is not present, it would be an agricultural land which would not be included within and treated as capital asset.

16. At this stage, we may mention that learned standing counsel, revenue had argued that the expression “any area” has to be read as synonymous with the expression municipality when such area becomes part of the municipality. On a careful reading of Clause (iii)(a) of Section 2(14) of the Act, we are unable to agree to such contention of learned standing counsel. Reading the provision as a whole we are of the considered opinion that the municipality as mentioned therein is a larger area comprising many smaller areas and the expression “any area” is a fraction of the larger area. Therefore, the expression “any area” would refer to a smaller area within the municipality. This is because the population of the municipality has to be more than the population of “any area”; certainly more than 10,000.

17. Having discussed the legal provisions as above, we may now advert to the relevant facts.

18. There is no dispute that Government of Maharashtra had issued draft notification on 14.09.2006 proposing to form a city having a corporation to be called Municipal Corporation of the city of Vasai-Virar. The schedule given comprised of 53 villages including the village of Juchandra at Serial No. 19. After hearing claims and objections, Government of Maharashtra issued notifcation dated 03.07.2009 constituting the Municipal Corporation of the city of Vasai-Virar specifying the date of such constitution as 03.07.2009. The said corporation included the village of Juchandra as per final notification. It appears that an objection was made thereafter for excluding all the 53 villages including the village of Juchandra. After considering the matter, Government of Maharashtra issued notification dated 31.05.2011 excluding from the Municipal limits of Municipal Corporation of the city of Vasai-Virar 29 villages as per schedule to the said Notifcation. However, the village in question i.e. village of Juchandra was not included in the list of excluded villages. Therefore, it continued to remain within the Municipal Corporation of the city of Vasai-Virar.

19. We may now advert to the impugned order passed by the Tribunal. In para-9 of the impugned order, Tribunal held that the agricultural land situated at village Juchandra remained as a rural area and became urban land on and from 31.05.2011.

That apart Tribunal held that the Municipal Corporation started collecting taxes from the Assessment Year 2012-13 onwards. Besides, the revenue records disclosed Juchandra village as a separate entity till 31.05.2011. In this backdrop, Tribunal concluded that the land sold by the respondent-assessee at Juchandra village was agricultural land since the sale transaction had taken place prior to 31.05.2011.

20. On this point, we cannot agree with the fnding returned by the Tribunal. Government of Maharashtra notifcation dated 03.07.2009 clearly mentioned that under sub-sections - (2) and (2A) of Section (3) of the Bombay Provincial Municipal Corporations Act, 1949, the Vasai-Virar Municipal Corporation was constituted and 03.07.2009 was specified to be the date when the larger urban area comprising the whole of Vasai Municipal Council, Navghar-Manikpur Municipal Council, Nalasopara Municipal Council, Virar Municipal Council smaller area and 53 villages including the village of Juchandra were declared as forming the city having a Corporation by the name of Municipal Corporation of the city of Vasai-Virar. Therefore, legally speaking, 03.07.2009 is the date of constitution of the larger urban area by the name of Municipal Corporation of the city of Vasai-Virar of which the village Juchandra became a part. It is another matter that by the subsequent notifcation dated 31.05.2011, 29 villages were excluded from the aforesaid urban area, but that does not mean that 31.05.2011 is the date for constitution of the Municipal Corporation. Late collection of tax by the Municipal Corporation or mentioning / recording in the revenue record that the said village continued to be a separate entity till 31.05.2011 would not make any material difference to the legal position that the village became part of the larger urban area on and from 03.07.2009.

21. Having noted that, we may once again revert back to the requirements of Clause (iii)(a) of sub-section (14) to Section-2 of the Act. For land to be excluded from capital asset, it has to be agricultural land in India; such land to be not agricultural must fulfill two conditions viz. it must be land situated in any area which is comprised within the jurisdiction of a municipality or cantonment board and which has a population of not less than 10,000. These two conditions are pre-conditions and must be read conjunctively. In other words, if both the conditions are present then it would not be agricultural land and would be treated as capital asset.

However, inversely speaking, if either of the two conditions are absent then the land would be agricultural land and excluded from capital asset. Though we have held the land in question to be within the jurisdiction of a municipality we find the second condition to bring the land outside the ambit of agricultural land i.e. that the area has a population which is not less than 10,000 absent. In this connection, Tribunal had considered the census report as well as the population certifcate of the village dated 02.06.2008 and other relevant documents and thereafter returned a finding of fact that at the time of sale, the land in question was situated at village Juchandra, the population of which was 5,912 which is less than the statutory requirement of 10,000. Thus, this condition being absent the sold land was rightly treated as agricultural land, not included within the ambit and meaning of capital asset.

22. This is a finding of fact which has not been questioned by the revenue as perverse being contrary to the record as would be evident from the two questions which have been raised. On this fnding of fact, we are of the opinion that Tribunal was justifed in holding that the lands which were sold were agricultural lands, not forming part of capital asset withinthe meaning Section 2(14) of the Act.

23. Consequently and in the light of the above, we answer both the questions in favour of the assessee and against the revenue.

24. Appeal is accordingly dismissed. However, there shall be no order as to costs.

(MILIND N. JADHAV, J.) (UJJAL BHUYAN,J.)