COMBINED INDUSTRIES (P.) LTD. vs COMMISSIONER OF Income Tax, MADRAS.

The following two questions have been referred under s. 256 (1) of the Income Tax Act, 1961 :

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the entire lands sold by the applicant

did not constitute agricultural lands ?

If the answer to question No. 1 is in the affirmative, then whether, on the facts and in the circunstances of the case, the Tribunal was justified in

law in directing the AAC should ascertain what portion of the lands in question had actually been utilised for agriculture during the three years, i.e.,

the previous years relevant to the assessment years 1965-66, 1966-67 and 1967-68 and on which expenditure had been incurred for levelling,

etc., in these years and only the profit referable to such portion of the land should be excluded from the amount of capital gains by the ITO ?

The assessee is a private limited company. It purchased in different lots agricultural lands of a total extent of 63.63 acres during the year 1955 for a

total cost of Rs. 16,979. The company was using the lands for agricultural purposes since the date of purchase. The managing director of the

company took the lands on lease on April 1, 1959, for the purpose of exploring the possibility of exacavating gypsum stones, undertaking to sell

whatever gypsum stones that are ecavated from the lands to the company and agreeing not to sell the gypsum stones to any third party without the

permission of the company. During the period between April 1, 1959, and March 31, 1965, the company also did business in gypsum stones. In

the first two years, they have purshaed gypsum of 1,000 tons each year and in the thrid year 2,200 tons, 4th year 1,011 tons, 5th year 90 tons,

and in the 6th year 2,022 tons. During the accounting year relevant to the assessment year 1967-68, the assessee sold an extent of 47.93 acres in

two lots to one M/s. Shankar Charities of Kallidaujurichi for a total sum of Rs. 1,05,000 as ""agricultural lands"". The sale proceeds being Rs.

1,05,00 showed a surplus of Rs. 88,203 over the cost price of Rs. 16,797. The ITO sought to tax the dirrence in the sale price and the cost price

as capital gain. The assessee contended that the lands were agricutural lands, that they were purchased as agricultural lands and they have been

cultivating them and earning income, than even the mining of gypsum was only for the purpose of making the lands fit for better cultivation as

gypsum will be on the surface only and that they also sold the lands as agricultural lands. The purchaser also gave an affidavit to the effect that they

purchased the lands for the purpose of agriculture and they are doing agriculture after the purchase. In addition to these facts, the assessee

produced extracts from the adangal register as also a certificate from the headquarter Deputy Tahsildar, Usilampatti, dated January 21, 1968. The

adangal extract showed that in fasli years 1370 and 1372, an extent of 25 acres were under cultivation, in faslis 1374 to 1376, about 10 acres

were under cultivation and in other years smaller portions were under cultivation. The fit for cultivation even after mining operations are over and

that the purchaser is using the same for the purpose of agriculture. The ITO was of the view that though originally the lands were were agricultural

lands and were purchased by the assessee as such, due to the leasing of the lands for the purpose of mining gypsum during the period from April 1,

1959, to March 31, 1965, they have lost the character as such agricultural lands and that, therefore, surplus amount was liable to be taxed as

capital gain"". On appeal, the AAC reversed this finding and relying on the totality of the circumstances, including the adangal extract and the

certificate issued by the Deputy Tahsildar held that the lands were agricultural lands and they were still retained as agricultural lands till the date

when they were sold and as such the amount was not liable to be included as ""capital gain"".

On a further appeal by the revenue, the Tribunal held that it was not possible to hold that the entire lands which were sold by the assessee-

company were agricultural lands and that the AAC should go into the question again afresh in order to ascertain what portion of the lands in

question had been utilised for agriculture during the three years prior to sale and on which expenditure had been incurred for levelling them for

agricultural purposes till it considered the possibiliy of exploiting gypsum by leasing the same to its managing director. The ITO, therefore, rightly

posed the question whether agricultural lands had been converted into non-agricultural lands or they ceased to have the character as agricultural

lands by reason of leasing out for mining gypsum. When once it was admittedly an agricultural land some act on the part of the assessee had to be

established which would prove that the assessee had converted the properly into non-agricultural land. Unless such contrary evidence is available,

it will have to be presumed that it continues to be agri cultural land and did not change it s character. Mere non-user of the land or keeping it fallow

for even a long period will not bedecisive to hold that there was a change in character. In order to show that the agricultural land is still retaining its

character as such it is not necessary to prove that every bit of the land is used for agriculture. If different extends of land of different survey was at

some time or other cultivated, it goes a long way to show that the land was still retained by the assessee as agricultural land. That the land is

registered in the revenue records as agricultural land and is assessed to land revenue is prima facie strong proof that it is agricultural land. In

considering whether it has lost its character as agricultural land, its proximity to municipal area or situation within municipal area or the character of

the adjoining lands may also be relevant and may have to be taken into account, but they are not conclusive. These are some of the principles

which have been laid down in the decision in Commissioner of Income Tax Vs. K. Ananthan Pillai, , Shiv Shankar Lal v. CIT [1974] 94 ITR 133 ,

and Controller of Estate Duty, Kerala Vs. V. Venugopala Varma Rajah, . The Tribunal thought that leasing out the lands to the managing director

of the company for mining gypsum had changed the original character of the land. We have seen the agreement. It mentions that the company was

desirous of exploring the possibility of exacavating gypsum stone from the lands and the managing director offered to take the lands on leasefor

such purpose. The agreement does not mention the extent of the land leased or its survey number. Probably only a part of a particular survey

number contained gypsum stones and the managing director undertook to find out where it was available and exacavate it. This by itself will not

show that the company treated the entirely of the lands as non-agricultural land or that the land itself lost its character as agricultural land. We,

therefore, find as admitted by the department itself, that some of the lands were still used for agriculture and the company had been deriving

agricultural income. The Tribunal failed to see that the extract from the adangal showed that only a small extent of 3.84 acres was used for mining

and this is consistent with the fact that only on an average 1,000 tons was excavated per year except in two years when it was a little over 2,000

tons. Over an extent of 3 acres one could even by scraping the land get an yield of 1,000 tons. Merely from the entries in the accounts of the

assessee we do not think the Tribunal was right in rejecting a Government record and doubting the Credibility of the extract of the adangal register.

We are of the view that the Tribunal was wrong in not relying on the adangal himself relied on the adangal extract. The Tribunal also seems to have

had two view because, while agreeing with the departmental representatives argument that by leasing out the land to the manaing director of the

company for mining gypsum the original character of the land has been changed, it still wanted to find out the extent of the land which was used for

mining as such and the extent used for agricultural purpose. The Tribunal also went wrong in not accepting the certificate issued by the Deputy

Tahsildar, there being no evidence to suggest that the lands were not arable lands or that the agricultural lands have ceased to be such lands. We

are, therefore, of the view that the Tribunal should be directed to reconsider the whole question afresh in the light of the important principle, that

once it was proved to be agricultural land it shall be presumed to retain its character as agricultural land until it was proved that there was a change

in the character of the land. In considering the further question the Tribunal shall also rely on the adangal extract and the certificate issued by the

Deputy Tahsildar. But, we are of the view that it is not necesary to prove that the entirety of the land is converted into non-agricultural land, that

portion will have to be taken our of the benefits or agrcultural land for the purpose of ""capital gain"".

In the circumstances, we cannot answer the question and, therefore, direct the Tribunal to go into the matter afresh in accordance with law under s.

260(1) of the Income Tax Act. The parties shall bear their respective costs.