By TIOL News Service

KOCHI, OCT 10, 2017: THE issue is - Whether when the acquisition of an agricultural land was for non-agricultural purposes and assessee was not carrying on any agricultural activity on date of sale, the land ceased to be an agricultural land and therefore, the assessee is not entitled to exemption from levy of capital gains tax. YES is the verdict.

Facts of the case

The Assessee-company was engaged in the business of manufacture and sale of oleoresins and spices oil. The Assessee purchased 512 cents of agricultural land at a village which was a Panchayat and was beyond eight kilometres radius of the nearby Municipality. The land was purchased for expansion of the Assessee's factory. However, local people objected to the expansion of the factory and therefore, the Assessee dropped its proposal for expansion and decided to convert the land into residential plots with an intention to develop and sell a residential villa project. The land was converted into plots and in the previous year relevant to the AY 2007-08, the Assessee sold 188 cents of land to various parties. In the subsequent years also, the remaining area of the land was sold and in some cases, the Assessee entered into agreements with the buyers for construction of villas. The Assessee claimed that gain on sale of land was exempted from capital gain on the basis that the land was an agricultural land situated in a Panchayat. However, the AO brought 50% of the income on sale of land as capital gain and the balance 50% was assessed as business income. That order was confirmed by the CIT(A) and the Tribunal.

On appeal, the High Court held that,

++ the Assessee purchased the land which was a rubber estate. The land was purchased to utilize it for the non-agricultural purpose of expansion of its factory. The rubber trees in the land were slaughter tapped which is a process that immediately precedes the cutting and removal of the rubber trees. The income returned by the Assessee, is the income from slaughter tapping of rubber trees. This income was not gained from agricultural operations, but was only from exploitation of standing trees at the end of its useful life. Thereafter, the Assessee had converted the land into housing plots leaving out common areas for roads and other purposes. Before that Assessee would have cut and removed rubber trees. The asset was brought in as the stock-in-trade of the Assessee. Thereafter, gradually the plots were sold to several people and agreements were entered into with many of the buyers for construction of villas. This, therefore, would establish beyond any doubt that though the property was once an agricultural land, its acquisition was for nonagricultural purposes, the Assessee did not carry on any agricultural activity in the land and at the relevant date, viz. the date of sale, the land had ceased to be an agricultural land. If that be so, the Assessee could not have claimed that the income gained from the sale of the land is from the sale of agricultural land entitling it to exemption from levy of capital gains. This precisely is the concurrent conclusion of the statutory authorities;

++ before the Tribunal, one document that was relied on by the Assessee to substantiate its contention that the land was an agricultural land, was the certificate dated 20.10.2010 issued by the Village Officer Aikkaranadu North Village. By this document, the Village Officer has certified that the properties mentioned in the survey were agricultural land as per the village records and that it is being used for agricultural operations. Insofar as this certificate is concerned, first of all, this document is purported to have been issued based only on the village records and not anything else. Even on the Assessee's own showing, long before the certificate was issued, the Assessee had cut and removed the rubber trees and had converted the land into plots. Therefore, the case of the Assessee itself would contradict the entry in the village records that the land is an agricultural land and that it was being used for agricultural operations. That apart, the Survey Numbers mentioned also do not tally with the Survey Numbers extracted in the order of the first appellate authority. Admittedly, at least substantial portion of the land was already sold for residential purposes long before the documents was issued. All these, therefore, show that the conclusion of the Tribunal that the certificate was unworthy of acceptance, cannot be said to be vitiated.

(See 2017-TIOL-2128-HC-KERALA-IT)