Per Shri T. R. Thiruvengadam, Accountant Member - These are appeals by the revenue against the orders of the Commissioner (Appeals) for the assessment years 1970-71, 1971-72 and 1972-73. The only point arising for consideration in these appeals is whether the forest land sold by the assessee during the previous years for these assessment years was agricultural land or not. The question came up before the Tribunal for these assessment years earlier in their order dated 30-10-1975 in IT Appeal Nos. 304 (Coch.) of 1971-72 and 53 and 180 (Coch.) of 1973-74.
The Tribunal held that this land sold by the assessee during these previous year was agricultural land and on that basis deleted the capital gains arising from such sales. However, the Tribunal reversed this finding by an order under section 254(2) of the Income-tax Act, 1961 (the Act), dated 31-7-1977. By this order, the Tribunal set aside the AACs orders and referred the assessments back to the ITO to decide afresh the nature of land in the light of the Supreme Courts decision in CED v. V. Venugopala Varma Rajah (1976) 105 ITR 593.
2. The facts for these three years are identical in that, briefly, the assessee had taken on lease a large tract of land and converted such land as plantation from year to year over a number of years. It would be convenient to refer to the actual determination of these facts by the Tribunal in their order dated 30-10-1975 which is as follows : "The predecessor-in-interest of the assessee had in 1923 obtained from a Malabar Janmi considerable extent of private forests in Malabar area for agricultural purposes, viz., to plant rubber. That land obtained on lease has now devolved on the assessee. The assessee is, therefore, in possession as the lessee. The leased lands had been developed by the predecessor-in-interest in portions from time to time into plantation estate keeping the undeveloped areas as reserve for future development as agricultural plantations. The assessee had been also extending the planted area from time by clearing portions of the undeveloped area left as reserve for future development. Still there were sizeable extent of undeveloped areas lying in a compact block. That is, these lands were not actually cultivated. It had retained its original character which it had at the time of lease. In short those were the portions of private forest originally leased. The assessee then wanted to dispose of these reserve lands. In 1969 it sold sizeable extent of that undeveloped areas known in planters parlance as reserve land. The sale in 1969 was by 70 documents to 70 persons. The land was sold in small plots ranging from and extent of one acre to sixteen acres per plot, each bit parcelled out of this compact block of this reserve land. Of these sale transactions, 39 falls within the assessment year 1970-71. The Collectors permission under the Madras Preservation of Private Forests Act for these sales to 70 persons was obtained in one proceeding. There was still another 130 acres left behind. Another permission was obtained from the Collector for the sale of this block which also is only a portion of the compact block of original reserve land. Out of that 130 acres, 70 acres were sold in 1970. The other left behind transactions of 1969 and this sale falls under assessment year 1971-72. The rest 60 acres were sold in 1971." There is no dispute by either party that the statement of facts contained in the above paragraph represents the true state of affairs.
In addition, the assessee had in the course of the reassessment proceedings, filed before the IAC a letter dated 1-3-1966 by the officer of the development department of the Rubber Board to the Secretary of the Agricultural Refining Corporation, Bombay, a copy of which has been endorsed to the assessee. This letter contained the report about the feasibility of extending the rubber plantation to an area of 769.94 acres and the requirement of finance for this purpose.
The assessee had also made certain submissions before the ITO in the form of two letters dated 19-1-1978 and 21-6-1978 when the ITO was seized of these assessment proceedings by reason of the order of the Tribunal under section 254(2).
A statement described as acreage statement detailing the total acreage in the possession of the assessee, the area planted, the area covered by buildings, roads, etc., and rest of the area described as reserves has also been filed before the Commissioner (Appeals) and such statement formed an annexure to the order of the Commissioner (Appeals). This statement shows the progressive conversion from 1962 of the forest land into plantation land.
3. The ITO held in the course of the reassessment proceedings that obtaining lease of 2,463 acres of forest land in 1923 for raising plantation did not make the entire forest land agricultural. He was of the view that the forest land remained as forest land until and unless the company, the assessee here, took steps to change its nature, by, for example, clearing and preparing the land. He considered that taking steps to raise a loan with the intention to raise a plantation or the fact that the assessee was extending the area under plantation year after year does not change the character of the land which, according to him, would remain unaffected. He also dismissed the contention of the assessee that the lands sold have been converted into agricultural lands by the purchasers on the ground that it is an irrelevant consideration. According to him, it was necessary that the assessee should have done something to develop the forest in the sense that any particular tree should have been planted till the point of sale. He also pointed out that the land which is governed by the Madras Preservation of Private Forests, Act could be cleared for planting only after obtaining the permission from the Collector under the said Act.
He, therefore, held that the land was not agricultural land.
4. The Commissioner (Appeals) on appeal held that the land was agricultural land. The arguments before him by the assessee were these.
The intention of the assessee in taking lease of the entire area of land was to convert the forest land into agricultural land. The assessee did not have sufficient finance for this and, therefore, was forced to, sell away the land. From year to year the assessee had been converting portions of the forest land into rubber estate. The assessees counsel pointed out the observations of the Supreme Court in V. Venugopala Varma Rajahs case (supra) that the question whether a land is agricultural or not has to be decided on evidence of actual or intended user for which the land may have been prepared or set apart and submitted that it was not necessary that the land should have been actually used for agriculture, that it was sufficient if the land need not have been actually prepared for use as agricultural land. It was pointed out by the assessee before the Commissioner (Appeals) that the very lease agreement itself provided that the land is to be used for plantation. The Commissioner (Appeals) on these facts including the actual progressive conversion of the forest land into agricultural land over a period of years came to the conclusion that the forest land sold by the assessee during the three previous years represented land which had been set apart and intended to be used as agricultural land. He considered that even according to the ratio of the decision of the Supreme Court in V. Venugopala Varma Rajahs case (supra), the land in question would be agricultural land and, therefore, not a capital asset within the meaning of the Act. The revenue is in appeal before us 5. The departmental representative repeated the arguments contained in the assessment orders. Stress was laid upon the fact that the assessee had not carried out any operations for agriculture on this part of the land and, therefore, the land has retained its character of forest land and has not been converted into agricultural land. The contention was that in the absence of such actual conversion of the forest land into agricultural land, the land would not assume the character of agricultural land so as to be excluded from the definition of capital asset contained in section 2 of the Act.
6. The counsel for the assessee, on the other hand, repeated the arguments that found favour with the Commissioner (Appeals). It is pointed out that the assessee had only leasehold rights on these lands, that the lease itself had been taken for the purpose of converting the entire forest land taken on lease into plantation, that the assessee had also over a number of years progressively converted the forest land taken on lease into plantation or agricultural land, and, therefore, the land would be agricultural land according to the ratio of the decision of the Supreme Court in V. Venugopala Varma Rajahs case (supra). It is pointed out that the Supreme Court has not laid down as a test in this connection that the land should have been used or prepared for agricultural purpose. It is enough if the land is set apart for use as agricultural land. This has been done by the lease itself was to convert all these forest lands into agricultural lands, it naturally follows that the land has been set apart for agricultural purposes in its entirety.
7. On a careful consideration off these submissions, we are of the opinion that the land in question should be treated as an agricultural land. The Commissioner (Appeals) has quoted the relevant part of the judgment of the Supreme Court in V. Venugopala Varma Rajahs case (supra). It is clear from this that it is enough for a land in order to become agricultural land if such land is set apart or earmarked for the purpose of agriculture. We feel that the purpose of the lease of this land taken by the assessee clearly indicates that the assessee had taken the land only for the purpose of agriculture. If this was the purpose of the lease then the entire land should be taken to have been specified, set apart or earmarked for the purpose of agriculture and, therefore, the impugned land would be agricultural land.
In the case of V. Venugopala Verma Rajah (supra) the assessee had the Janman rights in the lands in question. There was also no dispute that the lands were forest lands. There was no evidence in that case that the lands hitherto forest lands had been converted into lands or had been set apart for agriculture. Such setting apart would have been essential in that case to alter the character of the lands from forest lands into agricultural lands. In the case before us such a positive act on behalf of the assessee, who was only a lessee of the lands, is fully evidenced by the purpose for which the land was taken on lease, namely, the setting up of the plantation. The assessee had pursuant to such a purpose contained in the lease deed as well as in its memorandum of association been progressively converting the forest land into plantation area for a period of number of years. The lands that have been sold by the assessee could not in actuality be converted into agricultural lands due to paucity of funds and lack of finance with the assessee. But this only affected the assessees capacity to carry out its intention namely, covering these forest lands into plantation. The intention of the assessee is clear in respect of the impugned land that was to convert these lands into plantation or agricultural lands. It must, therefore, be said that the assessee had set apart these lands for agriculture. It would, therefore, follow that these lands are agricultural lands in the light of the ratio of the decision of the Supreme Court in V. Venugopala Varma Rajahs case (supra). We would, therefore, uphold the orders of the Commissioner (Appeals).