1 . T.C. No. 68/1975 is a reference made under Section 256(1) of the I.T. Act, 1961, raising the following questions :
'(1) Whether, on the facts and in the circumstances of the case, R.S. No. 154/10 which belonged to the assessee and which was acquired by the Government of Madras was agricultural land and hence not a capital asset within the meaning of that expression as defined in Section 2(14) of the Income-tax Act, 1961 ?
(2) If the first question is answered in the negative, whether the provisions of Section 52(2) can be invoked in computing the capital gains arising to the assessee by compulsory acquisition of that capital asset and
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the full value of the consideration for the transfer should be computed taking into consideration the compensation awarded by the city civil court ?'
2. In T.C. No. 70 of 1975, which has been referred under Section 27(1) of the W.T. Act, 1957, the following questions have been referred :
'(1) Whether the land bearing R.S. No. 154/10 of the extent of 12 grounds and 46 sq. ft. situate in Nungambakkam, Madras, which belonged to the assessee as on March 31, 1968, and which was acquired by the Government of Madras by Award No. 7 of 1968 dated December 14, 1968, was not an agricultural land and
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing that the value of the said land as on the date of valuation should be taken as Rs. 1,26,000 ?'
3. We shall first take up for consideration the reference under the I.T. Act. The assessee, an advocate by profession, owned land bearing R.S. No. 154/10 measuring an area of 12 grounds and 46 Sq. ft. in Nungambakkam, Madras. He had purchased the land for Rs. 2,000 in 1940. The assessee's brother had similarly purchased the land bearing R.S. No. 157/11 of an equal extent at or about the same time. At the time of purchase, both these lands had been leased out to one Parthasarathy Naicker who was cultivating them. The said Parthasarathy continued to cultivate the lands as lessee under the assessee and his brother right up to 1953. After 1953, there was no cultivation of the assessee's land. His brother also did not cultivate his land, but built a house thereon. On June 25, 1966, the Government of Madras issued a notification under Section 4 of the Land Acquisition Act proposing to acquire the assessee's land for the purpose of construction of buildings for the office of the Regional Provident Fund Commissioner. In the acquisition proceedings, the assessee claimed compensation at the rate of Rs. 22,000 per ground before the Land Acquisition Officer who, by his award dated December 14, 1968, determined the compensation payable at Rs. 89,843.27 made up of Rs. 78,124.58 being the value of the land at the rate of Rs. 6,500 per ground and Rs. 11,718.69 being the solatium at 15 per cent. The assessee was not satisfied with the compensation so awarded and he, therefore, got a reference made to the city civil court under Section 18 of the Land Acquisition Act. In the said reference, the city civil court awarded compensation for the acquired land at the rate of Rs. 10,500 per ground and the assessee preferred an appeal to the High Court seeking compensation at the rate of Rs. 15,000 per ground. At the time when this reference was made, the appeal before the High Court claiming compensation at Rs. 15,000 per ground was pending. It appears that the matter has since been disposed of and compensation of a higher amount than what was awarded by the city civil court has been awarded by this court.
4. For the assessment year 1969-70 for which the previous year ended on March 31, 1969, the assessee disclosed in Part IV of his return the receipt of compensation of Rs. 89,843.27 but he claimed that the land in question was agricultural land and hence not a capital asset within the meaning of the said expression as defined in Section 2(14) of the I.T. Act, 1961. The contention of the assessee was that the capital gains arising out of the compulsory acquisition could not be brought to tax under Section 45 of the Act. Reference was made to the land being described as wet land in the revenue records maintained by the Government of Madras and even in the notification under Section 4 of the Land Acquisition Act. The ITO, noticing that the land was situate in an area covered by the Town Planning Scheme, that a number of houses had been constructed in the said area several years prior to the acquisition thereof, that no cultivation had been done in the land since 1953, that the acquisition had been made only for the purpose of construction of an office building and quarters for the staff employed by the Regional Provident Fund Commissioner and that the assessee himself had claimed compensation for the land in question at the rate of Rs. 22,000 per ground at which rate no person would buy an agricultural land, held that the land in question was not agricultural land and that, therefore, the capital gain arising from the acquisition was liable to be taxed under Section 45. He did not adopt the compensation, as paid by the land acquisition authorities, as the market value, but adopted a sum of Rs. 15,000 per ground invoking Section 52(2) of the Act. After giving deduction for the value of the land as on January 1, 1954, the ITO brought to tax Rs. 1,14,000 and completed the assessment by applying the provisions of Sections 80L and 80T of the Act. The assessee appealed against the assessment so made before the AAC, who confirmed the assessment made by the ITO. Against the order of the AAC the assessee appealed to the Tribunal which confirmed the assessment and held that, as the City Civil Court had awarded compensation at the rate of Rs. 10,500 per ground, the ITO should compute the capital gains accordingly. It is against this order of the Tribunal that the assessee applied for reference which has been made with reference to the questions already extracted.
5. In the wealth-tax assessment for the year 1968-69, the question was as to whether these lands formed part of the taxable assets held by the assessee. The assessee claimed exemption in respect of the value of the lands by reference to Section 5(1) read with Section 2(m) of the W.T. Act, which gives exemption in respect of agricultural land. In the assessment made by the WTO, the assessee's claim was rejected, and his appeals before the AAC and the Tribunal were not successful. The Tribunal has directed the value of the property being taken at Rs. 1,26,000 taking into account the compensation as awarded by the city civil court at the rate of Rs. 10,500 per ground, as against the amount brought to tax by the WTO and the AAC. It is against this order of the Tribunal that a reference has been obtained and the questions already set out have been referred to this court.
6. In the reference under the I.T. Act, the relevant provisions that have to be considered are as follows :
7. Section 45 provides for levy of capital gains in respect of any profits or gains arising from the transfer of a capital asset. The word ' capital asset' has been defined in Section 2(14) as not including agricultural lands in India. Therefore, the question that arises for consideration in the present case is whether the land held by the assessee in Nungambakkam can be considered to be agricultural land so as to come within the scope of the exclusion under Section 2(14) of the Act. There is no definition of ' agricultural land ' in the relevant Acts. However, courts have gone into the question whether any particular land can be classified as agricultural land by reference to any agricultural operations performed on the land. It is unnecessary to refer to the decisions of the High Courts as the matter has been considered by the Supreme Court in CWT v. Officer-in-charge (Court of Wards), Paigah : 10ITR133(SC) . In that case, with reference to a 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, the question arose whether it constituted agricultural land within the meaning of Section 2(e)(i) of the W.T. Act, 1957. The Tribunal held that the property could not be treated as agricultural land as the land was never intended to be used for agriculture and was not ploughed or tilled. When the matter came before the High Court under reference, it was held that the land was agricultural land because-
(i) the area was 108 acres abutting the Hussain Sagar tank, (ii) the land had two wells in it, (iii) it was capable of being used for agricultural purposes, (iv) it had not been put to any use which could change the character of the land by making it unfit for immediate cultivation, and (v) it was classified and assessed to land revenue as ' agricultural land ' under the Andhra Pradesh Land Revenue Act.
8. The Supreme Court, on appeal, held that the first four features considered by the High Court and based upon the absence of any user for non-agricultural purposes were inconclusive, and the fifth feature alone provided some evidence of the character of the land from the point of view of its purpose and that the property being classified in the revenue records as agricultural land was not conclusive and such an entry was considered only to raise a rebuttable presumption. The matter was remanded to the Appellate Tribunal to determine afresh whether the lands were agricultural lands, after giving opportunity to both sides to let in further evidence. In the course of their judgment, their Lordships, pointed out at page 143 :
' 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.'. (Underlining* ours).
9. The above passage goes to show that the character of the land has to be determined according to the purposes for which it is meant or set apart and can be used and that this will depend upon the facts of each case. What is really to be shown is the connection of the land with an agricultural purpose, and the mere possibility of user of the land for agricultural purposes is of no consequence. At pages 143 and 144, their Lordships have pointed out in more than one place that the question is essentially one of fact.
10. It is in the light of this pronouncement, that we have to consider the question in the present case whether the lands are agricultural lands.
11. There is no dispute about the fact that the land, in the present case, was under cultivation between 1940 when the assessee purchased it and 1953. It is admitted that after 1953, there was no cultivation of the land, The assessee's brother, who simultaneously purchased the adjacent piece of land has put the same for use as a residential plot. Having regard to the fact that we have to consider the character of the land according to the purposes for which it was meant or set apart, it appears to us that the abandonment of cultivation from 1953 itself shows that the assessee had, by conduct, shown that the land was not meant for agricultural purposes. If really the assessee wanted to put the land for agricultural use, then one would not have expected him to have kept quiet for a period of thirteen years before the acquisition proceedings took place. The ITO has not called for the papers relating to the assessee's claim for compensation before the land acquisition authorities to see the basis of the claim made by him. From the manner in which the claim appears to have been made, it is clear that the basis is that the land was a house-site and not mere agricultural land. As pointed out by the Tribunal, the acquisition itself was for a non-agricultural purpose and the assessee also had claimed large compensation at the rate of Rs. 22,000 per ground at which-price no one would purchase agricultural lands. The area is covered by a town planning scheme and the property is surrounded by residences all around. These are features which would, in a way, show the character of the property for the purposes of finding out whether it is agricultural land or not. It may be that in a particular case a man can put a land to use for agricultural purposes even if it is in a city or town, and surrounded by residential buildings. However, in the present case, there is no evidence to show that the assessee intended to keep the land as agricultural land and utilised it as such at any time after. 1953.
12. Learned counsel for the assessee submitted that once the land was agricultural land, then in the absence of any other evidence showing that it was converted into a laud for non-agricultural purposes, the land should be treated as agricultural land. In other words, the proposition was, once a land was agricultural, it was always agricultural. We are unable to accept this submission. The character of the land will have to be determined in the light of the facts and circumstances that prevailed in the year of account or at or about the year of account. If the assessee has not shown any intention of his using the land for agricultural purposes, then the land will not retain the character of agricultural land.
13. Our attention was drawn to a recent decision of a Bench of this court in Combined Industries (P.) Ltd. v. C2T : 115ITR358(Mad) . In that case, the assessee which was a private limited company, purchased agricultural lands of an extent of 63'63 acres in 1955 for a total cost of Rs. 16,797. The company was using the lands for agricultural purposes since the date of purchase. The managing director of the company took the lands on lease in April, 1959, for exploring the possibility of excavating gypsum stones, undertaking to sell the gypsum stones taken from the lands to the company and agreeing not to sell the gypsum stones to any party without the permission of the company. Gypsum was obtained from the lands for some years. The quantities are referred to in the judgment. The assessee sold an extent of about 48 acres for a total sum of Rs. 1,05,000 as agricultural land. The sale proceeds showed a surplus of Rs. 88,203 and this amount was brought to tax in the assessment of the company. The assessee came on reference to the High Court as he had failed before the Tribunal on the question whether the lands were agricultural lands. When the matter came before this court, it was remitted to the Tribunal for the purpose of considering the question afresh in the light of the facts and circumstances. There are certain observations in the said judgment, on which considerable emphasis was laid by the learned counsel for the assessee, and those observations run as follows (p. 362) :
' When once it was admittedly an agricultural land some act on the part of the assessee had to be established which would prove that the assessee had converted the property into non-agricultural land. Unless such contrary evidence is available, it will have to be presumed that it continues to be agricultural land and did not change its character. Mere non-user of the land or keeping it fallow for even a long period will not be decisive to hold that there was a change in character.'
14. If these observations were intended as laying down any principle of law, then this court, in the above case, would have decided the reference in favour of the assessee and would not have sent the matter back to the Tribunal for deciding the question afresh, as there was no proof of the conversion of the lands. It has also to be remembered that in the judgment in that case there is reference to the judgment of the Supreme Court in CWT v. Officer-in-charge (Court of Wards), Paigah : 10ITR133(SC) . It is not possible to take the view that the learned judges wanted to take a view which would run contrary to the decision of the Supreme Court cited by them. We have already extracted the relevant passage from the judgment of the Supreme Court and that passage shows that the matter has to be decided with reference to the facts and circumstances obtaining at or about the relevant year. We are, therefore, unable to understand the observations in the case of Combined Industries (P.) Ltd. v. CIT : 115ITR358(Mad) as laying down any legal principle. The result is : Question No. 1 in both the references will have to be answered against the assessee. As far as question No. 2 in the income-tax reference is concerned, it is already covered by two decisions of this court against the revenue and those decisions are: CIT v. Rikadas Dhuraji : 103ITR111(Mad) and Addl. CGT v. Krishnamoorthy : 110ITR212(Mad) (Mad). In the light of these pronouncements, we answer that question in the income-tax reference against the revenue.
15. As regards question No. 3 in the income-tax reference and question No. 2 in the wealth-tax reference, the point arises in this way. The assessee had been agitating the question of compensation before the appropriate authorities under the Land Acquisition Act. The assessee was not satisfied with the compensation as awarded by the city civil court and brought the matter on appeal to this court. The question is whether the amount as awarded by the city civil court is to be considered in the respective assessments. The decision of either the Land Acquisition Officer or the city civil court or this court on appeal have all the effect of fixing the market value as on the date of acquisition. The market value that is determined by the respective authorities or the courts is only with reference to the date on which the land was acquired. Therefore, whatever has been determined subsequently, will have retrospective validity, so as to be effective as on the date of acquisition, with reference to the year in which the assessment is made. A decision of a Division Bench of this court, to which one of us was a party, in Dollar Company v. CIT : 107ITR280(Mad) has considered the position in the same light. At page 289, it was pointed out:
' What the courts did was merely to quantify the compensation. The right arose in the year in which the transaction took place. The right to the correct amount of compensation had already accrued to the assessee. The date of taking possession is only relevant for the purpose of 'taxation under Section 12B (of the Indian Income-tax Act, 1922).'
16. The provisions in the present Act of 1961, namely, Section 45, and the succeeding provisions are identical. It has been pointed out in the same decision that Section 12B of the 1922 Act had, by importing a fiction, taken the amount awarded as consideration received in the year in which the transaction took place. The circumstance that the higher amounts came to be awarded only subsequently did not affect the assessability of the amount in the year in which it was liable to be assessed. In the light of these aspects, the amount to be determined by this court will have to be taken into account in the relevant assessment to income-tax. The ITO originally adopted a higher figure for taking the compensation for the purpose of assessment, the AAC, on appeal, took the proper compensation as Rs. 12,000 per ground. The Tribunal, on appeal, has taken the compensation as flxed by the city civil court. As the matter has now to be decided in the light of the compensation awarded by this court, appropriately the matter can be dealt with by the ITO in the light of the circumstances. The Tribunal would have to remit the matter to him. As fat as the wealth-tax assessment is concerned, the Tribunal itself will be in a position to substitute the figure of market value on the basis of the High Court's judgment, as the Tribunal has powers of enhancement. The third question is answered in the negative and in favour of the revenue. Similarly, the second question in the wealth-tax reference is answered in the negative and in favour of the revenue. There will be no order as to costs in either of the references.