2014 (10) TMI 353 - AT - Income Tax

Computation of capital gain on sale of the land - Land falls under capital asset or not u/s 2(14) - Whether the subject matter of the land which is situated in Kakkanad falls within the jurisdiction of the municipality or within 8 kms radius of the notified municipality Held that - Kakkanad village where the property is situated in all the appeals falls within the territorial jurisdiction of Trikkakara panchayat at relevant point of time - Trikkakara panchayat is not a notified area on and from 06-01-1994 - In the notification dated 06-01-1994 the Cochin municipality is a notified municipality including part of Eloor and Marad panchayats upto a distance of 8 kms from the municipal limits - lands are beyond municipal limits or beyond 8 kms radius from the cochin municipal limits - Therefore, the Kakkanad village where the subject land is situated does not form part of the notified area, hence the agricultural land situated in Kakkanad village which falls in Trikkakara panchayat was excluded from the definition of capital asset u/s 2(14) of the Act - the agricultural land situated in Kakkanad village which falls in Trikkakara panchayat does not fall within the definition of capital asset u/s 2(14) of the Act. Land agricultural or not Held that - Section 10(37) was introduced with a view to mitigate the hardship faced by the farmers whose agricultural land situate in specified urban limit has been compulsorily acquired - in respect of the agricultural land which was used for agricultural purpose during the two years immediately preceding the date of compulsorily acquition under any law or transfer for a consideration which was determined or approved by Central Government or Reserve Bank of India, then such capital gain would not form part of the total income of the assessee - section 2(14) has to be interpreted strictly - Therefore, the requirement using the land for two years immediately preceding the date of transfer cannot be a pre-condition for the purpose of section 2(14) of the Act - what is required for section 2(14) is connection with agricultural purpose. The assessee has not applied for conversion of land for non agricultural purpose - The land is classified as agricultural land and the village officer certified that the land was subjected to cultivation - The assessee is contributing to the Agricultural Labourer s Welfare Fund and also paying revenue tax as agricultural land which is evidence from Basic Tax Register - The Village Officer certified that the subject lands were subjected to cultivation - the subject lands were agricultural lands beyond the municipal limits or beyond 8 kms radius of the notified municipality - the land cannot be treated as capital asset within the meaning of section 2(14) of the Act - hence not liable for capital gain tax under the Income-tax Act. Interest on fixed deposits Held that - The deposits were made for the purpose of earning interest - the interest income arising out of the fixed deposits has to be classified as Income from other sources and it has to be assessed accordingly - The assessees have also availed overdraft facility on the basis of the fixed deposit for the purpose of business - the interest payable by the assessees may be liable for deduction as business expenditure - interest paid under such circumstances cannot be deducted from the interest on the fixed deposit - CIT(A) is not justified in allowing the claim of the assessees thus, the matter is remitted back to the AO for fresh consideration Decided in favour of revenue. Payment of commission disallowed Held that - No material is available on record to suggest that the statements said to be recorded from third parties with regard to commission payments were furnished to the assessee - unless and until the copies of the statements recorded from third parties are furnished to the assessee, the same cannot be used against the assessee - before placing any reliance on the statement of third parties, the same shall be furnished to the assessee thus, the matter is remitted back to the AO for fresh consideration Decided in favour of assessee. Unexplained cash credit u/s 68 Held that - The CIT(A) is not justified in deleting the addition - one more opportunity to be given to the assessee to prove the credit would not prejudice the interest of the revenue thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of revenue.

Summary

Issues Involved:
1. Computation of capital gain on the sale of land and whether the land qualifies as agricultural land under Section 2(14) of the Income-tax Act.
2. Deduction of interest paid on overdraft against interest received on fixed deposits.
3. Disallowance of commission payments based on third-party statements.
4. Unexplained cash credit of Rs. 97 lakhs.

Detailed Analysis:

1. Computation of Capital Gain on Sale of Land:
The core issue was whether the land sold or acquired by the government qualifies as agricultural land under Section 2(14) of the Income-tax Act, thus exempting it from capital gain tax. The assessees claimed the land was agricultural, while the revenue argued otherwise.

- Revenue's Argument: The land, though classified as agricultural by the state, was not used for agricultural purposes at the time of transfer. The burden of proof lies on the assessee to prove the land's agricultural status. The revenue cited several judgments, including CIT v. Ramakrishna Deo and CIT vs R Venkataswamy Naidu, to support their stance.

- Assessee's Argument: The land was used for agricultural purposes, evidenced by certificates from the Village Administrative Officer and agricultural income returns. The land was situated beyond the municipal limits and was not a notified area, thus falling outside the definition of a capital asset.

- Tribunal's Findings: The Tribunal noted that the state government did not maintain records for cultivation. However, the land was classified as agricultural in the revenue records, and the assessees provided certificates from village officers and other relevant documents. The Tribunal concluded that the land in question was agricultural and situated beyond the municipal limits, thus not a capital asset under Section 2(14) of the Act. Consequently, the gains from the sale were not subject to capital gain tax.

2. Deduction of Interest Paid on Overdraft Against Interest Received on Fixed Deposits:
The assessees deducted interest paid on overdrafts from the interest received on fixed deposits, which the revenue disallowed.

- Revenue's Argument: The entire interest received on fixed deposits should be treated as income. The revenue relied on the judgment of Dr. V.P. Gopinathan vs CIT, where the Supreme Court held that interest paid on overdrafts cannot be deducted from interest on fixed deposits.

- Assessee's Argument: The overdrafts were taken against fixed deposits to avoid premature closure, and the interest paid on these overdrafts should be deducted from the interest received.

- Tribunal's Findings: The Tribunal, following the Supreme Court's judgment in Dr. V.P. Gopinathan, held that the interest paid on overdrafts cannot be deducted from the interest received on fixed deposits. The CIT(A)'s orders allowing the deduction were set aside, and the assessing officer's disallowance was restored.

3. Disallowance of Commission Payments Based on Third-Party Statements:
The assessee in ITA No.224/Coch/2011 claimed commission payments, which were disallowed based on third-party statements.

- Assessee's Argument: The assessing officer disallowed the commission payments without providing the assessee with copies of the statements recorded from third parties.

- Tribunal's Findings: The Tribunal held that statements from third parties cannot be used against the assessee without furnishing copies to them. The issue was remanded back to the assessing officer to furnish the statements to the assessee and decide the matter afresh, allowing the assessee an opportunity to cross-examine the third parties.

4. Unexplained Cash Credit of Rs. 97 Lakhs:
The assessee claimed to have received a loan of Rs. 97 lakhs from Mrs. Sunitha Elizebath George, which was disallowed by the assessing officer due to lack of evidence.

- Revenue's Argument: The assessee failed to prove the genuineness of the transaction and the creditworthiness of the creditor. Mrs. Sunitha Elizebath George did not appear before the assessing officer, and the details of the land sold were not furnished.

- Assessee's Argument: The assessee provided the permanent account number and bank statements of Mrs. Sunitha Elizebath George, proving the genuineness of the transaction.

- Tribunal's Findings: The Tribunal found that the CIT(A) allowed the claim based on documents not furnished to the assessing officer. The issue was remanded back to the assessing officer to re-examine the matter, giving the assessee an opportunity to provide necessary evidence to establish the identity, creditworthiness, and genuineness of the transaction.

Conclusion:
- The appeals regarding the agricultural land were dismissed, confirming the land as agricultural and exempt from capital gain tax.
- The disallowance of interest deduction on fixed deposits was upheld.
- The issue of commission payments was remanded for re-evaluation.
- The unexplained cash credit issue was remanded for further examination.