Income Tax Appellate Tribunal - Chandigarh
Sh. Jai Chand, Rampur Bushahr vs Department Of Income Tax on 14 November, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES 'A' CHANDIGARH BEFORE SHRI D.K.SRIVASTAVA, ACCOUNTANT MEMBER AND MS SUSHMA CHOWLA, JUDICIAL MEMBER ITA Nos.1232/Chd/2010 Assessment Years: 2007-08 The Income-tax Officer, Vs. . Shri Lalish Chander Negi Rampur Bushahr Vill. Kanai, P.O.Baltrang, Teh.Sangla, Distt.Kinnaur. PAN No. AEZPN9722R ITA Nos.1154/Chd/2010 Assessment Years: 2007-08 The Income-tax Officer, Vs. . Shri Jai Chand Rampur Bushahr Vill. Kanai, P.O.Baltrang, Teh.Sangla, Distt.Kinnaur. PAN No. AHFPC0969G ITA Nos.1155/Chd/2010 Assessment Years: 2007-08 The Income-tax Officer, Vs. . Shri Tejwant Singh Negi Rampur Bushahr Vill. Kanai, P.O.Baltrang, Teh.Sangla, Distt.Kinnaur. PAN No. BUGPS3635C ITA Nos.1156/Chd/2010 Assessment Years: 2007-08 The Income-tax Officer, Vs. . Shri Ram Gopal Negi Rampur Bushahr Vill. Kanai, P.O.Baltrang, Teh.Sangla, Distt.Kinnaur. PAN No. ACMPN6936E ITA Nos.1157/Chd/2010 Assessment Years: 2007-08 The Income-tax Officer, Vs. . Shri Devi Singh Rampur Bushahr Vill. Kanai, P.O.Baltrang, Teh.Sangla, Distt.Kinnaur. PAN No. BUVPS2753B ITA Nos.1158/Chd/2010 Assessment Years: 2007-08 The Income-tax Officer, Vs. . Shri Bhagmal Rampur Bushahr Vill. Kanai, P.O.Baltrang, Teh.Sangla, Distt.Kinnaur. PAN No. APIPB5122R ITA Nos.1159/Chd/2010 Assessment Years: 2007-08 The Income-tax Officer, Vs. . Shri Shyamal Singh Rampur Bushahr Vill. Kanai, P.O.Baltrang, Teh.Sangla, Distt.Kinnaur. PAN No. BIAPS3967H ITA Nos.1160/Chd/2010 Assessment Years: 2007-08 The Income-tax Officer, Vs. . Shri Mangal Singh Rampur Bushahr Vill. Kanai, P.O.Baltrang, Teh.Sangla, Distt.Kinnaur. PAN No. BUVPS2856N ITA Nos.1161/Chd/2010 Assessment Years: 2007-08 The Income-tax Officer, Vs. . Shri Suresh Chand Negi Rampur Bushahr Vill. Kanai, P.O.Baltrang, Teh.Sangla, Distt.Kinnaur. PAN No. AFAPN3605B ITA Nos.1162/Chd/2010 Assessment Years: 2007-08 The Income-tax Officer, Vs. . Shri Krishan Chand Rampur Bushahr Vill. Kanai, P.O.Baltrang, Teh.Sangla, Distt.Kinnaur. PAN No. AHFPC0968G (Appellant) (Respondent) Appellant By : S/Shri Binod Kumar, N.K. Saini, CIT DR Respondent By: Shri Praveen Kapoor Date of hearing : 14.11.2011 Date of Pronouncement : 24.11.2011 ORDER PER SUSHMA CHOWLA, JM
The above said captioned appeals filed by the Revenue against different assesees are against different orders of CIT(A), all dated 20.8.2010 relating to assessment year 2007-08 against separate orders passed under section 143(3) of the Income Tax Act.
2. The appeals relating to different assessees on the same issue were heard together and are being disposed off by this consolidated order for the sake of convenience.
3. Common grounds of appeal have been raised in all the captioned appeals and reference is being made to the facts in I.T.A.No. 1232/Chd/2010 relating to Shri Lalish Chander Negi. The grounds of appeal raised by the assessee read as under :
"1. On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the compensation amount of Rs.67.46.129/- received by the assessee was for loss of apple trees which formed his only source of livelihood and was hence a capital receipt not chargeable to tax, especially in view of following facts :
That as per the agreement dated 27/10/2006 entered into, the compensation was for "changes in the area, its topography, terraces, fields etc. and also cut/remove all the fruit trees" and was therefore a composite transaction that did not specify any amount separately for cutting/removal of apple trees. That the agreement dated 27/10/2006 was for lease of land for a period of several years and hence the compensation was not for destruction of any capital asset, much less for destruction of any income producing asset. That the assessee had declared income from salary/interest/retail trade and the apple trees, if any were not the only source of livelihood of the assessee. That no details could be furnished by the assessee of the number of apple trees standing on the land or the realizable value of the same. That as per revenue records filed, a major portion of the land was classified as 'banjar' and hence no trees could be standing on the same. That the assessee has mis-led the Ld. CIT(A) by stating incorrect facts, only for the purpose of evading tax. The Ld. CIT(A) has erred in treating the compensation amount as capital receipt when in fact it was only for carrying out modification in the land and was hence in the nature of revenue receipts. Without prejudice to the above, even if a part of the compensation can be said to be for destruction of apple trees, the same would be chargeable to capital gains tax, as trees are capital assets under section 2(14)."
4. The brief facts of the case are that the assessee had filed return of income declaring income of Rs.1,18,970/- and agricultural income of Rs.67,46,129/-. The case of the assessee was selected for scrutiny and notices under section 142(1)/143(2) of the Act were issued. The assessee was asked to establish the genuineness of agricultural income declared at Rs.67,46,129/-. The assessee was show caused to explain why the said compensation should not be assessed under the head "income from other sources", in view of the various ratios laid down by the Hon'ble Supreme Court. In response the assessee explained that "as per the agreement between the assessee and M/s J.P.Karcham Hydro Corp. Ltd., the company carried out changes in the fields & removed all the fruit trees to set up the plant and machinery in the fields. The removal of fruit trees resulted in loss of agriculture income for so many years, as it will require another 7-8 years after the term of agreement is over to grow the plants to fruit bearing stage of the tree. So definitely it was loss of agriculture income which is compensated in the present form. So keeping in view the nature of income it is shown as agriculture income". The assessee further explained that it was having other orchard income, which was not leased out and the said income was utilized for the maintenance of the orchard during the year. Further plea of the assessee was that the basic component of human skill and basic operation like cutting, pruning, sprays, fertilizers, etc. were carried out by the assessee. The Assessing Officer noted the contents of the agreement and was of the view that the explanation of the assessee was not satisfactory. As per the agreement rent of Rs.50,59,597/- was paid to the assessee and his two brothers for a period of seven years commencing from 27.10.2006 to 26.10.2013. The rent for the period relating to financial year 2006-07 amounting to Rs.120567/- was declared by the assessee in the return of income. Beside the rent for the land, the assessee alongwith his two brothers received sum of Rs.2,02,38387/- as compensation to carry out changes in the area, its topography, fields, etc. and also cut/remove fruit trees. The said changes were required for setting up Aggregate Processing and Concrete Batching and Mixing plant. The 1/3rd share of the assessee amounting to Rs.67,46,129/- was offered as agricultural income by the assessee. The assessee was show caused as to why the agricultural income declared in the return of income be assessed as income from other sources as land bearing some khasra numbers were titled as banjar kadam as per copies of Jamabandi. In response, the assessee on 15.12.2008 filed a revised return with a note that the said compensation be treated as capital receipt for loss of capital assets and not as agricultural income and the said amount was not taxable. Vide communication dated 19.12.2008, the assessee stated that "it is settled law that standing trees are capital assets under the Income Tax Act, 1961 and as per section 2(14) they constitute 'a property of any kind'. So the compensation received for loss of capital assets is capital receipt in the hands of assessee and outside the definition of Income and charge of Income Tax". The Assessing Officer was of the view that the asset being agricultural land was given on rent for use, which was entirely different from agricultural income. The Assessing Officer further observed that "the agricultural land do not falls under definition of capital asset as provided in the definition of capital asset in section 2(14) of the Income Tax Act, 1961 because the land of assessee is neither situated within the territorial jurisdiction of municipality or cantonment board having a population of 10000 or more or in any notified area. Hence the contention of the assessee that compensation received for loss of capital assets as capital receipt does not carries any weight". The Assessing Officer held as under :
"In view of the said facts, compensation received by the assessee neither falls under the definition of agriculture income as provided in section 2(1A) nor falls under the definition of capital assets as provided in section 2(14). As per the explanation 2 provided below section 2(1A) in the Income Tax Act, it has been declared that income derived from any building or land referred to in sub clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub clause (a) or sub clause (b) shall not agriculture income. In the instant case, assessee had derived income from non-agricultural activities, hence, these receipts can not be treated as agriculture income. The land of assessee is situated in the rural area, hence, the agriculture land situated in rural area is not a capital asset as claimed by the assessee as per the provisions of section 2(14). Hence, the claim of the assessee that, it is capital receipts on account of loss of capital asset is being rejected and entire compensation received by assessee is being assessed as income from other sources. Therefore, an addition of Rs.67,46,129/- is being made to the returned income of the assessee, as income from other sources."
5. The CIT(A) held as under :
"6. The facts of the case as well as the submissions of the appellant have been considered by the undersigned. The compensation received by the appellant in lieu of standing trees cut by the assessee M/s JP Karchan Hydro Corp. Ltd. has been claimed as exempt on the ground that standing trees are Capital Assets u/s 2(14) and compensation received for the loss of capital asset is Capital Receipt not chargeable to tax. The compensation was received by the appellant for loss of fruit bearing trees. In order to qualify under "Capital Receipt" the definition of "Capital Assets" has to be seen as defined u/s 2(14 of the I.T. Act, 1961 which reads as under :-
2(14) "Capital Asset reads property of any kind held by the appellant whether or not connected with his business or profession.
iii) Agricultural land in India, not being land situated outside municipal limits.
6.1 Standing trees do not fall within the definition of agricultural land. However, the same quality under property of any kind in view of Apex Court decision in Travancore Tea Estate Ltd. Vs. CIT 93 ITR 314 (Ker). The same are, therefore, Capital Asset. Compensation received for loss of a capital asset is capital receipt. In this case the appellant has received compensation for loss of his apple trees which formed his only source of livelihood. Therefore, the compensation qualifies under capital receipt.
6.2 The compensation received is on account of loss of the appellant's income generating activity. Therefore, it represents capital receipt. Compensation paid is in respect of sterilization of an income producing asset. Therefore, it is in the nature of capital receipt and not chargeable to tax. Where an injury is inflicted on the appellant's capital assets, the receipt would be a capital receipt keeping in view the Supreme Court decision in CIT Vs. Shamsher Printing Press 39 ITR 90 (SC). Similarly, in Senairam Doongarmal Vs. CIT 42 ITR 392 (SC), the Hon'ble Apex Court held that where the appellant's tea gardens factories and other buildings were requisitioned by the Military Authorities for defence purposes, the compensation received by the appellant was not in the nature of revenue receipt and did not comprise any element of income it was held as a Capital Receipt.
6.3 In the instance case, the appellant has received compensation for loss of apple trees from M/s J P Karchan Hydro Corporation Ltd. The compensation is in the nature of capital receipt since no element of income is involved in the same.
6.4 Keeping in view the facts and legal position discussed above, compensation received by the appellant for loss of apple trees is treated as a Capital receipt not chargeable to tax. The appellant succeeds on this ground of appeal."
6. The Revenue is in appeal against the order of the CIT(A). The contention of the learned D.R. was that the CIT(A) has only considered one aspect of the issue. Our attention was drawn to the agreement placed at pages 12 & 13 of the Paper Book filed by the assessee. It was pointed out that the agreement was a composite agreement where land was given on rent and compensation was paid for cutting of fruit trees. However, in the Jamabandi land was shown banjar kadam and no evidence of fruit growing tree on the said land was furnished. The assessee has not furnished any details of the orchards. The next contention of the learned D.R. was that the compensation was paid for land as the agreement was for establishing a processing and concrete mixing plant., which erodes the land.
7. The learned A.R. for the assessee has furnished written submissions before us and also pointed out that agricultural activities were discontinued and topography was changed and compensation was paid for the same. The learned A.R. further stated that it was a finding of the Assessing Officer that the said trees were not capital asset, whereas the CIT(A) says it is a capital asset. The learned A.R. further stressed that capital gain arises when there is sale of fruit trees. However, the compensation was received for removing the trees, which were grown by the assessee and cultivated by the assessee. Where the source of income is removed and it is permanent loss of income, as per the learned A.R. such receipt is capital receipt and not taxable. As per the learned A.R. the Assessing Officer had not disputed the segregation of compensation and the entire compensation was considered against removal of trees, which were the source of income generating assets. The next plea of the assessee was that the changes on land on which trees were grown were incidental to removing the trees. As per the terms of lease, the assessee has to again change topography of the land for further agricultural operation. The learned A.R. concluded by submitting that "it is immaterial whether the said trees are capital asset or not u/s 2(14) because the trees have been grown over the years by the assessee by agricultural operations and the destruction of trees resulted in loss of income generating asset."
8. We have heard the rival contentions and perused the record. The assessee alongwith his two brothers was the owner of agricultural land measuring 1.3120 hectare situated in Mohal Kanai, Tehsil Sangla Distt. Kinnaur, Himachal Pradesh. The assessee and his brothers entered into an agreement dated 27.10.2006 with M/s Jaypee Karcham Hydro Corporation Ltd. As per the said agreement the assessee agreed to let out the said land on rent for a period of seven years to the lessee w.e.f. 27.10.2006 to 26.10.2013. The total rent for the period for the said land was settled at Rs.50,59,597/- for a period of seven years which was paid by the lessee at the time of signing the agreement. In addition to the rent fixed between the parties, compensation of Rs.2,02,38,387/- was paid by the lessee to the assessee and his brothers for carrying out changes in the area, its topographgy, terraces, fields, etc. and also to cut/remove all fruit trees. The aforesaid changes were required for setting up Aggregate Processing and Concrete Batching and Mixing plant. The said receipt was shown as agricultural income by the assessee in the original return of income filed for the year under consideration. However, later on revised return was filed by the assessee claiming the said receipt to be capital receipt not exigible to tax. The issue raised before us is in connection with the assessability of the aforesaid compensation received by the assessee and his brothers. The 1/3rd share of the assessee in the said compensation works out to Rs.67,46,129/-.
9. The Assessing Officer was of the view that the agricultural land does not fall under the definition of capital assets as provided under section 2(14) of the Income Tax Act, as the land of the assessee was situated neither within the territorial jurisdiction of Municipality or Cantonment Board having population of 10000 or more, or any notified area. The Assessing Officer thus held that the contention of the assessee that the compensation received for loss of capital assets as capital receipt does not carry any weight. The Assessing Officer further held the assessee to have derived the income from non-agricultural activities and hence the receipts could not be treated as agricultural income. Rejecting the claim of the assessee that the receipt was a capital receipt on account of loss of capital assets, the entire compensation received by the assessee was assessed as income from other sources. Before the CIT(A) the claim of the assessee was that the compensation received for loss of capital assets i.e. standing fruit bearing trees was capital receipt in the hands of the assessee and outside the definition of income and charge of income tax. Further plea of the assessee was that the standing trees were agricultural assets and the compensation received for loss of such agricultural assets was capital receipt not chargeable to tax. The CIT(A) held that the standing trees though do not fall within the definition of agricultural land but were the 'property of any kind' in view of Hon'ble Kerala High Court decision in Travancore Tea Estate Ltd. Vs. CIT 93 ITR 314 (Ker). It was further held that the compensation received for loss of capital assets was capital receipt. The compensation being received for loss of apple trees which were the only source of livelihood of the assessee, were held to be the capital receipt. Further reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Shamsher Printing Press 39 ITR 90 (SC) and in the case of Senairam Doongarmal Vs. CIT 42 ITR 392 (SC) by the CIT(A) for the proposition that the same was capital receipt. The Revenue has filed an appeal against the order of the CIT(A).
10. The first objection of the Assessing Officer was that the receipts are not agricultural income, as it does not fall within the definition of agricultural income under section 2 (1A) of the Act. The term 'Agriculture' in the primary sense is connected to the cultivation of land and when the integrated activity carried on the said land comprising of basic operations followed by subsequent operations is performed, then such land can be said to be used for agricultural purposes and income derived therefrom can be said to be 'agricultural income' derived from the land by agriculture. The above said proposition was laid down by the Hon'ble Apex Court in CIT Vs. Raja Benoy Kumar Sahas Roy (32 ITR 466 (SC)). The onus is upon the assessee to prove that the income earned by it is agricultural income, which is exempt from tax. In the facts of the case, the assessee had initially offered the income as agricultural income and later revised its claim to said being receipt on sale of capital asset. Hence the receipts cannot be treated as agricultural income.
11. The issue to be considered by us is the nature of charges/compensation received by the assessee for cutting/removing of fruit trees and for changing topography, fields, etc. Section 2(14) of the Act defines capital assets as under :
2(14) "capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include--
(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ;
(ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes--
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
Explanation.--For the purposes of this sub-clause, "jewellery" includes--
(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;
(iii) agricultural land in India, not being land situate--
(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; 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;
(iv) 6½ per cent Gold Bonds, 1977, [or 7 per cent Gold Bonds, 1980,] [or National Defence Gold Bonds, 1980,] issued by the Central Government ;
(v) Special Bearer Bonds, 1991, issued by the Central Government ;]
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government ;
12. Under section 2(14) of the Act, capital asset is defined as 'property of any kind', other than that comprised in exceptions, which are provided in the definition itself. The Courts have held that expression "property of any kind" is of wide amplitude and includes both tangible and intangible assets of any kind. The expression "held by the assessee" in the clause includes physical possession of property of any kind. The assessee had received compensation on cutting and removing of trees, in continuation of its agreement of leasing its land for setting up manufacturing unit. The question to be addressed is whether such receipts are in the nature of transfer of capital asset or not.
13. The Hon'ble Supreme Court in Venugopala Varma Rajah (V) v CIT (1970) 76 ITR 460 and Vishnudatta Antharjanam (AKTKM) v CAgIT (1970) 78 ITR 58 (SC) had held that trees, until they are cut and removed, form an integral part of such land. The Hon'ble Kerala High Court in CIT v. Rajagiri Rubber Produce Co. Ltd. (No.1) (1990) 182 ITR 393 (Ker) and in CIT v Alanickal Co. Ltd. (1986) 158 ITR 630 (Ker) held that where the land is agricultural land and it is sold alongwith the trees thereon, the sale is only in respect of agricultural land of which the trees form an integral part. The Hon'ble Supreme Court in CAgIT v Kailas Rubber Co. Ltd. (1966) 60 ITR 435 (SC) held that a bifurcation of the asset, comprising of land and trees thereon can only happen when the trees are sold separately for being cut and removed while the right over the soil is retained by the owner. It has been held by the Hon'ble Kerala High Court in Travancore Tea Estates Co. Ltd. v CIT (1974) 93 ITR 314 (Ker) that the trees standing on agricultural land constitute "property of any kind" mentioned in section 2(14) of the Act and are "capital asset" and profits arising from their sale would be assessable under section 45 of the Act as capital gains.
14. Under the provisions of section 45 of the Income Tax Act, any profits or gains arising from transfer of capital asset effected in the previous year is chargeable to tax under the head "capital gains" and is deemed to be the income of the previous year in which such transfer took place.
15. Section 2(47) of the Act defines transfer as in relation to a 'capital asset'. The definition of transfer is an inclusive definition and what has been defined in this clauses is specifically "in relation to capital asset".
16. In the facts of the present case the assessee entered into an agreement for cutting and removing the standing trees on his land and also consequential changes in the topography/fields pursuant to lease agreement entered in to for leasing out its land to the said lessee, who in turn would establish a unit on the said land. The intention of the assessee in the present case was to cut and remove his standing trees in order to enable the lessee to establish its manufacturing unit, on the land leased to it. As held by the Hon'ble Kerala High Court in Travancore Tea Estates Co. Ltd. v CIT (supra) the standing trees are capital assets as it constitute property of any kind as defined under section 2 (14) of the Act. The said capital asset has been transferred by the assessee by way of the transaction entered into by the assessee with the lessee under which the rights of the assessee in the said asset stand extinguished as the parties entered into agreement for cutting and removing the same from the land in question. The profits arising on such transfer of the 'capital asset' by the assessee is exigible to tax as income from capital gains in the hands of the assessee, as laid down by Hon'ble Kerala High Court in Travancore Tea Estates Co. Ltd. v CIT (supra). Accordingly we hold that the profits arising out of compensation received by the assessee is includible in his hands as income under the head income from capital gains.
14. The learned A.R. for the assessee had fairly admitted that the said standing trees were capital asset in the hands of the assessee. Once the said capital asset is transferred by way of cutting and removing from the said fields, the compensation received on the removal of said trees is taxable being amount received on transfer of capital asset, which is assessable as income from capital gains. In view of the plea of the assessee that changes on land on which trees were grown were incidental to removing the trees and as the Assessing Officer had not disputed the segregation of the compensation and entire compensation was considered against the removal of trees, the total compensation received by the assessee is to be considered while computing the income under section 45 of the Income Tax Act. We find no merit in the claim of the assessee that the said trees being his only source of livelihood. Moreover, the Assessing Officer has erred in treating the income as income from other sources by merely disbelieving the evidence produced by the assessee, and without bringing on record any clinching evidence to the contrary. We set aside the order of the CIT(A) and direct the Assessing Officer to compute the income in the hands of the assessee under the head "income from capital gains", after allowing reasonable opportunity to the assessee. Thus on this aspect, the Revenue partly succeeds.
15. In the result, the appeal of the Revenue is partly allowed.
16. In so far as the other captioned appeals are concerned, it was a common point between the Department and the assessee that the facts and circumstances are identical. For the above reason, the respective orders of the CIT (A) in the other captioned appeals are set aside and the matter is restored back to the file of the Assessing Officer to adjudicate the issue in the light of our order in ITA No. 1232/Chd/2010 in the earlier paragraphs. Needless to mention, the Assessing Officer shall adjudicate the matter, only after allowing a reasonable opportunity to the assessee of being heard. Thus, the other captioned appeals are also allowed as above.
17. Resultantly, all the captioned appeals of the Revenue are partly allowed.
Order Pronounced in the Open Court on 24th day of November, 2011.
Sd/- Sd/-
(D.K.SRIVASTAVA) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 24th November, 2011
Rati
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
True Copy
By Order
Assistant Registrar, ITAT, Chandigarh
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