Case Law Details

Case Name : Smt. T. Urmila Vs Income-tax Officer, Ward-6(2) (ITAT Hyderabad)
Appeal Number : IT Appeal No. 398 (HYD.) OF 2012
Date of Judgement/Order : 12/12/2012
Related Assessment Year : 2008-09
Courts : All ITAT (4266) ITAT Hyderabad (240)

IN THE ITAT HYDERABAD BENCH ‘A’

Smt. T. Urmila

Versus

Income-tax Officer, Ward-6(2)

IT APPEAL NO. 398 (HYD.) OF 2012

[ASSESSMENT YEAR 2008-09]

DECEMBER 12, 2012

ORDER

Chandra Poojari, Accountant Member 

This appeal by the assessee is directed against the order of the CIT(A)-IV, Hyderabad dated 31.1.2012 for assessment year 2008-09.

2. The assessee raised the following grounds of appeal:

 1.  The order of the learned CIT(A) is not only perverse but is erroneous on facts and in law and is prejudicial to the appellant.

 2.  The learned CIT(A) erred in holding that the land sold by the appellant is not an agricultural land on the ground that its character did not remain as agriculture on the date of sale, and further erred in relying on the decisions to support such stand without putting them across to the appellant for explanation.

 3.  The learned CIT(A) while deciding the issue whether the land sold is agricultural or not when relying on decisions that are not put to the appellant erred in not looking into the decisions that are relied upon by the assessee and further erred in not appreciating the fact that in one such decision (292 ITR 481) their lordships has also considered the decision of Hon’ble Supreme Court in the case of Sarifa Bibi Mohd. Ibrahim (204 ITR 631) and still it is held that the land is agricultural in spite of the fact that the purpose for which it is sold is not agricultural and there by violated the principles of binding precedents.

 4.  The learned CIT(A) erred in assuming that once the land fall within the limits of the Hyderabad Airport Development Authority (HADA) constituted under A.P. Urban Areas (Development) Act it is a ‘municipality’ under section 2(14)(iii) of the Income Tax Act, 1961 failing to appreciate that HADA is not a ‘municipality’ as defined under section 2(14)(iii) of IT Act it loses its character of agriculture.

 5.  The learned CIT(A) erred in not holding that the notified authority Hyderabad Airport Development Authority is not a municipality nor it is Municipality being called so to fall within the definition U/s. 2(14)(iii) (a) of IT Act 1961.

 6.  Without prejudice, the learned CIT(A) failed to appreciate that the case of the appellant is rather a case of compulsory acquisition by State Government and therefore was exempt under the provisions of section 10(37) of the IT Act.

 7.  The learned CIT(A) erred in not entertaining the alternate plea to direct the AO to consider deduction u/s. 54F on the ground that the said claim is not made by filing revised return of income relying on the decision of Supreme Court in Goetz, in spite of the fact that such claim came to be made only when the AO refused to accept the claim of exemption from Capital Gains and hence is required to be entertained and there is no requirement of filing revised return in such circumstances for making alternate claim and further erred in giving a finding that such claim requires investigation into fresh facts.

3. Brief facts of the case are that the assessee is an individual. She had purchased 20.07 acres of land in Srinagar village in Maheswaram Mandal on 18.5.1993. During the relevant previous year, the said land was sold to M/s. Ramky Estates and Farms Pvt. Ltd. for Rs. 14,12,25,000. The receipt was not offered to tax by the assessee claiming that the land was agricultural land. The Assessing Officer noticed that the impugned land was situated in the village Srinagar of Maheswaram Mandal which is included in the Hyderabad Airport Development Authority (HADA), vide G.O. MS 352 MA dated 30.07.2001. He noted that HADA has been constituted as a Special Area Development Authority by the Government of Andhra Pradesh u/s. 3A of the Andhra Pradesh Urban Areas (Development) Act, 1975. Notification to this effect has been issued by the Municipal Administration and Urban Development (II) Department, Government of Andhra Pradesh, notifying 89 villages from 7 Mandals in the vicinity and surrounding the International Airport, Shamshabad, as a Special Development Area. The Assessing Officer noted that the village Srinagar in Maheswaram Mandal is included in the said 89 villages. The Assessing Officer further noted that the Government of Andhra Pradesh has issued a land acquisition notification under the Land Acquisition Act, for the acquisition of the above said land of the assessee to develop into an integrated township. He further noted that the purchaser, M/s. Ramky Estates and Farms Pvt. Ltd., hereinafter referred to as ‘Ramky’, has submitted a proposal dated 8.12.2006 to the Hyderabad Urban Development Authority (HUDA) for the development of the integrated township in a joint venture with them on the land for which acquisition notice was given by the Government of Andhra Pradesh including the above mentioned land. It was further noticed that the assessee had registered an irrevocable power of attorney in favour of Ramky on 5.5.2007 to receive the possession of the said land and enter into and to hold, defend, management and administer the property and deal with the property in any manner as Ramky may agree upon with any third party/ developer and to have the property developed by the construction of the project, as per the scheme or arrangement, as agreed by Ramky with HUDA/any third party developer and if need be to execute an irrevocable power of attorney in favour of the developer.

4. The Assessing Officer also noted that the Government of Andhra Pradesh had issued orders for development of the above said land into Integrated Township vide its order bearing GO Rt No. 93 dated 16.5.2007. It was noted that the assessee had sold impugned land admeasuring 20.07 acres, by entering into an agreement to sell and the sale consideration of Rs. 14,12,25,000 had also been received in full on 21.8.2007. Further, the assessee had also handed over the possession of the said land to Ramky on the said date itself. On an examination of the above facts, the Assessing Officer opined that the above said transfer of the land by the assessee to Ramky attracted the provisions of sec. 45 of the IT Act for the following reasons:

(a)  He noted that the impugned land was situated in Srinagar village of Maheswaram Mandal which is within the limit of HADA, and therefore, was a capital asset as per sec. 2(14) of the Act, liable to capital gains tax u/s. 45 thereof.

(b)  The document spoke of authorising Ramky to enter into an agreement with HUDA or any other third party or a developer for developing the assessee’s land. The Assessing Officer observed that if the said document is read with other documents viz., the Government Order regarding approval for the project of an Integrated Township and the proposal by Ramky for joint development with HUDA, it clearly was a ‘development agreement’ in respect of the said land. He, therefore, held that when the assessee intended to sell the said land for the purpose of construction of a township, such intention corroborated the nature of the said as being a capital asset within the meaning of Sec. 2(14) of the Act.

(c)  It was noted that the land was sold to Ramky on 21.8.2007 i.e., after the Government Notification and orders, regarding development of the said land into a Township. He observed that but for such notification, the land would not have fetched the price of Rs. 70 lakhs per acre. He observed that had the land been sold for agricultural purposes, such high price could not have been fetched, and therefore, these facts corroborated the fact that the transaction was with respect to a capital asset, liable to capital gains.

5. He also noted that the land was sold by the assessee at the rate of Rs. 70 lakhs per acre to a non agriculturist, for non agricultural use. It was sold at a price at which no agriculturist would purchase for agricultural use, as the said price was not commensurate with the value of agricultural produce on yield basis. This also showed that the transaction was that of transfer of a capital asset. In view of the above, the Assessing Officer concluded that the land transferred by the assessee was a capital asset within the meaning of sec. 2(14) of the Act, liable to be taxed u/s. 45 thereof.

6. In response to the show cause notice issued in this regard, the assessee vide her letter dated 24.12.2010, objected to the treatment proposed to be given by the Assessing Officer. It was claimed that the reasons cited to this effect in the show cause letter are not relevant. However, the Assessing Officer found the objections of the assessee untenable. He reiterated that consequent to the Government notification regarding constitution of a Local Authority by the name HADA and inclusion of Village Srinagar in the limit thereof, the status of the land was that of a capital asset. He noted that by way of the said notification, the area had been declared as a Special Development Area in and around the Shamshabad International Airport, for which Special Planning Control, high level of infrastructural and managerial inputs, status of Special Investment Zone, etc. had been specified.

7. The Assessing Officer also noted that the assessee had filed a petition before the Hon’ble High Court of Andhra Pradesh on 1.8.2006: praying them to quash the acquisition notification, fearing that the Government might give a meagre compensation since the use of the lands in the area has already been changed and the real estate companies had been purchasing lands therein at high prices, as the average market value in the Srinagar village became Rs. 70 lakhs per acre. It had also been mentioned in the said petition that the land notified in the acquisition notification was in Srinagar Village, which falls under the HADA limits and in the event that the present acquisition proposed is for a development sponsored by a Local Authority, then it would necessarily have to be done by HADA not by HUDA in any case or permission has to be necessarily obtained from the HADA for any construction or developmental activity undertaken by any person including any Government department. The assessee had stated in the petition that no sanctioned Government Housing Scheme or any other development scheme that is sponsored by either HUDA or HADA which are Local Authorities under the provisions of the Andhra Pradesh Urban Areas (Development) Act, 1975, much less is there any scheme that is initiated or sponsored by the HADA, which is the competent local authority, or by any municipal authorities with respect to development of the proposed integrated township for this purpose the present exercise of acquiring land has been undertaken and as on today, no action has been initiated to identify persons or class of persons, for whom these lands are destined to benefit. It was sated that the identity of the beneficiaries or the class of beneficiaries or the terms on which the lands would be ultimately allotted was yet to be determined. The Assessing Officer noted that the relevant and pertinent point of the petition was that the assessee had herself admitted that her land, which was sold, was in HADA limits and that the HADA is a local authority.

8. Referring to the definition of the term “Capital Asset”, as given in sec. 2(14) of the Act, the Assessing Officer observed that in the assessee’s case, the land was very much within the limits of the HADA, which is a Local Authority, comprising of 89 villages from 7 Mandals, surrounding the International Airport and having a population of 1.54 lakhs as per Census, 2001. The Assessing Officer held that HADA is a Government notified Local Authority and is a Municipality within the meaning of sec. 2(14)(iii)(a). He noted that in the case of Deoki Nandan & Sons v. CIT (115 Taxman 513), the Hon’ble Delhi High Court have held that the Faridabad Administrative Complex was akin to a Municipality. The Assessing Officer observed that the HADA also had a population of more than 10,000 as per Census, 2001. He also referred to the decision of the Hon’ble Madras High Court in the case of S. Hidaytullah Sahib v. CIT (158 ITR 20), as also that of the Hon’ble A.P. High Court in the case of CIT v. G. M. Omar Khan (116 ITR 950), which was upheld by the Hon’ble Supreme Court also later, as reported in 196 ITR 269. Accordingly, he observed that the land sold by the assessee was a non agricultural land and, therefore, a capital asset as per s. 2(14) of the Act, liable to capital gains u/s. 45 of the Act.

9. The Assessing Officer noted that the assessee’s contention is further not acceptable on account of the fact that the nature of the land sold had changed to non agricultural asset after the Government notification regarding the development thereof into a Township. He observed that the same was no longer agricultural land at the time of transfer, as the notification for development preceded the same. He also noted that on account of the Government notification, a big corporate group like Ramky who are non agriculturists, had purchased the land for construction of township, which is a non agricultural use at a high price of Rs 70 lakhs per acre. He observed that had the land been agricultural, and it would have been purchased for agricultural use, such price could not have been fetched. Accordingly, he observed that considering the totality of the circumstances, the land was non agricultural land, liable for capital gain tax. The Assessing Officer also noted that his conclusion was supported by the decision of the Hon’ble Supreme Court in the case of Sarifa Bibi Mohd. Ibrahim & Ors. v. CIT (204 ITR 631), wherein the observations of a division of Hon’ble Bombay High Court in the case of CIT v. V. A. Trivedi (172 ITR 95) had been upheld. He noted that in the assessee’s case also the land had been notified by the Government for construction of a Township by the time it was sold and the assessee gave a Power of attorney, authorizing Ramky to undertake the development of the land. He held that it showed that the assessee had entered into an agreement with Ramky for use of land for a non agricultural purpose and also that the land was not intended to be used for agricultural purposes.

10. With regard to the reliance of the assessee on the decisions in the case of DLF Housing and Construction (P) Ltd. v. CIT (114 ITR 806) (Del.), Hindustan Industrial Resources Ltd. v. ACIT (221 CTR 710)(Del) and further on the decision of the Hon’ble ITAT in the case of K. Renuka Devi, the Assessing Officer observed that the said decisions do not have much relevance, as the issue involved therein was the assessability of compensation for acquisition to capital gains tax. On the other hand, he observed that the decision of the Hon’ble Apex Court in the case of Sarifa Bibi Mohd. Ibrahim & Ors. v. CIT (supra) answers the objections of the assessee. He also relied on the decision of the Hon’ble Bombay High Court in the case of Gopal C. Sharma v. CIT (209 ITR 946) (Bom). He noted that the Hon’ble Courts have characterized some indicators and if one or more of them appear in a transaction, those are to be considered in determining whether a land is an agricultural land or a non agricultural one for the purpose of capital gains tax. He noted that in the assessee’s case more than one factor was so present and therefore, the land was to be held as non-agricultural for the purpose of capital gains tax. Accordingly, considering that the land had been held for more than 36 months by the assessee the receipt of Rs. 14,12,25,000 was brought to long term capital gains tax.

11. On appeal, the CIT(A) confirmed the finding of the Assessing Officer. Against this the assessee is in appeal before us.

12. The learned AR submitted that the assessee sold lands admeasuring 20.07 acres in Sy. Nos.224, 225, 226, 230 and 231 at Srinagar (V) for Rs.14,12,25,000 during the year relevant to A.Y.2008-09, and claimed the same to be exempt on the ground that the said lands were agricultural lands, not covered by the definition of Capital Asset u/s 2(14) of the Act. The AR submitted that the agricultural lands in question were located in Srinagar village, comprised in the area within the jurisdiction of Gram Panchayat of Mankhal and as such they were situated in an area outside any municipality or cantonment board, having a population of not less than ten thousand, and also beyond the distance notified by the Central Government from the limits of any such municipality or cantonment board. The said land of Ac 20.07 Gts was purchased by the Assessee in the May 1993 and from then onwards the assessee has been carrying on agricultural operations on the said land. It is an undisputed fact that such lands had been held by the Assessee for more than 13 years, upon which agricultural operations were carried out regularly throughout the period of holding till the date of sale and the agricultural income there from was disclosed in the respective returns filed with the department. They had never been used by the assessee for non-agricultural purpose before the date of sale nor did the assessee seek any permission from the relevant authorities to non-agricultural use.

13. The AR further submitted that as per the Andhra Pradesh Agricultural Land (Conversion for Non-Agricultural Purposes) Act, 2006, conversion of agricultural lands for any other purpose is prohibited except with specific permission by the authority under that Act. It is further submitted that the High Court of Karnataka, in the case of CIT v. Smt. K. Leelavathy (341 ITR 287), approved the order of the ITAT wherein it was held that the land sold by the assessee retained its agricultural character till the date of the order permitting non-agricultural use and could be treated as a capital asset only thereafter.

14. The learned AR submitted that the lands were classified as agricultural lands in the revenue records, even as on the date of sale and they were sold on acreage basis. In fact, there was actual cultivation at the relevant point of time, not only by the assessee but in the entire area in the vicinity of such land. There was no real development or actual urbanization as at the time of sale and the Government had simply issued a notification proposing an integrated township. At any rate, a mere notification proposing to develop a township, by itself, could not be a determining factor to infer that the character of such land had undergone a change. In this regard, the AR relied on the order of Pune Bench of the Tribunal wherein categorically held, in the case of Haresh V. Milani v. JCIT (111 TTJ 310) (Pune), that the mere fact that the land under reference was brought under industrial zone cannot be a determining factor to say that the character of the land had altered. While holding so, it relied on the decision of the Supreme Court in the case of N. Srinivasa Rao v. Special Court [2006] 4 SCC 214, wherein it was observed that the fact that the agricultural land in question was included in urban area, by itself, was not enough to conclude that the user of the same had been altered. The AR further submitted that there is no development in the subject area even as on date and agriculture is being carried out in the area even as on date. In view of the above facts and law, the lands sold by the assessee were agricultural in nature at the point of time when they were sold.

15. The AR further submitted that the impugned sale was, in fact, not voluntary but was made under certain compelling circumstances. The Government of Andhra Pradesh issued a notification u/s 4(1) of the Land Acquisition Act, 1894 for compulsory acquisition of the land pertaining to the assessee along with other tracts of land in the vicinity. As the assessee was not interested in parting with her agricultural land, she, along with others, challenged the Acquisition Notification before the High Court of Andhra Pradesh and obtained a stay. The Government was seriously pursuing the case and a Special Counsel had been entrusted with the job of taking necessary steps to get the stay vacated. As the matter was pending before the High court, M/s. Ramky Estates & Farms P. Ltd. approached the Government of Andhra Pradesh and Hyderabad Urban Development Authority (HUDA) with a proposal for development of an integrated township under Joint Development Model, by utilizing the land which was the subject matter of the Acquisition Notification. Considering the fact that the acquisition process could not proceed further due to the stalemate created on account of litigation by the land owners, the Vice Chairman, HUDA requested the Government to accord sanction to go ahead with Joint Development Model and also permission to withdraw Land Acquisition Notification after the land owners agree for transferring their lands to the Special Purpose Vehicle and withdrawal of court cases. Based on such request of the Vice Chairman, HUDA, the Government had granted in principle approval for such proposal. Accordingly, the said company was authorized as a Special Purpose Vehicle to acquire the lands in question for the specified purpose with a condition that the legal cases filed by the land owners were withdrawn. As there was uncertainty over the final outcome of the case pending before the High Court and the Government was very keen on acquiring the land compulsorily, either on its own or through a Special Purpose Vehicle, the assessee was compelled to sell his land to the company, which was granted in principle approval by the Government to acquire the land. The assessee decided to sell the land to the said company in order to fetch a little higher price than what she would have got from Government in the event of ultimate acquisition. Thus, the transfer of land to the company authorized by the Government to acquire the lands for the purpose for which Land Acquisition Notification was issued is in the nature of transfer on account of compulsory acquisition.

16. The AR humbly submitted that s. 2(14) of IT Act, 1961, specifically excludes the agricultural land from the definition of ‘Capital Asset’ unless it is situated in any area within the jurisdiction of a municipality, whether such municipality is known as municipality, municipal corporation, notified area committee, town area committee or by any other name. Thus, it is very clear that the gain on sale of an agricultural land would be. exigible to tax only when the land transferred is located within the jurisdiction of a municipality. The fact that all the expressions enlisted after the word municipality are placed within the brackets starting with the words ‘whether known as’ clearly indicates that such expressions are used to denote a municipality only, irrespective of the name by which such municipality is called.

17. The AR submitted the word “Capital Asset” is defined in Section 2(14) to mean property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-

(iii) agricultural land in India, not being land situate-

(a)  in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or

(b)  in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;

18. The AR submitted that it is very clear that the gain on sale of an agricultural land would be exigible to tax only when the land transferred is located within the jurisdiction of a municipality. The fact that all the expressions enlisted after the word municipality are placed within the brackets starting with the words ‘whether known as’ clearly indicates that such expressions are used to denote a municipality only, irrespective of the name by which such municipality is called. This fact is further substantiated by the provisions contained under clause (b) wherein it has been clearly provided that the authority referred to in clause (a) was only municipality.

19. The AR further submitted that the need for a clarification within the brackets is for the apparent reason that the name of the local body varies based on the nature of the area for which it is constituted and also for the reason that there is a lack of uniformity all over India with reference to the nomenclature of the urban local authority. In fact, municipality is known by different names in various parts of the country. This fact is also evident from Art.243Q of the Constitution of India, dealing with creation of municipalities. The term ‘municipality’ is not defined u/s 2(14) of the Act. However, the same is defined under article 243 P(e) of the Constitution of India, which is reproduced hereunder:

“243 P(e): “Municipality” means an institution of self-Government constituted under article 243Q. “

Since “Municipality” is defined to mean an institution constituted under Article 243Q, the same is extracted hereunder:

“243Q. Constitution of Municipalities.- (1) There shall be constituted in every State,-

 (a)  a Nagar Panchayat (by whatever name called) for a transitional area, that is to say, an area in transition from a rural area to an urban area;

 (b)  a Municipal Council for a smaller urban area; and

 (c)  a Municipal Corporation for a larger urban area, in accordance with the provisions of this Part:”

20. The learned AR further submitted that the constitution, composition, guidelines regarding elections, the eligibility and disqualification criteria to be elected as members, powers, authorities and responsibilities of municipalities etc., are contained under Part-IXA of the Indian Constitution and Art. 243R therein categorically states that all the members of the municipality shall be directly elected by the people of the respective territorial wards. The said article is extracted hereunder:

“243R. Composition of Municipalities.-

(1)  Save as provided in clause (2), all the seats in a Municipality shall be filled by persons chosen by direct election from the territorial constituencies in the Municipal area and for this purpose each Municipal area shall be divided into territorial constituencies to be known as wards.

(2)  The Legislature of a State may, by law, provide-

(a)  for the representation in a Municipality of-

  (i)  persons having special knowledge or experience in Municipal administration;

 (ii)  the members of the House of the People and the members of the Legislative Assembly of the State representing constituencies which comprise wholly or partly the Municipal area;

(iii)  the members of the Council of States and the members of the Legislative Council of the State registered as electors within the Municipal area;

(iv)  the Chairpersons of the Committees constituted under clause (5) of article 243S:

Provided that the persons referred to in paragraph (i) shall not have the right to vote in the meetings of the Municipality;

(b)  the manner of election of the Chairperson of a Municipality.”

Further, it is categorically provided that all the state laws dealing with the municipalities should be consistent with the provisions contained in Part- IXA.

21. The AR submitted that the above provisions of the Constitution leave no room for any doubt that ‘Municipality’ is a constitutional body concerning urban self government; the creation of which is mandatory. The provisions governing the constitution, composition and functioning of municipalities are contained in part IX-A of the Constitution and the relevant laws laid down by the respective state governments, AP Municipalities Act,1965 in the instant case, should be in consistency with such provisions. The term ‘Municipality’ is defined u/s. 2(22) of AP Municipalities Act,1965 to mean a municipality of such grade as may be declared by the Government, from time to time, by notification in the Andhra Pradesh Gazette on the basis of income and such other criteria as may be prescribed. Thus, in the state of Andhra Pradesh, a municipality has to be mandatorily constituted in terms of s. 3 of AP Municipalities Act,1965, as per the guidelines laid down in the constitution, and has to be so notified by the Government whereas setting up of a Development/ Special Area Authority is not mandatory. A state Government may decide to constitute such Authority for a specified purpose, depending on the specific requirements for which it is proposed to be set up, by way of a simple notification and the power to notify such Authority is drawn from an Act specially legislated for the said purpose. This is also evident from the Memorandum explaining the provisions of Finance Act, 1970, whereby s. 2(14) was amended so as to include the agricultural lands located within the jurisdiction of a municipality in the definition of the expression ‘Capital Asset’.

22. The AR submitted that the Chennai Bench of ITAT held, in the case of ITO v. Chander-HUF [2011] 47 SOT 17, that a Town Panchayat, which was notified for urban agglomeration, is not a municipality and as such the agricultural lands falling within the said Town Panchayat would not constitute a capital asset as per the definition under section 2(14)(iii) of the Act. The relevant portion of the decision is extracted hereunder:

“But as per the Act, the provisions of section 2(14) are attracted if the land falls within 8 km. of the municipality and nothing else. Therefore, in our opinion also the assessing officer has stretched the definition of municipality in his own manner. Even though Sholinganallur Town Panchayat is notified for Urban Agglomeration, it is not a Municipality. This definition will not at all fall in the definition of capital asset given in section 2(14)(iii)(b) of the Act. Admittedly, Perumbakkam and Arasankalani villages are separate Panchayats having population of less than 10,000 as stated above. Admittedly, the lands sold were agricultural lands and these were agricultural lands and doing cultivation was done thereon till the date of sale. A Panchayat is entirely different from a Municipality. Thus, Sholinganallur Town Panchayat cannot come within the purview of Municipality. The population of both the villages is less than 10,000. Both the villages are not notified by Central Government for urbanization which is a condition precedent for doing s0. The intention of the legislature is to exclude transaction relating to agricultural land from capital gains, unless it falls within the notified area of 8 km. of Municipal or Cantonment Boards. The words used municipality, municipal corporation, notified area committee, town area committee and town committee all refer to urban local self-government institutions. The Panchayats are rural self-government institutions whether they are Town Panchayats or Village Panchayats. The Municipalities are governed by Municipal Act and the Panchayats are governed by Panchayat Act.”

Reliance is also placed on the decisions in the cases of CIT v. Murari Lodge (194 ITR 125) (Ker), CIT v. P.J. Thomas (211 ITR 897) (Mad) and ITO v. P. Venkatramana (47 TTJ 549) (Hyd).”

23. The AR submitted that without prejudice to the same, the GO MS No. 352, issued by the Government of AP constituting HADA, itself clearly indicates that the provisions of the AP Urban Areas (Development) Act, 1975 were invoked not only in respect of major cities and towns but also extended to many other areas of the state even though such areas may not have a large urban population or may not be in the vicinity of large cities. Accordingly, HADA was constituted as a Special Area Development Body. The factual details with respect to HADA are as follows:

HADA area at a glance

HADA area is located about 21 km south of Hyderabad City

Total Area: 458.96 sq. km

Total number of Revenue Villages: 70

Total number of settlements: 107 (70 Village settlements + 37 hamlets)

Number of Mandals covered: 7 All partly covered only, viz., Shamsabad, Rajendranagar, Maheshwaram, Ibrahimpatnam, Saroornagar, Moinabad and Hayatnagar, respectively.

Entire HADA area falls within Ranga Reddy District

Population: 1,02,989 (1981)
1,47,172 (1991)
1,54,646 (2001)

Population increase of HADA was only about 5% in the last decade

Mailardevpally with a population of 21,210 is the settlement with largest population and the highest density in the HADA area. It is part of the Rajendranagar Municipality,

Only Shamsabad is a classified Class IV Town as per the Census, but its civic status is still that of a Gram Panchayat,

Population of Shamsabad: 11,172 (1981)

15,394 (1991)
18,737 (2001)

The population trend of other important villages in HADA area are:

Sl. No. Village 1981 1991 2001
1. Raviral 2219 2921 3232
2. Nadergul 4935 6089 5534
3. Narkhuda 2520 3234 2616
4. Pedda Shapur 2466 3144 2616
5. Jukal 1709 2043 1355
6. Palmakole 3351 4757 3926
7. Turka Yamjal 3690 6230 2151
8. Mailardevpally 2529 9945 21210
9. Gaganpahad 1887 3908 5386
10. Mamidpally 4600 5478 3494
11. Mankhal 6066 7701 3598
12. Tukkuguda 2843 3223 4309
13. Pahadi Sharif 2565 2853 3506

Area and economy is predominantly agriculture based. Percentage of cultivable area to total area: 59% Percentage of irrigated area to total cultivable area: 47%

Existing Work Force – Total Workers- 51.29%; Male-56.35%; Female-45.83%

The work force is predominantly agriculture (primary sector) based which is above 90% while in secondary sector it is below 8% while the tertiary sector work force is a marginal 2%. In the Draft Master Plan la total work force of 1.25 lakhs is assumed.

Number of Villages covered in the prohibited zone of the Catchment area of Himayatsagar lake: 40 (55% of HADA area)

Existing Land Use of HADA Area (May, 2002)

Sl. No. Land Use Extent in Ha Percentage
1. Dry agriculture 20768.60 45.27
2. Wet agriculture 8040.80 17.51
3. Layout plots area 3277.00 7.14
4. Vacant land 2809.00 6.12
5. Industrial 600.30 1.30
6. Forest land 1256.10 2.73
7. Poultry sites 703.00 1.53
8. Institutional 259.00 0.56
9. Settlements 1170.10 2.55
10. Garden/orchard 560.30 1.22
11. Brick kilns 73.70 0.16
12. Residential colonies 547.40 1.19
13. Transportation 71.50 0.15
14. Public utilities 2106.00 4.60
15. Hillocks 680.40 1.48
16. Water bodies 1229.00 2.67
17. Total 45896.00 100.00

24. He drew our attention to the different provisions of Andhra Pradesh Urban Areas (Development) Act, 1975 and relied on the judgement of Kerala High Court in the case of CIT v. Murali Lodge (194 ITR 125).

25. He relied on the judgement of Hon’ble High Court of Madras, in the case of Commissioner of Income-tax v. Thomas (P.J.) 211 ITR 897 (MAD), that, under section 2(14) of the Income-tax Act, 1961, the exclusion of agricultural land from the definition of a capital asset, would not be applicable to land within the limits of a municipality and not a panchayat. Further, the Hyderabad Bench of Hon’ble ITAT held, in the case of ITO v. P.Venkatramana 46 ITD 484, that the agricultural lands situated within the jurisdiction of a gram panchayat are not covered by the definition of ‘Capital Asset’ u/s 2(14). It was further held that municipality and gram panchayat are two distinct entities governed by the provisions of two different Acts and the expression “or by any other name” appearing in S.2(14) does not include a panchayat or gram panchayat.

26. The AR tried to distinguish the case law relied on by the Revenue. He submitted that in the case of Gopal C. Sharma v. Commissioner of Income-tax 209 ITR 946 (BOM), the Hon’ble High Court of Bombay upheld the finding of the lower authorities that the land under reference was not agricultural, on the ground that such finding was properly arrived at on cumulative considerations of the facts of that case, applying the relevant tests laid down by the Supreme Court in Sarifabibi’s case 204 ITR 631. The crucial facts which were against the claim of the assessee were as under:

 (i)  The Appellate Assistant Commissioner and the Tribunal had found that the lands were situated in a heavy industrial zone.

(ii)  The said lands had not in fact been used or intended to be used for agricultural purposes at the relevant time since several years.

(iii)  The Appellate Assistant Commissioner also recorded a finding of fact, based on relevant evidence, that at least 10 acres of the land out of 25 acres was in fact used for non-agricultural purposes for seven years prior to the date of transfer of the land.

27. The AR submitted that in the decision in the case of Sarifabibi Mohmed Ibrahim v. CIT 204 ITR 631, the Hon’ble Supreme Court approved as many as 13 tests laid down by the High Court in CIT v. Siddharth J. Desai 139 ITR 628 (Guj) for ascertaining the character of land at the time of sale. At the same time, the Supreme Court held that whether a land is an agricultural land or not is essentially a question of fact, which has to be answered in each case having regard to the facts and circumstances of that case. It was further observed that there may be factors both for and against a particular point of view and the court has to answer the question on a consideration of all of them by a process of evaluation and the inference has to be drawn on a cumulative consideration of all the relevant facts. The Supreme Court has further stated that not all these factors or tests would be present or absent in any case and that in each case one or more of those factors may make appearance and that the ultimate decision will have to be reached on a balanced consideration of the totality of the circumstances. Accordingly, on a cumulative consideration of all the facts as existing in that case, the land in question was held to be non-agricultural. The facts militating against the assessees’ plea that the said land was an agricultural land on the date of sale were as under:

(1)  It was within the municipal limits, situated at a distance of one kilometre from Surat railway station.

(2)  No agricultural operations had been carried on for the last four years preceding the date of sale and the assessees had no intention to bring it under cultivation at any time during that period.

(3)  The assessees had applied for permission to sell the said land for non-agricultural purposes under section 63 of the Bombay Tenancy and Agricultural Lands Act and executed sale deeds soon after obtaining the said permission.

(4)  It was sold on a per sq. yard basis at Rs. 23 per sq. yd.

(5)  It was sold to a non-agriculturist for a non-agricultural purpose and the purchaser-society commenced construction operations within three days of the purchase.

(6)  More than 15 years prior to the date of sale, a parcel of 2,607 sq. yards out of this very land was converted to non-agricultural user by constructing a chawl on it by the owners themselves after obtaining the requisite permission to convert the land to non-agricultural user under section 63 of the Land Revenue Code.

28. The AR submitted that the Hon’ble High Court of Bombay, after elaborately discussing the decisions in the cases of Sarifabibi Mohmed Ibrahim and Gopal Sharma (supra), held the land in question to be agricultural land in a later case i.e., CIT v. Minguel Chandra Pais 282 ITR 618 (Bom), wherein the land under reference was adjacent to 4 five star hotels and the person to whom the land was sold, was said to be a sister concern of one of those hotels. While coming to the conclusion, the High Court made a cumulative consideration of the facts vis-a-vis the tests laid down and the facts which weighed in favour of the assessee were as under:

 (i)  the subject land was situated in a village and at a distance of about 15 kms. from the municipal limits.

(ii)  All documents produced by the assessees showed that the said land was agricultural.

(iii)  The assessees had neither converted nor made any plans nor taken any steps towards the conversion of the said land into non-agriculture.

(iv)  The subject land had continued to be put to agricultural use and that it was always used for agricultural purpose.

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29. The AR also submitted that the Hon’ble High Court observed that as the assessees had satisfied most of the tests which were laid down by the Hon’ble Supreme Court in the case of Sarifabibi, the lands in question were agricultural in nature. This decision was followed in the case of CIT v. Smt. Debbie Alemao 331 ITR 59 (Bom), where the assessee had claimed exemption from capital gains on transfer of land which was shown in the revenue record as agricultural land and no permission was ever obtained for non-agricultural use by the assesses and such permission for non-agricultural use was obtained for the first time by the purchaser after it had purchased the land.

30. The ld. AR submitted that from the analysis of the facts and the legal position following picture emerges when the facts of the assessee’s case are tested on the touchstone of the guidelines, approved by the Apex Court in the case of Sarifabibi:

(i)  Whether the land was classified in the revenue records as agricultural and whether it was subject to the payment of land revenue – YES

(ii)  Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time -YES

(iii)  whether such user of the land was for a long period or whether it was of a temporary character or by any stopgap arrangement – YES. It was used for about 14 years.

(iv)  Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land – YES. The agricultural income derived by the Assessee over the years was very reasonable compared to the investment made by them.

(v)  Whether the permission was obtained for the non-agricultural use of the land – NO.

(vi)  Whether the land, on the relevant date, had ceased to be put to agricultural use ; if so, whether it was put to an alternative use ; whether such cesser and/or alternative user was of a permanent or temporary nature – NO

(vii)  Whether the land, though entered in the revenue records, had never been actually used for agriculture, that is, it had never been ploughed or tilled; whether the owner meant or intended to use it for agricultural purposes – NO. As submitted above, agricultural operations were carried out regularly throughout the period of holding and the said land had neither been used nor intended to be used for non-agricultural purpose.

(viii)  Whether the land was situated in a developed area ; whether its physical characteristics, surrounding situation and use of the lands in the adjoining area was such as would indicate that the land was agricultural -NO. There was no development at the relevant point of time. In fact, even today there is no development in the said area and agriculture is still being carried out in the vicinity.

(ix)  Whether the land itself was developed by plotting and providing roads and other facilities – NO

(x)  Whether there were any previous sales of portions of the land for non-agricultural use – NO

(xi)  Whether permission was obtained because the sale or intended sale was in favour of non-agriculturist ; if so, whether the sale or intended sale to such non-agriculturist was for non-agricultural or agricultural user – NO

(xii)  Whether the land was sold on yardage or on acreage basis – ACREAGE BASIS.

(xiii) Whether an agriculturist would purchase the land for agricultural purposes at the price at which the land was sold and whether the owner would have ever sold the land valuing it as a property yielding agricultural produce on the basis of its yield – NOT APPLICABLE since the sale in the Assessee’s case was in consequence of notification for compulsory acquisition and as such it was not voluntary.

31. The AR submitted that, as is evident from the above facts, the impugned land satisfies almost all the guidelines laid down by the Hon’ble Supreme Court and as such the said lands were agricultural in nature at the point of time when they were sold. On almost identical facts, the land was held to be agricultural in the following cases:

(1)  Surjeet Kaur v. CIT 74 TTJ 722 (Hyd)

(2)  Harish V. Milani v. JCIT 111 TTJ 310 (Pune)

(3)  M.S. Srinivasa Naicker v. ITO 292 ITR 481 (Mad)

32. The AR further submitted that it is a settled law that the character of the land at the time of sale has to be examined in the light of the facts as existing in the case of the seller/transferor and as such the purpose for which the land was purchased from the assessee or the fact that such land was the subject matter of compulsory acquisition for use other than for agricultural purpose are wholly irrelevant considerations. In the case of Hindustan Industrial Resources Ltd. v. Asst. CIT 335 ITR 77 (Delhi), where the land was subject to acquisition for industrial use, it was held by the Hon’ble High Court of Delhi that the intention of the land acquiring authority was a wholly irrelevant consideration for determining the character of land at the time of sale. It was observed that where the nature of the land both at the time of purchase and sale/compulsory acquisition was agricultural it cannot be held that its character had undergone any change during the transitional period i.e., between the date of purchase and the date of sale/compulsory acquisition and as such the said land retained the character of agricultural land at the time of sale. It was further held that the fact that the assessee intended to use the land for industrial purpose or that the assessee had not carried out any agricultural operation did not in any way alter the nature and character of the land. For coming to the conclusion, it relied upon the decisions of the Delhi High Court in DLF Housing and Construction (P.) Ltd. v. CIT 141 ITR 806 (Delhi), DLF United Limited v. CIT 161 ITR 714 (Delhi) and DLF United Limited v. CIT 217 ITR 333 (Delhi). Further, it was held by the Hon’ble High Court of Gujarat, in the case of CIT v. Shashiben 288 ITR 319 (Guj), that the fact of non-agricultural user by the buyer will not alter the character of land in the case of the seller. The relevant portion of the decision is extracted hereunder:

“If the land is recorded as agricultural, it would continue to be agricultural land. If somebody, thinking that the said land can be put to some other purpose, purchases the land for a higher price and thereafter, changes the use, for the first holder, the property would not change its character so long as he himself does not change the use or put the land to some other use after getting the conversion of use from the competent authority/officer.”

33. The AR submitted that inflation or escalation in price of the agricultural land would not change the basic character of the land. This view was upheld by the Hon’ble High Court of Bombay, in the case of CIT v. Minguel Chandra Pais (supra), wherein it was held that the price paid is not decisive to say whether the land is agricultural or not. Further, it was held in the case of CIT v. Smt. Debbie Alemao 331 ITR 59 (supra), that the use to which the purchaser would put could not be a factor for the inference that the land is not agricultural in the hands of the assessee at the time of transfer. Reliance is also placed on the decision of the Hon’ble High Court of Madras in the case of M.S. Srinivasa Naicker v. ITO (supra). The AR submitted that in view of the above factual and legal position, HADA is not a Municipality. And therefore the land sold by the Assessee was not a capital asset, in terms of s. 2(14) of IT Act, and as such the gain on transfer of such land is not eligible to tax.

34. The learned DR submitted that it is an undisputed fact that the land sold by the assessee was in the Srinagar Village, which, on the date of sale, stood included within the limits of Hyderabad Airport Development Authority (HADA). It is also clear that HADA itself has been constituted as a Special Area Development Authority by the State Government. Besides, by the time of such sale, the Government of Andhra Pradesh had also issued a land acquisition notification in respect of the said land for developing the area into an integrated Township. Therefore, It is clear that as a consequence o the above notifications, the status of the impugned land itself had changed and the land could not be said as an agricultural land anymore.

35. The DR further submitted that considering the potential user of the land and the surrounding circumstances, M/s. Ramky Estates and Farms Pvt. Ltd., a leading construction company, had evinced their interest in the said land much before the date of sale by the assessee. It was for this reason that they had submitted a proposal to HUDA on 8.12.2006 itself for the development of an Integrated Township in a joint venture with them on the land proposed to be acquired by the Government, which included the assessee’s land. The assessee also admitted of the commercial potential of the said land when it registered an irrecoverable Power of Attorney, in their favour on 5.5.2007, authorizing them the possession of the said land and permitting them to enter into and hold, defend, manage, maintain and administer the property and deal with the property in any manner, as they agreed upon with any third party or developer and to have the property developed by the construction of the project, as per the scheme of arrangement, as agreed by them with HUDA or any third party/ developer, and even to execute an irrevocable Power of Attorney in favour of the developer, if needed. In consequence of the Power of Attorney so registered by the assessee, it had also received the sale consideration in full on 21.8.2007.

36. The learned DR submitted that from the facts, it is clear that the intention of the seller, as also the purchaser of the land, for the purpose of development under a “Development Agreement”, amply establishes that at the time of sale the land under consideration had undergone a change in respect of its use. It was no more an agricultural land being transacted for future agricultural use anymore, but a valuable “Capital asset”. The Hon’ble Rajasthan High Court m the case of Mahaveer Enterprises v. UOI (244 ITR 789) have considered the following as a relevant tests, which can act as .guidelines in determining the nature or the character of land as agricultural or otherwise:

(1)  The proximity of the land, to building and building sites;

(2)  Sale of land for non-agricultural purposes;

(3)  Sale of land by a measure with reference to square yards and not acres;

(4) Price being such as to be non-viable, if the land is put to agricultural use by the purchaser, while it is more consistent with the price fetched for urban plots than for agricultural land.

(5)  Character of the land.

(6)  The purpose for which the land was held by the present owner. A firm which holds it may well be presumed to have held it as stock in trade and not for carrying out agricultural operations.

(7)  As regards use of the land for agricultural purposes prior to sale, more use in remote past though land revenue is paid, would not make it agricultural.

(8)  Mere capability of being used as agricultural land is not enough.

37. The DR submitted that applying the above tests it can be seen that the land was not only in proximity of building or building sites, but was very much a part of the proposed integrated township. It was for this reason only that it was sold to a construction or Real Estate company, who purchased it not for agricultural operations, but for developing the same and had even submitted a proposal to HUDA in this regard. The criteria regarding ‘measure of sale of land’ in the instant case is not of much importance, as in this case the land was a part of a larger proposed township, and therefore, was acquired in its entirety in terms of acre. Further, it is also clear that the price of Rs. 70 lakhs per acre was non-viable, if the land was to be put to agricultural use by the purchaser. On the other hand, the assessee herself had filed a petition before the Hon’ble High Court of Andhra Pradesh, fearing that the Government may not give it the price, as high as that being given by the Real Estate companies. The price of Rs. 70 lakhs per acre was, therefore, more consistent with the price fetched for urban plots than for agricultural lands. In view of these factors, as held by several judicial pronouncements, the ‘character of land’ mentioned in the revenue records also fades into insignificance. As regards the ‘purpose of holding’ of the land by the seller, it is clear that HADA had been notified on 10.7.2007 itself. It was in view of the developments in the area that M/s. Ramky had submitted a proposal to HUDA for development of an Integrated Township before the sale of land by the assessee itself. Therefore, even if any agricultural operations were at all carried on the impugned land during the intervening period, it is clear that the assessee was aware that it was not possible for her to own the land any more in future for agricultural purposes. Therefore, it is clear that the assessee was only waiting for an opportune moment for earning the best price in respect of the land, whose very use and status had changed after the notification. Obviously, the mere capability of the land for being used as agricultural land cannot be considered as a decisive factor.

38. The DR further placed reliance on the judgement of Apex court in the case of Sarifa Bibi Mohd Ibrahim & Ors. v. CIT (204 ITR 631) where their Lordships have clearly opined that whether a particular land is agricultural or not is essentially a matter of fact. In this regard their observation is that several tests evolving in the decisions on this issue are “more in the nature of guidelines”. The question, therefore, has to be answered in each case, having regard to the facts and circumstances of that case. They had observed that there may be factors both for and against a particular point of view, and therefore, the question has to be answered on a consideration and evaluation of all of them. The inference, accordingly, has to be drawn on a “cumulative consideration” of all of the relevant factors. On a consideration of the relevant facts in the case of the present assessee, it becomes abundantly clear that almost all of the tests laid down lead to the conclusive inference that the agricultural land sold by the assessee was not an agricultural land at the time of sale. The DR submitted that under similar facts even the Cochin Bench of the ITAT have taken a similar view in the case of M. K. Abdul Rehiman v. DCIT (2011) (16 Taxmann.com 406) by relying on the decisions discussed above. Besides, the decision of the Hon’ble P &H High Court in the case of Rockman Cycle Industries Ltd. v. CWT & Anr. (2010-TMI-207740, in WT Appeal No. 6 to 8 of 2004, dated 13.1.2010) also supports the view that the change in the land use is indeed the determining factor. In the case of the present assessee, the Government notifications and orders regarding inclusion of the relevant land in the HADA area and the development of the area into a township indeed establish that the land sold by the assessee in the said area was not agricultural land at time of sale. There is no infirmity in the action of the Assessing Officer in treating the receipt of Rs. 14,12,25,000 on account of the above sale as liable to capital gains.

39. The DR submitted that with regard to the claim of exemption of Rs. 7,19,28,000 u/s. 54F, such claim was made by the assessee without prejudice to the claim that the profits on account of sale of the land under consideration were not taxable at all. In this regard, it has been submitted that the assessee had filed a letter before the Assessing Officer making the claim for deduction u/s. 54F. However, the same was not discussed in the assessment order. Contending that even in view of the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. (284 ITR 323) while it is true that a claim can be made before the Assessing Officer only through a revised return, the representative of the assessee has averred that the said decision does not take away the power of appellate authorities to entertain legal grounds. It is claimed that the claim of deduction u/s. 54F is a legal ground.

40. The DR submitted that the ground so raised cannot be entertained at this stage as it indeed requires investigation into fresh facts. Admittedly, the assessee had not made such claim before the Assessing Officer by revising her return of income. Accordingly, in view of the decision of the Hon’ble Supreme Court in Goetze (India) Ltd. (cited supra), the alternative ground so raised cannot be entertained, as there is no provision in the Act allowing an amendment in the return without a revised return and the claim u/s. 54F does not emanate from the return filed by the assessee.

41. We have heard both the parties and perused the material on record including written submission filed by the Ld. AR.

42. The question as to whether a land is agricultural land or not is essentially a question of fact. The question has to be answered in each case having regard to the facts and circumstances of that case. There may be factors both for and against a particular point of view. We have to answer the question on a consideration of all of them, a process of evaluation and the inference has to be drawn on a cumulative consideration of all the relevant facts. It may be stated here that not all the factors or tests would be present or absent in any case and that in each case one or more of the factors may make appearance and that ultimate decision will have to be reached on a balanced consideration of the totality of the circumstances.

43. The expression ‘agricultural land’ is not defined in the Act, and now, whether it is agricultural land or not has got to be determined by using the tests or methods laid down by the Courts from time to time.

44. The Hon’ble Supreme Court in the case of Smt. Sarifabibi Mohmed Ibrahim (204 ITR 631) has approved the decision of a Division Bench of the Hon’ble Gujarat High Court in the case of CIT v. Siddharth J. Desai [1982] 28 CTR (Guj) 148 : [1983] 139 ITR 628 (Guj) and has laid down 13 tests or factors which are required to be considered and upon consideration of which, the question whether the land is an agricultural land or not has got to be decided or answered. We reproduce the said 13 tests as follows :

 1.  Whether the land was classified in the Revenue records as agricultural and whether it was subject to the payment of land revenue?

 2.  Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time?

 3.  Whether such user of the land was for a long period or whether it was of a temporary character or by any of a stopgap arrangement?

 4.  Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land?

 5.  Whether, the permission under s. 65 of the Bombay Land Revenue Code was obtained for the non-agricultural use of the land? If so, when and by whom (the vendor or the vendee)? Whether such permission was in respect of the whole or a portion of the land? If the permission was in respect of a portion of the land and if it was obtained in the past, what was the nature of the user of the said portion of the land on the material date?

 6.  Whether the land, on the relevant date, had ceased to be put to agricultural use? If so, whether it was put to an alternative use? Whether such cesser and/or alternative user was of a permanent or temporary nature?

 7.  Whether the land, though entered in Revenue records, had never been actually used for agriculture, that is, it had never been ploughed or tilled? Whether the owner meant or intended to use it for agricultural purposes?

 8.  Whether the land was situated in a developed area? Whether its physical characteristics, surrounding situation and use of the lands in the adjoining area were such as would indicate that the land was agricultural?

 9.  Whether the land itself was developed by plotting and providing roads and other facilities?

10.  Whether there were any previous sales of portions of the land for non-agricultural use?

11.  Whether permission under s. 63 of the Bombay Tenancy and Agricultural Lands Act, 1948, was obtained because the sale or intended sale was in favour of a non-agriculturist? If so, whether the sale or intended sale to such non-agriculturists was for non-agricultural or agricultural user?

12.  Whether the land was sold on yardage or on acreage basis?

13.  Whether an agriculturist would purchase the land for agricultural purposes at the price at which the land was sold and whether the owner would have ever sold the land valuing it as a property yielding agricultural produce on the basis of its yield?”

45. A reference could be made to the case of CWT v. Officer-in-charge (Court of Wards) (105 ITR 138) (SC) wherein the Constitution Bench of the Hon’ble Supreme Court stated that the term ‘agriculture’ and ‘agricultural purpose’ was not defined in the Indian IT Act and that we must necessarily fall back upon the general sense in which they have been understood in common parlance. The Hon’ble Supreme Court has observed that the term ‘agriculture’ is thus understood as comprising within its scope the basic as well as subsequent operations in the process of agriculture and raising on the land all products which have some utility either for someone or for trade and commerce. It will be seen that the term ‘agriculture’ receives a wider interpretation both in regard to its operation as well as the result of the same. Nevertheless there is present all throughout the basic idea that there must be at the bottom of its cultivation of the land in the sense of tilling of the land, sowing of the seeds, planting and similar work done on the land itself and this basic conception is essential sine qua non of any operation performed on the land constituting agricultural operation and if the basic operations are there, the rest of the operations found themselves upon the same, but if the basic operations are wanting, the subsequent operations do not acquire the characteristics of agricultural operations. The Constitution Bench of the Hon’ble Supreme Court in the aforesaid case observed that the entries in Revenue records were considered good prima facie evidence.

46. The Hon’ble Gujarat High Court in the case of Dr. Motibhai D. Patel v. CIT [1982] 27 CTR (Guj) 238 : [1981] 127 ITR 671 (Guj) referring to the Constitution Bench of the Hon’ble Supreme Court had stated that if agricultural operations are being carried on in the land in question at the time when the land is sold and further if the entries in the Revenue records show that the land in question is agricultural land, then, a presumption arises that the land is agricultural in character and unless that presumption is rebutted by evidence led by the Revenue, it must be held that the land was agricultural in character at the time when it was sold. The Division Bench of the Hon’ble Gujarat High Court further held that there was nothing on record to show that the presumption raised from the long user of the land for agricultural purpose and also the presumption arising from the entries of the Revenue records are rebutted.

47. The Hon’ble Bombay High Court in the case of CWT v. H. V. Mungale [1983] 32 CTR (Bom) 301 : [1984] 145 ITR 208 (Bom) held that the Hon’ble Supreme Court had pointed out that the entries raised only a rebuttable presumption and some evidence would, therefore, have to be led before taxing authorities on the question of intended user of the land under consideration before the presumption could be rebutted. The Court further held that the Supreme Court had clearly pointed out that the burden to rebut the presumption would be on the Revenue. The Hon’ble Bombay High Court held that the ratio of the decision of the Supreme Court was that what is to be determined is the character of the land according to the purpose for which it was meant or set apart and can be used. It is, therefore, obvious that the assessee had abundantly proved that the subject land sold by them was agricultural land not only as classified in the Revenue records, but also it was subjected to the payment of land revenue and that it was actually and ordinarily used for agricultural purpose at the relevant time.

48. We may also refer to the case of CIT v. Manilal Somnath [1977] 106 ITR 917 (Guj), wherein the Division Bench of the Hon’ble Gujarat High Court observed that the potential non-agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land on the relevant date of sale.

49. We may also refer to the case of Gopal C. Sharma v. CIT [1994] 116 CTR (Bom) 377 : [1994] 209 ITR 946 (Bom), in which, the case of Smt. Sarifabibi Mohamed Ibrahim & Ors. v. CIT (supra) was referred to and relied, amongst other cases. In this case, the Division Bench of the Bombay High Court has stated that the profit motive of the assessee selling the land without anything more by itself can never be decisive for determination of the issue as to whether the transaction amounted to an adventure in the nature of trade. In other words, the price paid is not decisive to say whether the land is agricultural or not.

50. We may refer to a judgment of the Hon’ble Madras High Court in the case of CWT v. E. Udayakumar [2006] 284 ITR 511 (Mad) where the Hon’ble Madras High Court has referred to the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT v. Smt. Savita Rani [2004] 186 CTR (P&H) 240 : [2004] 270 ITR 40 (P&H) and has observed and held as under :

“8. It is well settled in the case of CIT v. Smt. Savita Rani [2004] 186 CTR (P&H) 240 : [2004] 270 ITR 40 (P&H), wherein it is held that the land being located in a commercial area or the land having been partially utilised for non-agricultural purposes or that the vendees had also purchased it for non-agricultural purposes, were totally irrelevant consideration for the purposes of application of s. 54B.

9. In the abovesaid case, the assessee an individual sold 15 karnals, 18 marlas of land out of her share in 23 karnals, 17 marlas land during the financial year 1990-91, relevant to the asst. yr. 1991-92, the sale was effected by three registered sale deeds. While filing her return of income, she claimed exemption from levy of capital gains under s. 54B of the Act on the ground that the land sold by her was agricultural land and the sale proceeds were invested in the purchase of agricultural land within two years. The AO rejected the claim of the assessee holding that the land sold by the assessee was not agricultural land and this was upheld by the CIT(A). On further appeal, the Tribunal accepted the claim of the assessee holding that the transaction in question duly fulfilled the conditions specified for relief. On further appeal to the High Court, the Punjab & Haryana High Court found that the finding that the land had been used for agricultural purposes was based on cogent and relevant material. The Revenue record supported the claim. Even the records of the IT Department showed that the assessee had declared agricultural income from this land in her returns for the preceding two years. The land being located in commercial area or the land having been partially utilised for non-agricultural purposes or that the vendees had also purchased it for nonagricultural purposes, were totally irrelevant consideration for the purposes of application of s. 54B.

10. It is seen from the aforesaid decision that the agricultural land sold by the assessee with an intent to purchase another land within two years had also been permitted to claim exemption under s. 54B of the IT Act, 1961. In the instant case, even though there was no sale as such, the assessee owned agricultural land within the limits of Tirunelveli Corporation and he had not put up any construction thereon, the assessee is entitled to claim exemption from the WT Act for the assessment of wealth-tax. That the land in question is adjacent to the hospital is totally irrelevant.”

51. Adverting to the facts of the present case, the land in question is classified in the Revenue records as agricultural land and there is no dispute regarding this issue and actual cultivation has been carried on this land and income was declared in the return of income filed by the assessee for the past several years as agricultural income. It is also an admitted fact that the assessee has not applied for conversion of this agricultural land for non-agricultural purposes and the assessee has not put the land to any purposes other than agricultural purposes. It is also an admitted fact that neither the impugned property nor the surrounding areas were subject to any developmental activities.

52. Further, we are inclined to mention herein that there is no dispute with regard to facts that the assessee has been carrying on agricultural operations on the impugned property and agricultural income was declared by the assessee in her return of income from this land from year to year. Further it is important to mention that mere inclusion of impugned property in the HADA vide GO MS No. 352 (M.A.) dated 30.7.2001 cannot change the character of the property. According to the lower authorities HADA has been constituted as a Special Area Development Authority by the A.P. Government u/s. 3A of the A.P. Urban Areas (Development) Act, 1975 and the lower authorities observed that notification to this effect has been issued by the Municipal Administration and Urban Development (II) Department vide GO MS No. 352 M.A. dated 30.7.2001 wherein 87 villages from 7 Mandals in the vicinity and surrounding International Airport at Shamshabad have been notified as special development area. Srinagar of Maheswaram Mandal is included in the above notification. According to the lower authorities the property loses its original character. In our opinion mere inclusion of the property in the HADA by State Government notification does not change the character of the property if the property still continues to be agricultural land at the point of sale of said property. Nothing has been brought on record to show that in this village of Srinagar (Maheswaram Mandal) any infrastructure development has taken place. Without establishing and proving the fact that the land was put to use for non-agricultural purposes, it cannot be possible to treat the agricultural land as non-agricultural land. In the present case, during the relevant point of time of sale of the land in question, the surrounding area was totally undeveloped and mere possibility to put the impugned land for non-agricultural purposes would not change the character of the land into non-agricultural land at the relevant point of sale of land by the assessee. Further, the issue whether A.P. Agricultural Land (Conversion for Non-agricultural Purposes) Act, 2006 will prevail over A.P. Urban Areas (Development) Act, 1975, came before the Hon’ble jurisdictional High Court in the case of K. Satyananda Patnaik & Ors. v. HUDA in W.P. No. 26688/2007 and Ors. The Hon’ble High Court vide common judgement dated 28.4.2010 held as follows:

“The two enactments referred to above, no doubt, control the use, to which a piece of land can be put. However, their respective purposes and objectives are totally different from each other. The 1975 Act is intended exclusively for the systematic development of urban areas. It has no application for the areas outside the defined jurisdiction of the particular UDA. One of the important steps under that Act is to prepare and publish master plan for the urban development area. The master plan in turn, would stipulate the use to which the respective areas shown in it can be put. These include commercial, residential, industrial, recreational uses, etc., and each of the areas are called zones. The types of construction that can be made in the respective zones are also enlisted. Once an area is shown in a particular zone in the master plan, it cannot be put to a different use (Section 15). For example, in the residential zone, establishment of an industry cannot be permitted. The power to convert land use in a particular zone to a different one, is vested in the Government. Section 49 of the 1975 Act contains a provision, which directs that, if agriculture is being carried on any land within the area covered by master plan, it can be continued without any inhibition, irrespective of the zone in which it is shown.

The 2006 Act, on the other hand, is intended to regulate the conversion of an agricultural land for non-agricultural purposes. That Act operates, vis-à-vis the lands situated in rural as well as urban areas. It is different matter that the Act in its operation does not reflect the intended purposes. A perusal of the same discloses that, if a stipulated amount is paid, the concerned authority has no option, whatever, except to accord permission. In a way, the Act turned out to be a money generating devise, than the one, to prevent or curb indiscriminate conversion of agricultural lands to other uses. Once the authority under that Act accords permission to convert an agricultural land, the matter ends there, and it would not at all be concerned, whether the land is put to industrial, residential, commercial or any such other use.

It is lastly urged by the petitioners that insistence on clearance under the 2006 Act, even where a land ceased to be agricultural, prior to the enactment of that legislation cannot be sustained in law. In this regard, it needs to be observed that there is no indication to the effect that the enactment is retrospective in operation. It is only from the date on which the Act came into force, that no piece of land which was earmarked for agriculture, and is shown as such in the revenue records, can be put to non-agricultural use. In case the land was already put to residential or other use, much before the said Act came into force, a permission under it cannot be insisted. This, however, is a matter which needs to be verified by the concerned authority. If the petitioners are able to prove that the land has been put to non-agricultural use much before the Act came into force, they cannot be required to obtain the permission under that Act.

For the foregoing reasons, the writ petitions are disposed of holding that

(a)  It shall be competent for the Urban Development Authorities, or the Local Authorities, as the case may be, to insist on submission of clearance/permission under the 2006 Act as a condition precedent for releasing of layouts; and

(b)  The land has been put to non-agricultural use before the 2006 Act came into force, such clearance/ permission shall not be insisted.”

53. The provisions of Andhra Pradesh Agricultural Land (conversion for non-agricultural purposes) Act, 2006 also prescribed the procedure for conversion of agricultural land into non-agricultural land. Being so, whenever the agricultural land to be treated as non-agricultural land, the same has to be converted in accordance with the provisions of Andhra Pradesh Agricultural Land (conversion for non-agricultural purposes) Act, 2006. Further, HADA was formed by the notification under Urban Area (Development) Act, 1975 with a view to promoting and securing planned development of the area in and around the proposed international Airport at Shamshabad. The State Government have declared the areas covered by GO MS 352 (MA) dated 30.7.2001 fall under the jurisdiction of HADA which is a statutory body. HADA Board consists of Special Chief Secretary to Government, Transport, Roads and Buildings Department as the Chairman, the Principal Secretary to Government, Municipal Administration and Urban Development Department; the Managing Director of APIIC and the Vice Chairman, HUDA, as members. The Vice Chairman of HUDA is also the Vice Chairman of HADA. The jurisdiction of HADA is 458 sq. km and covers 89 revenue villages from 7 Mandals all falling in Rangareddy District. If by GO cited supra the nature of land covered by this notification changes from agriculture into non-agriculture then there is no question of conversion of this land for non-agricultural purposes by the Revenue authorities concerned. To our understanding nature of land cannot be changed by this notification and the land owners are required to apply to the concerned Revenue authorities for the purpose of conversion of the agricultural land into non-agricultural land and there is no automatic conversion per se by this notification.

54. It is also an admitted position that mere inclusion of land in the special zone without any infrastructure development thereupon or without establishing and proving that the land was put into use for non-agricultural purposes does not and cannot convert the agricultural land into non-agricultural land. In the instant case, at the relevant point of sale of the land in question, the surrounding area was totally undeveloped and except mere future possibility to put the land into use for non-agricultural purposes would not change the character of the agricultural land into non-agricultural land at the relevant point of time when the land was sold by the assessee. It is also an admitted position that the assessee had not applied for conversion of the land in question into non-agricultural purposes and no such permissions were obtained from the concerned authority. In the Revenue records, the land is classified as agricultural land and has not been changed from agricultural land to non-agricultural land at the time when the land was sold by the assessee. It is also not in dispute that there was no activity undertaken by the assessee of developing the land by plotting and providing roads and other facilities and there was no intention also on the part of the assessee to put the same for non-agricultural purposes. No such finding has been given by the Department. No material or evidence in support of the fact that the assessee has put the land in use for non-agricultural purposes has been brought on record. The nature of the crop and the person who cultivated the land are duly mentioned at the relevant point of time when the lands were sold by the assessee and where nothing is brought on record to show that the land was put in use for non-agricultural purposes by the assessee. In view of the decision of the Hon’ble High Court in the case of Gopal C. Sharma v. CIT (209 ITR 946) (Bom), it is also clear that the profit motive of the assessee in selling the land without anything more by itself can never be decisive to say that the assessee used the land for non-agricultural purposes. We may also refer to a decision of the Hon’ble Supreme Court in the case of N. Srinivasa Rao v. Special Court [2006] 4 SCC 214 where it was observed that the fact that agricultural land in question is included in urban area without more, held not enough to conclude that the user of the same had been altered with passage of time. Thus, the fact that the land in question in the instant case is brought in special zone cannot be a determining factor by itself to say that the land was converted into use for non-agricultural purposes.

55. Recently the Karnataka High Court in the case of CIT v. Madhukumar N. (HUF) [2012] 78 DTR (Kar) 391 held as follows:

“9. An agricultural land in India is not a capital asset but becomes a capital asset if it is the land located under Section 2(14)(iii)(a) & (b) of the Act, Section 2(14) (iii) (a) of the Act covers a situation where the subject agricultural land is located within the limits of municipal corporation, notified area committee, town area committee, town committee, or cantonment committee and which has a population of not less than 10,000.

10. Section 2(14)(m)(b) of the Act covers the situation where the subject land is not only located within the distance of 8 kms from the local limits, which is covered by Clause (a) to section 2(14)(iii) of the Act, but also requires the fulfilment of the condition that the Central Government has issued a notification under this Clause for the purpose of including the area up to 8 kms, from the municipal limits, to render the land as a “Capital Asset.

11. In the present case, it is not in dispute that the subject land is not located within the limits of Dasarahalli City Municipal Council therefore, Clause (a) to section 2(14][iii] of the Act is not attracted.

12. However, though it is contended that it is located within 8 knits,, within the municipal limits of Dasarahalli City Municipal Council in the absence of any notification issued under Clause (b) to section 2(14)(iii) of the Act, it cannot be looked in as a capital asset within the meaning of Section 2(14)(iii)(b) of the Act also and therefore though the Tribunal may not have spelt out the reason as to why the subject land cannot be considered as a ‘capital asset’ be giving this very reason, we find the conclusion arrived at by the Tribunal is nevertheless the correct conclusion.”

56. Further the Kolkata Bench of the Tribunal in the case of DCIT v. Arijit Mitra (48 SOT 544) (Kol) held as follows:

“7. From the above, it is clear that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of such Municipalities or Cantonment Boards are covered by the amended definitions of ‘capital asset’, if such areas are, having regard to the extent of and scope for their urbanization and other relevant considerations, is notified by the Central Government in this behalf. Central Government in exercise of such powers has issued the above notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situation in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of ‘capital asset’. Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression ‘capital asset’, the agricultural land situated in rural areas continues to be excluded from that definition. And as in the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Rajarhat Municipality and that also 2.5 KM away from the outer limits of the said Municipality, assessee’s land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. Accordingly, we quash the assessment order qua charging of capital gains on very jurisdiction of the issue is quashed. The cross objection of the assessee is allowed.”

57. It was held in the case of CIT v. Manilal Somnath (106 ITR 917) as follows:

“Under the Income-tax Act of 1961, agricultural lend situated in India was excluded from the definition of ” capital asset” and any gain from the sale thereof was not to be included in the total income of an assessee tinder the head “capital gains”. In order to determine whether a particular land is agricultural land or not one has to first find out if it is being put to any use. If it is used for agricultural purposes there is a presumption that it is agricultural land. If it is used for non-agricultural purposes the presumption is that it is non-agricultural land. This presumption arising from actual use can be rebutted by the presence of other factors. There may be cases where land which is admittedly non-agricultural is used temporarily for agricultural purposes. The determination of the question would, therefore, depend on the facts of each case.

‘The assessee, Hindu, undivided family, had obtained some land on a partition in 1939. From that time, up to the time of its sale, agricultural operations were carried on in the land. There was no regular road to the land and it was with the aid of a tractor that agricultural operations were being carried on. The land was included within a draft town planning scheme. The assessee got permission of the Collector to sell the land for residential purposes and sold it. On the question whether the land was agricultural land:

Held, that what had to be considered is not what the purchaser did with the land or the purchaser was supposed to do with the land, but what was the character of the land at the time when the sale took place. The fact that the land was within municipal limits or that it was included within a proposed town planning scheme was not by itself sufficient to rebut the presumption arising from actual use of the land. The land had been used for agricultural purposes for a long time and nothing had happened till the date of the sale to change that character of the land. The potential non-agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land at the date of the sale. The land in question was, therefore, agricultural land.

58. Further the word “Capital Asset” is defined in Section 2(14) to mean property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-

(iii) agricultural land in India, not being land situate-

(a)  in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or

(b)  in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;

59. It is very clear from the above that the gain on sale of an agricultural land would be exigible to tax only when the land transferred is located within the jurisdiction of a municipality. The fact that all the expressions enlisted after the word municipality are placed within the brackets starting with the words ‘whether known as’ clearly indicates that such expressions are used to denote a municipality only, irrespective of the name by which such municipality is called. This fact is further substantiated by the provisions contained under clause (b) wherein it has been clearly provided that the authority referred to in clause (a) was only municipality.

60. We find force in the argument of the AR that clarifying within the brackets in the section 2(14)(iii)(a) is for the apparent reason that the name of the local body varies based on the nature of the area for which it is constituted and also for the reason that there is a lack of uniformity all over India with reference to the nomenclature of the urban local authority. In fact, municipality is known by different names in various parts of the country. This fact is also evident from Art.243Q of the Constitution of India, dealing with creation of municipalities. The term ‘municipality’ is not defined u/s 2(14) of the Act. However, the same is defined under article 243 P(e) of the Constitution of India, which is reproduced hereunder:

“243 P(e): “Municipality” means an institution of self-Government constituted under article 243Q.”

Since “Municipality” is defined to mean an institution constituted under Article 243Q, the same is extracted hereunder:

“243Q. Constitution of Municipalities.- (1) There shall be constituted in every State,-

(d) a Nagar Panchayat (by whatever name called) for a transitional area, that is to say, an area in transition from a rural area to an urban area;

(e) a Municipal Council for a smaller urban area; and

(f) a Municipal Corporation for a larger urban area, in accordance with the provisions of this Part:”

61. The constitution, composition, guidelines regarding elections, the eligibility and disqualification criteria to be elected as members, powers, authorities and responsibilities of municipalities etc., are contained under Part-IXA of the Indian Constitution and Art. 243R therein categorically states that all the members of the municipality shall be directly elected by the people of the respective territorial wards. The said article is extracted hereunder:

“243R. Composition of Municipalities.-

(3) Save as provided in clause (2), all the seats in a Municipality shall be filled by persons chosen by direct election from the territorial constituencies in the Municipal area and for this purpose each Municipal area shall be divided into territorial constituencies to be known as wards.

(4) The Legislature of a State may, by law, provide-

 (c)  for the representation in a Municipality of-

(v)  persons having special knowledge or experience in Municipal administration;

(vi) the members of the House of the People and the members of the Legislative Assembly of the State representing constituencies which comprise wholly or partly the Municipal area;

(vii) the members of the Council of States and the members of the Legislative Council of the State registered as electors within the Municipal area;

(viii) the Chairpersons of the Committees constituted under clause (5) of article 243S:

Provided that the persons referred to in paragraph (i) shall not have the right to vote in the meetings of the Municipality;

(d)  the manner of election of the Chairperson of a Municipality.”

Further, it is categorically provided that all the state laws dealing with the municipalities should be consistent with the provisions contained in Part- IXA.

62. We also perused the meaning of the term local authority as referred in section 10(20) of the Act.

(20) the income of a local authority which is chargeable under the head “Income from house property”, “Capital gains” or “Income from other sources” or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service [(not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area].

[Explanation. – For the purposes of this clause, the expression “local authority” means –

 (i)  Panchayat as referred to in clause (d) of article 243 of the Constitution; or

 (ii)  Municipality as referred to in clause (e) of article 243P of the Constitution; or

(iii)  Municipal Committee and District Board,  legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or

(iv) Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924);

63. Under the provisions of section 10(20) of the Income-tax Act, 1961, the income of a local authority which is chargeable under the head ‘Income from house property’, ‘Capital gains’ or ‘Income from other sources’ or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service not being water or electricity within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area, is exempt from income-tax. The expression “local authority” is not defined in the Income-tax Act. Section 3(31) of the General Clauses Act, however, defines “local authority” as under: ‘Local authority’ shall mean a municipal committee, district board, body of port commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund. The test for determining whether a body is a local authority have been laid down in Union of India v. R.C. Jain’s [1981] 2 SCR 854 (2 SCC 308) . First, the authorities must have separate legal existence as corporate bodies. They must not be mere Governmental agencies but must be legally independent entities. Next, they must function in a defined area and must ordinarily, wholly or partly, directly or indirectly, be elected by the inhabitants of the area. Next they must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them. The autonomy may not be complete and the degree of dependence may vary considerably but, an appreciable measure of the autonomy there must be. Next, they must be entrusted by statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services, etc. Broadly they may be entrusted with the performance of civic duties and functions which would otherwise be Governmental duties and functions. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfilment of their projects by levying taxes, rates, charges, or fees. This may be in addition to moneys provided by Government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the authority.

64. Thus, it was laid down by the Supreme Court in the case of Union of India v. R.C. Jain [(AIR) (1981) SC 951] the following five ingredients, which are required to be fulfilled cumulatively before an authority can be said to be a ‘local authority’, in the light of the definition of ‘local authority’ as given under section 3(31) of the General Clauses Act, 1897:

(1)  The authority must have separate legal existence as a corporate body. It must be a legally independent entity.

(2)  The body must function in a defined area and ordinarily, wholly or partly, directly or indirectly be elected by the inhabitants of the area.

(3)  The body must enjoy a certain degree of autonomy, with freedom to decide for itself questions of policy affecting the area administered by it.

(4)  The body must be entrusted by statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services, etc. Broadly such body may be entrusted with the performance of civic duties and functions, which would otherwise be Governmental duties and functions.

(5)  The body must have the power to raise funds for the furtherance of their activities and the fulfilment of their projects by levying taxes, rates, charges, or fees. Essentially, control or management of the funds must vest in such body.

65. In the light of the above decision in the case of R.C. Jain (supra) we have to see the meaning of “Authority” as defined in section 2(b) of the Andhra Pradesh Urban Areas (Development) Act, 1975. It was mentioned in section 2(b) that “Authority” means an urban development constituted under subsection (1) of section 3 or a Special Development Authority constituted under subsection (1) of section 3A for Development Area under this Act. The HADA is constituted u/s. 3A of the Andhra Pradesh Urban Areas (Development) Act, 1975. By GO MS No. 35 MA dated 31.1.2002 is constituted by the AP State Government. As per which the Special Chief Secretary to Government (Transport, Roads and Buildings Department) as Chairman, the Principal Secretary to Government (Municipal Administration and urban Development Department); the managing Director of APIIC, and the Vice chairman, HUDA as members. The Vice-Chairman, HUDA is also the Vice-Chairman of HADA. Thus, all the members entrusted with carrying out the objects of the Authority were nominated by the Government of AP and none of them is directly elected member, which is against the provisions of Part-IXA of the Constitution of India read with those of AP Municipalities Act. As submitted by the AR that the above provisions of the Constitution leave no room for any doubt that ‘Municipality’ is a constitutional body concerning urban self government; the creation of which is mandatory. The provisions governing the constitution, composition and functioning of municipalities are contained in part IX-A of the Constitution and the relevant laws laid down by the respective state governments, AP Municipalities Act,1965 in the instant case, should be in consistency with such provisions. The term ‘Municipality’ is defined u/s. 2(22) of AP Municipalities Act,1965 to mean a municipality of such grade as may be declared by the Government, from time to time, by notification in the Andhra Pradesh Gazette on the basis of income and such other criteria as may be prescribed. Thus, in the state of Andhra Pradesh, a municipality has to be mandatorily constituted in terms of s. 3 of AP Municipalities Act,1965, as per the guidelines laid down in the constitution, and has to be so notified by the Government whereas setting up of a Development/ Special Area Authority is not mandatory. A state Government may decide to constitute such Authority for a specified purpose, depending on the specific requirements for which it is proposed to be set up, by way of a simple notification and the power to notify such Authority is drawn from an Act specially legislated for the said purpose. State Government is having power to regulate method of recruitment, conditions of service, etc, of officers so appointed u/s. 4 of the Andhra Pradesh Urban Areas (Development) Act, 1975. The exercise of power by the Board so constituted by the State Government is not only subject to the provisions of the Andhra Pradesh Urban Areas (Development) Act, 1975 but also subject to the control of the State Government. Thus, the Board has to comply with such directions as may be issued to it by the State Government from time to time. The object and activities carried on by the HADA are also with reference to the said Act. The State Government will exercise superintendent and control over the HADA at all times. Thus, HADA is basically and essentially a creation of the Act of State Legislature consisting of persons appointed by the State Government on salary basis. The Board Members are not elected by the people and there is no element of people choice being represented in any manner in the constitution of the Board. The Board functions strictly under the supervision and control of the State Government and does not hold or possess a “local fund”. Being so, HADA cannot be called as a local authority.

66. This is also evident from the Memorandum explaining the provisions of Finance Act, 1970, whereby s. 2(14) was amended so as to include the agricultural lands located within the jurisdiction of a municipality in the definition of the expression ‘Capital Asset’. The relevant portion of the said memorandum is reproduced hereunder:

“30. … The Finance Act, 1970 has, accordingly, amended the relevant provisions of the Income-tax Act so as to bring within the scope of taxation capital gains arising from the transfer of agricultural land situated in certain areas. For this purpose, the definition of the term “capital asset” in section 2(14) has been amended so as to exclude from its scope only agricultural land in India which is not situate in any area comprised within the jurisdiction of a municipality or cantonment board and which has a population of not less than ten thousand persons according to the last preceding census for which the relevant figures have been published before the first day of the previous year. The Central Government has been authorised to notify in the Official Gazette any area outside the limits of any municipality or cantonment board having a population of not less than ten thousand up to a maximum distance of 8 kilometres from such limits, for the purposes of this provision. Such notification will be issued by the Central Government, having regard to the extent of, and scope for, urbanisation of such area, and, when any such area is notified by the Central Government, agricultural land situated within such area will stand included within the term “capital asset”. Agricultural land situated in rural areas, i.e., areas outside any municipality or cantonment board having a population of not less than ten thousand and also beyond the distance notified by the Central Government from the limits of any such municipality or cantonment board, will continue to be excluded from the term “capital asset”.

67. Further it is very clear that the area comprised in the jurisdiction of HADA was essentially rural in nature, the economy of which was predominantly agriculture based. Further, the GO makes it abundantly clear that HADA was entrusted with only the job of granting technical sanction or approval for any proposed construction or development in the area, in order to regulate and ensure planned development in and around the proposed airport and the role of concerned local authorities was not done away with. Thus, HADA is only entrusted with the responsibility of preparing draft Master Plans and granting technical approval for any proposed construction or development in its jurisdiction. It does not have any power or ability to collect taxes nor is it responsible for provision of civic amenities which would be within the exclusive domain of the local authorities.

68. Further a careful and comprehensive reading of S.8 and S.36 of Andhra Pradesh Urban Areas (development) Act, 1975 clearly suggests that HADA, being a Development/Special Area Authority constituted under the said Act, cannot be either equated with a distinct municipality or considered as a complete substitute of a municipality or any other local authority. S.8 provides that the Special Area Authority constituted under the Act may cover an area comprised in more than one local authority, whether municipality or panchayat, and in such event makes it mandatory for such authority to consult the local authorities concerned while preparing Master/ Zonal Development plans both at initial stage and after preparation of draft plan, before submission to Government. Further, S.36 of the said Act, which is extracted hereunder, makes it abundantly clear that the Development/Special Area Authority created under the Act, by itself, would not constitute a distinct municipality or any other local authority.

“S.36. (1) Notwithstanding anything in any other law or regulation in force, where the government consider expedient for the effective functioning of the Authority, they may, by notification, suspend any of the powers of local authority relating to the control on development and use of land and buildings under the Hyderabad Municipal Corporations Act, 1955; the Andhra Pradesh Municipalities Act, 1965, the Andhra Pradesh Gram Panchayats Act, 1964, the Andhra Pradesh Panchayat Samithis and Zilla Parishads Act, 1959 and transfer such powers to the Authority.

(2) Where such powers are transferred to the Authority, the Authority shall be deemed to be the local authority concerned; the Chairman of the Authority shall be deemed to be the Standing Committee of the Municipal Corporation or the Chairman of the Municipality or the Sarpanch of the Gram Panchayat or President of the Panchayat Samithi or Chairman of the Zilla Parishad as the case may be and the Vice-Chairman of the Authority shall be deemed to be the Executive Authority and the Authority shall strictly exercise the powers transferred to it under sub-section (1) within the area under the territorial jurisdiction of the local authority concerned.”

69. As per the above section, only in the event of suspension of any of the powers and functions of a local authority of any area and subsequent delegation thereof to a Special Area Authority, it would be deemed to be such local authority, to the limited extent of performing/exercising the functions/powers so entrusted. In the instant case, the village in which the agricultural land was located was comprised in the area within the jurisdiction of Gram Panchayat of Mankhal village and as such the Special Area Authority, being HADA, shall be deemed to be such Gram Panchayat, to the extent of execution of the delegated function of granting technical approval for constructions/ development of lay-outs.

70. Further, Hyderabad Airport Development Authority (HADA) has been constituted, under the provisions of the Andhra Pradesh Urban Areas (development) Act, 1975, as a Special Area Authority by the state Government, and notified as such vide G.O.Ms. No. 352, MA, dt. 30-07-2001. It was neither constituted under AP Municipalities Act nor was it notified as a municipality by the state government. Further, the Development/ Special Area Authority can be dissolved, on achieving the purpose for which it is created, by way of a notification, as per S.60 of the Andhra Pradesh Urban Areas (development) Act, 1975, which is reproduced hereunder, whereas it is not possible in case of a municipality:

“S.60 (1) Where the government are satisfied that the purpose for which the Authority is constituted under this Act, has been substantially achieved so as to render the continued existence of the Authority, in the opinion of the Government, unnecessary, the Government may by notification, declare that the said Authority shall be dissolved with effect on and from such date as may be specified in the notification; and the Authority shall be deemed to be dissolved accordingly.”

71. The constitution and appointment of municipal authorities charged with the duty of carrying out the provisions of the Act were contained under Chapter-II of the AP Municipalities Act, which in turn are consistent with the provisions of Part-IX-A of the Indian Constitution. As per the provisions of the said Act, all the members of the municipality shall be directly elected by the people of the respective territorial wards, whereas the Development/Special Area Authority may be headed by persons nominated for the purpose by the state government. This is to submit that the HADA Board consists of the Special Chief Secretary to Government, Transport, roads and buildings department as the Chairman, the Principal Secretary to Government, Municipal Administration and urban Development Department; the managing Director of APIIC, and the Vice chairman, HUDA as members. The Vice-Chairman, HUDA is also the Vice-Chairman of HADA. Thus, all the members entrusted with carrying out the objects of the Authority were nominated by the Government of AP and none of them is directly elected member, which is against the provisions of Part-IXA of the Constitution of India read with those of AP Municipalities Act. The Hon’ble High Court of Kerala, while dealing with the similar issue, held, in the case of Commissioner of Income-tax v. Murali Lodge 194 ITR 125, as under:

“But all local authorities cannot be called municipalities. Only those local authorities which have all the trappings of a municipality can be treated as a municipality within the meaning of the section. Therefore, to find a solution to the problematic dispute, we have to give a meaning to the word “municipality” which stands undefined in the Act. Generally understood, ‘municipality’ means a legally incorporated or duly authorised association of inhabitants of a limited area for local governmental or other public purposes. (Black’s Law Dictionary). The above definition more or less is reflected in the provisions contained in Chapter III of the Kerala Municipalities Act, 1960. The council constituted under section 7 with the assistance of the standing committee of the council, chairman, commissioner, etc., will administer the provisions of the Act. The council consists of such number of members as are prescribed. They are called councillors. They are elected by the residents of the area coming within the jurisdiction of the municipality. The chairman and vice-chairman of the municipality are elected by the members of the council. The commissioner is appointed by the Government in consultation with the council. It is the duty of the commissioner to carry into effect the resolutions of the council unless it be that the said resolution is suspended or cancelled by the Government. The municipality contemplated under section 2(14)(iii) (a) must be one which satisfies the above requirements. All the local authorities included in the brackets must satisfy the above requirements to be known as a ‘municipality’ ……….

The Guruvayur township, constituted under the Guruvayur Township Act, considered in this backdrop, cannot be said to be a municipality. The Guruvayur township is not an autonomous body like a municipality. It is constituted by the Government by a notification issued under the Guruvayur Township Act. To put it differently, the members of the township committee are not elected representatives of the residents of the area”

72. Since the facts of the case are similar to those of the case cited above and the provisions of AP Municipalities Act, concerning the constitution and appointment of municipal authorities, are similar to those of the Kerala Municipalities Act, HADA cannot be treated as a ‘Municipality’ and as such the agricultural lands situated within the jurisdiction of HADA do not constitute capital asset.

73. A careful and comprehensive reading of 5.8 and 5.36 of Andhra Pradesh Urban Areas (development) Act, 1975 clearly suggests that a Development/Special Area Authority constituted under the said Act cannot be either equated with a distinct municipality or considered as a complete substitute of a municipality or any other local authority. S. 8 provides that the Special Area Authority constituted under the Act may cover an area comprised in more than one local authority, whether municipality or panchayat, and in such event makes it mandatory for such authority to consult the local authorities concerned while preparing Master/ Zonal Development plans both at initial stage and after preparation of draft plan, before submission to Government.

74. As per the above section, only in the event of suspension of any of the powers and functions of a local authority of any area and subsequent delegation thereof to a Special Area Authority, it would be deemed to be such local authority, to the limited extent of performing/exercising the functions/powers so entrusted. In the instant case, the village in which the agricultural land was located was comprised in the area within the jurisdiction of Gram Panchayat of Mankhal village and as such the Special Area Authority, being HADA, shall be deemed to be such Gram Panchayat, to the extent of execution of the delegated functions, if any. As per Part-IX of the Indian Constitution, Panchayat refers to rural self government, as distinct from municipality, which refers to urban self-government and as such agricultural land located within the jurisdiction of a village panchayat is not covered by the definition of Capital Asset u/s 2(14).

75. It was held in the case of CIT v. UP Forest Corporation (230 ITR 945) as follows:

“Under the provisions of section 10(20) of the Income-tax Act, 1961, the income of a local authority which is chargeable under the head ‘Income from house property’, ‘Capital gains’ or ‘Income from other sources’ or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service not being water or electricity within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area, is exempt from income-tax. The expression “local authority” is not defined in the Income-tax Act. Section 3(31) of the General Clauses Act, however, defines “local authority” as under: ‘Local authority’ shall mean a municipal committee, district board, body of port commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund. The test for determining whether a body is a local authority have been laid down in Union of India v. R.C. Jain’s [1981] 2 SCR 854. First, the authorities must have separate legal existence as corporate bodies. They must not be mere Governmental agencies but must be legally independent entities. Next, they must function in a defined area and must ordinarily, wholly or partly, directly or indirectly, be elected by the inhabitants of the area. Next they must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them. The autonomy may not be complete and the degree of dependence may vary considerably but, an appreciable measure of the autonomy there must be.

Next, they must be entrusted by statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services, etc. Broadly they may be entrusted with the performance of civic duties and functions which would otherwise be Governmental duties and functions. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfilment of their projects by levying taxes, rates, charges, or fees. This may be in addition to moneys provided by Government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the authority.

Held, allowing the appeals, ii) that the assessee was not a local authority within the meaning of section 3(31) of the General Clauses Act. Firstly, the members of the respondent Corporation are not wholly or partly, directly or indirectly, elected by the inhabitants of the area. The second essential attribute, which is lacking in the present case, is that the respondent does not have the functions and duties which are usually entrusted to the municipal bodies such as providing civic amenities to the inhabitants of the locality like health, education, town planning, markets, transportation etc. Finally, and which is more important, the respondent does not have the power to raise funds by levying taxes, rates, charges or fees. In the case of the respondent-Corporation, the Act does not enable it to levy any tax, cess or fee. It is the income from the sale of the forest produce which goes to augment its funds. It has no power under the Act of compulsory exaction such as taxes, fees, rate or charges. Like any commercial organisation it makes profit from sale of forest produce and it has been given the power to raise loans. Whereas municipal or local funds are required to be spent for providing civic amenities, there is no such obligation on the respondent to do so. Merely because section 17 of the U. P. Forest Corporation Act states that the fund of the Corporation “shall be a local fund” that would not make it a local fund (IS contemplated by 3(31) of the General Clauses Act. Therefore, the High Court was not correct in coming to the conclusion that the respondent was a local authority and entitled to exemption under section 10(20) of the Act.

76. Further it is nobody’s case that the property falls within any area which is comprised within the jurisdiction of a municipality or cantonment board or which has a population of not less than 10,000 according to the last preceding Census of which the relevant figures have been published before the first day of the previous year. In other words, the land does not fall in sub-clause (a) of section 2(14)(iii) of the Act as the land is outside of any municipality including GHMC. Further we have to see whether the land falls in clause (b) of section 2(14)(iii). This section prescribes that any area within such distance, not being more than 8 km from the local limit of any municipality or cantonment board as referred to in sub-clause (a) of section 2(14)(iii) of the Act, as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.

77. We have carefully gone through the notification issued by the Central Government u/s. 2(1A)(c) proviso (ii)(B) and 2(14)(3b) vide No. 9447 (F. No. 164/(3)/87/ITA-I) dated 6th January, 1994 as amended by notification No. 11186 dated 28th December, 1999. In the schedule annexed to the notification dated 6.1.1994, Entry No. 17 is relating to Hyderabad wherein mentioned that the areas up to a distance of 8 km from the municipal limits in all directions. In the notification 11186 dated 28.12.1999 there is no entry relating to Hyderabad. It is clear from these notifications that agricultural land situated in areas lying within a distance not exceeding 8 km from the local limits of Hyderabad Municipality (GHMC) is covered by the amended definitions of ‘capital asset’. Central Government in exercise of such powers has issued the above notification, as amended latest by Notification No. 11186 dated 28.12.1999 clearly clarifies that agricultural land situation in rural areas, areas outside the Municipality or cantonment board etc., having a population of not less than 10,000 and also beyond the distance notified by Central Government from local limits i.e. the outer limits of any such municipality or cantonment board etc., still continues to be excluded from the definition of ‘capital asset’. Accordingly, in view of sub-clause (b) of section 2(14)(iii) of the Act even under the amended definition of expression ‘capital asset’, the agricultural land situated in rural areas continues to be excluded from that definition. And as in the present case, admittedly, the agricultural land of the assessee is outside the Municipal Limits of Hyderabad Municipality and that also 8 km away from the outer limits of this Municipality, assessee’s land does not come within the purview of section 2(14)(iii) either under sub clause (a) or (b) of the Act, hence the same cannot be considered as capital asset within the meaning of this section. Hence, no capital gain tax can be charged on the sale transaction of this land entered by the assessee. This is supported by the order of Kolkata Bench of this Tribunal in the case of Arijit Mitra (cited supra), Harish V. Milani (supra) and M.S. Srinivas Naicker v. ITO (292 ITR 481) (Mad). By borrowing the meaning from the above section, we are not able to appreciate that the land falls within the territorial limit of any municipality without notification of Central Government as held by the Karnataka High Court in the case of Madhukumar N. (HUF) (cited supra).

78. Further, the Visakhapatnam Bench in the case of Tadavarthy Kanakavalli w/o. T. Dasaratha Rama Rao in ITA No. 74/Vizag/2011 and CO No. 3/Vizag/2011 considered the similar issue of taxability of agricultural land on sale covered by this Notification No. GO MS 352 (MA) dated 30.7.2001. Vide order dated 4.7.2011 the Tribunal held in para 4 as follows:

“4. The grounds numbered as 1, 2 and 7 in the appeal of the revenue are general in nature and hence require no adjudication. In the grounds numbered as 5 and 6, the revenue is raising a new claim that the impugned lands fall within the limits of area declared as special development area by G.O. Ms. No. 352, MA, dtd. 30-7-2001 issued by the Municipal administration and urban development, Government of Andhra Pradesh. However, we notice that this was not the case of the assessing officer for bringing the impugned gain on sale of land. Secondly, it was not shown that the authority concerned with the development of the areas is a municipality as defined u/s 2(14) of the Act. As per the provisions of sec. 2(14)(iii) of the Act, the agricultural land will fall in the definition of ‘Capital asset’ only if it is situate in any area which is comprised within the jurisdiction of a municipality (whether known as municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name)…. In view of the above cited reasons, we do not find any merit in the said grounds and accordingly dismiss them.”

79. Further, we make it clear that when the land which does not fall under the provisions of section 2(14)(iii) of the IT Act and an assessee who is engaged in agricultural operations in such agricultural land and also being specified as agricultural land in Revenue records, the land is not subjected to any conversion as non-agricultural land by the assessee or any other concerned person, transfers such agricultural land as it is and where it is basis, and also it is not the transfer of any share in the right in the development of such land through any joint development agreement, in such circumstances, in our opinion, such transfer like the case before us cannot be considered as a transfer of capital asset.

80. Coming to the other ground relating to granting of deduction u/s. 54F of the Act and applicability of section 10(37) do not require adjudication as these grounds are held to be infructuous in view of our findings in the earlier para, as the impugned land is not a capital asset to bring the transfer of the same into taxation.

81. In the result, assessee appeal is partly allowed.

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