RANCHHODBHAI BHAIJIBHAI PATEL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference arises out of an assessment to income tax made on the assessee for the asst. yr. 1964 65, the corresponding account year being the financial year ended 31st March, 1964. The assessee had a large area of ancestral agricultural land admeasuring 2,02,088 sq. ft. situate in village Savad at some distance from Baroda City. Two agreements of sale were entered into by the assessee in respect of different portions of this land, one on 27th June, 1962, and the other on 7th July, 1962. By the agreement of sale dt. 27th June, 1962, the assessee agreed to sell 2 acres 2 gunthas of land to Ajay Construction Co. of Baroda and the remaining 30 gunthas of land was agreed to be sold to Bapunagar Co operative Housing Society Ltd., by the agreement of sale dt. 7th July, 1962. The land was being used for agricultural purposes by the assessee and it was, therefore, apparent that by reason of S. 63 of the Bombay Tenancy & Agricultural Lands Act, 1948 (hereinafter referred to as "the Tenancy Act"), the assessee would not be able to sell any portion of the land to Ajay Construction Co. or Bapunagar Co operative Society Ltd., pursuant to the agreements of sale unless the land ceased to fall within the definition of "land" in S. 2(8) of the Tenancy Act. The assessee accordingly applied to the Collector under S. 65 of the Bombay Land Revenue Code, 1879, for permission to make non agricultural use of the land and such permission was granted on 23rd Jan., 1963. The assessee admittedly ceased to carry on agricultural operations on the land from 23rd Jan., 1963, and completed the sales in favour of Ajay Construction Co. and Bapunagar Co operative Housing Society Ltd. on 29th April, 1963 and 15th July, 1963, respectively for the sums of Rs. 30,000 and Rs. 50,000. In the course of assessment of the assessee to income tax for the asst. year 1964 65, the ITO took the view that at the dates when the sales were effected, the portions of land sold had ceased to bear the character of agricultural land and were "capital assets" within the meaning of S. 2(14) of the IT Act, 1961, and capital gain arising from the sales of these capital assets was, therefore, liable to be included in the taxable income of the assessee. According to S. 48 "the cost of acquisition of the capital asset" is to be deducted from the amount of consideration for determining the capital gain. The assessee contended that the land was throughout agricultural land and it became "capital asset" in the hands of the assessee for the first time on 23rd Jan., 1963, when it was converted into non agricultural land and, therefore, "the cost of acquisition of the capital asset" in relation to the land must be taken to be the market value of the land on 23rd Jan., 1963. This contention was negatived by the ITO who held that "the cost of acquisition of the capital asset" was what it cost the assessee to acquire the capital asset, namely, the land, and since the land was acquired by the assessee prior to 1st Jan., 1954, the assessee had the option under S. 55(2) to substitute the fair market value of the land on 1st Jan., 1954. The ITO accordingly computed the capital gain by deducting from the sale proceeds the market value of the land on 1st Jan., 1954. There was a claim for deduction of Rs. 10,000 made by the assessee in respect of amount paid to the tenant for surrender of the tenancy rights but this claim was disallowed by the ITO. The result was that a sum of Rs. 40,000 was brought to tax as capital gain in the hands of the assessee. The assessee appealed to the AAC but the appeal was unsuccessful and hence the matter was carried in further appeal to the Tribunal. The Tribunal rejected both the contentions of the assessee in regard to the taxability of the amount but allowed the deduction of Rs. 10,000 in computing the capital gain and reduced the amount of capital gain to Rs. 30,000. The assessee was obviously dissatisfied and he, therefore, moved for a reference and, on his application, the following two questions of law, namely,

(2.) THE first question is whether the land sold by the assessee was "agricultural land" within the meaning of S. 2(14) at the date when its different portions were sold. This question becomes material because under S. 45 the charge to income tax under the head "capital gains" is attracted only in respect of profits or gains arising from the transfer of a "capital asset" and "capital asset" is defined in S. 2(14) to mean property of any kind held by an assessee but, including, inter alia, not agricultural land in India. If, therefore, the land sold by the assessee was agricultural land at the dates when the sales of its different portions were effected, profits or gains arising from such sales would not be taxable as capital gain under S. 45. Now, the expression "agricultural land" is nowhere defined in the Act and it must, therefore, be understood in its plain ordinary meaning according to English language. What is it that according to the ordinary natural sense of the expression distinguishes "agricultural land" from other land We had occasion to consider this question in a recent decision given in a WT Reference, Rasiklal Chimanlal Nagri vs. CWT (1965) 56 ITR 608 (Guj). There the question was whether certain land belonging to the assessee was agricultural land within the meaning of S. 2(a) of the WT Act so as to be exempt from wealth tax and that necessitated consideration of the true meaning and import of the expression "agricultural land". Though the observations made in that decision were in reference to the expression "agricultural land" as occurring in S. 2(e) of the WT Act, what we said there must apply equally in determining what is "agricultural land" within the meaning of S. 2(14) of the IT Act. We pointed out various factors which have to be taken into account in determining whether a particular land is agricultural land and this is what we said:

(3.) THAT takes us to the second question which raises a controversy as to how capital gain is to be computed when a capital asset which is sold was not "capital asset" at the date when it was acquired by the assessee but subsequently became "capital asset", as for example, in the present case, where the land being originally agricultural was not capital asset but acquired the character of capital asset on 23rd Jan., 1963, when it ceased to be agricultural land and became non agricultural. To determine this controversy, it is necessary to refer to a few relevant provisions of the Act. Sec. 45 charges to tax "any profits or gains arising from the transfer of a capital asset effected in the previous year" and provides that such profits or gains shall be deemed to be the income of the previous year in which the transfer took place. It is clear on a plain reading of this section that the only condition for attracting the charge of tax under it is that the capital asset must be transferred : in other words, there must be transfer of property and the property transferred must be "capital asset" at the date of transfer. If this condition is fulfilled, profits or gains arising from the transfer are taxable as "capital gains". So far as the present case is concerned, as we have already pointed out above, the land sold by the assessee was not agricultural land at the time of sale and was, therefore, clearly "capital asset" and its transfer by way of sale attracted the charge of tax under S. 45. But the question is : how are the profits or gains arising from the transfer to be computed ? The answer is provided by S. 48, which says: