Monday 12 March 2012

Income tax - Whether when assessee fails to prove that any agricultural activity was carried on plot of land, located in proximity of residential area, sale of such land gives rise to capital gains - YES: ITAT


THE issue before the Tribunal is - Whether when assessee fails to prove that any agricultural activity was carried on the plot of land, located in proximity of the residential area, the sale of such land gives rise to capital gain. And the verdict goes against the assessee.
Facts of the case
A) Assessee sold an agricultural land and claimed that since it was not a capital asset, the profit on the transfer of the
same was exempt. AO concluded that the land was not agricultural in nature and treated the sale transaction as ‘an adventure in the nature of trade'. AO asked the assessee to provide the details of crops grown, expenses incurred for raising the crops and evidence for agricultural receipt. Assessee contended that under a bonafide belief that no income was taxable, no details were maintained by her except a copy of the 7/12 extract.

AO summoned the purchaser of the land u/s 131 and recorded a statement wherein, the purchaser stated that there was no evidence of any crop grown on the said land and the land was filled with only grass at time of sale. Further the land was purchased applied and obtained certificate of non agricultural (N.A.) and plotted the land into housing plots and it was never meant for cultivation. AO also issued summons to Talati to verify the genuineness of the contents of the 7/12 extracts. In the statement recorded the Talathi stated that the remarks about the crops grown in the 7/12 extracts were generally placed after visiting the land and as per the information provided by the owner of the land. AO confronted the Talati to the statement of the purchaser but the Talati could not explain properly as he was not the Talati at that time. Based on the same, AO concluded that the contents of the 7/12 extracts could not be taken as acceptable evidence and rejected the assessee’s claim that the said land was cultivated and decided that the land was purchased to sell it at profit and not cultivate and therefore, constituted as an adventure in the nature of trade.

Assessee raised the plea of invalid assessment which was rejected by the CIT (A). Further, CIT(A) approved the finding of the AO that there was no agricultural activity on the aid piece of land and approved the AO’s contention that the sale was an adventure in the nature of trade and held that the surplus on the sale transaction of the land had to be treated as capital gains.

Assessee contended that the land was purchased with the intention to cultivate the land. As per the records of the land revenue, it was classified as agricultural land. Assessee had cultivated the land from the date of its purchase until the date of sale. The land being agricultural land and situated outside the municipal jurisdiction/limit was outside the purview of the definition of capital asset liable to tax, as per sec. 2(14)(iii)(a). As per the evidence in the form of 7/12 extract the land was cultivated by the assessee and had taken the crops. The land was never held as stock in trade or business asset. It was retained by the assessee as a capital investment till it was sold out. The land was sold not with intention to make profit but it had become inconvenient and difficult to carry out the agriculture activities in the said area due to uncongenial circumstances prevailing in that area. The assessee reinvested the part sale proceeds of agricultural land in purchase of new agricultural land. Assessee had continued her agricultural activity and there is no prohibition to reinvest the sale proceeds of agriculture land in purchase of new agriculture land. AO merely assumed and presumed, as per his sweet will, that assessee indulged in sale and purchase transactions of agricultural lands without bringing any evidence on record. There was no other investment made by the assessee except purchase and sale of land. Merely, non furnishing of details of expenditure incurred on cultivation could not be ground for total rejection of claim of agriculture income. The surrounding lands were agriculture land. Thus presumption would be in favour of holding that the land agricultural land in question was also agricultural land. Mere inclusion in residential zone…by town planners did not make the land as non agricultural land. The land revenue / agriculture cess was paid. No other activity was carried out. The intention of the assessee must be considered in the light of the various attendant circumstances.

Revenue contended that the assessee sold the land after the gap of 28 months and earned huge profit which was not disclosed in the return on the ground that it was not a capital asset. The additional ground for granting exemption u/s 54B for investment made in another agricultural land was raised. The said land was never used for agricultural purpose. The land was located in the ‘residential zone’ marked by the local bodies and there was no way there was conducting any agricultural activity in the said land. The 7/12 extracts of the assessee were not dependable as held by the Hon’ble Apex Court in the case of Smt. Saarifabibi Mohamed Ibrahim and Others. Therefore it was contended that the said land was non agricultural in nature and transaction in question should be construed as ‘an adventure in the nature of the trade’.

B) AO issued a notice u/s 148 within four year from the end of the year in which the return was filed. The assessing officer recorded the reasons for reopening the assessment. AO rejected the objections which were confirmed by the CIT(A) during the first appellate proceedings. Assessee heavily relied on the decision of the Bombay High Court in the case of P. S. Joshi and Supreme Court’s decision in the case of Kelvinator of India and stated the reassessment proceedings were initiated due to the change of opinion which were invalid. Further, she referred to the provisions of sec 157 of the Maharashtra land Revenue Code 1966 and sec 114 of the Indian Evidence act, 1872 to advance his case.

Revenue contended that there was no occasion for formation of an opinion on any issue in general or on the issue which was the subject matter of reassessment. Thus, it was not a case of change of opinion. AO who was in local know of the geography of the area and the real estate developments had formed an opinion based on the information available before him in the form of return of income and the annexure appended thereto, had come to the conclusion that the sale transaction in question was an adventure in the nature of trade. Therefore, capital gains were attracted. The land in question could not be said to be the agricultural land and impugned sale transaction could not be held to be non commercial transaction. Thus, the AO had rightly assumed jurisdiction u/s 147.

C) Assessee raised an additional ground to allow exemption u/s 54B of the Income tax Act stating that the land being an agricultural land the assessee is entitled for exemption u/s 54B.

After hearing both the parties, the ITAT held that,
A) ++ the land transferred in question is borne in the records of the revenue as agricultural in nature. Regarding the use of the land for agricultural purpose, there is lot of dispute. Assessee failed to provide any direct evidence say purchase/labour bills in support of the purchase of seed/seedlings, fertilizers, pesticides, labour bills etc on one side or sale bills in support of the earning of the net agricultural income. It is a settled legal proposition that, when the claim of exemption/deduction is made, the onus is on the assessee to demonstrate the genuineness of such claim. Considering the assessee’s failure in this regard, the arguments/views of the revenue be upheld on this issue of use of the land for agricultural purpose. The holding period of the impugned land in the hands of the assessee is only 27 months and odd and therefore, this period falls short of the holding period specified for long term capital asset such as land and building as defined vide section 2(47A) of of the Act. Therefore, the land cannot be even meet the definition of a ‘long term capital asset’. Revenue contended that the land parcel owned by the assessee is just a 1 km away from the residential zone. The zoning system will make sure that the use of the land is regulated in and around that area. The short distance from the residential zone makes it clear that practically, the agricultural practices cannot be undertaken and in any case the land would be now in the Town Planning (TP) scheme of that area of Jalgaon. There is no direct evidence and convincing evidence to demonstrate the existence of agricultural activity on the said land during the holding period. Regarding the conversion of the land, plotting, construction of roads and sale of the plots in yardage and not acreage, it is a fact that she did not do any of these activities, however, the vendee has done all these activities. The assessee sold the property of Rs 1.43 lakhs worth for the sum of Rs 11.11 lakhs in the gap of 27 months of holding period indicate that the said land is worthy for earning commercial profits and the assessee is aware of such value addition owing to the proximity of the land to the residential zone. Therefore the arguments of the assessee are dismissed. As the land is not suitable for agricultural activities, no real agriculturist will go for such land, which is unsuitable for agriculture practices. Why will any agriculturist go for this piece of land knowing very well that it is not fit for agricultural activities in view of the untold uncongenial circumstances? Therefore, there is no hesitation in dismissing the assessee’s views on this point;

++ the judgement of the Supreme Court in the case of Smt.Saarifabibi Mohamed Ibrahim and Others is considered in which it was held that for ascertaining whether land is agricultural, cumulative effect of all relevant facts for and against assessee must be considered. The Apex Court dismissed the assessee’s facts that the land is borne on the revenue records and assessee paid the land revenue. Revenue’s failure to prove that the said lands were used for non agricultural purpose was also dismissed. On the other hand, various other events i.e. potential of the property for non agricultural use i.e. housing purpose and the intention and conduct of the assessee to exploit such potential, were considered and decided the case in favour of the revenue. In the case of the assessee, potential of the property i.e. location based or otherwise, intention and conduct of the land owner in dealing with such potential filled property, end use of the said property are vital facts to be considered for adjudicating the issue under consideration. The impugned land should be held not used for the agricultural purposes as the assessee failed show up any evidence forget about any direct evidence. In fact there is contrary evidence to suggest that the said land was not used for agricultural purpose in the form of a statement of the vendee of the land. The assessee did not made use of the offer of the CIT(A) for cross examination of the witness. It is undisputed fact that the said land is located proximity to the residential zone and the end use of the land is for residential plots only. Considering the end use of the land done soon after the sale transaction, the assessee cannot be held free from the commercial exploitation of the impugned land. The non agricultural use of land is part and parcel of the impugned sale transaction and therefore, the assessee is beneficiary of such non agricultural profits. The land purchased for Rs 1.43 lakhs was sold for Rs 11.11 lakhs in a span of 27 months which is generally possible with non agricultural land deals. Intention of the assessee is decipherable from such events. Potential of the land for plotting for housing purpose and phenomenal price of Rs11.11 lakhs earned by the assessee also are the relevant indicators. Thus, the ratio of the apex court’s judgment is applicable mutatis mutandis. Thus, since the assessee failed to discharge the onus claiming exemption as agricultural income, the order of the CIT (A) treating the profit on sale of land as capital gain is upheld;

B) ++ the case of the assessee is that the assessee is an agriculturist and the land in question is agricultural in nature and earned agricultural income of Rs 15,000/- and the sale transaction is not an adventure in the nature of trade as proposed by the AO. On the other hand, the case of the revenue is that the assessee is not an agriculturist and land in question was not used for agricultural purposes. Apex court’s decision supports the views of AO. Therefore, the AO rightly assumed jurisdiction u/s 147 of Act. What are available to the AO for formation of the ‘reasons to belief’ for recording the reasons and issue of notice u/s 148 of the Act. Based on the details on record, AO formed an opinion that the “assessee is carrying on the business of purchase and sale of agricultural land and therefore the activity is an adventure in the nature of trade or business and income from the same is taxable as business income.” It is decide if the said belief is erroneous or otherwise and the said information is sufficient enough for generating a “reason to believe” as mentioned in the section 147. The Hon’ble Supreme Court held in the case of Joti Parshad vs. State of Haryana that “suspicion” or “doubt” or “believing” cannot be equated with the expression “reason to believe. From the explanation given in sec. 26 of the IPC, “sufficient cause to believe” is an essential ingredient of “reason to believe”. The circumstances also assume the importance in this matter of formation of reason to believe as per the above judgment of the Supreme Court of India. The circumstances must give rise to knowledge about the thing and reason to believe about it. AO has ‘reason to belief’ that the income has escaped as the AO had the knowledge about the impugned transaction for purchase of land, the land was located close to the residential zone and of course unsuitable for agricultural purposes, holding of

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