INCOME TAX ACT, 1961

Section 2(14)(iii)

Capital gains - Capital asset - Sale of agricultural/plantation land -

Assessee claimed exemption from payment of capital gains tax on consideration received from schedule property situated in Kinalur and Kanthalad Villages in Quilandi Taluk, Kozhikode District. AO pleaded that schedule property sold in favour of Kerala State Industrial Development Corporation Limited is not a capital asset under section 2(14) of the Act. The assessee used the schedule property as agricultural land/rubber plantation on the date of sale, and the schedule property is situated in a very remote area where there is no infrastructure facility. The AO refers to one of the clauses of memorandum of agreement, dated 1-12-1995, which is to the effect that the assessee agreed to deliver to Kerala State Industrial Development Corporation Limited or its nominee upon receipt of due consideration and after removing all the rubber trees at the expense of the assessee and other trees standing on the schedule property and carry away the cut trees. The said clause and the cutting of trees by the assessee have been appreciated by the AO as converting the schedule property into non-agricultural land, facilitating purchase by Kerala State Industrial Development Corporation Limited. Thus, the objections raised by the assessee were rejected and the assessment order was made including the sale consideration as exigible to capital gain and demanded tax. Held: Assessee was the owner of agricultural/ plantation land. It agreed to sell the schedule property without burden of rubber trees. The cutting and the carrying away of rubber trees did not change the classification of land from agricultural to non-agricultural land. Assessee continued to treat schedule property as agricultural land for the financial year ending 31-3-1995. The assessee could not be expected to have control over the activities of his buyer once transfer was completed. The incidence of exigibility of assessee-vendor was not dependent on an act of commission or omission of vendee. The vendor had no control on future use. What is very important is whether on the date of sale the land was agricultural land, both in record and use. The incidence to pay capital gains tax cannot be and ought not to be traced to an act of commission or omission by the transferee of the assessee. Being an absolute owner the transferee is always free to put the land to best use as the transferee thinks fit and proper. In the instant case assessee both factually and legally did not change the character of land from agriculture to non-agriculture. The assessee had demonstrated that classification of land continued to be agricultural land in the revenue records even as on the date of sale had the land been converted for non-agricultural purpose/laid out in plots, then stamp duty payable on registration would be on the nature of land sold at the relevant point of time. The schedule property was described as land in conveyance deed. The schedule property consisted of vast extents of agricultural land, admittedly outside a notified area. There was no change of user at the instance of the assessee. The burden fastened on assessee in the circumstances of the case had been discharged and, therefore, addition made by AO was not justified.

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