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TMI Blog2013 (1) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... s not conclusive in determining the true nature of land. In the present case, no connection of the land to the agricultural purposes or user is established. In fact, land was not meant for agricultural purposes and had also not been used by the assessee for agricultural purposes. Thus, even though the land had not been converted into non-agricultural it remained non-agricultural land. The conversion into non-agricultural land was necessary for the purpose of usage of the land for industrial purpose and merely because the land was not converted the same could not be considered as agricultural as there was no connection of the land to the agricultural purpose and user. Argument of the DR that since land was beyond Municipal limits the same has to be considered as agricultural cannot be accepted as it is not the location of the land but its connection with agricultural purpose and user which makes it agricultural. The term “agricultural land” has not been defined either in the Income tax Act or in Wealth Tax Act, therefore, tests laid down by the Hon'ble Supreme Court to determine the true nature of land in a case relating to Wealth tax Act will be equally applicable in case of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leveling expense 5.80 1994-95 Boring 0.65 1994-95 Fencing 7.41 1994-95 Consulting charges, advertisement & marketing legal fees, traveling and hotel expenses 36.27 1995-96 Stamp duty and registration 0.95 1996-97 Land revenue 0.09 1996-97 Legal expense 0.05 1996-97 Interest capitalized 99.41 Total Rs.150.63 2.2 The assessee claimed that the land had been converted into stock in trade on 31.3.2000. The assessee, therefore, computed the capital gain being difference of market value as on 31.3.2000 and cost of acquisition as long term capital gain under section 45(2) of the Income tax Act, 1961 (the Act). The market value as on 31.3.2000 as per valuer's report was Rs.3.54 crores and indexed cost of acquisition was Rs.404.19 lacs. The assessee thus declared long term capital loss of Rs.50,19,320/-. The balance gain being sale price minus market value as on 31.3.2000 was declared as business income under the provisions of section 45(2). 2.3 The AO noted that the land had been acquired by the assessee from the Government of Maharashtra under section 43 and section 63 of Bombay Tenancy & Agricultural Lands Act, 1958 with the following conditions: i) The land s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to assessment year 2006-07. It was, therefore, not proper for the AO to question the conversion already accepted in assessment year 2000-01. The assessee further submitted though the authorities permitted the use for industrial purpose, it did not mean that the assessee could not carry on industrial activities. The assessee converted land into stock-in-trade to carry out real estate development for providing the property for buyers for industrial purposes. It was pointed out that incident of transfer upon conversion happened in the year of conversion which had become final and only taxability was to be considered in the year of sale. 2.6 The AO however, did not accept the contentions raised. It was observed by him that the land was meant for industrial use which had been converted by assessee into stock-in-trade illegally as assessee had neither right to change usage of land or sell the land. Therefore, conversion was void abinitio and a nullity. The conversion had also been made without permission of the Government. Moreover, there were no capital asset on the date of conversion which could be converted into stock-in-trade. The AO, therefore, held that the conversion was null and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and at Malad as its share of capital in partnership firm known as "Bombay Properties", a property which was subsequently developed and sold in 1997. The assessee converted other lands situated at Gorgeaon into stock-in-trade and had entered into a joint venture with Mahindra Realities & Infrastructure Developers and profit derived there from had been declared as business income. Thereafter on 31.3.2000 the assessee converted land under consideration into stock-in-trade with a view to develop the same commercially in pursuance of Board Resolution. The conversion of land into stock-in-trade was duly mentioned in the notes to the accounts for the year ended 31.3.2000 and the difference of cost and market value on the date of conversion had been credited to the capital reserved. The conversion had been accepted by the AO after scrutiny under section 143(3) in assessment year 2000-01. The assessee therefore submitted that the gain had to be computed under section 45(2) partly as capital gain and partly as profit of business. 3.1 As regards the argument of AO that the land remained agricultural land till it was converted on 27.5.2004, the assessee submitted that the land was under indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land in absence of any user of the land for agricultural purposes. For land to be classified as agricultural, it should be meant for agricultural use and should be actually used or ordinarily used for agricultural purposes. The land in this case could not be used for agricultural purpose being in industrial zone. The MOA of the assessee also did not permit agricultural activities. Moreover, the issue of conversion of land into stock-in-trade had already been decided and became final in assessment year 2000-01. 3.2 Therefore CIT(A) agreed with the assessee that the provisions of section 45(2) were required to be invoked for computation of income chargeable to tax as per which the gain based on market value on the date of conversion has to be assessed as capital gain and balance gain as business profit. CIT(A) also accepted the plea of the assessee regarding applicability of provisions of section 50C. These provisions were applicable from assessment year 2003-04. They could not be applied to the computation of capital gain in the year of conversion i.e., assessment year 2000-01. These provisions could also be not applied in relation to computation of business profit as these were a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icultural land" must be interpreted with respect to literal meaning as the same was clear and unambiguous. He referred to the judgment of the Hon'ble Supreme Court in the case of Orissa State Warehousing Corporation Vs CIT (237 ITR 589) in this regard and several other judgments. It was thus argued that land in this case became capital asset only on 27.5.2004 when it was converted into non-agricultural and it was accordingly urged that approach adopted by the AO in respect of short term capital gain should be accepted. 4.1 The ld. AR for the assessee on the other hand reiterated the submissions made before the lower authorities that the area in which the land was situated had been declared by the government as industrial zone and, therefore, when the land was acquired by the assessee it was in industrial zone. The land was not meant for agricultural use nor any agricultural activity was carried on by the assessee and, therefore, it has to be considered as non-agricultural in view of the tests laid by Hon'ble Supreme Court in case of CWT Vs Officer-in-charge (Court of Wards) (105 ITR 133), (supra). It had been made clear by the Hon'ble Supreme Court that entry in the land records i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of business profit and since the provisions were effective from assessment year 2003-04, the same did not apply to computation of capital gain for assessment year 2000-01. It was accordingly urged that the order of CIT(A) should be upheld. 5. We have perused the records and considered the rival contentions carefully. The dispute raised in this appeal is regarding computation of capital gain from sale of land. The assessee had acquired certain plots of land during assessment year 1991-92 to 2003-04 under Bombay Tenancy and Agricultural Act. 1958. The area in which land was situated had been notified by the government as industrial zone. The assessee had been allotted land to be used for the bonafide non-agricultural purposes after taking NA (Non Agricultural) permission from the competent authority. These facts are not disputed. The assessee converted the land into stock-in-trade on 31.3.2000 by passing a Board Resolution as the assessee being a sick company could not use it for industrial purposes. The assessee had been taking extension from time to time for industrial use and got the land converted into non-agricultural land on 27.5.2004. The assessee sold the land o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot been converted into non-agricultural land, it can be considered as a non-agricultural land and whether the conversion by the assessee into stock-in-trade was legally valid. We find that even though the land had not been converted into non-agricultural land on 31.3.2000, there is no dispute that the land was situated in the industrial zone and was meant for industrial use. The claim of the assessee that the land was not meant for agricultural use nor any agricultural activity had been carried on by the assessee on the said land after the date of acquisition has not been controverted before us. The agricultural land has not been defined in the Act. The issue as to what would constitute agricultural land had come up for consideration by the Hon'ble Supreme Court in the case of CWT Vs Officer-in-charge (Court of Wards) (105 ITR 133), (supra). The Hon'ble Supreme Court held that for a land to be agricultural, it was required to be shown its connection with agricultural purpose and user and not merely possibility of usage by some future owner. The Supreme Court also held that the entry in the revenue records though prima facie constituted good evidence but was not conclusive in determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered as stockin-trade of the business of the assessee. The conversion of land into stock-in-trade had been duly declared by the assessee in the return for the assessment year 2000-01. The notes to the audited accounts also mentioned this fact and differences between cost of land and market value had been credited into capital reserve. We therefore, see nothing illegal about the conversion of land by the assessee into stockin-trade. A copy of the order dated 29.2.1992 of the competent authority as per which the land was acquired by the assessee also did not prohibit the sale of land. It clearly stated that sale of land was permitted for industrial purposes. Since the land was non-agricultural and could be sold with the permission of the competent authority, we do not see any thing illegal in conversion of the land into stock-intrade by the assessee. We therefore see no infirmity in the order of CIT(A) in applying the provisions of section 45(2) of the Act. We also do not see any infirmity in the order of CIT(A) holding that provisions of section 50C will not apply to computation of capital gain on conversion of land in assessment year 2000-01 as the said provisions were effective on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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