Shri Kamanahalli Pilla Reddy Nagesh Vs ITO (ITAT Bangalore)
Conclusion: Even though the agricultural land was converted for non-agricultural purposes, but cultivation of land continued till the date of sale of the land. Thus, the land should have been treated as agricultural land and exempt from capital gain in view of section 2(14).
Held: AO made addition of Rs.2.06 crores as long term capital gain arising from sale of land. Assessee claimed that the said land was situated beyond the Municipal limits 10 kms. and therefore, it was not a capital asset as per section 2(14). However, AO held that, the land was converted for nonagricultural purposes before execution of sale deed, therefore, it was a capital asset u/s 2(14) and it could not be exempted u/s 10(1). Accordingly, the same was brought into taxation as capital gain. It was held that the main reason for treating the land as non-agricultural was that the land was converted for usage of non-agricultural purposes. However, the assessee filed revenue records wherein it was stated that the land still continued to be agricultural land wherein crops like Ragi & Paddy were cultivated by the assessee. Further, it was brought on record by assessee that the land revenue was paid as applicable to agricultural land only. The land got converted by assessee for non agricultural purposes and conversion permission was granted on the condition that the land should be used for non-agricultural purposes within two years, otherwise original character of the land i.e., agricultural in nature would be restored. Assessee has not used the land for non-agricultural purposes even after conversion of the land for non-agricultural purposes. Tribunal observed that though the said land was converted for non-agricultural purposes, but cultivation of land continued till the date of sale of the land. Thus, the land should have been treated as agricultural land and exempt from capital gain in view of section 2(14). As the revenue failed to bring anything on record to controvert the tribunal’s observation, the exemption u/s 10(1) was allowable as the sale did not amount to capital asset.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present appeal is filed by assessee against order dated 28.03.2019 passed by Ld. CIT(A)-9, Bangalore for A.Y. 2014-15 on the following grounds of appeal:
“1. The orders of the authorities below in so far as they are against the appellant, are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A] is not justified in upholding the assessment order passed u/s. 143[3] of the Act despite the fact that no valid notice u/s.143[2] of the Act was served upon the appellant taking recourse to the provisions of sec. 292B of the Act and holding that the appellant was not entitled to raise the said challenge under the facts and circumstances of the appellants case.
3. Without prejudice to the above, the learned CIT[A] is not justified in upholding the assessment of Rs. 2,01,92,432/-as Long Term capital gains in the hands of the appellant in individual capacity under the facts and circumstances of the appellant’s case.
4. The learned CIT[A] ought to have appreciated that the property sold by the appellant was received upon partition of the bigger HUF of which the appellant was a coparcener earlier and thus, the said property received upon partition belonged the appellant’s branch of HUF of which the appellant was the karta, which also stood disrupted and therefore, the assessment of capital gains on the sale of the said property in the hands of the appellant in Individual capacity was misconceived.
5. Without prejudice to the contention that the property sold does not belong to the appellant in individual capacity but to the erstwhile HUF of the appellant, the learned CIT[A] ought to have granted deduction of brokerage paid a sum of Rs. 75,000/- while computing capital gains under the facts and in the circumstances of the appellant’s case.
6. Without prejudice to the contention that the property sold does not belong to the appellant in individual capacity but to the erstwhile HUF of the appellant, the learned CIT[A] ought to have granted deduction towards indexed cost of improvement of Rs. 29,90,446/- being the expenditure incurred towards the construction of the compound by the erstwhile joint family of the appellant, which the appellant is otherwise entitled to as per law under the facts and in the circumstances of the appellant’s case.
7. Without prejudice to the contention that the property sold does not belong to the appellant in individual capacity but to the erstwhile HUF of the appellant, the learned CIT[A] ought to have granted deduction u/s.54B of the Act of Rs. 1,66,75,000/- being the extent of agricultural lands purchased by the erstwhile joint family of the appellant, which the appellant is otherwise entitled to as per law under the facts and in the circumstances of the appellant’s case.
8. Without prejudice to the right to seek waiver with the Hon’ble CCIT/DG, the appellant denies himself liable to be charged to interest u/s.234-A and 234B of the Act, which under the facts and in the circumstances of the appellant’s case and the levy deserves to be cancelled.
9. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”
2. Facts of the case are that the A.O. made addition of Rs.2.06 crores as long term capital gain arising from sale of land situated at Survey No.40, Chikkanahalli Kammanahalli, Sarjapur hobli, Anekal Taluk, Bengaluru. The assessee claimed that the said land is situated beyond the Municipal limits 10 kms. and therefore, it is not a capital asset as per section 2(14) of the Act. According to the Ld. A.R., the sale of agricultural land outside municipal limit is to be treated as agricultural land and should be exempted u/s 10(1) of the Act. However, the A.O. held that, the land was converted for nonagricultural purposes before execution of sale deed, therefore, it is a capital asset u/s 2(14) of the Act, and it cannot be exempted u/s 10(1) of the Act. Accordingly, the same was brought into taxation as capital gain.
On appeal, the Ld. CIT(A) confirmed the above finding of the A.O.
Against this, the assessee is in appeal before us.
The Ld. A.R. submitted that, the assessee entered into sale agreement on 15/4/2013 to sell subjected property and the land was got converted as per condition laid down by the purchaser in sale agreement. As per this condition in sale agreement, the Ld.AR submitted that, the assessee got converted the said land for non-agricultural purposes on 16.9.2013 by order of Dy. Commissioner of Bangalore district OM No.ALN(S)-SR/37/13-14 dated 16.9.2013, and, the assessee entered into sale deed on 18.9.2013. It was submitted that the conversion of said property for non-agricultural purpose was only to fetch good price and not any other intention. The Ld.AR submitted that, the property was sold within a period of 2 days after the order of conversion, and the land was not subjected to use for non-agricultural purpose on any day and the sole intention of conversion was to get good price that cannot be reason to hold that the land sold by assessee is non-agricultural land.
Further, it was submitted that, land has been used by the assessee till the date of transfer as agricultural land and also assessee declared income from agriculture in its return of income which was not accepted by the department.
Further, the Ld.AR drew our attention to the record of rights, wherein it was classified as non-agricultural land and the land was subjected to cultivation, wherein assessee cultivated cashew nut and Neilgiri. He also submitted that the endorsement issued by the Dy. Tahsildar, Sarjapur Hobli, Anekal vide no. Sanaaka/MNK/MSC/20/2014-15 dated 13.1.2015, the land is situated 10 kms away from the local municipality. He relied on the following judgements:-
a) Shri M.R. Pattabhiram (HUF), in WTA No.34-36/Bang/2014 dated 16.10.2015.
b) Shri M.R. Anandaram (HUF), ITAT Bengaluru Bench in ITA Nos.1169 to 1172/Bang/2015 & CO Nos.220 to 223/Bang/2015
c) Hon’ble Jurisdictional High Court of Karnataka in the case of CIT Vs. Smt. K. Leelavathy (2012) 21 taxmann.com 148 (Kar) dated 2.1.2012
d) Smt. K. Leelavathi, ITA No.997 & 998 (Bang) 2010.
The Ld.AR submitted that though the property was within limits of BMRDA, that itself cannot be treated as the land is situated within the municipality or local authority in terms of section 2(14)(iii)(a) of the Act. For this purpose, he relied on the order of the Tribunal in the case of WTA No.34-36/Bang/2014 dated 16.10.2015 in the case of M.R. Pattabhirama (HUF).
3. On the other hand, the Ld. D.R. submitted that the land was converted for non-agricultural purpose before sale and the sale of converted land for non-agricultural purpose should be liable for tax as it is not an agricultural income in terms of section 2(14) of the Act.
We note that assessee has filed following additional grounds.
It is submitted that no new facts needs to be adjudicated and accordingly application dated 28.04.2022 stands allowed.
“1. The Appellant begs to submit the following additional grounds of Appeal for Adjudication in addition to the grounds of Appeal already urged in the Appeal Memorandum.
2. Additional Ground
The Ld.AO has erred in holding a sum of Rs. 2,01,92,432/-as income from Capital Gains on the sale of Agricultural Lands situated at Sy.No. 40, Chikkanahalli Kamanahalli, Sarjapur Hobli, Anekal Taluk, Bangalore jointly sold by the Appellant along with his family members vide Sale Deed dtd: 18-092013 without appreciating the fact that the Land sold were the Agricultural Lands not liable for Capital Gain Tax.
3. The Appellant submits that the additional ground is absolutely necessary for Adjudication for the cause of advancement of substantial justice and equity since the adjudication id required in accordance with Law and facts of the case.
4. The Appellant submits that the admission of additional grounds does not cause any prejudice to the revenue since the matter in appeal needs to be adjudicated on merits of the case in accordance with law. On the otherhand if the additional grounds are not admitted the Appellant would be put to hardship and denial of justice admissible in accordance with law.
5. The Appellant begs to place reliance on the following decisions
i. The Hon’ble Supreme Court in the case of National Thermal Power Corporation Ltd v/s. CIT 229 ITR 383 (SC)
ii. The Hon’ble Supreme Court in the case of CIT v/s. Kelvinator of India Ltd (2010) 320 ITR 561 (SC)
6. Therefore the Appellant respectfully prays that this Hon’ble Bench be pleased to admit the Additional Grounds of Appeal for adjudication in the interest of equity and substantial justice.”
4. It is also submitted by the Ld.AR that in the event the additional grounds is considered, assessee would not press on the main grounds raised in the grounds of appeal. He also submitted that assessee had also raised additional grounds vide application dated 28.04.2022.
5. The Ld.AR at the outset submitted that on identical facts in case of co-owner Shri K.P. Manjunatha Reddy vs. ITO in ITA No. 977/Bang/2019 vide order dated 25.03.2022, the Coordinate Bench of this Tribunal held the land sold not to be liable for capital gain being an agricultural land.
The Ld.DR however submitted that the issue may be remanded to the Ld.AO to verify the same.
6. We have perused the submissions advanced by both sides in the light of records placed before us.
7. We note that on identical facts, Coordinate Bench of this Tribunal in co-owner’s case observed and held as under:
“4. We have heard the rival submissions, perused the materials available on record and gone through the orders of the authorities below. In this case, the assessee sold property situated at Survey No.40, Chikkanahalli Kammanahalli, Sarjapur hobli, Anekal Taluk, Bengaluru and claimed it as an agricultural land. However, the A.O. observed that the land was subjected to conversion before sale agreement on 15.4.2013 and the assessee got converted the said land for non-agricultural purposes on 16.9.2013 by order of Dy. Commissioner of Bangalore district OM No.ALN(S)-SR/37/13-14 dated 16.9.2013. Later, the assessee entered into sale deed on 18.9.2013. However, assessee furnished Record of rights issued by revenue authorities that land was subjected to cultivation, wherein assessee cultivated cashew nuts and Neilgiri in the assessment year under consideration. The assessee also produced the certificate from Dy. Tahsildar, Sarjapur Hobli, Anekal, wherein he has stated that the land is situated 10 kms. away from the municipal limits. These facts support the case of assessee to hold that land is an agricultural land and only to facilitate to get good price, the assessee converted the land and at the time of entering into sale agreement, land was not converted into nonagricultural land. The assessee also declared agricultural income from the said land as an agricultural income at Rs.9 lakhs, which was accepted by the department and there was no disturbance on this count. The situation of land within the BMRDA limits cannot be considered as the land is situated within the limit of municipality and moreover, BMRDA is not a municipal or local authority in terms of section 2(14)(iii)(a) of the Act. This proposition is verified by the order of the Tribunal in the case of M.R. Pattabhiram (HUF) Vs. ACWT in WTA Nos.34 to 36/Bang/2014 dated 16.10.2015, wherein Tribunal held as under:
7. The next is came up for our consideration, is whether the CWT(A), right in holding the impugned lands are urban lands and the BIAPPA is municipality or notified area as defined in section 2(14)(iii) of the Act. The Id. Authorised representative brought to the notice of the bench that the issue in this appeal is covered by assessee own case in ITA.No. 262/B/2013.We find that the co-ordinate bench of this tribunal in assessee own case in ITA No. 2628/2013 for the assessment year had considered whether the impugned lands situated at Akkalenahalli- Mallenahalli Village pertaining to the assessee which are subject matter of appeal before us are urban lands as defined in section 2(14)(iii) of the Income tax Act, 1961 and are capital assets and the gain from transfer of these lands are liable for capitalain tax. The ITAT had examined the issue whether the lands in question are capital assets, situated within the municipal limits of BIAPPA and the BIAPPA is a municipality or notified area. The Tribunal after considering the relevant details has come to the conclusion that the impugned lands are not capital assets within the meaning of section 2(14). The relevant portion is reproduced hereunder.
8.It is now for us to consider as to whether the order passed by the co-ordinate bench of this Tribunal in the case of M.R. Seetharam (HUF) in ITA No.16154/BangI2012 dt.13.6.2014 is applicable to the facts of this case.
The land in question, which are sold by the assessee and subjected to the charge of LTCG by the authorities below, became the properties of the assessee’s virtue of a family settlement of land purchased by Late Sri M.S. Ramaiah in 1951. In the said family settlement in 1970, the assessee and other family members including M.R. Seetharam were allotted lands belonging to the said family. The lands sold by the assessee, some other family , members, as well as the lands sold by M.R. Seetharam are contiguous in nature and possess the same physical attributes. Admittedly these lands were converted for nonagricultural purposes, but no development was eft:I-Tied out by the assessee in respect of the said land. Agricultural activities were continued thereon right up to the date of sale thereof on 8.2.2008 and the same has been accepted by the Income Tax Department while determining the assessee’s income and computing the taxes thereon. In fact no development activities have taken place on these lands even after six years after the date of sale and this was evident from the physical inspection undertaken by the Members of the Co-ordinate bench prior to the passing of the appellate order in the case of M.R.Seetharam (HUF). Considering the fact that the assessee’s lands are contiguous to the lands of M.R.Seetharam (HUF) and have the same physical properties, they are identical to the lands which formed the subject matter of the order in the case of M.R. Seetharam and therefore we are in no doubt that the order passed in the case of M.R. Seetharam (HUF) in ITA No.1654/Bang/2012 dt.13.6.2014 is applicable to the appeal in the case on hand.
9.1 We now proceed to examine and take up for consideration the issues and reasons cited / raised by revenue in written submissions dt.12.9.2014 as to why the order of the co-ordinate bench of this Tribunal in the case of M.R. Seetharam (HUF) is not to be applied to the case in hand:-
” 1. Various factual and legal aspects of the order delivered in case of M R Seetharam (ITA No.1654/Bang/2012) need to be deliberated upon once again, especially in the context of the above mentioned appeals and only after such deliberation the Ld. Bench may arrive at a conclusion in case of the above mentioned appeals.”
The above reason being general in nature no finding or adjudication is called for thereon.
” 2. The issues involved in the above mentioned appeals (viz. status of land-agricultural or non-agricultural, status of BIAPPA etc.) have huge revenue implications given the fact that the sale considerations are high due to the lands being located in the vicinity of the Bangalore Airport.”
Revenue must bear in mind the sacrosanct principle that the Tribunal should not concern itself with the possible implications on Revenue that the orders passed by it may have. The Tribunal is expected to pass orders which, in its opinion, are correct in law, based on facts and circumstances, irrespective of implications on the revenue or for that matter on the assessee’s case also.
” 3. Apart from the above mentioned assessees, many other assessees have sold lands in this area which is arguably one of the areas with very high commercial potential due to its location being near the Bangalore International Airport. Thus, the judgement in the above mentioned cases is going to affect taxation of many high value land transactions in this prime area of Bangalore.”
These issues do not and should not have any bearing on the Tribunal arriving at a decision which is in accordance with law.
” 4. Most importantly the judgment in the above mentioned cases would decide a very important question-“what is the definition of a converted land in the state of Karnataka.” ” The order of this Tribunal will confine itself to deciding the taxability or otherwise of the gains arising from the sale of the lands in question in accordance with the provisions contained in the Income Tax Act, 1961. If Revenue expects this Tribunal to decide the question framed in the above cited reason, then such expectation is either borne out of ignorance or mischievous in nature. If mischievous, then Revenue would be well advised to avoid such tongue-in-check arguments.
9.2 On careful consideration of the above four reasons cited by Revenue (supra), we are of the considered view that none of them survive as they are wholly extraneous in arriving at a decision in accordance with the provisions of law.
10.0 We now proceed to carefully consider the several other issues raised by Revenue and examine these in the light of the order passed by the co-ordinate bench of this Tribunal in. the case of M.R. Seetharam (HUF) (supra). On a careful reading of the above, we draw the following conclusions as regards the decision rendered in the order in the case of M.R. Seetharam (HUF): –
10.1: There is no dispute as regards the fact that the lands in question stood converted, as on the date of sale, in the records of the land revenue authorities of the State Government, as but for this fact, the sale of the lands in question to corporates could not have taken place in the State of Karnataka. Thus the fact that the lands sold are therefore non-agricultural as on the date of sale is also not in dispute.
10.2 The assessee admittedly obtained an order of conversion to put the land to use for non-agricultural purposes. One of the mandatory conditions stipulated in the conversion order was that the lands should be put to non-agricultural use before a period of two years from the date of the said order of conversion, failing which the permission granted would automatically lapse’ and stand cancelled. The assessee has taken this as one of the reasons to support the proposition that the land continued to be agricultural lands as the permission was not acted upon within the given time and that the lands in question continued to be used only for agricultural purposes. The co-ordinate bench of this Tribunal at para 7.2.6 of its order in the case of M.R. Seetharam (HUF) (supra), citing the mandatory condition in the conversion order, observed that –
“…. 10. The land should be used for the said purpose within two years from the date of this order [ Refer pages 8(‘ to 92 (including English transaction) of paper book of A.R.] ” only for the limited purpose of stating that the Assess* Officer is not correct in taking a stand that once the agricultural land is converted for nonagricultural purposes, the land cannot be treated as agricultural land even though it continues to be used only for agricultural purposes. The fact that the mandatory condition was not complied with by the assessee was not the reason by the co-ordinate bench of this Tribunal held that the lands sold are agricultural lands and not capital assets u/s. 2(14) of the Act.
10.3 The co-ordinate bench of this Tribunal has proceeded to hold that the lands sold are agricultural lands and not capital assets u/s.2( 14) of the Act on the basis of its findings rendered from paras 7.2.7 to 7.3.10 of its order in the case of M.R.Seetharam (HUF) (supra) and has come to the following important conclusions :-
(i) The lands in question do not cease to be agricultural lands merely because it stood converted in the records of the land revenue authorities of the state government.
(ii) The land continued to be agricultural land for the limited purpose of determining whether the same falls under the definition of capital asset under section 2(14) of the Act in view of the following facts :-
(a) The said land was put to use as agricultural land by the assessee right up to the date of sale and the assessee has also been declaring the agricultural income earned therefrom in the returns of income filed before the Department in this period;
(b) The assessee did nothing to change the physical character of land from agricultural to non-agricultural even after obtaining the permission to convert;
(c) The land continued to be agricultural land in actual physical condition even after a period of six years after its sale.
(d) The assessee obtained permission to convert the land merely to facilitate its sale to corporate entity as the sale would otherwise not been possible.
10.4.1 The co-ordinate bench of this Tribunal only after satisfying itself that the above facts were present in the case of M.R. Seetharam (HUF) (supra) held that the lands sold are agricultural lands and not capital assets under section 2(41) of the Act. In coming to this decision, the coordinate bench of this Tribunal placed reliance of these earlier decisions of different co-ordinate benches of the Bangalore Tribunal, in the following cases :-
(i) H.S. Vijaykumar V ACIT, Hassan ( ITA No.108/Bang/2009 dt.28.11.2006).
(ii) T. Suresh Gowda & Others (ITA Nos.1464 & 1465/Bang/2008; 177, 178, 262 & 305/Bang/2009 dt.30.12.2009).
The Tribunal also placed reliance on the decision of the Hon’ble jurisdictional High Court of Karnataka in the case of –
iii) CIT V. Smt. K. Leelavathy reported in (2012) 21 t’dxmann.com 148 (Kar) dt.2.1.2012.
10.4.2 In all the above three cited cases (supra) the facts are that the respective assessees sold their Agricultural lands, after getting the same converted for non-agricultural use, to persons who were not going to continue any agricultural activity. Further, in all the above three cases, the assessee’s therein :-
(i) continued to carry on agricultural activities on the land in question up to the date of sale;
(ii) did not act upon the conversion by carrying out any non-agricultural activity on the said lands; and
(iii) obtained the conversion order merely to facilitate sale to non-agriculturists.
In fact in the case of H.S. Vijaykumar (supra), the assessee therein sold the land to a corporate entity as in the case on hand. All the requirements which led the coordinate bench of this Tribunal to hold that the lands sold are agricultural lands and not capital assets under section 2(14) of the Act in the case of M.R. Seetharam (HUF) (supra) are also found in the case on hand before us.
10.4.3 The co-ordinate bench of this Tribunal in the case of M.R. Seetharam (HUF) (supra) has also placed reliance on the decision of the Hon’ble jurisdictional High Court of Karnataka in the case of CIT V Smt. K. Leelavathy (supra), ;which upheld the decision of the Tribunal in that case. The Hon’ble Court had occasion to analyse the provisions of section 2(14) r. w. sections 45 and 48 of the Act. The two questions of law which were raised by the Revenue in the case of Smt. K. Leelavathy (supra) were as under :-
“1: Whether the appellate authorities were correct in holding that the land which is the subject matter of sale is agricultural land as on the date of sale without taking into consideration the conversion of land to nonagricultural purpose and consequently recorded a perverse finding ?
2.Whether the appellate authorities were correct in holding that though the land is converted into nonagricultural, in view of the cultivation of the land till the date of sale, the land should be treated as agricultural land and the same is exempt from capital gains in view of section 2(14) read with sections 45 and 48 of the Act ? “
10.5The Hon’ble Court after considering the averments of both parties and the orders of the authorities below held as under :
“5. We find from the record that the Appellate Commissioner as well as the Tribunal followed an earlier ruling of the Tribunal rendered on December 30, 2009, in the case of T.Suresh Gowda [ITA NO.262/Bang/2009] wherein it appears, the question was resolved by looking into the date of permission for conversion as the cut-off line to decide as to whether the land was an agricultural land or otherwise.
6. It appears, the Tribunal had opined that the land retained its agricultural character till the date of order permitting non-agricultural use and, thereafter, it is not an agricultural land and, therefore, can be treated as capital asset.
7. The Appellate Commissioner as well as the Tribunal has applied this norm and while they did hold that the sale transaction in respect of the following extent of land:
