1. This is an appeal by the revenue and the following grounds have been raised: 1. The learned A AC has erred in cancelling the order of the ITO Under Section 143(3) and holding that the assessee is not liable to any capital gains on the transfer of agricultural land.
2. The learned AAC has erred in holding that the ITO was not justified in taking action Under Section 148.
3. The learned AAC's order may be set aside and that of the ITO be restored.
2. We have heard the learned Departmental Representative. No one appeared on behalf of the assessee in spite of service of notice.
3. The ITO initiated action against Sh. Mohd. Hanif, deceased through his son Shri Fateh Mohd., as the deceased had sold certain land during the relevant accounting period for a total sum of Rs. 1,32,126 and in the ITO's view capital gains arising from the transaction had escaped assessment. Return was filed before the ITO declaring nil income. The assessee's contention before the ITO was that the land sold was agricultural land and the refore no profit arising on its sale were taxable. It was also contended that in any case if it was to be treated that the land had been converted into a trading asset before its sale then the market value of the land on the date of such conversion should be deducted from the sale price to arrive at the extent of capital gains. There was some controversy about whether the capital gain would be treated as a short term capital gain or long term capital gain. The ITO took the view that since the assessee had deposited 20 times of the land revenue on 5-8-1972 to acquire bhumidhari rights the capital gain was only a short term capital gain. The contention of the assessee that no capital gainarises from the sale of agricultural land as well as the alternative contention that the market value of the land on the date of conversion were also rejected.
4. On appeal, the learned AAC cancelled the assessment holding that capital gain arising from the sale of agricultural land was not taxable and hence no action Under Section 148 should have been taken against the assessee. In Manubhai A. Sheth v. N.D. Nirgudkar, Second ITO [1981] 128 ITR 87, Hon'ble the Bombay High Court was concerned with the definition of 'capital asset' in Section 2(14)(iii) as amended by the Finance Act, 1970. By this amendment agricultural lands situate within municipal limits were included in the definition of capital asset. At the same time agricultural lands situate within 8 kms. of certain notified urban areas were also included in the definition of capital asset. The Hon'ble Bombay High Court held that profits or capital gains arising on sale of agricultural land would be revenue derived from land within the meaning of Section 2(1)(a) of the Income-tax Act, 1961, which defines agricultural income. Since the same profit was intended to be taxed as capital gains the Hon'ble High Court held that the Legislature was not competent to amend Section 2(14)(iii) in the manner it did and in order that the said amendment does not become totally invalid it held that Sub-clause (iii) of Section 2(14) should be read in a manner so as to exclude lands used for agricultural purposes.
According to this judgment, therefore, the profit arising from the sale of agricultural land is agricultural income within the meaning of Section 2(1)(a). Agricultural income is patently exempt from income-tax. According to the amendment made to Section 2(14) as referred to above the same profit would be capital gains and would be liable to tax. It is to avoid this contradiction that the Hon'ble High Court held that Sub-clause (iii) should be read in a modified manner as suggested above. If Sub-clause (iii) is read in the manner as suggested by Hon'ble the Bombay High Court in the above case, profit arising from the sale of land which is used for agricultural purposes would not be taxable as capital gains.
5. The learned Departmental Representative, on the other hand, relied upon a judgment of Hon'ble the Kamataka High Court in B.S. Jayachandra v. ITO [1986] 161 ITR 190/26 Taxman 689 which was followed in the same High Court in CIT v. B.S. Rajendrappa [19&6] 162 ITR 666/27 Taxman 460.
The Hon'ble Karnataka High Court has dissented from the view taken by the Hon'ble Bombay High Court in the case of Manubhai A. Sheth (supra).
It held that the amendment was valid. There does not appear to be any expression of opinion by Hon'ble the Karnataka High Court whether profit arising from the sale of agricultural land would be revenue arising from agricultural land within the meaning of Section 2(1)(a).
Though the Hon'ble Karnataka High Court has expressed its dissent from the Bombay judgment, it is not clear whether the dissent is restricted to the legislative competence of Parliament regarding the insertion of Sub-clause (iii) of Section 2(14) or it extends to the definition of agricultural income as well.
6. Thus we have two different opinions available on the point. No decision of the jurisdictional High Court, i.e., the Hon'ble Allahabad High Court on the point has been pointed out to us. When two different views are possible, a view which is favourable to the subject has to be taken. According to the view taken by Hon'ble the Bombay High Court the profit arising from sale of agricultural land is agricultural income.
On the other hand, according to the Karnataka High Court it is not so because of the amendment of Section 2(14). We would, therefore, follow the Bombay judgment which is favourable to the assessee.
7. In the case before us it is not disputed that the land in question situate within the Municipal limits of Meerut was agricultural land and was used for agricultural purposes till the sale. It is also admitted that the land waf assessed to land revenue and was recorded as agricultural land in the revenue records. The ITO has himself stated that it was on 5-8-1972 that the deceased deposited the necessary amount for acquiring bhumidhari rights over this land. The property sold, therefore, was agricultural land used for agricultural purposes and, therefore, according to the view taken by Hon'ble the Bombay High Court in the aforesaid case, the profit arising from its sale was revenue derived from agricultural land and was thus agricultural income. That being so, the income was not taxable at all. Therefore, the learned AAC was right in cancelling the assessment.
8. In view of the above finding we are of the view that the other questions, i.e. whether action Under Section 147 was validly taken and whether the profit arising was short term or long term capital gain need not be decided. In the result, the revenue's appeal is dismissed.
1. My learned brother has upheld the order of the Appellate Assistant Commissioner by holding that profit on sale of agricultural land was agricultural income and not capital gains. For this he has relied on the decision of the Bombay High Court in the case of Manubhai A. Sheth (supra). He has duly taken note of the other view but in view of the divergence has followed the view which was favourable to the assessee.
2. In the present case there is no dispute that the conditions laid down for the charge of capital gains on the transfer of agricultural lands are satisfied. I am party to an order in the case of Mahinder Kishore [IT Appeal No. 6316 (Delhi) of 1985] and several other appeals relating to Kishore Kunj group in Delhi Bench "B". In that case a note was taken of the decision of the Karnataka High Court in the case of B.S. Jayachandra (supra), where the decision of the Bombay High Court had not been followed. In fact the Karnataka High Court had followed the decision of the Gujarat High Court in the case of Ambalal aganlal v. Union of India [1975] 98 TR 237 in holding that the relevant provisions were not ultra vires. In another decision the Karnataka High Court in the case of B.S. Rajendrappa (supra) has taken the same view in a reference proceeding. In that decision their Lordships made the following observation:- We are somewhat surprised that the Tribunal and the Appellate Assistant Commissioner should have held that Section 2( 14)(iii) of the Act was not on the statute book on the basis of a ruling of the Bombay High Court which had its operation only in the State of Maharashtra. In Patil Vijaykumar v. Union of India [1985] 151 ITR 48/20 Taxman 363 (Kar.), we have clarified the legal position of a declaration of an all India Act by a different High Court. We do hope and trust the Tribunal and the Appellate Assistant Commissioner will follow our ruling in Patil Vijay kumar's case [1985] 151 ITR In the case of Patil Vijaykumar v. Union of India [1985] 151 ITR 48/20 Taxman 363 the Karnataka High Court has held that the decision rendered by the High Court is binding on that High Court or the Tribunal's functioning in the territorial area over which it exercises jurisdiction and not on other High Courts or the other Tribunals. While doing so, their Lordships dissented from the view expressed by the Bombay High Court in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589.
3. I am, therefore, of the view that the law having made capital gains chargeable on the sale of such agricultural lands, the orders of the revenue authorities have to be upheld.1. We, having differed on an issue, proceed to state the point of difference as below and refer it to the President, Income-tax Appellate Tribunal for nominating Third Member for deciding the matter :- Whether on the facts of the case, the profit on the sale of agricultural land was chargeable to capital gains in the relevant assessment year 1. This is a matter that came before me as a Third Member on account of the difference of opinion between the Members of Delhi Bench 'A' who heard this appeal. The point of difference of opinion is: "whether on the facts of the case, the profit on the sale of agricultural land was chargeable to capital gains in the relevant assessment year.
2. Late Shri Mohd. Hanif Gaddi had sold certain agricultural lands during the accounting period relevant for the assessment year 1974-75 for a total consideration of Rs. 1,32,126. In response to the notice issued by the ITO to assess capital gains arising on the sale of this land, the legal representative of the deceased assessee filed return disclosing nil income. The contention of the assessee was that the land sold was agricultural land and, therefore, no profit arising on its sale could be taken as capital gain and taxed. Alternatively, it was contended that if the land was converted into a trading asset before sale, then the market value of the land on the date of conversion should be taken as the cost and should be deducted from the sale price to arrive at the capital gains. In either case, there would be no taxable capital gains. The ITO, however, treated that the land was a short-term capital gain and rejecting the assessee's contention that no capital gain arose from the sale of the agricultural land as well as the alternative contention. The ITO brought to tax the capital gains arising on this sale, that was computed at Rs. 97,130.
3. On appeal, the AAC cancelled the assessment holding that the capital gain arising from the sale of agricultural land was not taxable and hence no action Under Section 148 was available to the department 4. The matter came before the Tribunal at the instance of the Income-tax Officer, Cir. II, Meerut. The Tribunal noticed that there was a divergence of views on this issue as to whether the sale of agricultural land could be taken as agricultural income or not among the High Courts. In Manubhai A. Sheth's case (supra), the Bombay High Court held that the sale of agricultural land would be revenue derived from the land within the meaning of Section 2(1)(a) of the Income-tax Act, 1961 which defines agricultural income. Going through the reasons that prevailed with the Bombay High Court in holding that the capital gains arising on sale of agricultural land would be revenue income derived from the land suffice it to say that the Bombay High Court was trying to reconcile the amended Section 2(14)(iii) by enlarging the definition of the capital asset to include agricultural lands situate within the municipal limits. Since agricultural income was patently exempt from income-tax according to the judgment of Bombay High Court, the profits or capital gains arising on sale of agricultural land would also be entitled to exemption. This was the view held by the learned Judicial Member in his order. Although his attention was drawn to the other views expressed by the Karnataka High Court, he preferred to follow the Bombay High Court on the principle that whenever two opinions are possible, the one that is in favour of the assessee should be preferred in the absence of any decision of the jurisdictional High Court. On this view, he exempted the capital gain arising on the sale of the agricultural land from tax and confirmed the order of the AAC.5. The learned Accountant Member, however, followed the Karnataka High Court's decision and held that the law having made capital gains chargeable on the sale of such agricultural land was proper, the orders of the revenue authorities deserve to be upheld. The Karnataka High Court held in the case of BS. Rajendrappa (supra) that the Tribunal was hot justified in holding that Section 2(14)(iii) of the Income-tax Act was not on the statute book following the ruling of the Bombay High Court in the case referred to earlier which had its operation only in the State of Maharashtra. It was on account of this divergence of opinion, the above difference of opinion arose which was referred to me as Third Member.
6. None appeared on behalf of the assessee either before me as Third Member or before the Tribunal or for that matter even before the authorities below. I have, therefore, heard the learned Departmental Representative and perused the records. The learned D.R. brought to my notice that the Finance Act, 1989 had introduced Explanation to Section 2(1)(a) of the Income-tax Act with retrospective effect w.e.f. 1-4-1970 which provided that: "for the removal of doubts, it is hereby declared that the revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of Sub-clause (Hi) of Clause (14) of this Section". The result of the introduction of this Explanation is to nullify the effect of the Bombay High Court's decision holding that the profits or gains arising on the sale of agricultural land would be agricultural income. Since the revenue derived from land is not to include any income arising from the transfer of any land, the capital gains arising from the transfer of the land in question is not any more to be treated as revenue derived from land and, therefore, as agricultural income. Since this is given retrospective effect from 1-4-1970 which covers the assessment year in question before me, it must be held that the capital gains arising on the sale of the agricultural land is capital gain and not agricultural income and, therefore, the view expressed by the learned Accountant Member has to be accepted as correct in law. I, therefore, agree with his view and hold that the profit on the sale of agricultural land in question was chargeable to capital gains in the relevant assessment year.
7. The matter will now go before the regular Bench for disposing of the appeal according to the majority opinion.