the judgement of the Court was delivered by
RAJAGOPALAN, J. - The assessee was a dealer in cotton goods, sarangs and kailees, with his place of business at Melapalayam. Between August, 1940, and December, 1944, he purchased some plots of lands in T. S. 3140in Melapalayam which together totalled 2.54 acres. They were cultivable lands and were registered in revenue records as dry lands assessed to land revenue. The price paid by the assessee for these lands totalled Rs. 3,400. Even by April, 1944, the assessee entered into an agreement with Muslim Educational Society, Melapalayam, to construct buildings on the land for use as a school. Construction commenced in 1944 and was completed and completed in 1946 at a cost of Rs. 33,167. the committee occupied the buildings even before they were completed and paid rent which eventually raised to Rs. 100 a month. the committee decided to buy the property, and after some negotiations the assessee sold the land with the buildings thereon to the committee for Rs. 80,000 on the 5th June, 1946.
The Departmental Authorities treated Rs. 43,433, the difference between the sale price and what the assessee had expended, as a capital gain. The market value of the land alone was estimated at Rs. 9,000, and so Rs. 5,600 was treated as the capital gain made by the assessee which could be allocated to the sale of the land apart from the building. Out of this, again, 1/5th was excluded, as 1/5th of the area of the land was found to be in use, even after Committee had acquired the property, for agricultural purposes. The school authorities used a fifth of the compound as an experimental farm attached to the school. The rest of the land, apart from the extent on which the building stood, was apparently in use as a playground. Four-fifths of Rs. 5,600, Rs. 4,480, was treated by the Department as the capital gain assessable to tax under section 12 B of the Indian Income-tax Act, i.e., with reference to the sale of the lands. As there was not much dispute as regards the capital gain from the sale of the house the amount chargeable to tax at Rs. 42,313. The Tribunal agreed with the Assistant Commissioner on this point.
The questions referred to this Court under section 66 (1) of the Act were :
1. Whether the provisions of section 12B of the Indian Income-tax Act imposing a tax on capital gains are ultra vires the Indian LEgislature ?
2. Whether the assessment of the capital gains at Rs. 4,480 on four-fifths of the land is valid ?
The first question is no longer res integra, It is concluded by the decision of the Supreme Court in Navinchandra Mafatlal v. Commissioner of Income-tax : 26ITR758(SC) , where the validity of section 12B was upheld.
What is taxable under section 12B of the Act is 'Profits or gains arising from the sale........... of a capital asset. ' 'Capital asset' has been defined in section 2 (4A). 'Capital asset' means property of any kind held by an assessee, whether or not connected with his business, profession or vocation, but does not include............ (iii) any land from which the income derived is agricultural income. 'Agricultural income' has been defined in section 2 (1) of the Act.
The contention of the assessee was that all the land, except that actually occupied by the building in use as a school house, was held by him as agricultural land, and that any profit made by the sale of such agricultural land was excluded from the operation of section 12 : agricultural land was not a capital asset as defined by section 2 (4A).
The questions that arise are :
1. Was the land in question T. S. 3140 land from which the assessee derived agricultural income ?
2. Did he derive income from the land ?
3. Was that income 'agricultural income' as defined by section 2 (1) of the Act ?
The assessee relied on entries in the adangal registers to show that all through, up to at least the end of June, 9145, the lands were used for agricultural operations and crops were raised thereon. He relied on entries in his accounts to show that he derived agricultural income from these lands by the sale of the produce. The accounts did not shoe specifically that the produce from these lands was sold. Admittedly the assessee had other lands which were under cultivation. The Tribunal declined to attached any importance to entries in the adangals either which showed the entire area of 2.54 acres as under cultivation all through, despite the fact that the building operations commenced in 1944 and the school building was occupied even in 1944-45. The assessee admittedly received rent from the Committee. It was' income ' but obviously it was not 'agricultural income. ' The assessee failed to establish that he got another income from the land in the years that preceded the sale. There was thus no evidence that the assessee derived 'agricultural income' from the lands in question. That the previous owners of the lands cultivated them and derived agricultural income therefrom could not be relevant. Therefore the nature of the lands before the assessee purchased them cannot help in deciding the question at issue.
It is clear that more than two years before the assessee sold the land, and even before he purchased the last of the plots to complete the holding of 2 acres 54 cents, the assessee had decided to put the land to use for school house, on construction which he embarked after his agreement with the Committee in April, 1944. Building operations commenced soon thereafter. It is difficult to conceive of any cultivation operations being carried on by the assessee in any extent of the land after the construction had commenced, or after the school authorities moved in. The need for a good bit of the land around the building for use as a playground should be obvious. In the experimental farm, agricultural or historical operations were obviously carried on by the school authorities and not by the assessee. The total extent of 2.54 acres could be hardly enough for the school. It was thus a case of a sale of building with a reasonable extent of land appurtenant thereto.
As we said that one time before the assessee purchased the lands, they were agricultural lands, is not enough to sustain the claim of the assessee that he came within the scope of the exemption in sub-clause (iii) of section 2 (4A). He did not hold the land for agricultural purpose. He did not derive any agricultural income therefrom.
We answer the first question in the negative and the second question in the affirmative, both against the assessee. As the assessee has failed. he will pay the cost of this reference; counsel fee Rs. 250.
Reference answered accordingly.