Commissioner of Income-tax Vs. Dhable, Bobde Parose, Kale, Lute and Choudhari - Court Judgment

Dr. B.P. Saraf, J.

1. At the instance of the Commissioner of Income-tax the following two questions have been referred us by the Income-tax Appellate Tribunal, Nagpur Bench, Nagpur, for our opinion :

'1. Whether the Income-tax Appellate Tribunal is correct in holding that income arising out of purchase and sale of agricultural lands which constitutes a business of the assessee, is also income from agriculture and as such is not taxable at all

2. Whether, on the facts and in the circumstances of the case, the decision of the Bombay High Court in the case of Manubhai A. Sheth relied upon by the Tribunal applies to this case ?'

2. The relevant assessment year is 1967-68. The assessee, which is an association of persons, purchased a plot of agricultural land on October 1, 1966, for Rs. 42,085 which was sold by it to one Shri Shivaji Griha Nirman Sahakari Sanstha, Nagpur, on January 6, 1967, for Rs. 84,759. The assessee claimed exemption in respect of the profits arising out of this deal on the ground that the subject-matter of the transaction being agricultural land, the profits therefrom are not taxable under the Income-tax Act, 1961. The Income-tax Officer rejected the assessee's contention and held that the transaction constituted an adventure in the nature of trade and the income therefrom amounting to Rs. 37,700 was taxable as profits and gains of business. The order of the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner. However, on further appeal by the assessee, the Income-tax Appellate Tribunal decided in favour of the assessee and reversed the findings of the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal observed that the Income-tax Officer himself had accepted the fact that the land in question was agricultural land. That being so, it was held by the Tribunal that the profits derived from the sale of such agricultural land was revenue within the meaning of section 2(1)(a) of the Act and, as such, exempt from Income-tax under section 10(1) of the Act. Hence, the Tribunal came to the conclusion that the aforesaid income of Rs. 37,700 derived by the assessee from sale of agricultural land could not be included in his total income for the purposes of assessment under the Income-tax Act, 1961. At the instance of the Commissioner, the Tribunal has referred the aforesaid questions of law to us under section 256(1) of the Act for our opinion.

3. The relevant facts, as set out above, are brief and simple. There is no dispute that the profit or gain in question resulted from sale of agricultural land. The land was purchased on October 1, 1966, and sold on January 6, 1967. This was the only transaction of purchase and sale of land by the assessee during the whole year. The assessee had not been selling and purchasing lands in the course of its business. Admittedly, it is an isolated transaction of purchase and sale of agricultural land by the assessee. There is also no past record of the assessee having carried on any such business. The question that arises for consideration is, whether, in such a situation, the profits from the sale of agricultural land in question can be subjected to tax under the Income-tax Act.

4. The matter can be examined from three angles. Firstly, whether the income from sale of 'agricultural land' can be termed as agricultural income within the meaning of the term as defined in clause 2(1) of the Act. Secondly, whether the income from transfer of agricultural land in question can be treated as capital gain and subjected to tax under section 45 of the Act and, lastly, whether the agricultural land in the instant case could be treated as stock-in-trade of the assessee and the profits arising from the sale thereof 'profits and gains of the business' for the purpose of subjecting them to tax. We shall deal with these three aspects one by one. However, while doing so it will always be necessary to bear in mind that the transfer in question in the instant case took place on October 6, 1967, much before March 1, 1970, which is relevant in view of certain amendments effected in section 2(1) [now numbered as 2(1A)], sections 2(14) and 47 of the Act with retrospective effect from April 1, 1970.

5. So far as the first question is concerned, it appears to be concluded by the decision of the Bombay High Court in Manubhai A. Sheth v. N. D. Nirgudkar : [1981]128ITR87(Bom) , wherein it was held that profits or gains on sale of agricultural land would be 'revenue' within the meaning of section 2(1)(a) of the Act. To quote from the judgment (headnote) :

'The word 'revenue' has been used in a very wide sense as is shown by that sub-clause itself. The sub-clause states 'any rent or revenue derived from land....' The word 'any qualifies not merely the word 'rent' but also the word 'revenue'. The word 'revenue' means 'income, especially of a large amount from any source'. Thus, the expression 'any revenue' would mean income of every kind. The word 'revenue' is not used as a synonym for the word 'rent' but in contra-distinction to it and to cover all income from land, which is used for agricultural purposes, other than rent and income of the types specified in sub-clauses (b) and (c) of section 2(1). The source of capital gains on the transfer of agriculture land is the same as the source of the other types of agricultural income referred to in section 2(1), namely, the land, and it is a gain which has sprung up or arisen from land like any other gain or income referred to in section 2(1)(a).'

6. It was, therefore, held that (headnote) : 'capital gains arising from 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.' This decision still holds the field so far as the present case is concerned, as it remains unaffected by the amendment of section 2(1) [now section 2(1A)] by the Finance Act, 1989, with retrospective effect from April 1, 1970, by insertion of the following Explanation at the end of renumbered section 2(1A) :

'Explanation. - For the removal of doubts, it is hereby declared that 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 (iii) of clause (14) of this section;'

7. According to this Explanation, 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 under item (a) or under item (b) of sub-clause (iii) of clause (14) of section 2. It may be pointed out that section 2(14) defines 'capital assets'. However, by the Finance Act, 1970, with effect from April 1, 1970, certain agricultural lands described in items (a) and (b) of sub-clause (iii) were excluded from the ambit of 'agricultural land in India'. Such lands, therefore, became capital assets with effect from April 1, 1970. Prior to the amendment by the Finance Act, 1970, 'capital asset' as defined in this clause did not include 'agricultural land in India'. As a result, such land did not form part of capital assets and no capital gain was leviable on the transfer of such land. Besides income derived from transfer of such lands cannot be held to be agricultural income within the meaning of section 2(1) of the Act consequent to the insertion of the Explanation referred to above as it has been done with effect from the assessment year 1970-71. So far as the present assessment is concerned which relates to the assessment year 1967-68, these amendments are not material and the law as laid down by the Bombay High Court in Manubhai A. Sheth v. N. D. Nirgudkar : [1981]128ITR87(Bom) still holds the field. The Tribunal was, therefore, right in holding that the income derived by the assessee from the sale of agricultural land was agricultural income.

8. So far as the second aspect is concerned, on a conjoint reading of section 45, section 2(14) and section 47(iii) of the Income-tax Act, 1961, it is clear that the income from transfer of any agricultural land effected before March 1, 1970, is not subject to any capital gains tax. The decision of this court in Manubhai A. Sheth : [1981]128ITR87(Bom) , still applies in this regard as the amendments made to nullify the effect of the aforesaid judgment have been given retrospective effect only from April 1, 1970.

9. The controversy may now be examined from the third and the last angle. In the instant case, it is not the case of the Revenue that the assessee was carrying on the regular business of sale or purchase of land. The case of the Revenue mainly appears to be that 'the land in question was not purchased by the assessee for carrying on agricultural operations and that there was an intention of doing business'. However, no materials could be brought on record by the Revenue in support of this stand except the allegation that some of the members of the assessee-association of persons, had also entered into similar deals in their individual capacity and that the land in question was sold by the assessee within three months from the date of purchase. The Tribunal did not accept this contention of the Revenue. The fact of purchase and sale of the land by the members of the assessee-association of persons was also contradicted by the assessee. The case of the assessee was that all its members were agriculturists and they never indulged in any such purchase or sale of agricultural land. The Tribunal did not accept the contention of the Revenue in this regard. In that view of the matter, there being no finding in regard to the carrying on of the business by the assessee of sale and purchase of the land and the land being stock-in-trade, the contention of the Revenue that the income from sale of land amounted to profits and gains of business cannot be sustained. In view of the aforesaid factual position, it is not necessary to go into an elaborate discussion on the point as to when a transaction will fall within the definition of business as being an adventure in the nature of trade. As in the instant case, there is no evidence at all of any trading activity in the isolated transaction of purchase and sale of land by the assessee, the transaction cannot be treated, without more, to be a venture in the nature of trade. The onus of proving that the land formed part of the business assets of the assessee is on the Department and in the absence of any evidence to that effect the presumption will be that the land was held as a capital asset by the assessee and the income from transfer thereof was not income from business.

10. In view of the foregoing discussion, it is clear that the income in question could not be subjected to tax under the Income-tax Act either as business income or as capital gains.

11. The two questions referred by the Tribunal are, therefore, answered in the affirmative and against the Revenue. We make no order as to costs.