This is an appeal by the Assessee against the order dated 29.03.20 17 of Pr. C.I.T.-2, Kolkata passed u/s 263 of the Income Tax Act, 1961 (Act) relating to A.Y.2012-13.
2. The Assessee is a company. It is engaged in the business of growing and manufacturing and selling of tea. The assessee’ s tea estate is located at Harishnagar Tea Estate, P.O.Harishnagar via Bhishalgarh Vill.Gokul Nagar District Sepahijala, Tripura West – 799102. During the previous year a portion of the assessee’s tea plantation comprising of land together with tea gardens thereon was acquired by the Government under the Land Acquisition Act, 1894 for a public purpose viz., extension of North East Railway line from Agartala to Sabroom. An extent of about 3.63 acres of tea garden was compulsorily acquired for the aforesaid public purpose. The assessee received a compensation of Rs.1,32,74,986/- on compulsory acquisition of the land. It is not in dispute that upto the date of acquisition the land was used for the purpose of agriculture as there was an existing tea garden on which tea plantations producing tea leaves existed. It is also not dispute that the land in question is more than 11 kms from the municipal area and the population of village Gokul Nagar was less than 5000. The certificate of the Deputy Collector S.D.M. Bishalgarh Sepahijala Tripur certifying the aforesaid facts is on record. The land therefore qualifys for being regarded as an agricultural land within the meaning of section 2(14) (iii) of the Act. Under section 2(47) (iii) of the Act, compulsory acquisition of a capital asset is also regarded as transfer of a capital asset capital gain that accrues or arises out of compulsory acquisition is chargeable to tax under the head “capital gain”. It is however to be mentioned that it is only in case where the asset which is the subject matter of transfer satisfies the definition of “capital asset” as defined u/s 2(14) of the Act that the capital gain can be brought to tax on its transfer. As we have already seen agricultural land as defined in section 2(14)(iii) of the Act is not a capital asset.
3. The assessee filed its return of income for A.Y.2012-13 in which he did not compute and offer to tax the capital gain on compulsory acquisition of its agricultural land. In the course of assessment proceedings, the AO specifically called upon the assessee to explain as to why capital gain on compulsory acquisition of a portion of the tea estate was not offered to tax. The assessee vide its letter dated 17.12.2014 explained that the land in question was an agricultural land which was used for agricultural purpose and therefore not a capital asset within the meaning of section 2(14) of the Act. The assessee further submitted that the compensation received on compulsory acquisition will be in the nature of agricultural income within the meaning of section 10(1) of the Act and was therefore not liable to tax. The following was the reply of the assessee to the AO :-
“Agriculture income arose due to compensation received on acquisition of Agricultural Land Rs..1,32,74,986 – We submit that we have been engaged in cultivation, manufacturing and selling of tea. Our tea estate is located at :-
Harishnagar Tea Estate
P.O. Harishnagar Via Bishalgarh Village – Gokulnagar
District – Sepahijala
Tripura (West) – 799 102
During the year under assessment, Government of Tripura has acquired the land used by us for agricultural purposes. At the time of requisition by Tripura Government and also earlier to that, the land was used by us for agricultural purposes. Hence the compensation received amounting to Rs.1,36t47,685/- by Government of Tripura is purely agricultural income in the meaning of Section 10( 1) and therefore, not liable to tax. Your honour will appreciate that the undernoted legal Judgements are squarely applicable in our present case :-
(i) In CIT Vs. All India Tea and Trading Co. Ltd. (1979) 117 ITR 525 (Cal),
It was held that as the land in question was agricultural land which was being used for agricultural purposes, the amount or compensation paid on its acquisition was not taxable under the head “Capital gains” as the said land was not a capital asset.
(ii) In CIT Vs. All India Tea & Trading Co. Ltd. (1996) 85 Taxman 391/219 ITR 544, Hon’ble Supreme Court has held “Where land of assessee – tea company was requisitioned by state Government and same was given to refugees and at the time of requisition assessee was carrying on agricultural operation of land, compensation received by assessee was to be treated as agricultural income since such compensation clearly had the character of rent or, in any case, had to be regarded as revenue derived from the land. Therefore compensation paid for acquisition of land by State Government can only be regarded as agricultural income which admittedly is not taxable.”
In the light of above legal position, we submit that we have rightly claimed the compensation received by state of Tripura on acquisition of our agricultural land amounting to Rs.1,32,74,986 (Rs.1,36,47,685 less cost of land Rs.3,72,699) as not taxable under section 10(1) of I.T. Act, 1961. “
4. The AO passed an order u/s 143(3) of the Act dated 18.12.2014 in which he did not bring to tax any capital gain. It means that the AO was satisfied with the claim of the Assessee that the land which was compulsorily acquired for which the Assessee received compensation was an agricultural land and such compensation will also assume the character of agricultural income and therefore not chargeable to tax.
5. The CIT in exercise of his powers u/s 263 of the Act was of the view that order of the AO accepting the claim of the Assessee as stated in para-4 above was erroneous and prejudicial to the interest of the revenue. The crux of the order of CIT is that the assessee in the course of assessment proceedings before the AO took a stand that the amount received by it on compulsory acquisition of land was not liable to tax under the head ‘Capital gain’ on the ground that the Hon’ble Calcutta High Court in the case of CIT vs All India Tea and Trading Co. Ltd. (1979) 117 ITR 525 (cal) held that agricultural land which was used for agricultural purpose and which are acquired and for which compensation is paid cannot be brought to tax under the head ‘capital gain’ as agricultural land cannot be regarded as capital asset and the sum received was in the nature of Agricultural income not chargeable to tax. The Hon’ble Supreme Court also confirmed the view of the Hon’ble Calcutta High Court in the case of CIT vs All India Tea & Trading Co. Ltd. (1996) 219 ITR 544 (SC). According to the CIT in the decision rendered by the Hon’ble Supreme Court it was noticed by the Hon’ble Supreme Court that refugees from Bangladesh had occupied agricultural land on which agricultural operations were carried on. The Government acquired these lands and gave the lands so acquired to the refugees who occupied those lands. The refugees also continued to carry on agricultural operations over the land on which they encroached. Thus in this circumstances the Hon’ble Supreme Court held that compensation received on compulsory acquisition is not chargeable to tax under the head ‘capital gain’. According to the CIT in the case of the assessee the agricultural land lost its character as agricultural land after acquisition by the railways because they used the land acquired for non agricultural purpose. The CIT was therefore of the view that the AO ought not to have allowed exemption u/s 10(1) of the Act on the basis of the cases cited by the assessee before the AO. The followed were the relevant observations of CIT :-
“I have carefully considered the arguments of the assessee. Reliance placed by assessee on the decision of Hon’ble Supreme Court in the case of All India Tea & Trading Co. Ltd. is of no help, because the facts of this case are different. In the case of assessee, the character of the land change after acquisition. Whereas in the case of All India Tea & Trading Co. Ltd., the land was being utilized for agricultural purpose both before and after its acquisition. Therefore, I hold that exemption u/s. 10(1) has been incorrectly allowed by the A.O, thus making the assessment order erroneous and prejudicial to the interest of revenue.
I, therefore, set aside the assessment order u/s. 263 and direct the A.O to complete the assessment again after disallowing exemption u/s. 10(1).
After conducting the inquiries & verification as directed above, the AO should pass a speaking order, providing adequate opportunity of betng heard to the assessee.
The impugned order u/s.143(3) 18/12/2014 is accordingly, set aside and assessment should be done as per above directions.”
6. Aggrieved by the order of CIT the assessee has preferred the present appeal before the Tribunal.
7. We have heard the submissions of the ld. Counsel for the assessee, who submitted that order of the AO accepting the claim of the assessee that compensation received by the assessee on compulsory acquisition of its agricultural land is not chargeable to tax cannot be termed as erroneous or prejudicial to the interest of the revenue. In this regard the ld. Counsel pointed out that in the decision of the Hon’ble Supreme Court in the case of CIT vs All India Tea and Trading Co. Ltd. (supra) the Hon’ble Supreme Court while dealing with the facts of the case observed that the agricultural land which was being used for agricultural purpose even after its being acquired, the amount of compensation paid on its acquisition was not chargeable under the head ‘capital gains’ as the said land was not a capital asset. The Hon’ble Supreme Court further observed that “It is clear, therefore, that at no point of time or at least till its acquisition the land lost its character of agricultural land.” The ld. Counsel submitted that the above observations have been wrongly construed by CIT as a condition imposed by the Hon’ble Supreme Court that the land acquired should continue to be agricultural land prior to acquisition and after acquisition. It was submitted by him that this wrong approach adopted by CIT has resulted in coming to the conclusion that order of the AO was erroneous and prejudicial to the interest of the revenue. It was his submission that the Hon’ble Calcutta High Court in its decision in the case of CIT vs All India Tea and Trading Co. Ltd. (supra) has summarised its opinion on this issue as follows :-
“27. Having discussed all the cases cited at the Bar, we will now summarise our opinions in the following terms:
(i) The words “held by-an assessee” in Section 2(4A)of the 1922 Act include physical, actual, constructive and also symbolic possession of a property of any kind;
(ii) A land is an agricultural land if it is used for agricultural purposes and, briefly speaking, an income derived from such land by agriculture. is an agricultural income ;
(iii) Though ownership is a property, any land from which the income derived is an Agricultural income is not a capital asset;
(iv) If no agricultural income. can be derived by an assessee from an agricultural land in the accounting year or for some time for any reason beyond his control, such land does not automatically cease to be an agricultural land;
(v) Where the assessee is the owner of an agricultural land and he uses it for agricultural purposes and derives agricultural income from it, any profits or gains arising from the sale, transfer, acquisition, etc., of such land is not taxable under the head “Capital gains”. for such land is not a capital asset;
(vi) Even where any person other than the assessee uses an agricultural land belonging to the assessee for agricultural purposes with or without the consent of the assessee and such person derives agricultural income from it, any profits or gains arising from the sale, transfer, acquisition, etc., of such land is not taxable under the head “Capital gains” in the hands of the assessee; and
(vii) The land is a capital asset where it is not used for agricultural purposes, for there cannot be any question of deriving any agricultural income from it, and any surplus arising from its sale, transfer or acquisition, etc., is taxable under the head “Capital gains“,
28. We will now restate only those facts which are relevant for our purposes. The assessee used those lands for agricultural purposes and derived agricultural income from those land at the time of their requisition in’1 949. Those lands were being used by the landless people after requisition for agricultural purposes who were also deriving agricultural income from those lands at the time of their acquisition in 1959.
29. Therefore, at all material times those lands were agricultural lands and they were held by the assessee as their owner although it lost their physical possession in 1949 by requisition. Though the assessee was prevented from EARNING any agricultural income from those lands due ‘to the aforesaid requisition, those landless people by using those lands for agricultural purposes actually derived agricultural income from those lands in 1949.
30. In these circumstances, at no point of time those agricultural lands became capital assets in the hands of the assessee and, accordingly, the contentions of Mr. Sen gupta must fail.”
8. It was submitted by him that the proposition laid down in para 27 of its judgment by the Hon’ble Calcutta High Court does not impose a condition that even after acquisition compulsory acquisition that the land should continue to be used for agricultural purpose. It was therefore submitted by him that order of the AO was neither erroneous nor prejudicial to the interest of the revenue. The ld. DR relied on the order of CIT and in particular on the decision of the Hon’ble Andhra Pradesh High Court in the case of Suryanarayan Murthy 42 ITR 83 (AP)
9. We have given a very careful consideration to the rival submissions. We are of the view that the CIT was not justified in invoking his jurisdiction u/s 263 of the Act in the facts and circumstances of the present case. It is not disputed that up to the date of acquisition of the land it was used by the assessee for the purpose of agriculture. It is also not disputed that the other condition for regarding the property of the assessee that was acquired by the Government as agricultural land within the meaning of Sec.2(14)(iii) of the Act is satisfied. As we have already noticed, the definition of a capital asset u/s 2(14) of the Act does not include agricultural land. Therefore if any income accrues on compulsory acquisition of agricultural land it is to be regarded as agricultural income and not chargeable to tax under the Act under the head ‘capital gain’. 10. The main contention of the CIT in the impugned order is that the land should continue to retain the character of an agricultural land even after acquisition. This, in our view, is based on wrong reading of the decision of the Hon’ble Supreme Court in the case of CIT vs All India Tea & Trading Co. Ltd. (supra). The Hon’ble Supreme Court had not laid down any proposition that to be regarded as an agricultural income the land that is compulsorily acquired should retain its character as agricultural land before and after acquisition by the Government. Those observations were made in the context of distinguishing the decision of the Hon’ble Andhra Pradesh High Court rendered in the case of Pydah Suryanarayan Murthy (supra). In the case of Pydah Suryanarayan Murthy’s case, the facts were that land of the Assessee was requisitioned for military purposes and compensation was paid for use and occupation of the land so requisitioned. The question before the Hon’ble Court was whether such compensation can be regarded as Agricultural Income or not. The Hon’ble Court held that after requisition by the military purpose, the land requisitioned was not used for Agricultural purpose and therefore damages for use and occupation cannot be regarded as “Agricultural Income”. The Hon’ble Delhi High Court in the case of D.L.F. Housing & Construction (P) Ltd. vs. C.I.T. (1983) 141 ITR 806 Delhi has held that there exists distinction between the expression “compensation given under an award for requisition of the property” and “compensation payable under Land Acquisition Act”. The former is as case of payment for use and occupation whereas the latter is for compulsory transfer of the property. From the aforesaid observations it is clear that there is a distinction between requisitioning of properties and compensation payable for acquisition of a property under the Land Acquisition Act. The payment for use of an occupation of a property cannot be equated with the payments made for acquisition of the property. In the former case only right to use and enjoy is transferred whereas in the later case there is a complete transfer of the whole interest over or complete ownership over the property. We are therefore of the view that the approach adopted by CIT in the present case was not proper in law. Since the order of the AO is not erroneous the CIT was not justified in invoking the jurisdiction u/s 263 of the Act. We therefore quash the order u/s 263 of the Act and allow the appeal of the assessee.
10. In the result the appeal of the assessee is allowed.