2022 (2) TMI 1146 - HC - Income Tax

Capital gains - nature of land sold - land converted into a barren land to establish an industrial estate - land sold by the assessee through sale deed in favour of Kerala State Industrial Development Corporation Limited (for short KSIDC ) - assessee is a public limited company engaged in a range of activities such as cultivation, processing, and trading in tea, rubber, aquaculture; providing engineering services, etc - Whether Tribunal was right in holding that the land converted into a barren land to establish an industrial estate was an agricultural land u/s.2(14) and therefore, profit on sale not assessable to income tax for capital gains? - whether the sale of an asset constitutes sale of a capital asset or agricultural land, and is case-specific and to be determined on a case-to-case basis? - HELD THAT - The schedule property, as admitted by the parties, is located in Kinalur and Kanthalad village in Quilandi taluk, nearly 20 kms away from Kozhikode Municipal Corporation limits. The schedule property, a plantation land, was an agricultural land both by classification and user till date of cutting of rubber trees. With the cutting of rubber trees, at best, the schedule property becomes arable land, which may not be an agricultural land with plantations. The user for agriculture is not denied by such cutting of rubber trees. This contention that barren land is not agricultural land is neither supported by authority nor material. This Court is of the view that the vacant agricultural land available upon cutting and carrying away of trees, at best, can be called arable land meaning, land used for any agricultural purpose. Either to attract the meaning of capital asset or not to attract agricultural land, something more is required. The ipsi dixit objection, examined with admitted factors, would not decisively act in determining whether the schedule property satisfies capital asset or not. In the case on hand, the assessee both factually and legally did not change the character of land from agriculture to non-agriculture. The assessee has demonstrated that the classification of land continued to be agricultural land in the revenue records even as on the date of sale. Though it is a peripheral, it is an important matter in appreciating the character of land sold by the assessee; namely, had the land been converted for the non-agricultural purpose/laid out in plots, then the stamp duty payable on registration would be on the nature of land sold at the relevant point of time. The schedule property was described as land in conveyance deed. The schedule property consists of vast extents of agricultural land, admittedly outside a notified area. There is no change of user at the instance of assessee. The burden fastened on the assessee in the circumstances of the case has been discharged and the findings recorded by the Tribunal are available in the facts and circumstances of the case. We apply the principles enunciated in the cases referred to supra to the case on hand and the tests taken out as relevant by the Revenue and examined as tenable or not. The findings of fact recorded by the Tribunal, in the circumstances of the case, do not warrant interference of this Court. The three objections raised against the findings recorded by the Tribunal since are without merit, the substantial questions are answered in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Classification of land as agricultural or non-agricultural.
2. Applicability of capital gains tax on the sale of the land.
3. Interpretation and application of legal precedents regarding agricultural land.

Detailed Analysis:

Issue 1: Classification of Land as Agricultural or Non-Agricultural
The primary issue revolves around whether the land sold by the assessee to KSIDC is classified as agricultural land or not under Section 2(14) of the Income Tax Act. The assessee argued that the land was used for agricultural purposes, specifically as a rubber plantation, and was not within the area notified by the Central Government under Section 2(14)(iii)(b) of the Act. The land was recorded as agricultural in the revenue records, and agricultural income tax was paid. The Tribunal found that the land was used for agricultural purposes until the date of sale, and the mere cutting of rubber trees did not change its classification to non-agricultural land. The Tribunal also noted that the land's future use by KSIDC as an industrial estate was not a deciding factor in its classification at the time of sale.

Issue 2: Applicability of Capital Gains Tax
The Revenue contended that the land was converted into non-agricultural land by the assessee for the sale to KSIDC, thus attracting capital gains tax. The Assessing Officer and the CIT (Appeals) had determined that the land was non-agricultural based on the MoA clause allowing the assessee to cut and remove rubber trees. However, the Tribunal held that the land's classification as agricultural land should be based on its use and status at the time of sale, not on its potential future use. The Tribunal concluded that the sale consideration received was not exigible to capital gains tax as the land was agricultural at the time of sale.

Issue 3: Interpretation and Application of Legal Precedents
The Revenue relied on the Supreme Court's decision in Sarifabibi Mohmed Ibrahim and other High Court judgments to argue that the land should be classified as non-agricultural. The Tribunal, however, distinguished the facts of the present case from those precedents, noting that the land in Sarifabibi Mohmed Ibrahim was within municipal limits and had not been used for agriculture for several years. The Tribunal emphasized that each case must be examined on its merits, considering all relevant factors, including the land's classification in revenue records, its actual use, and the absence of steps to convert it to non-agricultural use.

Judgment Summary:
The Kerala High Court upheld the Tribunal's decision, agreeing that the land sold by the assessee was agricultural at the time of sale and not subject to capital gains tax. The Court noted that the classification of land as agricultural or non-agricultural is a question of fact, to be determined based on the specific circumstances of each case. The Court found that the assessee had demonstrated that the land was used for agricultural purposes and was classified as agricultural in the revenue records. The future use of the land by KSIDC as an industrial estate did not affect its classification at the time of sale. The appeal by the Revenue was dismissed, with the Court affirming that the land was agricultural and not subject to capital gains tax.