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Meccano Industries (P.) Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1985)14ITD151(Mad.)
AppellantMeccano Industries (P.) Ltd.
Respondentincome-tax Officer
Excerpt:
1. by a sale deed, dated 2-2-1898, the east india distilleries & sugar factories ltd. (e.i.d. parry & co.), a company incorporated under the english companies act, purchased 6 acres and 76 cents comprised in old survey nos. 29/1, 29/2 and 29/4 (present new survey number is 64). they put up a factory building and godowns on the land. the land with the factory building (mentioned as karkana building in the letter, dated 24-2-1960) and the godowns were sold to the appellant for rs. 30,000.the appellant made further constructions on the land and put up a unit called 'chips section'. on 11-2-1959, the appellant entered into an agreement with three persons (s/shri j.r. mehta, a. kolandai pillai and g. venkataram) agreeing to sell for rs. 2,50,000 6.2 acres of land out of the 6.76 acres.....
Judgment:
1. By a sale deed, dated 2-2-1898, the East India Distilleries & Sugar Factories Ltd. (E.I.D. Parry & Co.), a company incorporated under the English Companies Act, purchased 6 acres and 76 cents comprised in old survey Nos. 29/1, 29/2 and 29/4 (present new survey number is 64). They put up a factory building and godowns on the land. The land with the factory building (mentioned as Karkana building in the letter, dated 24-2-1960) and the godowns were sold to the appellant for Rs. 30,000.

The appellant made further constructions on the land and put up a unit called 'chips section'. On 11-2-1959, the appellant entered into an agreement with three persons (S/Shri J.R. Mehta, A. Kolandai Pillai and G. Venkataram) agreeing to sell for Rs. 2,50,000 6.2 acres of land out of the 6.76 acres of land purchased from E.I.D. Parry & Co. The appellant has bifurcated the land purchased from E.I.D. Parry & 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 ; (5) the erstwhile watchman of the appellant-company, lyyamperumal, 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 appellant-company at the rate of rupee one per sq. ft. shows the character of the land as non-agricultural.

On these grounds, the ITO negatived the claim for exemption from capital gains tax.

(1) It is inconceivable that a plot of land purchased for Rs. 30,000 in 1959 could be sold for a sum of Rs. 2,50,000 even after excluding a portion of the area purchased originally, if the claim that the land in question was agricultural throughout was correct.

(2) The existence of a garden, incurring of expenditure for maintenance of the garden, growing of certain plants and planting of trees, salary disbursed to a garden supervisor and sale of coconuts to the managing director cannot stamp the land with the character of agricultural land.

(3) Compared to the extent of land owned by the appellant, the expenditure claimed against the garden maintenance was too meagre to be taken to imply that any agricultural operation was carried on in the land and the so-called garden maintenance expenditure could only be taken to mean that the expenditure was for maintenance of any ordinary garden around a house or a factory.

(4) The evidence adduced by the appellant is not sufficient to conclude that the criteria for treating a piece of land as agricultural land exist in the present case.

(5) If there had been agricultural operations and the land was put to agricultural user, these should be sale of agricultural produce grown on the land and it is significant that there is no sale of agricultural produce apart from the alleged sale of a few coconuts to the managing director. (6) As the basic agricultural operations like tilling of the land, sowing of seeds, planting and similar work usually done on an agricultural land are completely absent in the present case, the land cannot be stamped with the character of agricultural land.

On these grounds, the AAC negatived the claim for exemption from capital gains tax. Aggrieved against the order of the AAC, the appellant has come up in appeal before the Tribunal.

The land has been used for agricultural purposes by growing vegetables, raising coconut and banana plants and the extracts from the Adangal register show cultivation of cholam for the two assessment years 1968-69 and 1969-70 and the kist receipt and the lease deed executed by the watchman, lyyamperumal, 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 at the rate of one rupee per sq. ft. shows that the land was never sold as an agricultural land.

(2) Even as per the accounts maintained by the appellant, the expenses incurred since the date of purchase of the property is termed as 'garden maintenance expenses' and in the books of account, the appellant has not disclosed any sale proceeds of agricultural produce except the alleged receipt of the sum of Rs. 250, stated to have been received from the managing director towards the cost of coconuts supplied to him.

(3) The price paid by the purchaser is a very strong piece of evidence to show that what was sold by the appellant was not agricultural land.

(4) The land is situated in the outskirts of Salem town and the postal division being 'Salem-4'.

(5) After purchase, the appellant had been putting the land only to industrial use and any sporadic and stray act of cultivation cannot stamp it with the character of the agricultural land and the claim of agricultural land has been rightly negatived.

5. The short question for consideration is whether the character of the land sold by the appellant can be construed as an agricultural land.

6. As pointed out in Rasiklal Chimanlal Nagri v. CWT [1965] 56 ITR 608 (Guj.), whether a particular land is agricultural land or not must depend on the general nature or character of the land and various factors would have to be taken into account. The various factors are : (a) The situation of the land and its surroundings. This is an important factor as it would affect the land and its capacity of being used for agricultural purposes and it would also indicate the purpose for which the land would ordinarily be used.

(b) The physical characteristics of the land would be another factor to be taken into account.

(c) The intention of the owner as gathered from all the relevant circumstances would also have a bearing on the general nature or character of the land.

So, in deciding whether a particular land is an agricultural land or not, what matters is the general character of the land and not the use to which it may be put at a particular point of time. The general character of the land can be determined by its environment and situation, nature and character of the land, intention at the time of purchase, previous, present and future use to which the land is put and its potential value. We now proceed to apply the 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 appellant purchased from E.I.D. Parry & Co., the factory buildings and godowns with the vacant land adjoining them.

9. The appellant-company was incorporated mainly for the purpose of manufacturing mosaic or other flooring tiles, cement pipes, stoneware or earthenware pipes or other allied products. Though as many as 48 objects are specified in the memorandum of association, carrying on agricultural operation or putting the land to any agricultural user is not one of the objects specified in the memorandum of association. It is no doubt mentioned in the memorandum of association that the appellant-company is empowered to purchase land and also to take lands on lease. That cannot surely be for the purpose of carrying on any agricultural operation but only for the purpose of mining or quarrying magnesite or other raw materials required for manufacturing mosaic flooring tiles, cement pipes, etc. The promoters of the appellant-company, from their very description and occupation, are men engaged in the field of commerce and industry. As graphically and picturesquely argued by the learned departmental representative, three merchants from Coimbatore and an advocate from South Canara (these are promoters as seen from the memorandum of association) could not have gone to Salem to purchase agricultural land or to carry on agricultural operations in the land purchased by them. The purpose for which the appellant purchased the land is brought out in the memo of argument submitted before the AAC, wherein it is stated that the appellant was in need of a factory building and a factory building surrounded by a vast stretch of land, no doubt conveniently described as 'agricultural land', was auctioned by E.I.D. Parry & Co. and it purchased the same and used the building for its factory. It is, therefore, obvious that the appellant never purchased any agricultural land for any agricultural purpose but only a factory building and land for carrying on its manufacturing activity. After purchase, the appellant has put up a crushing unit adjacent to this land. On the land purchased from E.I.D. Parry & Co., was put up another factory building called 'chips section'. Shri C.R. Narayana Rao, Chartered Engineer, who has inspected the newly constructed building by the appellant, has stated in his report, dated 26-8-1960 that the newly constructed building of Meccano Industries (P.) Ltd., 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",50,000 6.2 acres of land out of 6.76 acres purchased from E.I.D.Parry & Co. The questions that have to be considered are : (2) Did the land retain the character of agricultural land at the time of sale? We are not certainly considering for what purpose the vendees purchased the property from the appellant. We are only considering the character of the land in the hands of the appellant at the time of sale. The transfer of the land was effected in the following manner : (1) By an agreement dated 11-2-1959 the sale consideration was fixed at Rs. 2,50,000. Rs. 50,000 was paid as advance and the balance must be paid in three instalments on specified dates.

(2) The appellant should apply to the authorities concerned to get the necessary lay-out sanctioned.

(3) The group of three parties should plot out the land as house plots and bear all the expenses in this connection.

(4) The appellant should execute sale deeds to the nominees of the group of three persons describing the property sold as house plot and/or site at the rate of one rupee per sq. ft.

(5) It was agreed that the entire area comprising the house plots sold should be named 'Meccano Lands'.

(6) In pursuance of the agreement of sale, the appellant executed the sale deeds transferring the house plots to the various nominees of the group of three persons.

10. The above analysis of the sale transaction, the mode, purpose and the manner in which the appellant sold the land in bits clearly brings out one salient feature, viz., the agricultural character of the land was lost when the transfer took place by executing the registered documents to the individual purchasers. The transfer that was effected by the appellant was transfer of a capital asset as defined under Section 2(47) of the Income-tax Act, 1961 ('the Act') and not a piece of agricultural land. The property purchased on 11-2-1959 for Rs. 30,000, when sold seven years later and that too only a portion, could fetch a price of Rs. 2,50,000 bear eloquent testimony to only one fact, namely, what sold was only a capital asset and not an agricultural land. So, taking into account the location, the general characteristics of the land, the previous, present and future user of the land and the intention of the owner in purchasing, holding and selling the land, as gathered from all the relevant circumstances, we have no hesitation in holding that the land in question was never held or intended to be held by the appellant as an agricultural land.

11. We now proceed to scrutinise the alleged agricultural user of the land. According to the appellant, 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 Expenses Incomeyear Rs. Rs.1961-62 195 This includes Rs. 32.50 and Rs. 2.50 as building1962-63 1,109 Major part of the expenses relate to manuring1963-64 2,282 This represents gardening expenses and garden1964-65 1,032 This is stated to be expenses for repairs and1965-66 206 This is stated to be expenses for repairs and1966-67 Nil ...1967-68 Nil 2751968-69 Nil 125 The income shown for the assessment year 1967-68 is stated to be the income received by sale of coconuts to the managing director. The income of Rs. 125 shown for the assessment year 1968-69 is alleged to be the lease amount paid by the watchman of the appellant-company. The existence of a garden, incurring of expenditure for the maintenance of the garden, growing of certain plants and planting of trees, salary disbursed to a garden supervisor and sale of coconuts to the managing director, are not sufficient and cannot stamp the land with the character of an agricultural land. As rightly pointed out by the AAC, a few saplings of the coconut brought by the managing director from his native place and planted in the garden and a few of the coconuts being taken possession of by him for which nominal charges were made to the appellant-company, cannot establish that the land in question is an agricultural land. The garden maintenance account, as rightly pointed out by the AAC, can only be taken to mean that expenditure was incurred for maintaining the usual garden around a house or factory. The alleged lease of over 6 acres of land to the appellant-company's watchman for cultivation for a paltry amount of Rs. 275 per year seems to suggest a feeble attempt at securing evidence for some agricultural user of the land. When there is no evidence of regular and systematic carrying on of the basic agricultural operations like ploughing, tilling of the land, manuring, watering, sowing of seeds, etc., the existence of some coconut trees, plantain trees and growing of vegetables, cannot clothe the land in question with the character of agricultural land. A certificate from the village karnam was produced to the effect that the land was under cultivation for 10 years. It is not in the form of a sworn affidavit. It was produced before the Tribunal for the first time at the time of hearing. The same thing can be said of the certificate of cultivation given by the President of the Meyyanur Panchayat Union.

No reason has been given as to why these documents have not been produced earlier and why they should be admitted at this stage. In the letter dated 7-4-1971, written to the Assistant Town Planning Officer, the appellant has stated that it is not paying any land or property tax in respect of the land. However, at the time of hearing, a single solitary list 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 agricultural 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 vacant lands of about 108 acres and also buildings enclosed in compound walls constituted 'agricultural land' within the meaning of Section 2( ... It is imperative to give reasonable limits to the scope of the 'agricultural land', or, in other words, this exemption had to be necessarily given a more restricted meaning than the very wide ambit given to it by the Full Bench of the Andhra Pradesh High Court.(p.

141) ... The determination of the character of land, according to the purpose for which it is meant or set apart and can be used, is a matter which ought to be determined on the facts of each particular case. What is really required to be shown is the connection with an agricultural purpose and user and not the mere possibility of user of land, by some possible future owner or possessor, for an agricultural purpose. It is not the mere potentiality, which will only affect its valuation as part of 'assets' but its actual condition and intended user which has to be seen for purposes of exemption from wealth-tax....

... One of the objects of the exemption seemed to be to encourage cultivation or actual utilisation of land for agricultural purposes.

If there is neither anything in its condition, nor anything in evidence to indicate the intention of its owners or possessors, so as to connect it with an agricultural purpose, the land could not be 'agricultural land' for the purposes of earning an exemption under the Act....(p. 144) The minimal test of 'agricultural land' is laid down by the Supreme Court in these words : ... Even if we could give a wider connotation to the term 'agricultural' than the one it carries with it in the Income-tax Act, we cannot dispense with credible evidence of at least appropriation or setting apart of the land for a purpose which could be regarded as agricultural land for which the land under consideration could be reasonably used without an alteration of its character. This, we think, is the minimal test of 'agricultural land' which should be applied in such cases. (p. 137) From the observations of the Supreme Court extracted above, the following requirements have to be satisfied before a land can be held as 'agricultural land' : (1) The condition of the land and the intention of the owners must indicate 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 (supra) 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 question for any agricultural purpose or user. Secondly, the land was purchased by the appellant not for carrying on any agricultural operation, but only to carry on its own manufacturing activity. As there is no evidence of appropriation or setting apart of the land for agricultural purposes and the condition of the land and the intention of the owner do not indicate connection with any agricultural purpose, we have to hold that the land sold by the appellant was not an agricultural land.

13. In Krishna Iyer v. Addl. ITO [1966] 59 ITR 145 (Ker.), the assessee's claim for exemption from wealth-tax was rejected having regard to- In Venugopala Varma Rajah v. CED [1967] 64 ITR 358 (Ker.), the land was forest land and it was pleaded that it should be exempt on the ground that it was capable of being put to agricultural use. This argument was repelled and the Kerala High Court made the following observations : 'Agricultural land', as we understand it, 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. During a period of food shortage, a building site which a prudent owner may never use for purposes of husbandry may be brought under cultivation because the need is great, the prices are high, and the expense is of no consideration. Similarly, during days of national peril, a scorched earth policy may be followed and farming land deprived of its vegetation. That too cannot necessarily mean that the land had lost its agricultural character.

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. (p. 361) From the two decisions cited above, it is obvious that unless the current user of the land for agricultural purposes is the natural, ordinary and prudent user of the land, it cannot have the benefit 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 pr 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 the head 'Capital gains' is deemed to be the income of the previous year in which the transfer of title took place. So, capital gains can be assessed in the assessment year corresponding to the previous year in which the transfer, namely, vesting of title, took place. In the case of immovable property worth Rs. 100 and above, no title passes to the transferee until the conveyance by the executor is registered under the Indian Registration Act, 1908. The fact that a transaction of sale of immovable property has been partly performed by delivery of possession to the purchaser and there was payment of consideration in entirety would not amount to a 'transfer' so long as there is no registered sale deed. Since charge to capital gains arises only on the execution of a registered deed of transfer, we direct that capital gains should be recomputed by taking into account only those transfers which were completed by registered deeds of transfers to the individual purchasers in the relevant previous year.

16. The last point in dispute relates to the computation of capital gains. The learned departmental representative contended that objection regarding the quantum of capital gains computed has not been specifically raised in the grounds of appeal and it is not open to the appellant to raise the issue at this stage before the Tribunal. The grounds of appeal are wide and comprehensive enough to include the plea now raised on behalf of the appellant. Even otherwise, the issue raised is a legal plea and it can be entertained at this stage. Moreover, the appellant has a/1 along been contending that the lands sold were agricultural lands and there was no liability to capital gains. When that contention is not upheld, the next question that naturally arises for consideration is what is the correct quantum of capital gains to be levied in the instant case. In this view also, we are inclined to permit the appellant to raise this plea before the Tribunal.

17. The contention of the appellant is that even granting, for argument's sake, that the land due to changes taking place in and around it or on account of the specific action taken by the appellant has subsequently become non-agricultural land, the cost of acquisition of such a capital asset for computation of capital gains cannot be the original cost at which the appellant purchased the agricultural land but must be its 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 converted into non-agricultural lands The High Court answered the question against the assessee in the following words: ... Section 45 says that profits or gains arising from the transfer of a capital asset shall be chargeable to tax and Section 48, Clause (ii), then proceeds to add that such profits or gains shall be computed by deducting from the full value of the consideration of the transfer 'the cost of acquisition of the capital asset'. The words 'the capital asset' in Section 48, Clause (ii), are clearly intended to refer to the capital asset which is transferred as mentioned in Section 45. They are identificatory words to denote the property transferred and they do not introduce any requirement that the property transferred shall be capital asset at the date of acquisition. The law says that when property which is a capital asset is transferred, profits or gains arising from the transfer shall be liable to tax and you shall compute such profits or gains by deducting from the consideration for the transfer, what cost you to acquire the 'capital asset' that is, the property transferred.

The difference between the consideration for the transfer of the property and the cost of acquisition of the property would represent the profits or gains arising from the transfer of the property and they would be taxable as capital gain under Section 45. This appears to be the plain natural construction of the words used in Section 48, Clause (ii), read with Section 45. ... (p. 457) The High Court further pointed out that the contention that the cost of acquisition of the capital asset must be deemed to be the market value of the land on 23-1-1963 and not the original cost of acquisition of the land is contrary to the plain language of Section 48 of the Act and observed as under : ... Where the property transferred was not capital asset at the date of acquisition but subsequently became capital asset as in the present case, it is difficult to see how it can be said that the property as a capital asset was acquired by the assesses when it was converted into a capital asset and how it would be possible in such a case to determine the cost of acquisition. There are now two different acquisitions of property, one as a non-capital asset and the other as a capital asset. The property is acquired by the assessee only once and merely its character changes in the sense that, whereas, 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....(p. 458) 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 Section 55(2)(i), viz., when the property, which was non-capital asset becomes capital asset, it must be deemed to become the property of the assessee for the purposes of Section 55(2). In view of these weighty observations of the High Court and since the appellant's contention has the effect of importing two legal fictions-one under Section 48(ii) and the other under Section 55(2)(i) the contention raised on behalf of the appellant cannot be accepted.

19. Emphasis was laid on the use of the words 'the cost of acquisition of the capital asset'' in Section 48(ii) and it was contended that in order to attract this provision, the asset transferred must be a capital ass et both at the time of acquisition as well as transfer and since in the present case, the asset transferred was capital asset only at the time of transfer and not at the time of acquisition, the capital gains cannot be computed by resorting to Section 48(ii) and the cost of acquisition in such cases must be taken as the market value at the time when the agricultural land came to be converted as non-agricultural land.

20. The identical contention was raised on behalf of the assessee in the case reported in Ranchhodbhai Bhaijibhai Patel's case (supra) and the Gujarat High Court repelled the contention by observing as under : ...The only condition for attracting the charge to tax which is laid down in Section 45 is that the property transferred must be capital asset at the date of transfer. How the profits or gains arising from the transfer of such property are to be computed is laid down in Section 48. Section 48 is not intended to lay down any further condition for attracting the charge to tax. It would not, therefore, be right to construe Section 48, Clause (if), as providing that the property, besides being capital asset at the date of transfer as required by Section 45, must also satisfy the definition of 'capital asset' at the date of acquisition by the assessee. Moreover, such a construction would stultify the charging provision by unduly restricting the ambit and scope of the charge to those cases where the property transferred is 'capital asset' at both terminals, namely, date of the acquisition and date of transfer.... (p. 456) The fair measure of assessing trade profits is to take the market value at one end and the actual sale proceeds at the other end and the difference between the two is the profit 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 (supra) 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 the property was a non-capital asset, should be subjected to tax and this could not be brought within the taxation net by invoking Section 48 and Section 55(2). The intention of the Legislature must be gathered from the words used. It is well settled that what is unexpressed by the Legislature must be taken as unintended. As pointed out by the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case (supra), 'we cannot presume a certain intention on the part of the Legislature and then bend the language of the section with a view to make it accord with such a presumed intention'. A plain reading and construction of sections 48 and 55(2) clearly suggests that the Legislature did intend that even in cases where the property transferred was capital asset on the date of transfer and not a capital asset on the date of acquisition, it should be brought within the taxation ambit under those sections. If the Legislature has intended otherwise a suitable provision would have been made indicating what should be the cost of acquisition in case where the property transferred was a capital asset on the date of transfer and not a capital asset on the date of acquisition. When the capital asset becomes the property of the assessee in the various contingencies specified under Section 49 of the Act, how the cost of acquisition should be computed is provided in that section. If the Legislature intended that there should be a separate mode of computation of cost of acquisition where the property transferred was a capital asset at the date of transfer and not a capital asset at the date of acquisition, a specific provision should have been made. In the absence of any such specific provision, it is clear that the words 'the capital asset' in Section 48(r7) are identificatory and demonstrative and they are intended to refer to the property which is the subject of levy of charge of capital gains under Section 45. In this view, the computation of capital gains as done by the ITO has to be upheld.1. The assessee is a limited company. On 11-2-1959 the assessee purchased a land extending up to 6.76 acres in which there were factory and godown buildings, for a sum of Rs. 30,000. On 19-8-1966, the assessee entered into an agreement with three persons for selling 6.2 acres out of the above 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 6 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, the learned counsel for the assessee pointed out that the land when purchased was agricultural in nature. It has been used for agricultural purposes growing therein vegetables, raising coconut and banana plants, cultivating cholam, etc. The extracts maintained from the adangal register showed that cholam was cultivated in some part of the land. A lease deed executed by one lyyamperumal clearly went to establish that the land has been leased out to him for agricultural purposes. There was no evidence to show that the assessee had at any time converted the land into non-agricultural at all. The land was situated outside the city limits. Even though the agreement to sell included several provisions imposed by the vendees for their convenience likely to indicate that the land was non-agricultural, all this happened only after the assessee parted with the land. The assessee had incurred expenses and earned also some agricultural income from these lands. A certificate from the village karnam indicated that the land was under cultivation for nearly 10 years. A kist receipt was also produced.

4. For the department, it is pointed out that the assessee purchased the land from E.I.D. Parry & Co. They never held the land as an agricultural land. The assessee-company was formed for the manufacture of tiles, cement pipes, etc., and carrying on agricultural operations was not one of the objects for which the company was incorporated. The meagre evidence and the negligible income and the expenditure for agricultural purposes referred to did not indicate the performance of much of agricultural operations. The price paid by the purchaser was strong evidence to show that the land sold was not agricultural. It is al so pointed out that the assessee had been putting the land to industrial use and sporadic and stray acts of cultivation could not stamp it with the character of being agricultural.

5. The question is whether the assessee sold agricultural land or non-agricultural land constituting a capital asset and if so, it could be assessed on capital gains totalling up to Rs. 2,28,902.

6. What constitutes agricultural land has been considered in several decisions. One of the earlier decisions in V. Sarojini Devi v. T. Sri Krishna AIR 1944 Mad. 401 held that "the expression 'agricultural land' should be interpreted in its wider significance as including lands which are used 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. ... (p. 32) The Gujarat High Court in Rasiklal Chimanlal Nagri's case (supra) 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 objective, something related to the nature or character of the land and not varying with the intention of the owner as to the use to which he wants to put the land at a particular point of time. Of course when we say this we must not be understood to mean that the intention as to user is altogether an irrelevant consideration ; it is certainly a factor which would bear on the nature or character of the land but it does not afford a sole or exclusive criterion for determining whether a land is agricultural land or not.... (p. 614) ... Whether a particular land is agricultural land or not must depend on the general nature or character of the land, and various factors would have to be taken into account. The development and use of the lands in the adjoining area and the surroundings and situation of the land would be an important factor which would have a bearing on the question whether the land is agricultural land or not. This factor may affect the land and its capacity of being used for agriculture and would also indicate the purpose for which the land would ordinarily be likely to be used. The physical characteristics of the land would be another factor to be taken into account. The physical characteristics may show the general nature or character of the land particularly in regard to its adaptability for being used for agricultural purpose. Then the intention of the owner as gathered from all the relevant circumstances would also have a bearing on the general nature or character of the land....

The fact that the land is assessed for agricultural purposes would also be a relevant consideration and due effect would have to be given to this factor in arriving at the conclusion whether the land is agricultural land or not. But we cannot agree that the capacity of the land for being put to agricultural use is a determinative factor in deciding whether the land is agricultural land or riot. If that were the correct test, even building sites assessed for non-agricultural purpose would be agricultural lands so long as they are not actually put to non-agricultural use, since it would always be possible to say of them that they are capable of being used for agricultural purposes. As a matter of fact all land which has not actually been put to non-agricultural use would be liable to be regarded as agricultural land if this test were the correct test.

(p. 615) ... 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.... (p. 619) 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 (supra) 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 is subjected to agricultural use then the prima facie presumption about the agricultural character of the land would at once be displaced.... (p. 47) 8. In Sri Krishna Rao L. Balekai v. Third WTO [1963] 48 ITR 472 (Mys.), the land was requisitioned in 1944 or 1945 for the purpose of locating a military aerodrome. The land had been levelled and an airstrip constructed thereon and for over 15 years the land was being used as an airstrip. On those facts it was held that the land was not agricultural land. The fact that at some future time the Government may derequisition the land thereafter, the owner of the land may take steps to reconvert it into agricultural land was not considered a relevant consideration. In Avtar Singh Rangwala v. CIT [1972] 84 ITR 96 (Punj. & Har.) agricultural land belonging to the assessee was requisitioned by the Government for being used as a parade ground by the police authorities. Grass was grown on the land till the requisition by the Government, the land was irrigated, payment was made for the canal water and the land was also assessed to land revenue. The land was within the municipal limits of Amritsar and was also included in a town planning scheme. Their Lordships of the Punjab and Haryana High Court held that merely on the ground that the land had been requisitioned, it could not be concluded that the land had ceased to be agricultural land which it was earlier. The fact that the land was situated within the municipal limits and had been included in a town planning scheme did not alter the nature or character of the land. Referring to the decision in Sri Krishna Rao L. Baleka's case (supra), their Lordships pointed out that one of the factors taken into consideration by the learned Judges of the Mysore High Court was that in order to convert the land again into agricultural land, it would require a considerable expense in labour and money. In the case before their Lordships the land was in the same condition in which it was re quisitioned except that for regular crops of foodgrains or fodder, grass was grown which could also be used as a fodder for the cattle. If the Government were to derequisition the land at any time, it could at once be put to agricultural use, without any appreciable expenditure in labour and money.

9. Two other cases where this question was considered are-Syed Rafiqur Rahman v. CWT [1970] 75 ITR 318 (Pat.) and CWT 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 (supra), their Lordships of the Punjab High Court, not agreeing with the 'narrow test laid down' in Syed Rafiqur Rahman's case (supra) 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 on the valuation date should be the basis of the decision, but no such provision has been made. In a case where land has been admittedly put to agricultural use till a day or a month or few months before the valuation date, the land would not cease to be agricultural, merely because it does not happen to be under the plough on the valuation date. Particularly, in a case of the type before us when it is admitted or proved that the land in dispute was agricultural land for a long time, till about two years before the valuation date in the instant case, it would be presumed to continue to remain as agricultural land unless something definite has in the meantime happened to make it non-agricultural. Till the user of the land is actually changed, or other definite indications to the contrary are available in a given case, it is safe to presume that a property would normally continue to be put to the use to which it has been put all along for a long time.

10. The meaning of 'agricultural land' came up for consideration in two estate duty cases before the Kerala High Court. In F. Venugopala Varma Rajah v. CED [1969] 72 ITR 226 (Ker.), their Lordships held that whether a land is agricultural or not, has to be determined with reference to its nature and not to the use to which it may be put at a particular time. They held : . .. It is well-known, that the extensive areas of different varieties of plantation that we have got in this State were once forest lands ; and it is also equally well-known that year after year large areas of forest lands in this State are being cleared and converted into valuable plantations. In the absence of exceptional circumstances such as the land being entirely rocky or barren for other reasons, all forest lands in this State are agricultural lands in the sense that they can be prudently and profitably exploited for agricultural purposes. There is no case that the forest lands concerned in this case or any part thereof are unfit for agricultural exploitation, (p. 232) This decision of the Kerala High Court was reversed by the Supreme Court in CED v. V. Venugopala Varma Rajah [1976] 105 ITR 593 holding that the view of the High Court that all forest lands are agricultural lands in the sense that they can be prudently and profitably exploited for agricultural purposes is too wide. Their Lordships of the Supreme Court applied the same test in this case as was laid down by them in Officer-in-Charge (Court of Wards)' case (supra). In V. Venugopala Varma Rajah's case (supra), 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 under- take 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. (p. 361) 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. 33,000 in 1955.

The lands were covered by certain cowles. The Government wanted to encourage the planting of trees. The land was to be free of rent for 20 years from the date of grant. The holder of the cowle was at liberty to grow any fruit or forest trees or plantation for fuel. There were other considerations connected with the planting of trees, payment of irrigation rates, etc., and at the relevant period there were several palmyrah trees and palm trees on the said lands and the assessee was deriving income from the land, part of which was cultivated with blackgram, horsegram, etc. There was a well in the property. The land itself had been described in the revenue records as 'punjai'. On the facts, their Lordships of the Madras High Court after discussing all the decided cases in extenso held that the land was agricultural in nature. The position was summarised as under: ... The test as to whether the land is capable of being used for agriculture has to be understood in the sense of the quality or nature of the land, or its being fit for cultivation, as it is. The classification of the land in the revenue records of the State Government would throw some light on the problem. The situation within the municipal limits or the application of a town planning scheme to the area would not be conclusive. The proposition urged for the revenue that there can be no agricultural land within the city limits is too wide to be accepted. The application of the town planning scheme is only to regulate building activity and does not by itself convert what is already an agricultural land into non-agricultural property unless the owner has taken steps to convert the land into building plots or factory sites. A clear case of agricultural land would be where income derived therefrom is agricultural income in the relevant year. However, the absence of income in one or more years would not convert the property into non-agricultural property, if there is no evidence of the owner having abandoned any idea of agriculture with reference to that property or had decided to convert it into non-agricultural property. The intention of the owner to keep it as agricultural property, though not conclusive, would be a relevant circumstance.

If, however, the property is surrounded by residences, then the intention of the owner would lose its significance. Keeping these principles in view we have to approach the question in the present case. (p. 378) 12. The term 'agriculture' was considere d 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 agricultural 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)"1 case (supra) 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 for agricultural purposes. In other words, 'agricultural land' must have a connection with an agricultural user or purpose. It is on the nature of the user that the very large number of definitions and authorities discussed by this Court in Raja Benoy Kumar Sahas Roy's case [1957] 32 ITR 466 (SC) have a direct bearing. In that case, this Court held that the wider meaning given to agricultural operations, such as breeding and rearing of live-stock, poultry farming or dairy farming will not be applicable. It held that the correct test to apply would be to find out whether human labour had been applied to the land itself, in order to extract from its natural powers, added to or aided by other natural or artificial sources of strength to the soil, a product which can yield an income.... (p. 136) 13. The Andhra Pradesh High Court considered the question in Smt.

Manyam Meenakshamma v. CWT [1967] 63 ITR 534. The Division Bench did not follow the decision of the Madras High Court in Sarojini Devi's case (supra) to the effect that it was enough that the land was capable of being used for agricultural purposes, but were inclined to agree with the view of the Mysore High Court in Sri Krishna Rao L. Balekai's case (supra) that the present characteristics and not the potentialities of a land are the proper criterion. The conflict between the views contained in Sarojini Devi's case (supra) and Smt. Manyam Meenakshammd's case (supra) led to a reference to a larger Bench which considered the question in Officer-in-Charge (Court of Wards) v. CWT [1969] 72 ITR 552 (AP) (FB). The Full Bench decision summarised as under : (1) the words 'agricultural land' occurring in Section 2(e)(i) of the Wealth-tax Act should be given the same meaning as the said expression bears in entry 86 of List I and given the widest meaning ; (2) the said expression not having been defined in the Constitution, it must be given the meaning which it ordinarily bears in the English language and as understood in ordinary parlance ; (3) the actual user of the land for agriculture is one of the indicia for determining the character of the land as agricultural land ; (4) land which is left barren but which is capable of being cultivated can also be 'agricultural land' unless the said land is actually put to some other non-agricultural purpose, like construction of buildings or an aerodrome runway, etc., thereon, which alters the physical 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.(p. 570) was the subject matter of appeal before the Supreme Court in Officer-in-Charge (Court of Wards)' case (supra). 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 purpose for which it is meant or set apart and can be used, is a matter which ought to be determined on the facts of each particular case. What is really required to be shown is the connection with an agricultural purpose and user and not the mere possibility of user of land, by some possible future owner or possessor, for an agricultural purpose. It is not the mere potentiality, which will only affect its valuation as part of 'assets', but its actual condition and intended user which has to be seen for purposes of exemption from wealth-tax. One of the objects of the exemption seemed to be to encourage cultivation or actual utilisation of land for agricultural purposes. If there is neither anything in its condition, nor anything in evidence to indicate the intention of its owners or possessors, so as to connect it with an agricultural purpose, the land could not be 'agricultural land' for the purposes of earning an exemption under the Act. Entries in revenue records are, however, good prima facie evidence.... (p. 143) Since it was found that the Full Bench of the Andhra Pradesh High Court had not considered the question from the point of view of a rebuttable presumption as to the land being agricultural, arising from the fact that it was assessed to land revenue and since not even a finding that the conclusion reached by the taxing authorities that the land was never even intended to be used for an agricultural purpose, rested on no evidence at all, the matter was sent back to the Tribunal to determine afresh what was merely a question of fact as to whether the lands were agricultural or not.

14. Certain inevitable corollaries flow from the above decisions : Whether a land is agricultural or not is a question of fact. Even on the face of a definite finding in the Andhra Pradesh High Court case in Officer-in-Charge (Court of Wards) (supra) that the land had never been actually used for agriculture in the sense that it had never been ploughed or tilled, the Supreme Court sent the case back to the Tribunal for determining the factual question. The case referred to above were decided in connection with the wealth-tax assessments which are an annual feature. The question whether land is agricultural or not, therefore, certainly depends on its nature on the valuation dates ; but it may also depend on the nature of the land earlier or later to that date. The nature of the land 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 (supra) and Avtar Singh Rangwala'a case (supra) 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 present case, I agree with my learned brother that what the assessee sold in 1966 was non-agricultural land, a capital asset. Capital gains were clearly attracted.

16. I do not, however, agree with my learned brother that the capital gains should be computed at a figure of Rs. 2,28,902. The assessment to capital gains is made under Section 45. The mode of computation of the income is specified in Section 48 ; sections 49 and 50 of the Act relate to the determination of cost in certain cases. The relevant provisions are as under: 45 (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54B and 54D, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place.

48. The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.

(i) on any distribution of assets on the total or partial partition of a Hindu undivided family ; (b) on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons, or (c) on any distribution of assets on the liquidation of a company, or (e) under any such transfer as is referred to in Clause (iv) or Clause (v) or Clause (vi) of Section 47 ; (iv) such assessee being a Hindu undivided family, by the mode referred to in Sub-section (2) of Section 64 at any time after the 31st day of December, 1969 the cost of acquisition of the assets shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.Explanation : ** ** ** (2) Where the capital asset being a share or shares in an amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in Clause (viz.) 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 the fair market value of the asset on the said date as reduced by the amount of depreciation, if any, allowed to the assessee after the said date, and as adjusted.

17. The income chargeable under the head 'Capital gains' should be computed by reducing the cost of acquisition of the capital asset and costs of improvement, etc., from the full value of the consideration received. The expression used is 'cost of acquisition of the capital asset'. What is the cost of acquisition of the 'capital asset' where the assessee purchased a non-capital asset which after undergoing transformation became a capital asset by the time of the transfer attracting capital gains Where an assessee purchased undisputably agricultural land and due to changes taking place on the land itself or all around or on account of the specific action taken by the assessee himself, it becomes non-agricultural land and a capital asset, the question would be whether the cost of acquisition of the 'capital asset' is the original cost at which the assessee purchased the agricultural land, i.e., a non-capital asset, or something else.

18. Here a non-capital asset is converted into a capital asset and the profit on its transfer is to be computed. Cases on the other side where capital investments have been converted into stock-in-trade have come up for consideration before the Supreme Court and several High Courts.

In CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86, the assessee who held by way of investments shares in several companies commenced business in shares. The shares held as investments were converted into the stock-in-trade of the share business and, subsequently, sold off at a profit. The Supreme Court held that the assessable profit on the sale of shares was the difference between the sale price of the shares and the market price of the shares prevailing on the date when the shares were converted into stock-in-trade of the business in shares and not the difference between the sale price and the price at which the shares were originally purchased by the assessee. Posing the question as to how actual profits should be computed when admittedly there has been a sale in the business sense and actual profits have resulted therefrom, their Lordships observed : ... What then is the basis for computing the actual profits in the present case We think that the basis must be, as the High Court 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 Raddiffe, 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 profit or loss as the case may be. In trading or commercial sense this seems to us to accord more with reality than with fiction.(p. 95) In New Jehangir Vakil Mills Co. Ltd. v. CIT [1963] 49 ITR 137, the Supreme Court considered Bai Shirinbai K. Kooka's case (supra) and since in the latter case the assessee was a dealer even earlier when the shares which he sold in the accounting year were originally purchased, the profits were computed as the excess of the sale price over the original cost price. In CIT v. Hantapam Tea Co. Ltd. [1973] 89 ITR 258 (SC), the assessee-company, which carried on the business of manufacture and sale of tea, used in its business thatch, bamboo and fuel, etc., grown in its tea estate. In computing the profits of the business the Supreme Court held that the assessee was entitled to deduct by way of expenditure the market value of the thatch, bamboo and fuel, etc., grown by it and utilised for the purpose of the tea business. In Anil Starch Products Ltd. v. CIT [1966] 59 ITR 514 (Guj.), the assessee-company formed originally for the manufacture and sale of industrial starch subsequently set up another plant for producing destrose, a pharmaceutical product, of which starch is the raw material. Their Lordships of the Gujarat High Court held that the real profits by acting on commercial principles were to be ascertained so that the starch produced by the old undertaking and used as a raw material in the new undertaking was to be taken at the market price for the purpose of computing the profits and gains under Section 15C of the Indian Income-tax Act, 1922 ('the 1922 Act'). The decision of the Allahabad High Court in Gangadhar Babu Lal v. CIT [1966] 62 ITR 718 also is on the same lines.

19. These decisions refer to cases where a capital asset has been converted into a non-capital asset. The Courts held that for the purpose of determining the profits on the sale or transfer of the non-capital assets, the market value of the asset on the date of conversion has to be taken. We may also recall with advantage cases involving both agricultural and non-agricultural operations. For the purpose of determining non-agricultural income in such cases, the market value of the agricultural product is deducted and not the actual expenses incurred in raising the agricultural product.

20. The question came up for consideration in Ranchhodbhai Bhaijibhai Patel's case (supra) 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 gains and in order to arrive at real or net profits or gains, the cost which has been incurred by the assessee in acquiring the capital asset must be deducted from the full value of the consideration received by him", their Lordships considered the scope of the expression 'acquisition of the capital asset' and held that even in the case of a self-created asset only any cost incurred by the assessee in creating or producing it would represent the cost of acquisition of such capital asset and would be deductible from the value of the consideration received by the assessee as a result of the transfer of such capital asset. Their Lordships in coming to this conclusion dissented from the decision of the Madras High Court in CIT v. K. Rathnam Nadar [1969]71 ITR 433 and of the Calcutta High Court in CIT v. Chmilal Prabhudas & Co. [1970] 76 ITR 566. In K. Rathnam Nadar's case (supra) (being a Madras High Court decision, the ratio is binding on us) dealing with the question of goodwill, the Madras High Court held that goodwill is a capital asset under Section 2(14). They, however, held that being a self-generated asset it has no cost in terms of money in its creation or acquisition. It is stated : ... Goodwill is created by the trading activities of the assessee, and probably by the name he has earned and the goodwill he has created among his customers. Goodwill of a firm is an intangible asset. It is difficult to say that it costs anything in terms of money for its coming into existence. Goodwill of a firm can probably be compared to a seed which is planted on the day that the firm begins its business and sprouts and grows as the firm grows in its dealings, in its stature and in its reputation. (p. 445) Instead of deducting 'nil'' as 'cost of acquisition', they held that such an asset was even outside the taxing net. When the appeal by the department against the decision of the Madras High Court in K. Rathnam Nadar's case (supra) came up for hearing before the Supreme Court, the department did not press its appeal. Apart from the binding nature of the decision within the State of Madras, thus, this decision represents the law on the subject. That this is so is clear from the decision of the Karnataka High Court in CIT v. B.C. Srinivasa Setty [1974] 96 ITR 667. Referring to the above decision and also the decision of the Calcutta High Court in Chunilal Prabhudas's case (supra), the Karnataka High Court in B.C. Srinivasa Setty's case (supra) 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 (supra), K.Ratnam Nadar's case (supra) was followed in the matter of Ucencesm 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 (supra) 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 (supra) : ... 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.(p. 103) conforms to the decision of their Lordships of the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case (supra). Their Lordships' view that adoption of the market value introduces a fiction runs counter to the observations in the majority judgment in Bai Shirinbai K. Kooka's case (supra) : In a trading or commercial sense this (i.e., adoption of the market', value) seems to us to accord more with reality than with fiction.

In fact, their Lordships themselves in the subsequent case of Mohanbhai Pamabhai (supra) set out the object of the charging provision as taxing 'profits or gains' meaning 'real or net profits or gains'. In order to arrive at real or net profits or gains the cost which has been incurred by the assessee in acquiring the capital asset must be deducted.

22. Thus, on the one extreme we have cases of the type of K. Ratnam Nadar (supra) of self-generating assets, the original cost of which is nil but one which results in transfer of a capital asset. On the other extreme are cases where the assessees purchase capital assets and sell them after a period. The capital gains in these latter cases would be the difference between the full consideration and the purchase price.

In between lie cases where an assessee acquires a non-capital asset such as agricultural land, retains it for some period during which either on account of circumstances induced by him such as voluntarily conversion into non-agricultural land or on account of circumstances over which he has no control such as operation of nature whereby an agricultural land is reduced to non-agricultural land or human activity all around such as coming up of factories, building constructions and municipal regulations, etc., the agricultural land gets converted into non-agricultural land, i.e., a capital asset. The capital asset is retained by the assessee for some time and then transferred attracting capital gains under Section 45. Having regard to the decisions of the Supreme Court and the High Courts in the reverse cases of conversion of capital asset into noncapital asset and also the decision of the Madras, Calcutta and Karnataka High Courts, the only proper thing would be to adopt as the cost of acquisition of the 'capital asset' the market value of the agricultural land on the date it became a non-agricultural land. It will be interesting to recall the following from the decision in the case of B.C. Srinivasa Setty (supra).

... 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. (p. 670) What is stated above in connection with the assessment of goodwill, a self-generated asset, would apply with equal force to the concept of 'cost of acquisition' adopted for computing capital gains in a case where agricultural land became a capital asset during the course of years.

23. Apart from the above, sections 48, 49 and 50 would also support the view taken above of adopting the market value as the cost of acquisition. In Section 48(i7) the Legislature has purposely used the words 'the cost of acquisition of the capital assets. [Emphasis supplied].

If the intention was to adopt the cost of acquisition of the particular property at whatever time it was acquired, there was no necessity to particularly refer to 'capital asset' especially having stated in the earlier part of Section 48 'as a result of the transfer of the capital asset the following amounts'. Section 49 takes particular care to deal with cost of acquisition in cases where a capital asset became the property of the assessee on a distribution of assets on partition, under gift or will, etc. Special provision for computing the cost of acquisition in the case of depreciable assets obtains in Section 50 ; the depreciation allowed under the Act is to be reduced from the cost at which the assessee had purchased the assets. When the Legislature has taken special care to deal with the above two types of acquisition of assets and has taken particular care not to provide for a case where a non-capital asset becomes a capital asset, it is clear that the specific reference to 'cost of acquisition of the capital asset' in Section 48(a) must be regarded as a reference to the ordinary principles of arriving at the cost on the day the capital asset became an asset in the hands of the assessee and not an earlier date when the assessee purchased the non-capital asset which in course of time was converted or got itself converted into a capital asset.

24. The above view gets further support from the definiti on of 'short-term capital asset' given in Section 2(42A) as under : (42A) 'Short-term capital asset' means a capital asset held by an assessee for not more than sixty months immediately preceding the date of its transfer ; Explanation : (1) in determining the period for which any capital asset is held by the assessee- (a) in the case of a share held in a company in liquidation, there shall be excluded the period subsequent to the date on which the company goes into liquidation ; (b) in the case of a capital 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 m 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 transfer of a short-term capital asset and not a long-term capital asset. The provisions of Explanations (i) and (if) also confirm the above. If the nature of the asset, whether capital or not, is not relevant for either computation of capital gains or even consideration of the asset as a short-term capital asset, Clause (a) of Explanation (i) excluding the period subsequent to the date on which the company goes into liquidation would be meaningless. If a share is a capital asset, the assessee's interest in the company even after its liquidation could be said to be a capital asset in the same way as a non-capital asset prior to its conversion could be treated as a capital asset for calculating the period-this is the gist of the revenue's contention. If there is no difference between holding of a capital asset and non-capital asset, there could be no purpose in enacting Explanation (ii) either. 1 have no doubt, therefore, that in computing the capital gains in the circumstances considered herein the market value of the asset on the day it became the capital asset should be treated as the cost of acquisition for the purposes of Section 48(ii).

25. On a consideration of the evidence before us, I hold that what the assessee purchased is an agricultural land. The predecessor owner, E.I.D. Parry & Co., purchased 6 acres and 76 cents of land on 2-2-1898.

They put up a factory building and godowns on part of the land. That the land was outside the skirts of Salem town is undisputed. In the year 1898 the Salem town should not have been such a developed area as to put the present location of this land in any way in the urban sphere. This piece of land would have been very much outside the 'then city of Salem'. E.I.D. Parry & Co. was manufacturing sugar in the factory. A sugar factory building of the type constructed does not require as extensive an area as 7 acres of land. On the contrary, it is clear that the E.I.D. Parry & Co., a company incorporated under the English Companies Act and having its head office most probably in Madras, purchased this land on the outskirts of Salem with the idea that sugarcane would be available nearabouts. Looking to the nature of the sugarcane industry and the type of sugarcane factories obtaining all over the country, it is not unreasonable to think that the extra acres of land attached to the factory premises would have been intended by the company for growing its own sugarcane and possibly sugarcane was also produced. The outskirts 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 Sand 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 never denied that the assessee-company was a manufacturer of tiles, bricks, etc. But it is also indicated that at no stage clay or other materials from this land has been or could be taken or utilised for the purpose of the assessee's factory. It, thus, means that apart from the factory building and the godowns attached to it, the remaining 6 and odd acres of land was clearly not useful to the assessee for its business of tile making. Why the assessee-company started its business of tile making in Salem is beyond our purview. But it is clear that if in an auction along with necessary godowns and factories some land also included had to be purchased, the character of that land cannot be regarded as the same as godowns and factory in which the assessee was interested. In other words, the claim of the assessee that while it purchased the godown and factory premises in a single auction sale the remaining agricultural lands inseparable from the auctioned buildings came to, it cannot be altogether rejected (sic). It is in this context that the reference of the learned departmental counsel to the assessee being a company formed for the purpose of tiles manufacture and not doing agriculture as one of its objects in the memorandum or articles of association has to be analysed. In the first place, merely because certain activities are not in the objects clause of the company, if the assessee does undertake the activity and earns income therefrom, it cannot be claimed that these are non-taxable or have not been done. If the assessee did in fact purchase agricultural land whether its articles provided for it or not, the mere fact of the purchase by the assessee-company would not render what was agricultural land into non-agricultural land. The rights of the shareholders or creditors may be affected by the ultra vires actions of the company but they have no relevance to the determination of the nature of the assets purchased by the company. In the present case, moreover, these assets came to the company allegedly as an annexure to the factory and the buildings which it wanted to purchase in the auction. This particular contention, therefore, cannot be accepted. Evidence before us and also those referred to by the ITO and the AAC indicates that there has been some type of cultivation though not extensive. Some expenditure has been incurred and some income earned. The departmental 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 lyyaperumal, 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 conversion into non-agricultural land can be made would be the date of this agreement. The market rate on that date obviously is Rs. 2,50,000.

It may be that on going into the details of the case, further evidence would be forthcoming to show that the land had been converted either by way of 'actual condition' or 'intended user' (as laid down by the Supreme Court), on a prior date. I, therefore, think in the interest of justice that the matter must go back to the AAC to find out the particular date on which such conversion took place. The AAC would give full opportunity to the ITO and the assessee to produce details and fixing the date, arrive at the market value of those lands as on that date which would be the cost of acquisition of the capital asset. I agree with my learned brother that capital gains would be assessable with regard to the transfer of the immovable property only when a conveyance deed is executed and registered under the Indian Registration Act. The value of the full consideration for the purpose of computation of capital gains also has to be separately found out for each plot of land registered on each date.

27. It was pointed out by the learned counsel for the department that the question of quantum of capital gains was not raised specifically and should not be gone into. This objection cannot be accepted. In the first place the claim before the ITO was that no amount should be included by way of capital gains. Ground No. 1 in the grounds of appeal before us is also sufficiently wide enough to include this plea. The assessee's contention is that no amount should be included as capital gains, whereas the department's case was that the entire amount assessed should be sustained as capital gains. In between it would certainly be open to the Tribunal on the facts of the case to come to the correct conclusion as to the exact amount of capital gains taxable, if at all, they are so taxable. The Tribunal is final fact finding authority and cannot be compelled to decide matters on a mere 'yes' or 'no' level : and income-tax proceeding before the Tribunal is not a case of a Us between the two parties but a decision on the taxability of income of the citizen-Bhartia Steel & Engg. Co. OP.) Ltd. v. ITO [1974] 97 ITR 154 (Cal). In CIT v. M.R.M.M.P.L. Firm Tax Case No. 195 of 1973 dated 15-12-1976, capital gain was computed by the departmental authorities 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 A AC 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 (supra) 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 Tribunal to come to a finding as to whether the assessee is taxable on an income and if so, as to the exact extent of the income so taxable.

The members having differed, the following question is referred to the President for reference to the Third Member : Whether, on the facts and in the circumstances of the case, the capital gains assessable for the assessment year 1968-69 would be Rs. 2,28,902 or any lesser amount 1. This appeal has come to me as a result of difference of opinion between the Judicial Member and the Accountant Member on the following question, as set out by them : Whether, on the facts and in the circumstances of the case, the capital gains assessable for the assessment year 1968-69 would be Rs. 2,28,902 or any lesser amount 2. The assessee had claimed exemption from capital gains of the profit of Rs. 1,97,607 which has arisen out of sale of 6.2 acres of land out of 6.76 acres of land purchased from E.I.D. Parry & Co., on the ground that the land sold was agricultural land. The said land of 6.76 acres were purchased by sale deed dated 2-2-1898 from E.I.D. Parry & Co., a company incorporated under the English Companies Act. The assessee-company had bifurcated the land purchased from E.I.D. Parry & Co. as industrial area and farm section. The industrial area formed only 1 acre and 2362 sq. ft. whereas the farm section, according to the assessee, consisted of 6 acres and 20 cents. The Judicial Member, Mr.

P. Venugopal, after consideration of all facts held, summing up in paragraph No. 14 of his order, that the agricultural character of the land has to be determined on a consideration of not one but all the circumstances of the case and the cumulative effect of the entire circumstances considered was that the land in question does not constitute agricultural land so as to enable the assessee to claim exemption from the levy of capital gains tax, whereas the Accountant Member agreed with the Judicial Member that what the assessee sold in 1966 was non-agricultural land, a capital asset, but disagreed with the Judicial Member that the capital gains should be computed at a figure of Rs. 2,28,902 and in paragraph No. 25 of his order held that what the assessee purchased was an agricultural land. He came to the conclusion that there is an 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 show that the land had been converted either by way of 'actual condition' or 'intended user'.

3. The question as referred tome and quoted above prima facie appears to be a general question rather than pinpointing the real point of difference which was with reference to the definition of the cost of acquisition. The department's case was that the Judicial Member has categorically held that the land sold was never from the inception an agricultural land. For this purpose he referred to page 6 of the Judicial Member's order where he has referred to the fact of there being no evidence that the seller of the property used this piece of land as an agricultural land or was paying any land revenue and, on the other hand, the evidence showed that the assessee purchased from E.I.D.Parry & Co., the factory buildings and godown with the vacant land adjoining them. Again in paragraph No. 9 on page 7 he has reiterated that 'it is, therefore, obvious that the assessee never purchased any agricultural land for any agricultural purpose but only a factory building and land for carrying on its manufacturing activity'. Whereas, the assessee's counsel pointed out that in paragraph No. 10 the Judicial Member has referred that the agricultural character of the land was lost when the transfer took place by executing the registered documents to the individual purchasers and this is what even the Account-ant Member has referred to and, therefore, there was really no controversy at all.

4. On the main question as to whether from the inception what the assessee purchased was capital asset the real question that has to be considered is about the agricultural use of the land as claimed by the assessee. In respect of this the Judicial Member in paragraph No. 11 of his order had referred to the garden maintenance account which can only be taken to mean that the expenditure was incurred for maintaining the usual garden around a house or a factory. According to him, the lease of over 6 acres of land to the watchman for cultivation for a penalty amount of Rs. 275 per year seems to suggest a feeble attempt of securing evidence for some agricultural user of the land. According to him, there being no evidence of regular and systematic carrying on of the basic agricultural operations, like ploughing, tilling of the land, manuring, watering, sowing of seeds, etc., the existence of some coconut 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 time 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 assessee, relied on the same adangal register to show that in column 6, which refers to the name of the patta holder cultivating the land, the old vendor's name, 19, East India Sugar Factory has been mentioned. According to the assessee's counsel, that shows that the old company was having that as an agricultural land. With these evidences as well as the reference in the original agreement of sale between the assessee-company and E.I.D.Parry & Co. entered on 11-2-1959 where in paragraph No. 5 of the deed there is a specific reference to the vendor releasing to the purchaser of the part and parcel of land together with all hedges, ditches, trees, well, fences, water, waterways, liberties, rights, privileges, easements, advantages and appurtenances whatsoever referred thereto, he argued that these aspects should be considered in fairness.

5. As against that, the departmental representative's argument was that these citations in the agreement of sale are the usual citations for any land but in the case of agricultural land there will be a specific description about the land being an agricultural land. As regards the adangal register, to which reference was made by the learned counsel, the departmental representative referred to the order of the Judicial Member and submitted that the Judicial Member has rightly rejected this piece of evidence as not admissible having not been placed earlier before the lower authorities.

6. In my opinion, since an essential test for considering a land as an agricultural land is the actual user of the land for cultivation and since an adangal register has been produced before the Tribunal, though for the first time, in the interests of justice the matter should have been referred back to the AAC to examine the veracity of the adangal register instead of the Accountant Member himself giving a finding straightaway that the land was an agricultural land in the hands of the assessee by virtue of the user of the land for agricultural purposes and remitting the matter back to the AAC for the purpose of only finding out as to when these agricultural activities ceased. In my opinion, a finding to the effect that the land was an agricultural land in the hands of the assessee by virtue of the user of the land for agricultural purposes can be given only if the evidence in the form of adangal register and the certificate of cultivation have 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 the matter back to the AAC for examination of the evidences, they may also consider the applicability or otherwise of the circular in question also and give their finding on that.

8. After the Bench hears on the above points and if there is still need to refer to the Third Member the same question of difference, the Bench may remit the file back to him for dealing with the point of difference.

1. On a difference between the learned members who heard the appeal originally, the following point has been stated : Whether, on the facts and in the circumstances of the case, the capital gains assessable for the assessment year 1968-69 would be Rs. 2,28,902 or any lesser amount The then President nominated Shri D. Rangaswamy, the then Vice President (Southern Zone), as the Third Member to dispose of this case within the meaning of Section 255(4) of the Act. It was, inter alia, submitted before the learned Third Member that there was a circular of the CBDT having a direct bearing on the issue and that the said circular had not been considered by the learned members who originally heard the appeal. The learned Third Member took the view that the matter should go back to the Bench to consider the applicability or otherwise of the circular in question. He also indicated that it would be open to the Bench to send the appeal back to the AAC for examination of the evidence or to consider the applicability or otherwise of the circular in question, etc.

2. Against the aforesaid order of the learned Third Member, the department filed a writ petition and by their order dated 5-9-1983, their Lordships of the Madras High Court allowed the petition with the following observations : ...The Third Member has no such power and such a power has to be construed as an appellate or revisional power and, therefore, a member to whom a reference has been made under Section 255(4) of the Act can only decide the dispute referred to it one way or the other and he cannot remit the matter back to the Tribunal... Therefore, following the said decision, this writ petition is allowed and the order of the Third Member dated 26-1-1978 remitting the matter back to the Tribunal is quashed. The result is, the reference has to be disposed of by a Member of the Tribunal who shall be nominated by the President under Section 255(4) of the Act.

It is in these circumstances that the President assigned this case to himself.

3. The parties have been heard at length. There does not seem to be any difference of opinion between the learned members about the fact that the capital asset sold during the previous year was, when purchased, not a capital asset inasmuch as it was an agricultural land. M o 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 Judicial Member had observed in the order in favour of the revenue. Be that as it may, on going through the entire order of the learned Judicial Member and having regard to the point of difference formulated by the learned Members. I am of the view that the learned Judicial Member had also proceeded on the basis that the land when purchased was an agricultural land, i.e., not a capital asset and that it was a capital asset, i.e., non-agricultural land, when sold during the previous year.

Since this has also been the basis of the order of the learned Accountant Member, I do not consider it necessary to go further into this aspect of the question.

4. The agreement of sale is dated 19-8-1966. The proceedings relate to the assessment year 1968-69 for which the previous year ending is 30-6-1967. In terms of the agreement of sale the assessee is to divide its agricultural land into different sizes of plots and to convey it to the eventual buyers as per the directions of the assessee's buyers. It has, thus, been taken by both the learned Members that 19-8-1966 may be conveniently treated as the date of conversion of the agricultural land into a non-agricultural land. While the learned Judicial Member has held, following the Gujarat High Court decision in the case of Ranchhodbhai Bhaijibhai Patel (supra) that the date of conversion is of no consequence and that the cost of acquisition of the agricultural land will be the cost of acquisition of the capital asset for the purpose of computing income under the head 'Capital gains', the learned Accountant Member has held that the abovementioned Gujarat High Court decision should not be applied to the facts of this case inasmuch as the following decisions, having a bearing on the issue, were not considered by the Gujarat High Court in their above decision-Bai Shirinbai K. Kooka's case (supra), New Jehangir Vakil Mills Co. Ltd.'s case (supra), Hantapara Tea Co. Ltd.'s case (supra), Anil Starch Products Ltd.'s case (supra) and Gangadhar Babu Lal's case (supra).

In this context, the learned Accountant Member has also referred to the subsequent decision of the Gujarat High Court in the case of Mohanbhai Pamabhai (supra) to show that the Gujarat High Court has itself subsequently considered the scope of the expression 'cost of acquisition of the capital asset' in a different manner. He has also referred to the Madras High Court decision in the case of K. Rathnam Nadar (supra), the Calcutta High Court decision in the case of Chunilal Prabhudas & Co. (supra) and the Karnataka High Court decision in the case of B.C. Srinivasa Setty (supra). 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 withdrawn by the CBDT on 23-9-1971. According to the counsel for the assessee, it is not open to the CBDT to withdraw the circular retrospectively and the effect of withdrawal of the circular will be that the earlier circular will not apply to the previous years commencing thereafter. For this purpose, the learned counsel has placed reliance on the decisions of the Kerala High Court in the cases of CIT v. B.M. Edward, India Sea Foods [1979] 119 ITR 334 (FB) and CIT v. Geeva Films [1983] 141 ITR 632. According to the departmental representative, however, the circular withdrawn cannot be applied to the proceedings after the withdrawal irrespective of the assessment year or the previous year involved. That income chargeable to tax has to be computed on commercial principles has, it has been argued, also been held by the Supreme Court in the case of Miss Dhun Dadabhoy frapadia v. CIT [1967] 63 ITR 651.

6. Having heard the parties at, length and after carefully going through the orders of the learned Members, I am of the view that the Gujarat High Court's decision in the case of Ranchhodbhai Bhaijibhai Patel (supra) squarely applies to the facts of this case. It is pertinent to mention that the fact that the expression 'cost of acquisition of the capital asset' was used in Section 48(ii) and not the expression like 'cost of acquisition of the asset', has been duly noticed and appreciated by the Gujarat High Court in its decision in Ranchhodbhai Bhaijibhai Patel's case (supra). Their conclusion is : It is, therefore, clear that the words 'the capital asset' in Section 48, Clause (ii), are identificatory and demonstrative and they are intended to refer to the property which is the subject of levy of charge of capital gains under Section 45. ...(p. 459) The above decision has not been reversed or adversely commented upon by the Hon'ble Supreme Court or any other High Court to my knowledge.

Therefore, the decisions relied upon by the learned Accountant Member where dichotomy between the assessee and the business and/or non-taxable business and taxable one or partly taxable business has been recognised, cannot be construed to mean that the above Gujarat High Court's decision does not justify non-following of the above Gujarat High Court's decision (sic). For this and other reasons given by the learned Judicial Member, with which I agree, I hold that the cost of acquisition of the capital 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 (supra) 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 (supra). No decision of any other High Court or the Supreme Court where a contrary view could have been taken has bee n 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-]I) where following the Supreme Court's decision in the case of Bai Shirinbai K.Kooka (supra), 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 circular dated 23-9-1971 being Instruction No. 324 and Circular No. 207/13/7 l-IT(AT-I), where following the Gujarat High Court's decision in the case of Ranchhodbhai Bhaijibhai Patel (supra), the CBDT has withdrawn the above circular and directed that the cost of acquisition of the property originally and not the market value of the property on the date of its conversion should be taken for the purpose of computing the surplus liable to capital gains tax. The year involved before me is the assessment year 1968-69. The first circular was, thus, not in operation during the previous year or the assessment year under appeal and at the time of the assessment, which has been made on 8-3-1972, the circular had already been withdrawn. Therefore, this case does not fall within the ratio of the abovesaid Kerala High Court's decision. The question, therefore, arises is whether the circular dated 1-8-1969 should be followed in this case. I am of the view that a circular which was not in operation during the accounting year or even the assessment year but which was, though in operation for about two years, was withdrawn before the assessment was completed cannot be said to be binding on the income-tax authorities. In this view of the matter, I hold that even the circular dated 1-8-1969 does not help the case of the assessee.

Accordingly, I agree with the learned Judicial Member that the surplus liable to capital gains tax in this case would be Rs. 2,28,902.

8. In the result, the Third Member order will now go to the Division Bench for deciding the appeal according to the majority view.


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