COMMISSIONER OF INCOME TAX Vs. RAMA BAI

JUDGEMENT

(1.) The following question of law has been referred by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961, for the decision of this court : "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the reassessment proceedings initiated by the Income-tax Officer in this case were not valid in law ?" The facts giving rise to this reference are these : An extent of acre 42 of land situate at Nacharam village near Hyderabad which belonged to the respondent-assessee was acquired by the State Government in the year 1964. By an award dated 20/11/1965, the assessee was awarded compensation of Rs. 25,240 including interest. Later, on a reference to the interest. The decree of the civil court was confirmed by this court by judgment dated 26/10/1970. The assessee did not file any return of income under section 139 of the Act. However, he filed a return on 17/02/1972, i.e., after the period prescribed by section 139(4), disclosing an income of Rs. 3,599 on the compensation amount. On receipt of this return, the Income-tax Officer initiated proceedings under section 147(a) of the Act for the year ending on the 31/03/1965, treating the return filed by the assessee as an invalid return. The reasons for taking action under section 147(a) could be seen from the letter addressed by the Income-tax Officer seeking sanction of the Commissioner. The Income-tax Officer stated therein that the land in question is not agricultural land and has not been subjected to agricultural operations and hence the capital gains were chargeable to income-tax. He also referred to the fact that the return filed by the assessee was an invalid return. After referring to these facts, he stated that he had reason to believe that the income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the assessee to make a valid return under section 139. Thereafter, notice under section 147(a) was issued on 21/04/1973. The assessment was finalised on 4/03/1978, subjecting the capital gains arising out of the compensation received by the assessee under the Land Acquisition Act to tax under the provisions of the Income-tax Act. The assessment was made on the taxable income of Rs. 2,10,240. On appeal by the assessee to the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) held that, in view of the law laid down by the Full Bench of this court in Officer-in-charge (Court of Wards) v. CWT (1968) 72 ITR 552 which was holding the field as the time of initiating the proceedings under section 147(a), the Income-tax Officer could not have had reason to believe that the land in question was not agricultural land. The assessment under section 147(a) was, therefore, cancelled. The Department appealed against this order to the Income-tax Appellate Tribunal. The Tribunal confirmed the order to the Commissioner of Income-tax (Appeals). The Judicial Member held that the Income-tax Officer could not reasonably come to a belief that income had escaped assessment in the face of the Full Bench judgment of this court in Officer-in-charge (Court of Wards) v. CWT (1968) 72 ITR 552. The learned Accountant Member pointed out that the reasons in support of the Income-tax Officer's conclusion that the land was not agricultural land were not spelt out at all by him and that there was no material on record before the Income-tax Officer by which he could form the belief that the land in question was non-agricultural land on the application of the tests laid down by the full Bench in Officer-in-charge (Court of Wards) v. CWT (1969) 72 ITR 552 (AP) and hence income had escaped assessment. The Tribunal also went into the second question, viz., whether the land was agricultural land by applying the tests laid down but the Supreme Court in CWT v. Officer-in-charge (Court of Wards) (1976) 105 ITR 133 (which was a judgment rendered on appeal against the judgment in Officer-in-charge (Court of Wards) v. CWT (1969) 72 ITR 552 (AP) (FB) and held that the land was agricultural in character. On this second aspect, it appears that this court called for a statement of case under section 256(2) and counsel are unable to tell us the number of the reference case. Hence, we are disposing of this reference separately.

(2.) Before we take up the question for consideration, it is appropriate to advert briefly to the Full Bench decision of this court in Officer-in-charge (Court of Wards) v. CWT (1969) 72 ITR 552 and the judgment of the Supreme Court in CWT v. Officer-in-charge (Court of Wards) (1976) 105 ITR 133. The Full Bench of this court in Officer-in-charge (Court of Wards) v. CWT (1969) 72 ITR 552, laid down certain principles for ascertaining whether a parcel of land is agricultural or non-agricultural in character. The Full Bench, inter alia, held that the actual user of the land for agriculture is one of the indicia for determining the character of the land as agricultural land. At the same time, the Full Bench held that neither actual cultivation of the land nor the nature of the products raised are decisive tests and that the capability of the land being put to agricultural use can also be taken into consideration. This judgment was the subject-matter of appeal before the Supreme Court in Civil Appeals Nos. 2552-2556 of 1969. The judgment is reported in CWT v. Officer-in-charge (Court of Wards) (1976) 105 ITR 133. The Supreme Court held that the land can be treated as agricultural land if such land can be said to be either actually used or ordinarily used or meant to be used for agricultural purposes. In other words "agricultural land" must have a connection with agricultural user or purpose. The Supreme Court pointed out that the court cannot dispense with credible evidence of at least appropriation or setting apart of the land for a purpose which can be regarded as agricultural and for which the land under consideration can be reasonably used without alteration of its character. The Supreme Court stressed that what is required to be shown is connection with an agricultural purpose and user and not the mere possibility of user of the land. The Supreme Court observed that the Full Bench of the High Court did not examine the question from a correct angle and the Full Bench fell into an error of law in stating that it was enough to show capability of the land being used for agricultural purpose. The Full Bench judgment of this court was, therefore, set aside and the matter remitted to the Tribunal. Thus, it may be noticed that the Supreme Court did not approve of all the tests laid down by this court for the purpose of determining the real nature of the land. The aforementioned judgment of the Supreme Court was rendered on 6/08/1976, i.e., during the interregnum between the issuance of section 147 notice and the date of final order.

(3.) We will now proceed to consider the question referred to us.