9911796707
TMI Blog1985 (7) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... ry Co. as industrial area and farm section. According to the appellant, the industrial area comprises of one acre and 2362 sq. ft. and the farm section is comprised of 6 acres and 20 cents. There is no dispute regarding the liability for capital gains in respect of the industrial section. The dispute is regarding the capital gains arising on the sale of 6 acres and 20 cents alleged to be agricultural land by the appellant. The ITO came to the conclusion that (1) the appellant purchased the land to utilise for its business of manufacture of tiles ; (2) in the sale deed in favour of the appellant there is no mention that what was purchased by the appellant was an agricultural land ; (3) the extent of the land is about 6 acres while the claim for agricultural expenses is very meagre ; (4) no kist has been paid by the appellant; (5) the erstwhile watchman of the appellant-company, Iyyamperumal, taking the land on lease is not supported by any stamped lease agreement and enquiries reveal that he has not paid any lease amount to the appellant-company nor did he confirm categorically that he executed any lease deed ; and (6) the price at which the land was sold by the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the watchman, Iyyamperumal, clearly go to establish the agricultural character of the land and in the absence of any evidence to show that the appellant has converted the land into non-agricultural land, the agricultural character of the land continues to be the same and the profits arising on the transfer of such a land are exempt from capital gains tax. 4. The contentions of the learned departmental representative can be summed up as under: (1) The appellant's predecessor in title E.I.D. Parry Co. never held the land as agricultural land. The appellant-company was formed for manufacturing mosaic and other flooring tiles, cement pipes, store-ware and earthenware pipes, etc., and carrying on agricultural operations was not one of the objects for which the appellant-company was incorporated and since the appellant-company cannot carry on any operation not specified in the memorandum of association, it is obvious that the land in question could not have been purchased for any agricultural purpose or user and the land was never held or intended to be held by the appellant as agricultural land and the very fact that the land was sold by the appellant as house sites and plots ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tests enunciated above to determine the general character of the land. 7. Environment and situation of land - The land in question is situated on the Suramangalam road outside the city limits of Salem Municipality and comes under Meyyanur Panchayat Board. On the north it is bounded by Salem junction and Yercaud road. It is now comprised in the Salem Postal Zone and has the pin code number 4. 8. Previous, present and future use to which the land is put and the intention of the appellant at the time of purchase - The land was originally purchased by E.I.D. Parry Co. as early as 2-2-1898. E.I.D. Parry Co., engaged in distillery and manufacture of sugar, could not have purchased the land for agricultural purpose. To a query by the ITO the company by its letter dated 19-2-1960 informed that it has sold the old 'Karkana building' to the appellant for Rs. 30,000. In the sale deed, executed by E.I.D. Parry Co., there is absolutely no mention that the land sold by them to the appellant was an agricultural land. There is no evidence that E.I.D. Parry Co., used this piece of land as an agricultural land or was paying any land revenue. Materials on record disclosed that the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at survey No. 64, Meyyanur village, Suramangalam Road, Salem, comprises a compound wall, concrete roofed shed and lean to structure with asbestos sheets. The appellant has also put up a guest house near the factory. The factory building with the godowns, guest house, etc., were leased out by the appellant to another private limited company under the name and style of Meccano Floorings (P.) Ltd., for Rs. 12,000 per annum for one portion and Rs. 4,500 per annum, for another portion. Later, the appellant entered into a licence agreement with one Kandaswamy Chettiar allowing the latter the use of the crushing section in the factory for crushing magnesite, cuddapah stones and all types of other stone-lumps into chips and powder at the rate of Rs. 17 per ton of finished material. On 11-2-1959 the appellant entered into an agreement with a group of three persons (S/Shri J.R. Mehta, A. Kolandai Pillai and G. Venkataram) agreeing to sell for Rs. 2,50,0006.2 acres of land out of 6.76 acres purchased from E.I.D. Parry Co. The questions that have to be considered are. (1) Was it sold as an agricultural land ? (2) Did the land retain the character of agricultural land at the time of sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant, the land was cultivated with coconut and banana plants, and cholam and vegetables were grown. The expenses and income under the head 'garden maintenance' are as under : Assessment Income Expenses Year Rs. Rs. 1961-62 195 This includes Rs. 32.50 and Rs. 2.50 as building maintenance expenses and Rs. 45 as miscellaneous expenses........... 1962-63 1,109 Major part of the expenses relate to manuring and watering the plants and for gardening ........... 1963-64 2,282 This represents gardening expenses and garden supervisor's salary ........... 1964-65 1,032 This is stated to be expenses for repairs and maintenance of the garden ........... 1965-66 206 This is stated to be expenses for repairs and maintenance of the garden ........... 1966-67 Nil ........... 1967-68 Nil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, at the time of hearing, a single solitary kist receipt was produced. No survey number has been given in that receipt. There is no evidence that patta No. 19 given in that receipt relates to the land which is now in dispute. Copies of extracts from the adangal register for the assessment years 1967-68 and 1968-69 are produced to show that cholam crops were raised in the land. These documents produced may furnish prima facie evidence of the agricultural character of the land. They cannot be taken as conclusive evidence for the agricultural character of the land. If we take the other factors and circumstances, such as its location, the user to which it was put by E.I.D. Parry Co., the purpose for which the appellant purchased the land, the intention of the owner with regard to the purchase, user and sale of the land, singularly and cumulatively go to establish that the land in question was never held as an agricultural land or intended to be held as an agricutural land. 12. In CWT v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133, the question before the Supreme Court was whether property called Begumpet Palace within the municipal limits of Hyderabad consisting of va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate connection with an agricultural purpose. (2) There must be credible evidence of appropriation or setting apart of the land for agricultural purposes. (3) Not only the actual condition of the land has to be seen but also the intended user of the land. The above observations and the tests profounded by the Supreme Court were no doubt made in a case where no agricultural operations were carried on in the land at the relevant point of time. Since the determinative factor is not the current user of the land, but the general characteristics of the land, as gathered from all the relevant circumstances, such as its situation, development and user of the lands in the adjoining areas, the intention of the owner with regard to the user of the land, the tests profounded by the Supreme Court in the case reported in Officer-in-Charge (Court of Wards)'s case can be applied in the present case. As a limited company has no power to do anything which is outside the purview of its memorandum of association and carrying on agricultural operation is not one of the objects for which the appellant-company was set up, it is obvious that the appellant could not have purchased the land in questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of exemption from capital gains tax. The land that was sold for Rs. 2,50,000 was put to agricultural user to earn paltry incomes of Rs. 275 for the assessment year 1967-68 and Rs. 125 for the assessment year 1968-69 and no income at all for earlier years is an unmistakable indication to show that the alleged agricultural user is neither the ordinary nor the natural user of the land. The object of exemption from capital gains tax is to encourage cultivation or actual utilisation of land for agricultural purposes. It is, therefore, imperative to give a reasonable meaning to the term 'agricultural land' and not to give an unrestricted scope for interpreting the term. 14. To sum up, the agricultural character of the land has to be determined on a consideration of not one but all the circumstances of the case. No single factor even that of actual user for agricultural purpose is conclusive. It is the cumulative effect of the entire circumstances that has to be considered. In doing so, we hold that the land in question does not constitute agricultural land so as to enable the appellant to claim exemption from the levy of capital gains tax. 15. Under section 45 of the Act income under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market value on the date when it became an agricultural land. 18. The identical contention was raised in Ranchhodbhai Bhaijibhai Patel v. CIT [1971] 81 ITR 446 (Guj.). In that case, the assessee contended that the land was throughout an agricultural land and it became capital asset in his hands for the first time only on 23-1-1963 when it was converted into non-agricultural land and, hence, the cost of acquisition of the capital asset must by taken to be the market value of the land on 23-1-1963. This contention was negatived by the Tribunal by holding that 'the cost of acquisition of the capital asset' was what it cost to the assessee to acquire the capital asset, i.e., the land, and since the land was acquired by the assessee prior to 1-1-1954, the assessee had the option under the provisions of section 55(2) of the Act to substitute the fair market value of the land on 1-1-1954. On this finding of the Tribunal, the question referred to the High Court was : "Whether in computing the capital gains, the assessee is entitled to deduct from the sale proceeds the market value of the land sold as on 1-1-1954 or the market value of the land as on 23-1-1963, when the lands were conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas, originally it was non-capital asset, it now becomes capital asset. It would indeed be doing violence to the language of section 48, clause (ii), to read the words 'the cost of acquisition of the capital asset' in the manner suggested on behalf of the assessee...." The High Court ultimately held that the interpretation suggested on behalf of the assessee would have the effect of introducing the following two unwarranted fictions in section 48(ii) : (1) The property, which on the date of acquisition was non-capital asset and subsequently became capital asset, must be deemed to have been acquired by the assessee as a capital asset only on that date. (2) The market value of the property on that date should be deemed to be the cost of such acquisition. The contention of the assessee would also introduce yet another legal fiction in section 55(2)(i), as pointed out by the High Court, that "the property which is transferred would become the property of the assessee only at one point of time and it could not become the property of the assessee as a non-capital asset at one point of time and as capital asset at another point of time". This will introduce a legal fiction in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit or loss as the case may be, in a trading or commercial sense. It was contended for the appellant that on the same analogy where a non-capital asset (agricultural land) has been converted into a capital asset (non-agricultural land), then for purposes of determining the real profits in a commercial sense on the sale or transfer of such a capital asset, the market value of the asset on the date of conversion should be taken. It was further contended that where capital investments have been converted to stock-in-trade, in computing the commercial profits in such cases, the market value of the property on the date of conversion is taken and on the same analogy, when a non-capital asset is converted into a capital asset, the market value of the property at the date of conversion should be taken for computing the capital gains. There is no reported case in support of the plea raised on behalf of the appellant. On the other hand, the Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel clearly negatives the plea of the appellant. 21. It was sought to be contended that the Legislature would not have intended that the enormous appreciation in value, which took place when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove 6.76 acres of land purchased in 1959. The assessee had in the meanwhile bifurcated the land purchased by it into industrial and farm areas, the former comprising up to just one acre and the latter to acres and 20 cents for which, as stated above, an agreement to sell was entered into on 19-8-1966. The assessee accepted its liability to capital gains in respect of the 'industrial' portion of the land, but not the area of 6.2 acres which the assessee claimed to be an agricultural land. The ITO rejected the assessee's contention and brought to tax capital gains computed on this transfer of Rs. 2,28,902. He took the full value of the consideration at Rs. 2,50,000 and deducting therefrom the original cost of acquisition of 6.2 acres worked out the figure of capital gains at Rs. 2,28,902. On appeal, the AAC upheld the ITO s order. It is, thus, that the matter is in appeal before the Tribunal. 2. The assessee has raised several grounds of appeal, the substance of which reduces itself to two, namely, that assessment to capital gains of Rs. 2,28,902 is unjustified and that what is sold being agricultural land, capital gains were not attracted on the transfer at all. 3. Before us, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or are capable of being used for raising any valuable plants or trees or for any other purpose of husbandry. In Megh Raj v. Allah Rakhia AIR 1942 FC 27, the Federal Court observed : "... It may on a proper occasion be necessary to consider whether for the purposes of the relevant entries in Lists 2 and 3, Constitution Act, it will not be right to take into account the general character of the land (as agricultural land) and not the use to which it may be put at a particular point of time...." The Gujarat High Court in Rasiklal Chimanlal Nagri's case considered the meaning of 'agricultural land' with reference to certain plots of land situated in Ahmedabad in a wholly residential area with residential buildings around the plots. The area was covered by a town planning scheme and the land had ceased to be cultivated over two decades. The following obtains: "... The intention of the owner of the land to put it to any particular use at a given point of time cannot be the determining factor. Whether a land is agricultural land or not cannot depend on the fluctuating or ambulatory intention of the owner of the land. The criterion must be something more definite, something more obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the correct test." They concluded stating : "... The true test to be applied for the purpose of determining whether a particular land is agricultural land or not, in a case where the land is not being actually put to any use, is not whether the land is capable of being used for agricultural purpose but whether having regard to the various factors to which we have referred earlier, the general nature or character of the land is such that it can be regarded as agricultural land...." 7. In CWT v. Narandas Motilal [1971] 80 ITR 39, the Gujarat High Court considered the question in the context of its earlier decision in Rasiklal Chimanlal Nagri's case and held that the land was agricultural land. They held as : "... If once the assessee becomes successful in showing that the land is consistently used for agricultural purpose throughout the relevant period, then that fact can be taken as furnishing some prima facie evidence to determine the character of the land in question. However, this may not be considered as sufficient looking to other facts and circumstances of the case. For instance, if building site which is situated in the midst of a fully developed residential locality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WT v. Smt. Sheela Devi [1970] 77 ITR 693 (Punj. Har.). In the former case the learned Judges of the Patna High Court held that it was only when the integrated activity of agriculture was undertaken and performed on any land that could be called agricultural land and that the mere presence of trees on the land would not make it agricultural especially when the land was situate in the heart of a town and was surrounded by residential buildings. "The question whether a piece of land is agricultural or not does not depend on the intention of the owner to use the land for purpose of agriculture ; the criterion must be something more definite and more objective, something related to the nature or character of the land." In Smt. Sheela Devi's case, their Lordships of the Punjab High Court, not agreeing with the 'narrow test laid down' in Syed Rafiqur Rahman's case observed : "... If the Legislature had intended that it is only such land which should be treated as agricultural land for purposes of the Act which is actually under cultivation, there would be no difficulty in making a provision to that effect. It is indeed open to the Legislature to indicate that actual user of the land o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case as was laid down by them in Officer-in-Charge (Court of Wards)' case. In V. Venugopala Varma Rajah's case, their Lordships of the Kerala High Court considering a case of forest lands with trees of spontaneous growth, held : "'.... Agricultural land, ... is land on which a prudent owner will undertake any of the processes of farming in its widest sense. The fact that a particular area is being used for agriculture may indicate that the land is agricultural in character. But a current user is by no means conclusive....' The test, as we have already indicated, should be whether a prudent owner would embark on an adventure in agriculture in respect of the lands concerned. The prudent owner is the common man of the common law, sane and sensible, reasonable and responsible, averse to gambling and speculative experiments, but nonetheless. prepared for normal risks and legitimate expenditure." 11. In CWT v. P. Sankaran Nair [1976] 103 ITR 366, the Madras High Court had occasion to consider the question in connection with 17 acres and odd of land in Velachery village, Saidapet Taluk, Chingleput district, which the assessee purchased for a sum of Rs. 33,600 in 1955. The lands we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion in the present case." 12. The term 'agriculture' was considered in CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 by the Supreme Court. The question before the Court was whether income from forest lands derived from sal and piyasal trees not grown by human skill and labour could constitute agricutural income. The test applied there was whether there was some integrated activity which could be described as agricultural operations yielding income. It was pointed out that, although a mere wild or spontaneous growth of trees not involving the employment of any human labour or skill for raising them could not be agricultural income yet when there was a forest more than 150 years old which had been carefully nursed and attended to by its owners, the income would be agricultural. Stating that this is not a direct authority upon what is 'agricultural land', the Supreme Court held in Officer-in-Charge (Court of Wards)' case that the above decision nevertheless went a long way in helping us to decide what would be agricultural land. The following obtains: "... We think that this must be land which could be said to be either actually used or ordinarily used or meant to be used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... character of the land rendering it unfit for immediate cultivation ; (5) if the land is assessed to land revenue as agricultural land under the State revenue law, it is a strong piece of evidence of its character as agricultural land ; (6) mere enclosure of the land does not by itself render it a non-agricultural, land ; (7) the character of the land is not determined by the nature of the products raised, so long as the land is used or can be used for raising valuable plants or crops or trees or for any other purpose of husbandry ; (8) the situation of the land in a village or in an urban area is not by itself determinative of its character." was the subject matter of appeal before the Supreme Court in Officer-in-Charge (Court of Wards)' case. Holding that it is not correct to give as wide a meaning as possible to the terms used in the statute simply because the statute does not define the expression, their Lordships of the Supreme Court held that it is imperative to give reasonable limits to the scope of the expression 'agricultural land'. The Supreme Court laid down the following tests : "... We agree that the determination of the character of land, according to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, thus, not fixed for all time. For capital gains purpose, the nature of the land at the time of the sale may not be the same as at the time of purchase. The Supreme Court held that the potential use of the land is not decisive of the matter but read in the light of Sri Krishna Rao L. Balekai's case and Avtar Singh Rangwala's case it would appear that if possibility of the transformation from agricultural land to non-agricultural land and vice versa is simple and cheap, the land may be regarded as returning to its earlier nature. The Supreme Court stressed the importance of the actual condition and the intended user. These two tests cannot obviously be applied simultaneously. If actual condition is agricultural on a particular date, the intended user may be of no significance. But if the actual condition is not agricultural, the intended user may be decisive, e.g., where the land is tilled, irrigated say by putting up a pumpset, etc., the intended user would be agricultural and the land would also be agricultural. The nature of the land, thus, varies not only with the time but also with the person who owns it and uses it. 15. Applying the above principles to the facts of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamated company." "50. Where the capital asset is an asset in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year either under this Act or under the Indian Income-tax Act, 1922 (11 of 1922) or any Act repealed by that Act or under executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force, the provisions of sections 48 and 49 shall be subject to the following modifications: (1) The written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset. (2) Where under any provision of section 49, read with sub-section (2) of section 55, the fair market value of the asset on the 1st day of January, 1964, is to be taken into account at the option of the assessee, then, the cost of acquisition of the asset shall, at the option of the assessee, be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has put it, the ordinary commercial principles on which actual profits are computed. We think that the approach of the High Court was correct and normally the commercial profits out of the transaction of sale of an article must be the difference between what the article cost the business and what it fetched on sale. So far as the business or trading activity was concerned, the market value of the shares as on April 1, 1945, was what it cost the business. We do not think that there is any question of a notional sale here. The High Court did not create any legal fiction of a sale when it took the market value as on April 1, 1945, as the proper figure for determining the actual profits made by the assessee. That the assessee later sold the shares in pursuance of a trading activity was not in dispute ; that sale was an actual sale and not a notional sale ; that actual sale resulted in some profits. The problem is how should those profits be computed ? To adopt the language of Lord Radcliffe, the only fair measure of assessing trading profits in such circumstances is to take the market value at one end and the actual sale proceeds at the other, the difference between the two being the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case before the Gujarat High Court. Their Lordships held that where the property transferred was not a capital asset on the date of its acquisition but became one subsequently, only its character has changed and the cost of acquisition should be taken as the price at which the original property was purchased. Ordinarily, this decision would have been decisive of the matter but for the above-mentioned Supreme Court decisions and for certain other developments. The same High Court considered in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393, the computation of capital gains in the case of goodwill. The concept of cost of acquisition of the 'capital asset' was examined there also. Their Lordships rejected the claim that the gains arising from transfer of goodwill is not taxable. The assessee in that case relied strongly on section 48 in support of his contention that since goodwill transferred did not cost anything to him in terms of money, it was not a capital asset the transfer of which fell within the mischief of the charging provision in section 45. Observing that "the object of the charging provision is to tax 'profits and gains' and this expression means real or net profits or gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in B.C. Srinivasa Setty's case followed the decision of the Madras High Court and the Calcutta High Court and dissented from that of the Gujarat High Court in Mohanbhai Pamabhai's case, K. Ratnam Nadar's case was followed in the matter of licences in CIT v. Kuppuswamy Pillai [Tax Case No. 420 of 1971 dated 20-9-1976], CIT v. Naina Mohammad [Tax Case No. 211 of 1972 dated 26-10-1976] and CIT v. Abdul Rahim [Tax Case No. 223 of 1972 dated 23-2-1977]. 21. As far as the interpretation of the expression 'cost of acquisition of the capital asset' is concerned, the earlier decision of the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case should, thus, be regarded as no longer good law. The observations of Sarkar J., in his minority judgment in Bai Shirinbai K. Kooka's case: "... If you cannot distinguish a business from its proprietor, then the cost of a thing for the purpose of the business would be its value at the time the proprietor of the business acquired it. Such value from a businessman's point of view would in my opinion be the value for which he acquired it when he did so for value, or its market value on the date of acquisition, when he paid no value for it. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Setty. "... No doubt, two views are possible on the question. When two views are possible on a question concerning the interpretation of a tax law, the one which is fair both to the assessee and the department should be followed. The view that capital gains tax is not attracted to transfer of goodwill is a fair and just interpretation. If the view of the Gujarat High Court in Mohanbhai Pamabhai's case [1973] 91 ITR 393 is correct, the cost of acquisition of a goodwill being nil, the full value of the consideration for its transfer has to be brought to charge to capital gains tax. Such a levy will not be a tax on profits or gains but, in substance, a tax on the capital value of the asset. The capital value of goodwill is charged to tax under the Wealth-tax Act, 1957. Wealth-tax is an annual recurring tax. When there is an annual recurring tax on the capital value of goodwill, it will be unfair to levy another tax calling it as capital gains on the same value of the goodwill in the same assessment year, merely because the goodwill has been transferred for consideration." What is stated above in connection with the assessment of goodwill, a self-generated asset, would apply with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1) of section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section ; (c) in the case of a capital asset being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee ; (ii) In respect of capital assets other than those mentioned in clause (i), the period for which any capital asset is held by the assessee shall be determined subject to any rules which the Board may make in this behalf ;" Reference is specifically made in the above provision to 'a capital asset held by the assessee' for a period. The expression used is not 'an asset'. If a non-capital asset is held for some time and it becomes converted into a capital asset and the assessee holds the same after such date of conversion for not more than 60 months immediately preceding the date of the transfer, this would constitute the transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the company for growing its own sugarcane and possibly sugarcane was also produced. The out-skirts of Salem have been sugarcane producing area. Looking to the extent of the land purchased and the likely extent of the area of the factory, the above persumption is inevitable. 26. The factory building along with the extensive lands surrounding it was sold to the assessee in 1959 for a sum of Rs. 30,000. The factory building must have depreciated over a period of 60 years. Even if some value has to be put on this, the value of 6 acres of land accompanying the old factory building would be a good portion of the purchase price. In the outskirts of Salem town completely barren land, useless for any purpose, would certainly not have cost this amount as was paid by the assessee- company. It is, therefore, clear that this was not barren land but cultivable or cultivated land. The price paid by the company more or less approximates to the likely cost of the agricultural land in the area during that period that is, a few thousand rupees per acre and not a few hundreds per acre which would be the price of barren land. The assessee purchased this land with buildings in an auction. It is nev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal authorities in fact have referred to coconuts, banana, etc., being brought by the managing director from his native place and planted in the area. There is, thus, evidence of clear planting of coconuts and bananas. The adangal register refers to the cultivation of cholam. The certificate from the village karnam also supports this. It cannot, therefore, be stated that there were no agricultural operations on the land. The cumulative result of these facts is that what the assessee purchased in 1959 was clearly agricultural land on which some sort of cultivation seems to have been continued even later. It may be to find out the extent of cultivation and the date up to which the nature of the land was continued as agricultural, the persons who have given evidence such as the village karnam, the alleged tenant Iyyaperumal, etc., would require to be examined. It could, however, be stated that by 1966 when the assessee entered into an agreement for the sale of this property, it had clearly given up all ideas of cultivation. It had also undertaken to perform the non-agricultural activities referred to in the agreement of sale. The latest date, therefore, on which an inference of conver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on original cost as on 1-1-1954. The assessee was a firm and came into existence on 1-7-1962 after the partition of an erstwhile HUF which had purchased the capital asset. The Tribunal remanded the case to the AAC to compute the capital gains treating the value as on 1-7-1962 at the original cost rejecting the department's contention that this point was not raised either before the AAC or the Tribunal. Their Lordships of the Madras High Court upheld the Tribunal's direction. The classic observations of Sethuraman, J. are as under: "As regards the jurisdiction of the Tribunal to rectify the error in the manner in which the Income-tax authorities had proceeded, we find that the Tribunal had jurisdiction to find out how the capital gains have to be arrived at having regard to the provisions of the law. The Tribunal cannot perpetuate an error if it had crept into the orders of the authorities below." This observation and also similar observations in Abdul Rahim's case Tax Case No. 76 of 1975 dated 23-2-1977 support the view above. In the present case, grounds of appeal No. 1 in fact covers the entire ground. It is, therefore, not only correct but absolutely necessary for the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence of clear planting of coconuts and bananas and also cultivation of cholam as evidenced by the adangal register coupled with the certificate from the village karnam. He took the view that could not be said that no agricultural operation were done on the land at all. He reiterated in paragraph No. 26 of his order that what the assessee purchased in 1959 was clearly an agricultural land on which some sort of cultivation seems to have been continued even later and it cannot be said that by 1966 when the assessee entered into an agreement for the sale of this property, it had clearly given up all ideas of cultivation and it had also undertaken to perform the non-agricultural activities referred to in the agreement of sale. According to him, the latest date on which an inference of conversion into non-agricultural land can be made would be the date of this agreement. The market rate on that date was Rs. 2,50,000. He finally found it necessary in the interests of justice to send the matter to the AAC to find out the particular date on which such conversion took place as, according to him, it may be that on going into the details of the case further evidence may be forthcoming to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t trees, plantain trees and growing of vegetables, cannot clothe the land in question with the character of an agricultural land. When the assessee's counsel produced the certificate from the village karnam to show that the land was cultivated for 10 years, the Judicial Member was of the view that it was not in the form of a sworn affidavit and that it was produced for the first lime at the time of hearing. Similarly, in respect of the certificate of cultivation given by the President of the Meyyanur Panchayat Union, he applied the same reasoning that was given for the first time and no reasons have been given as to why these documents have not been produced earlier and why they should be admitted at that stage. As against the above view of the Judicial Member with regard to the actual user of the land, the Accountant Member has taken the very same factors into consideration and wanted to remit the matter back to the AAC to find out when these activities which testify the agricultural user of the land ceased. In this connection, the question as to what the assessee purchased was an agricultural land or not is a matter that has to be firstly decided. Mr. Ramgopal, appearing for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been tested. I would, therefore, hold that in the absence of examination of these evidences a proper decision on this question cannot be arrived at and, therefore, I would refer this matter back to the Bench to consider remitting the matter back to the AAC for examination of the evidence. 7. Further, in this case also, the assessee's counsel, Mr. Ramgopal, referred to the circular of the CBDT as referred to and relied on by the counsel, Shri S.P. Mehta, in the case of Krishna Tiles Potteries [IT Appeal No. 2212 of 1975-76] and wanted us to adopt the same arguments as advanced by Shri Mehta in that case. In the abovementioned case, by my order dated 23-1-1978 I have already taken the view that this matter should go back to the original Bench to consider the applicability or otherwise of the circular in question. Since in any case, as mentioned earlier, I am sending this appeal back to the Bench to consider remitting also consider the applicability or otherwise of the circular in question also the matter back to the AAC for examination of the evidences, they may and give their finding on that. 8. After the Bench hears on the above points and if there is still need to refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year was, when purchased, not a capital asset inasmuch as it was an agricultural land. No doubt the departmental representative had invited my attention to an observation of the learned Judicial Member in paragraph No. 10 of his order for the purpose of showing that the learned Judicial Member had held that the land in question was never held or intended to be held by the assessee as an agricultural land. However, when it was pointed out to him that the learned Judicial Member had himself in paragraph No. 9 of his order categorically stated that the questions that have to be considered are : (i) was it sold as an agricultural land, and (ii) did the land retain the character of an agricultural land at the time of sale and that in paragraph No. 16 of his order he has addressed himself to the question whether the cost of acquisition of the agricultural land is to be taken as the original cost of acquisition or its estimated cost on the date it became capital asset, that is, it became non-agricultural land, Shri Venkataraman, the departmental representative, fairly stated that he has nothing more to say and that he considered it to be his duty to point out what the learned Jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a High Court decision in the case of Chunilal Prabhudas Co. and the Karnataka High Court decision in the case of B.C. Srinivasa Setty. In particular, he has laid great emphasis on the fact that the Legislature has, in its wisdom, used the expression 'cost of acquisition of the capital asset' in section 48(ii) as distinct from the expression 'the cost of acquisition of the asset'. He has also laid emphasis on the fact that for the purpose of ascertaining whether the surplus arising out of such a sale would be liable to long-term capital gains or short-term capital gains. What is important is the date of conversion into capital asset. If the said date is important, he stated, the cost of acquisition on the date of conversion will have to be equally important. As stated earlier, the learned Judicial Member has felt that the issue was squarely covered by the decision of the Gujarat High Court. 5. There has also been controversy before me with regard to the circular issued by the CBDT dated 1-8-1969 in terms of which the cost of acquisition of the capital asset will be the market value of the agricultural land on the date of its conversion. This circular, it may be stated, has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al asset for the purpose of section 48(ii) should be the actual cost of acquisition of the agricultural land to the assessee. 7. There is, however, another aspect of the matter which requires serious consideration. The Kerala High Court has, in its Full Bench decision in the case of B.M. Edward, India Sea Foods held that a circular affecting the right of the assessee, despite its withdrawal, is applicable for the years in which it was in operation. This decision has been followed by the Kerala High Court in a subsequent case in the case of Geeva Films. No decision of any other High Court or the Supreme Court where a contrary view could have been taken has been brought to my notice. Having regard to this aspect of the matter, I have carefully gone through the circular issued by the CBDT on 1-8-1969 being Instruction No. 88 and Circular No. 12/10/68-IT(A-II) where following the Supreme Court's decision in the case of Bai Shirinbai K. Kooka, the CBDT has taken the view that for the purpose of computing the surplus liable to capital gains tax, the market price of the land at the point of time when the agricultural land became capital asset should be taken. There is then another circu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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