Income Tax Appellate Tribunal - Mumbai
Second Income-Tax Officer vs National Machinery Mfrs. on 14 October, 1985
Equivalent citations: [1986]15ITD514(MUM)
ORDER
D.S. Meenakshisundaram, Judicial Member
1.This appeal arises out of the income-tax assessment of National Machinery Mfrs. Ltd. now known as Mafatlal Engg. Industries Ltd. (the assessee). The assessment year is 1972-73 for which the previous year ended on 31-12-1971. During this year the assessee sold 62,224 square yards of land for a total consideration of Rs. 4,85,210 by a sale deed dated 24-4-1971. The lands sold by the assessee were situated in the village Kalwa in Thane District. The original cost of these lands was Rs. 55,505. In its original return, the assessee had declared the capital gains on this sale at Rs. 4,29,709, which it later on, revised in its revised return dated 20-2-1974 at Rs. 2,67,426 by substituting the original cost with the fair market value of the lands as on 1-1-1954 at the rate of Rs. 33.50 per square yard. The ITO worked out the capital gains at Rs. 4,22,986 as, according to him, the fair market value of the lands would not be in excess of Re. 1 per square yard as on 1-1-1954.
2. When the assessee took up the matter in appeal, it raised an additional ground before the AAC to the effect that the land sold by it was agricultural land and that, therefore, there was no capital gains liable to tax in its hands. The AAC did not admit this additional ground filed by the assessee, but confirmed the addition made by the ITO. The assessee took up the matter on further appeal to the Tribunal, who by their order dated 29-7-1978 in IT Appeal No. 1569 (Bom.) of 1977-78 directed the AAC to admit the additional ground raised by the appellant and then decide the same on merits after taking into consideration the material which was already brought on record.
3. Pursuant to this order of the Tribunal, the matter was again heard by the Commissioner (Appeals), who, after considering the materials placed by the assessee, accepted the contentions of the assessee and held that the lands sold by the assessee were agricultural lands. He held that the entries in the record of rights are good prima facie evidence regarding the land being agricultural as held by the Gujarat High Court in the case of Chhotalal Prabhudas v. CIT [1979] 116ITR631. He pointed out that the fact that the assessee had been carrying on agricultural operations, though on a very small scale, was evidenced by the records. He also found that before the sale of this land the assessee had been showing the income from agriculture, though such amounts had not been substantial. He further found that it was true that a part of the land had been lying fallow, but what was sold was a contiguous area, though the sale had been shown as of different plots and that since the assessee had been carrying on agricultural operations, it could not be held that the land which was sold was non-agricultural. He further held that Notification No. SO. 77(E), dated 6-2-1973[1973] 89 ITR (St.) 145issued by the Central Government bringing the lands in the village of Kalwa should be treated as urban area for the purpose of income-tax and wealth-tax, could be effective only from the date of the notification and not earlier. Since the sale in the present case took place prior to this date, the surplus realised could not be brought to tax under the head 'Capital gains'.
4. This is being objected to by the revenue in the present appeal in ground No. 1 in the following words :
1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding that land at Kalwa can be treated as urban land for the purposes of Income-tax Act, 1961 and Wealth-tax Act, 1957, only with effect from 6-2-1973, i.e., from the date of notification issued by the CBDT and the sale having taken place prior to this date, the surplus realised was not taxable under the head 'Capital gains'.
5. We have heard Shri Roy Alphonso, the learned departmental representative, and Shri R.C. Desai, the learned counsel for the assessee, and carefully considered their submissions in the light of the materials placed before us and the decisions cited by them.
6. Shri Roy Alphonso took us through the earlier order of the Tribunal dated 29-7-1978, in IT Appeal No. 569 (Bom.) of 1977-78, setting aside the order of the AAC and restoring the matter to him with directions contained in paragraph 25 of the order, for fresh disposal of the issue raised by the assessee in its additional ground of appeal filed before the AAC. The learned departmental representative submitted that the Commissioner (Appeals) erred in his conclusion that the notification dated 6-2-1973 issued by the Central Government did not take effect from 1-4-1970 but only from the date of the notification itself, namely, 6-2-1973 and that, therefore, the said notification was inapplicable to the facts of the present case to bring to tax the surplus arising on the sale of the lands in question by the assessee as capital gains under Section 45 of the Income-tax Act, 1961 ('the Act'). He argued that the notification issued by the Central Government on 6-2-1973 would take effect from 1-4-1970 itself when Sub-clause (iii) of clause (14) of Section 2 of the Act was substituted by the Finance Act, 1970, with effect from that date. He, therefore, argued that the order of the Commissioner (Appeals) on this issue was erroneous and that the same should be reversed.
7. Shri R.C. Desai, the learned counsel for the assessee, pointed out that in its grounds of appeal the department accepted the position that the lands in question were agricultural lands and that they were cultivated as stated by the Commissioner (Appeals), and that the only ground taken by them was purely a legal one. He submitted that the department did not challenge the factual findings of the Commissioner (Appeals) and that the Commissioner (Appeals) was right in his conclusion on the legal issue as there is nothing either in Section 2(14)(iii) as amended by the Finance Act, 1970, with effect from 1-4-1970 nor in the notification, which would show that the notification issued by the Central Government on 6-2-1973 would take effect from 1-4-1970. Shri R.C. Desai argued that in the absence of any express provision in the Act itself there could be no retrospective operation of this notification as otherwise it would lead to chaos in respect of completed transactions of sale.
8. In our view, the decision of the Commissioner (Appeals) that the Notification No. SO. 77(E) issued by the Central Government on 6-2-1973 would take effect only from that date, that is 6-2-1973, is right and that the same has to be upheld. The relevant extract of this notification, notifying village Kalwa in Thane District, which is published in [1973] 89 ITR (St.) 145 to 160, has been furnished at page 47 of the assessee's paper book. This extract shows that this notification declares urban areas for income-tax and wealth-tax purposes. The opening portion of this notification does not say that it is retrospective in operation, that is, that it takes effect from 1-4-1970. In fact it is highly doubtful whether any such retrospective operation could be given by means of a notification issued by the Central Government unless expressly provided for in the statute, namely, Section2(14)(iii). We find nothing either in the Finance Act, 1970, which substituted a new Sub-clause (iii) for the old Sub-clause (iii) in Section 2(14) or in the new Sub-clause (iii), empowering the Central Government to issue a notification with retrospective effect from 1-4-1970. The amendment brought about by the Finance Act, 1970, no doubt, takes effect from 1-4-1970, but there is nothing in item (b) of sub-clause (iii) of Section 2(14) which would warrant the contention of the revenue that the said notification issued by the Central Government on 6-2-1973 would take effect from 1-4-1970, itself. No authority has been placed before us by the revenue to show that the notification would have retrospective operation even though there is nothing expressly stated in Section 2(14)(iii)(b) giving effect to such retrospective operation or empowering the Government to issue such a notification with retrospective effect. On the contrary, a plain reading of Section 2(14)(iii)(b) shows that the notification issued by the Central Government can operate only prospectively from the date of issue, i.e., 6-2-1973 and not earlier. The learned counsel for the assessee is right in his submission that any other interpretation would lead to confusion and chaos in respect of all completed transactions of sale particularly when no such retrospective effect is intended by the Parliament in Section 2(14)(iii)(b). The decision of the Andhra Pradesh High Court in Addl. CIT v. G.M. Omarkhan [1979] 116 ITR 950 to which a reference was made in the course of the hearing, is of no relevance as it related to the interpretation of Section 2(14)(iii)(a) and not of Section 2(14)(iii)(b) with which we are presently concerned in this appeal. In that case there was no dispute that Gaddimalkapur village is within the Hyderabad Municipal Corporation. The arguement on behalf of the assessee was that the population of this village was less than ten thousand according to the last preceding census and that, therefore, the property acquired giving rise to the capital gains could not be regarded as a capital asset. This argument was negatived by the Andhra Pradesh High Court as could be seen from the discussion at pp. 960 and 961 wherein their Lordships held that the population of the entire municipality should be considered together and not merely the population of the particular part of the municipality, namely, Gaddimalkapur village should be considered, as done by the Tribunal in the said case. We are, therefore, of the opinion that this decision is of no assistance to the revenue in the present case.
9. It was next argued by Shri Roy Alphonso that the Commissioner (Appeals) was not justified in accepting the assessee's contentions and in holding that the lands in question were agricultural lands. This contention of the revenue was vehemently opposed by Shri R.C. Desai, the learned counsel for the assessee, as it has not been specifically raised by the revenue in the grounds of appeal. Since, however, the matter has been examined by the Commissioner (Appeals) on merits also, we heard the learned counsel on both sides on the merits of the case also in the interests of justice and for a proper and effective disposal of the appeal.
10. The argument of the revenue is that the evidence produced by the assessee was only for the year 1967-68, that out of the 11 plots of land sold, extracts from the land records were filed only for 8 plots, that the income of Rs. 10,000 for a total area of 25 acres of land held by the assessee was too meagre and nominal and that the extracts filed by the assessee themselves showed that part of the land was lying fallow and some other part yielded only grass of spontaneous growth. Shri Roy Alphonso argued that the Commissioner (Appeals) was not justified in considering all the lands as cultivated. He pointed out that the total land revenue paid to the Government for 12 acres was Rs. 26 only as against Rs. 3,132 for 25 acres which, according to the learned departmental representative, indicated that the agricultural income shown by the assessee could be from the lands retained by the assessee and not from the 12 acres of land sold by the assessee. According to Shri Roy Alphonso at least the two plots of land which are lying fallow would give rise to capital gains liable to tax. In this connection, Shri Roy Alphonso relied upon the decision of the Supreme Court in CWT V. Officer-in-Charge {Court of Wards) [1976] 105 ITR 133, and submitted that the use of the land in each year should be considered in order to determine the true nature of the land at the time of the sale in the present case. Shri Roy Alphonso, however, fairly stated that the decision of the Bombay High Court in Manubhai A. Sheth v. N.D. Nirgudkar, Second ITO [1981] 128 ITR 87, would be in favour of the assessee and against the revenue insofar as the attempt of the revenue to tax this capital gains under Section 2(14)(iii) is concerned.
11. Shri R.C. Desai, the learned counsel for the assessee relied upon the findings of the Commissioner (Appeals) and further stated that all these materials referred to and relied upon by the Commissioner were already on the record of the department as could be seen from the earlier order of the Tribunal remanding the case to the AAC. He pointed out that the two sale deeds at pp. 16 to 35 of the assessee's paper book clearly described the lands sold by the assessee as agricultural lands. Adverting to pp. 36 to 45 of the paper book, Shri R.C. Desai submitted that these records, though they related to the year 1967-68, clearly established that the lands were cultivated by the assessee and that agricultural operations were carried on by the assessee on these lands even though some pieces of the lands were lying fallow. In this connection Shri R.C. Desai referred to p. 46 of the paper book which is a statement showing the total yield of paddy cultivated on the agricultural lands owned by the assessee-company and the amounts realised therefrom, and submitted that this statement was filed before the Commissioner (Appeals) and that further the statement clearly established that agricultural operations were carried on by the assessee in all the years on these lands from 1967 to 1971 till their sale and on the remaining lands till 1981. Shri R.C. Desai also referred us to p. 48 of the paper book which is a letter dated 18-5-1977 written by the assesseee to the AAC, Range 'E', Aayakar Bhavan, Bombay enclosing among other things, a certified true copy of Receipt No. C.N. 434809 dated 30-11-1971, from the Maharashtra Stated Co-operative Marketing Federation Ltd., confirming the receipt of paddy grown on the company's land. Shri R.C. Desai next referred to the letters at pp. 53 and 54 of the paper book which showed that the co-operative housing societies to whom the assessee had sold the lands were not called upon to pay any non-agricultural cess pertaining to the period prior to the sale of the lands by the company to the said societies. Basing himself on these materials, Shri R.C. Desai argued that the conclusion of the Commissioner (Appeals) that the lands in question were agricultural lands at the time of their sale was correct and that the same should be upheld. Shri R.C. Desai contended that this finding of the Commissioner (Appeals) had not been challenged by the department by a specific ground and that it was for the reason that it conformed to the principles laid down by the Supreme Court in the case of Officer-in-Charge (Court of Wards) {supra) and relied upon by the revenue. The learned counsel submitted that the meagre income derived from the agricultural operations would not alter or affect the true nature of the agricultural lands in question nor would they justify the inference as contended by the department that the lands sold by the assessee were not agricultural lands. Adverting to the contention of the revenue that the land revenue paid to the Government for these 12 acres of land was Rs. 26 only, Shri R.C. Desai submitted that this itself proves the correctness of the assessee's case that the land in question was an agricultural land. He further submitted that the sum of Rs. 3,132 referred to by the learned departmental representative as the land revenue for 25 acres was incorrect and that it represented the land revenue paid in respect of other lands held by the assessee-company. Slid Desai argued that the mere fact that some portions of the land in question were lying fallow and not cultivated would not alter the true nature of the land as an agricultural land, as held by the Bombay High Court in CWT v. H.V. Mungale [1984] 145 ITR 208. Shri R.C. Desai next relied upon the decisions of the Gujarat High Court in Smt. Chandravati Atmaram Patel v. CIT [1978] 114 ITR 302, CIT v. Vajulal Chunilal (HUF) [1979] 120 ITR 21 and Manibhai Motibhai Patel v. CIT [1981] 131 ITR 120 as supporting the contentions of the assessee. Finally, Shri R.C. Desai relied upon the decision of the Bombay High Court in Manubhai A. Sheth's case (supra) at pp. 121-140 and contended that the assessee was entitled to succeed on the basis of this decision of the Bombay High Court as the surplus in question cannot be taxed as capital gains as held by the Bombay High Court in this case under Section 2(14)(iii).
12. In the earlier order of the Tribunal dated 29-7-1978, the Tribunal after setting out the submissions as to this aspect of the case in paragraphs 19 to 24 of their order held as follows in paragraph 25 to remand the case to the AAC :
25. Now in the sale deed there is a clear mention at various places that the land under sale was agricultural land. Then in the profit and loss account and balance sheet, there is a credit on account of agricultural income. There are also debits for agricultural expenses. The extracts from the land record, though for the season 1967-68, point out to the fact that in that season at least, agricultural operations were carried on the land. Thus, there was enough material on the ITO's record which could point out to the fact that the land in question may be agricultural land. Now, under the Act as it stood for the relevant assessment year, the agricultural lands are not included in the definition of capital asset. Therefore, any gains arising on the sale of the agricultural lands are not liable to capital gains tax. The ITO is expected to be aware of this legal position. In these circumstances, it was necessary for the ITO to examine the material on record and whether or not the claim was made before him by the assessee, to decide whether there was any liability to capital gains tax owing to the assessee's sale of the land. The ITO omitted to do so maybe because a specific claim was not made before him. However, before the AAC, such a claim was made by the assessee. With the existence of the above material on record, the AAC ought to have examined the said material and decided whether or not to admit the additional ground raised before him for the first time. On the facts and in the circumstances of the case, the decision of the Supreme Court in Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1 is not attracted to the assessee's case. In the above circumstances, in our opinion, the AAC was not justified in refusing to admit the ground in regard to the character of the land which was raised by the assessee before him. We direct that the AAC should admit the said ground and then decide it on merit after taking into consideration the material which is already brought on record.
Thus, it would be clear from the passage quoted above that the assessee had placed all the materials to prove that the lands sold by it were agricultural lands even before the ITO. A copy of the sale deed dated 15-4-1971 executed by the assessee-company in favour of N.M.M. Kamgar Co-operative Housing Society Ltd. at pp. 16 to 27 of the paper book clearly shows that what the assessee was selling to the co-operative society of its employees, was agricultural land. This is clear from the recitals in the sale deed. In fact the recital at p. 18 of the paper book specifically refers to the fact that the lands in question were agricultural lands and that out of abundant caution the parties had applied to the Collector, Thane, for the requisite permission under the provisions of Section 64A of the Bombay Tenancy and Agricultural Lands Act, 1948. Similar is the position in the copy of the other sale deed executed in favour of Shree Sahyadri Co-operative Housing Society Ltd. by the assessee-company at pp. 28 to 35 of the paper book. The extract from the land records at pp. 36 to 45 of the paper book prove that paddy was grown on these lands by the assessee-company as self-cultivation. Some of the extracts also indicate that some portions of the land were lying fallow and on some portion grass was being grown. The statement at p. 46 of the paper book sets out in detail the total yield of paddy in each of the years from 1967 to 1981 derived by the assessee from its agricultural lands as well as the amount received after deducting expenses with their dates of receipt. The letter dated 18-5-1977 at p. 48 of the paper book establishes that even in the year of account the assessee had sold paddy to the Maharashtra State Co-operative Marketing Federation Ltd. from the paddy grown on its land. The letters written by the two co-operative societies at pp. 53 and 54 of the paper book show that they were not called upon to pay any non-agricultural cess pertaining to the period prior to the sale of land by the assessee-company to them.
13. In our view all the above materials clearly establish that the lands sold by the assessee to the two co-operative societies were agricultural lands and that they did not cease to be agricultural lands at the time of the sale by the assessee-company to the co-operative societies. There is no dispute that the land revenue had been paid to the extent of Rs. 26 in respect of these lands even in the year of account.
14. In the case of Officer-in-Charge {Court of Wards) (supra) the Supreme Court held as follows :
The determination of the character of the land, according to the purpose for which it is meant or set apart and can be used, is a matter which ought to be determined on the facts of each particular case. What is really required to be shown is the connection with an agricultural purpose and user and not the mere possibility of user of land, by some possible future owner or possessor, for an agricultural purpose. It is not the mere potentiality, which will only affect its valuation as part of 'assets', but its actual condition and intended user which has to be seen for purposes of exemption from wealth-tax. One of the objects of the exemption is to encourage cultivation or actual utilisation of land for agricultural purposes. If there is neither anything in its condition, nor anything in the evidence to indicate the intention of its owners or possessors so as to connect it with an agricultural purpose, the land could not be 'agricultural land' for the purposes of earning an exemption under the Act. Entries in revenue records are, however, good prima facie evidence.
In H. V. Mungale's case (supra) their Lordships of the Bombay High Court held that the circumstance that a land which is recorded as agricultural land in the revenue records, cannot be used for non-agricultural purposes by the owner, unless the land is allowed to be converted to non-agricultural purposes by the Collector under the provisions of the relevant Land Revenue Act or the Land Revenue Code, must be taken into account while determining the character or the nature of the land. This decision is also authority for the proposition that merely because the land remained fallow for an year, it did not cease to be agricultural land. Applying the ratio of these two decisions to the facts of the present case and the materials referred to above, we have no hesitation in holding that the Commissioner (Appeals) is right in his conclusion that the lands sold by the assessee were agricultural lands and that they did not cease to be agricultural lands on the date of their sales as contended by the revenue.
15. The decision of the Bombay High Court in Manubhai A. Sheth's case (supra), is directly in favour of the assessee and against the revenue. Their Lordships of the Bombay High Court held as follows :
In our opinion, capital gains made on sale of land situate in India, which land is used for agricultural purposes, would be revenue derived from such land and, therefore, agricultural income within the meaning of Section 2(1) of the Income-tax Act, 1961, and Parliament would have no legislative competence to tax such agricultural income. Therefore, to the extent that the impugned Sub-clause (iii) of Section 2(14) read with secfion 45 of the Income-tax Act, 1961, would make the profits or gains arising from the transfer of such lands situate in the areas mentioned in paras (a) and (b) of the said Sub-clause (iii) subject to the levy of capital gains tax by Parliament, it would be beyond the legislative competence of Parliament inasmuch as capital gains on the transfer of lands used for agricultural purposes and situate within these areas would fall within the legislative field of State Government by reason of entry 46 in List II of the Seventh Schedule to the Constitution of India.
Finally, their Lordships of the Bombay High Court held as follows :
... We further hold that Sub-clause (iii) of clause (14) of Section 2 of the said Act does not operate, read with the other relevant Sections of the said Act, to levy a capital gains tax on profits or gains arising from transfer of land which is used for agricultural purposes and must be read down so as to exclude from the operation of the said sub-clause land which is used for agricultural purposes even though it may be situated in any of the areas mentioned in para (a) or para (b) of the said Sub-clause (iii), or, in other words, the said Sub-clause (iii) should be read as if the brackets and words '(other than land which is used for agricultural purposes)' occurred in the said sub-clause after the words 'not being land'. We further hold that read in this manner the impugned Sub-clause (iii) is not beyond the legislative competence of Parliament. We also hold that the said Sub-clause (iii) is not a piece of colourable legislation. We also hold that the said Sub-clause (iii) is neither void as infringing article 14 of the Constitution of India nor void on the ground that it delegates to the executive authority unguided and excessive legislative power. We also hold that a tax on the profits or gains arising from the transfer of agricultural land in India is not a tax on land but a tax on income.
Respectfully following this decision of the Bombay High Court we hold that the assessee-company is not liable to tax on the capital gains arising on the sale of its agricultural lands in the year under appeal. Accordingly, we confirm the order of the Commissioner (Appeals) on this point and reject ground No. 1.
16. In ground No. 2 the objection of the revenue is that the Commissioner (Appeals) erred in holding that the depreciation was admissible on drawings and designs amounting to Rs. 5,53,404. In paragraph 16 of the appellate order dated 29-7-1978, the Tribunal had remanded this issue also to the A AC for the following reasons :
16. As we pointed out earlier, the ITO did not consider the assessee's claim for the depreciation allowance. The AAC, on the other hand, rejected the claim for depreciation allowance on the ground that the manufacturing documents and patterns are not plant. Now while considering the assessee's claim for capital loss under the head 'Capital gains', we have already held in view of the decision of the Gujarat High Court in CIT v. Elecon Engg. Co. Ltd. [1974] 96 ITR 672, that the manufacturing documents and patterns are plant. With that finding, the AAC's ground that the manufacturing documents and patterns are not plant does not survive. At the same time, our findings that the manufacturing documents and patterns are plant automatically do not make the assessee entitled to the depreciation allowance. In order that the assessee is entitled to depreciation allowance, it must satisfy the following further conditions as prescribed in Section 32(1)(i) : (7) it must be established that the plant is used for the purpose of the assessee's business in the year in which the claim is made, (2) it should be established that the plant is owned by the assessee, and (3) the assessee must furnish the prescribed particulars in accordance with the provisions of Section 34(2)(z) of the Act. In the circumstances which we have indicated earlier, the enquiry as to whether the assessee satisfied the above conditions has not been made at the lower stages, and before a decision is taken to grant depreciation allowance on the manufacturing documents, enquiry on the above points is absolutely essential. It is not possible for us to embark upon the said enquiry at this stage. For that purpose the matter must go back to the AAC.
17. After examining in detail the materials placed before him, the Commissioner (Appeals) held in paragraph 7 of his order that the assessee's case fully satisfied the three conditions pointed out by the Tribunal in paragraph 16 of their order to qualify for depreciation. He, therefore, held that the assessee-company was entitled to depreciation on the basis of the decision of the Gujarat High Court in the case of CIT v. Elecon Engg. Co. Ltd. [1974] 96 ITR 672.
18. Before us, the only submission made on behalf of the revenue by Shri Roy Alphonso is that the revenue seeks to keep alive this issue since the matter has been taken on further appeal to the Supreme Court by the revenue from the decision of the Gujarat High Court in Elecon Engg. Co. Ltd.'s case (supra). We, therefore, respectfully follow the said decision of the Gujarat High Court and confirm the order of the Commissioner (Appeals) on this point also.
19. In the result, the appeal is dismissed.