1970 (9) TMI 19 - HC - Income Tax

Sale of agricultural land - On account of the ban on the sale of agricultural land to non-agriculturists, the applied to the Collector seeking permission to convert the lands into non-agricultural lands - permission was granted and thereafter the sales were effected - whether profit on sale are taxable as capital gain

Summary

Issues Involved:
1. Whether the lands sold by the assessee were agricultural lands within the meaning of section 2(14) of the Income-tax Act, 1961.
2. If the answer to the first question is negative, whether the assessee is entitled to deduct from the sale proceeds the market value of the lands sold as on January 1, 1954, or the market value as on January 23, 1963, when the lands were converted into non-agricultural lands.

Detailed Analysis:

Issue 1: Agricultural Land Definition under Section 2(14)

The primary question was whether the land sold by the assessee was "agricultural land" within the meaning of section 2(14) of the Income-tax Act, 1961, at the time of sale. This determination is crucial because under section 45, capital gains tax is applicable only on the transfer of a "capital asset," which excludes agricultural land in India.

The court noted that the term "agricultural land" is not defined in the Act and must be understood in its plain ordinary meaning. Referring to a previous judgment in Rasiklal Chimanlal Nagri v. Commissioner of Wealth-tax, the court outlined several factors to determine whether land is agricultural. These factors include the actual use of the land, the intention of the owner, the physical characteristics of the land, and the surrounding area's development and use.

In this case, the land was used for agricultural purposes until January 23, 1963, when the assessee obtained permission for non-agricultural use from the Collector. The court observed that this change was not temporary but intended to be permanent, as the land was sold for constructing residential houses. The court also noted that the price was fixed per square foot, a common practice for non-agricultural land, further indicating the change in the land's character.

Given these circumstances, the court concluded that the land ceased to be agricultural from January 23, 1963, and thus, at the time of sale, it was not agricultural land within the meaning of section 2(14). Therefore, the first question was answered in the negative.

Issue 2: Computation of Capital Gains

The second issue concerned the computation of capital gains when a capital asset, initially not a "capital asset" at the time of acquisition, subsequently became one. Specifically, whether the assessee could deduct the market value of the land as of January 23, 1963, when it was converted into non-agricultural land, or as of January 1, 1954.

Section 45 of the Income-tax Act charges to tax any profits or gains arising from the transfer of a capital asset. Section 48 provides the method for computing these gains, requiring the deduction of the "cost of acquisition of the capital asset" from the full value of the consideration received. Section 55(2) defines "cost of acquisition" for assets acquired before January 1, 1954, allowing the assessee to opt for either the original cost or the fair market value as of January 1, 1954.

The assessee argued that the "cost of acquisition of the capital asset" should be the market value as of January 23, 1963, when the land became non-agricultural. However, the court rejected this argument, stating that the only condition for tax under section 45 is that the property must be a capital asset at the date of transfer. The court emphasized that the words "the cost of acquisition of the capital asset" refer to the cost incurred to acquire the property, regardless of its status as a capital asset at the time of acquisition.

The court concluded that the correct interpretation of section 48, clause (ii), read with section 55(2), clause (i), is that the original cost of acquisition or the fair market value as of January 1, 1954, should be deducted from the sale proceeds. Therefore, the second question was answered by stating that the assessee is entitled to deduct the market value of the land as of January 1, 1954.

Conclusion:

The court answered both questions in the negative, ruling that the lands sold were not agricultural lands at the time of sale and that the assessee could deduct the market value of the lands as of January 1, 1954, in computing capital gains. The assessee was ordered to pay the costs of the reference to the Commissioner.