Commissioner of Income Tax, Cochin v Harrisons Malayalam Ltd.

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** # **THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN** **&** **THE HONOURABLE MR.JUSTICE ASHOK MENON** **THURSDAY, THE 06TH DAY OF DECEMBER 2018 / 15TH AGRAHAYANA, 1940** **I.T.A.No.238 of 2012** **AGAINST THE ORDER IN I.T.A.No.77/COCH/2010 DATED 29.06.2012 OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN. [ASSESSMENT YEAR 2006-07]** ## **APPELLANT/APPELLANT:** **THE COMMISSIONER OF INCOME TAX, COCHIN.** **BY ADV. SRI.JOSE JOSEPH, SC FOR GOI (TAXES).** ## **RESPONDENT/RESPONDENT:** **M/S. HARRISONS MALAYALAM LTD., BRISTOW ROAD,WILLINGTON ISLAND, KOCHI-682003.** **BY ADVS. SRI.JOSON MANAVALAN SRI.K.JOHN MATHAI SRI.KURYAN THOMAS SRI.M.GOPIKRISHNAN NAMBIAR SRI.PAULOSE C. ABRAHAM SRI.P.GOPINATH (SR.)** ## **OTHER PRESENT:** **SRI P.K.R. MENON, SR COUNSEL FOR GOI (TAXES) SRI RAJA KANNAN (FOR APPELLANT) SRI. JOSEPH MARKOS (SR.)** _**AMICUS CURIAE**_ **THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06.12.2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** **I.T.A.No.238/2012** ## **- 2 -** ## **JUDGMENT** ## **Vinod Chandran,J.** **The following questions arise from the order of the Tribunal in the assessment year 2006-07:** - **(i) Whether licence fee paid to RPG Enterprises Limited is allowable as a deduction under Section 37 of the Income Tax Act, 1961 [for brevity “the Act”]?** - **(ii) Whether the dis-allowance of delayed payments made to Employees' Provident Fund and Employees' State Insurance, etc., amounting to Rs.4 Crores, is allowable as a deduction under Section 37 of the Act?** - **(iii) Whether the Tribunal was correct in having affirmed the action of the Assessing Officer [for brevity “AO”] in taking 30% of the sale proceeds of Grevellea trees as cost and balance sale proceeds brought to tax as capital gains?** - **(iv) Whether the Tribunal was correct in having found the sale of two estates as going concerns, the proceeds of which was claimed as agricultural income was disallowed treating as slump sale and taxing it as income under Section 50B?** - **(v) Whether the Tribunal was correct in having affirmed the action of the AO in having added back the provision for gratuity in computing the income under Section 115JB?** **These questions are first taken up for consideration, since most of the issues are covered by the decision of this Court itself.** **- 3 -** **I.T.A.No.238/2012** **2. On question No.(i) the learned Senior Counsel, Government of India (Taxes) submits that the Department has instructed him to not press the same. In such circumstances, the order of the Tribunal remains untouched on that aspect. We decline to answer the said question.** **3. On the question of dis-allowance of delayed payments under the EPF and ESI, since they relate to employees' contributions which the assessee had deducted from the monthly salary payable to them, the issue stands covered against the assessee and in favour of the Revenue by our decision reported in** _**Popular Vehicles & Services Pvt. Ltd. v**_ **.** _**The Commissioner of Income Tax, Ernakulam**_ **[** _**(2018) 406 ITR 150 (Ker.)**_ **]. Hence, we answer question No. (ii) in favour of the Revenue and against the assessee. The Tribunal's order to that extent stands deleted and the AO's dis-allowance stands restored.** **4. On the sale of Grevellea trees, we have considered the issue in the Revenue's appeal, in** _**I.T.A.No.1776 of 2009**_ **vide judgment dated 17.09.2018 [** _**CIT, Cochin v**_ **.** _**Harrisons Malayalam Ltd.**_ **]. We extract paragraph 18 of the judgment:** **“18. The further question raised is on the justification in treating the consideration received on sale of shade trees as long term capital loss** **- 4 -** **I.T.A.No.238/2012** **entitled to be carried forward from the earlier years. We see that the Tribunal had considered the facts and had held that the order of the CIT (Appeals) directing deletion of such deduction in the capital gains has to be set aside, on facts. The Tribunal has also held that it being long term capital loss, is entitled to be carried forward. We do not see any question of law arising from the order of the Tribunal and, hence, uphold the order to that extent”.** **Hence, question No.(iii) is answered in favour of the assessee and against the Revenue.** **5. On the question of slump sale, again in the Revenue's appeal for another year, was considered in I.T.A.No.1782 of 2009 in common judgment dated 17.09.2018. In paragraphs 11 and 12, we found on a reference to the agreement of sale that there was a transfer as a going concern and it does not change by the mere fact that the employees were taken over by the purchasing company as a measure to avoid any retrenchment compensation being paid. We had specifically referred to the terms of the agreement and the Tribunal too in the present case does refer to the facts here, which we find to be similar to the earlier sale. The fact finding authorities also notice that the terms of the agreement are identical with that entered into in the earlier year. The issue being on facts as to the specific terms of the agreement and not giving rise to a** **- 5 -** **I.T.A.No.238/2012** **question of law we refuse to answer question No.(iv). The order of the Tribunal to the extent of deleting the levy under Section 50B is confirmed.** **6. On the next question of adding back the provision for gratuity in computing income under Section 115JB, we have found in I.T.A.No.1 of 2007 vide common judgment dated 09.10.2018 [** _**The Fertilizers & Chemicals Travancore Ltd. v. CIT, Kochi**_ **] that the same would be an ascertained liability and, hence, would be capable of being deducted from computation of the Minimum Alternate Tax (MAT) under Section 115JB. We, answer question No.(v) in favour of the assessee and against the Revenue.** **7. Now, we have to deal with three other questions raised by the Revenue in the appeal. The first of the said questions as seen from the appeal memorandum is on the dis-allowance of proportionate interest under Section 14A on loans given to the subsidiary companies finding that there is no commercial expediency. The learned Senior Counsel for Government of India (Taxes) would, however, point out that neither in the assessment order nor in the Tribunal's order Section 14A is referred to and, hence, this Court would have to consider whether the dis-allowance was proper** _**dehors**_ **Section 14A. The following questions of law also arise in the assessment year:** **- 6 -** **I.T.A.No.238/2012** - **“(vi) Whether, on the facts and in the circumstances of the case,--** - **a) In the light of S.A.Buildings reported in 288 ITR 1, the Tribunal is right in law and facts in deleting the addition of Rs.3.18 crores made on account of interest dis-allowance made by the assessing Officer;** - **b) Whether on the facts and in the circumstances of the case did the assessee prove 'commercial expediency' to advance the amount;** - **c) If the answer is in the negative is not the order of the Tribunal on the issue perverse and wrong?** - **(vii) Whether, on the facts and in the circumstances of the case and also in the light of Rules 7 and 7A of the Income Tax Rules is not the consideration obtained on sale of old rubber exigible to tax under the Income Tax Act?** - **(viii) (a) Whether on the facts and in the circumstances of the case, the Tribunal is right in its order/direction to exclude the profit on sale of two estates from computing book profit for the purpose of Section 115JB as agricultural income?** - **(b) Whether, on the facts and in the circumstances of the case rubber income being partially taxable should not capital gain be viewed and decided similarly?”** **- 7 -** **I.T.A.No.238/2012** **8. The learned Senior Counsel, Government of India (Taxes) would contend that the assessee while claiming expenditure under Section 36(1)(iii) should come squarely within the ambit of the aforesaid provision. The business for which the funds have been utilised is the business of the sister concerns and not the business of the assessee itself. Hence, there could be no claim raised under Section 36(1)(iii) on the portion as dis-allowed by the AO.** **9. We look at Annexure-A order to better understand the disallowance made. The assessee had claimed as Head Office expenditure Rs.9,75,12,638/- as interest on overdrafts, term loans, etc. Those overdrafts and term loans were used for the purpose of the business of the assessee itself. Hence, the assessee maintained that the three conditions under Section 36(1)(iii) were satisfied that the assessee had borrowed capital for which there was interest liability which was paid, and the said borrowed capital was used for business purposes. However, the AO found that there were interest free loans granted to subsidiary companies and the average of such loans granted was found to be Rs.13,035.04 lakhs which was stated to be diverted funds. The AO also found from the accounts of the assessee that the assessee had both interest bearing funds and non-interest bearing funds, which was in the proportion** **- 8 -** **I.T.A.No.238/2012** **of 9775.94 : 30168.70. Hence, the AO, in that proportion, apportioned the total average loans given to the assessee Companies as being from interest bearing funds and non-interest bearing funds. We are of the opinion that there can be no such device employed of apportionment on ground of it being not permitted by the statute or by prescription in the Rules. Definitely, such an addition could have been made if the non-interest bearing funds available with the assessee was lesser than the loans given to its subsidiary Companies on interest free basis. Here, we notice that the assessee was flushed with non-interest bearing funds as found by the first appellate authority also. Looking at the manner in which the proportion was computed by the AO itself, we find that the assessee had more than Rs.30,000 lakhs of non-interest bearing funds. The loans which were said to be interest free, granted to its subsidiary Companies came to only Rs.21,221.04 lakhs. Hence, the assessee is deemed to have granted the interest free loans to its subsidiary Companies from its non-interest bearing funds available with it, which was also in excess of the total loans granted by the assessee to the subsidiary companies. There was absolutely no warrant for applying the proportion between interest bearing funds and non-interest bearing funds to make a dis-** **- 9 -** **I.T.A.No.238/2012** **allowance of the interest liability satisfied by the assessee for the assessment year which was claimed as an expenditure in the said year. Question No.(vi) is, hence, answered in favour of the assessee and against the Revenue. The deletion of Rs.3,18,21,074/- as affirmed by the Tribunal is sustained.** **10. The next question is as to whether Rule 7A applies to the sale of old and unyielding rubber trees. We need only to refer to (2011) 203 Taxman 63 [** _**Commissioner of Income Tax v**_ **.** _**Thiruvambadi Rubber Co.Ltd.**_ **], wherein a Division Bench of this Court had clearly found that sale of old and unyielding rubber trees would not give rise to an agricultural income. If there is no agricultural income, then there is no question of application of Rule 7A. In such circumstances, question No.(vii) is answered in favour of the assessee and against the Revenue. The order of the Tribunal to that extent is sustained.** **11. In answering question (viii), we cannot but notice that in the earlier order of the Tribunal, referred to in the order impugned here, there is no finding as to the consideration received on sale of estate being an agricultural income as such. The question decided there was only whether there was a slump sale involved or not. On the question of slump sale all the authorities had followed the** **- 10 -** **I.T.A.No.238/2012** **earlier orders and found the facts to be identical,in the sale of estate carried out in this particular year also. There is however considerable argument raised on the other issue as to the sale consideration being agricultural income. Considering the importance of the issue, we requested Sri.Joseph Markos, learned Senior Counsel to assist us in the matter. The learned Counsel for the respondent would contend that sale of agricultural land not coming within item (a) or (b) of sub-clause (iii) of Clause (14) of Section 2 would be "agricultural income" as defined under Section 2(1A) of the Act and is also exempted under Section 10. Hence applying Clause (2) of Explanation 1 to Section 115JB, the same has to be reduced from the profits as seen from the books of accounts, is the agrument.** **12. The learned Counsel for the assessee would rely on the decision of the Andhra Pradesh High Court in** _**S.Muthiyam Reddy**_ **,** _**Commissioner of Income Tax v. All India Tea and Trading Co. Ltd. [(1996) 219 ITR 544]**_ **and** _**Singhai Rakesh Kumar v. Union of India [(2001) 247 ITR 150]**_ **. However, immediately it is to be noticed that the judgment of the Andhra Pradesh High Court in** _**S. Muthiyam Reddy**_ **[supra] was overruled by the Hon'ble Supreme Court in** _**Union of India**_ **v.** _**S.Muthiyam Reddy**_ **[** _**(1999) 240 ITR 341 SC**_ **]. Then, it was argued that the proposition insofar as consideration** **- 11 -** **I.T.A.No.238/2012** **on sale of agricultural land being agricultural income as propounded by the Andhra Pradesh High Court has been left untouched by the Hon'ble Supreme Court. The Division Bench of the Andhra Pradesh High Court has been overruled only on the question of assessment of capital gains on agricultural lands coming under item (a) & (b) of sub-clause (3) of Clause (14) of Section 2 of the Act is the argument. The other decision of the Hon'ble Supreme Court cited herein above would also advance the said argument, according to the assessees Counsel.** **13. The learned Senior Counsel Sri.Joseph Markos would refer to an unreported decision of the Madras High Court in TCA No.359 of 2008 dated 09.11.2016, wherein an identical issue was considered and relying on sub-section (5) of Section 115JB, it was held that though capital gains form part of the net profit in the case of the assessee therein, the assessee was specifically eligible for exemption under Section 54AC of the Act. The learned Senior Counsel would not support the contention raised by the assessee that the sale of agricultural land within rural areas, not included under Section 2(14)(iii)(a) & (b), of the Act would be agricultural income. But the sale of agricultural land being specifically excluded from the definition of capital gains under Section 2 (14),** **- 12 -** **I.T.A.No.238/2012** **sub-section (5) of Section 115JB; has to be given effect and the same excluded from computation of book profits under Section 115JB, since it is not exigible to tax at all, is the argument.** **14. The learned Senior Counsel, Government of India [Taxes] would point out that though not exigible to capital gains, the consideration received on sale of estate, will be reflected in the profits as per the books of accounts. There is no provision for exemption as such from income tax, since there is no charge on the sale of agricultural land, not included under Section 2(14)(iii)(a) & (b). The Madras High Court decision hence would not apply, since therein there was a specific exemption provided to capital gains and the Court was also considering the question as to whether the capital gains, which form part of the net profit in the profit and loss account of the assessee, should be taken into account for computing tax and book profits under Section 115JB of the Act. Here, the consideration of sale of agricultural land, admittedly within rural area would not be exigible to income tax, nor would it come under the definition of capital gains as provided under Section 2(14) of the Act. That the consideration received has to be credited to the profit and loss account is beyond any pale of doubt.** **- 13 -** **I.T.A.No.238/2012** **However, since reduction of the amount so reflected in the profit and loss account is not enabled by the statute, there could be no reduction of the amounts received as consideration on sale of agricultural land from the book profits, in computing the same for the purpose of Section 115JB.** ## **The consideration** **15. We notice from the judgment of the Division Bench of the A.P. High Court in** _**S.Muthiyam Reddy**_ **[supra] that therein the question arose as to whether the Parliament was competent to levy tax on sale of agricultural lands situated within the limits of Municipalities and Cantonments, as provided under Section 2(14)(iii)(a) & (b) of the Act. The assessee therein also held lands coming within item (a) & (b) of Section 2(14) (iii) of the Act. The Division Bench, while considering the issue, found that sale of agricultural land would be agricultural income and also held that the provision bringing in capital gains on such agricultural lands situated within the municipal area would not be exigible to tax. The provision enabling such inclusion was found to be** _**ultra vires**_ **. On appeal, the Hon'ble Supreme Court in** _**S.Muthiyam Reddy**_ **[supra], noticed the Explanation brought into the definition clause; to find that it takes away the** **- 14 -** **I.T.A.No.238/2012** **whole basis of the decision of the A.P. High Court.** **16. The Hon'ble Supreme Court found the A.P. High Court decision to be without any legal sustenance; in so far as the Explanation having been introduced with retrospective effect. We do not think the declaration, made by the A.P. High Court with respect to the consideration received on sale of agricultural land being agricultural income, would survive for more reason than one. Primarily the Supreme Court has found the decision to have no basis on the introduction of the Explanation, leaving no room to find any portion of the decision having been affirmed or left to survive. Then the question arising before the A.P High Court was only on the taxability of sale consideration of agricultural lands coming within Section 2(14)(iii) (a)&(b) and the other declaration, if at all discernible, being** _**per incuriam**_ **does not even have a persuasive effect on us. Further there is a contrary decision by a Division Bench of our own High Court reported in** _**Commissioner of Income Tax v. T.K. Sarala Devi [(1987) 167 ITR 136 (Ker)].**_ **17. Coming now to** _**All India Tea and Trading Co. Ltd**_ **. [supra], the question arose as to whether the revenue derived as compensation received on requisition of agricultural land is agricultural income or not. The requisition of agricultural land made therein, was to** **- 15 -** **I.T.A.No.238/2012** **transfer it to the refugees for the purpose of carrying on agricultural operations. The relevant facts on which the decision came is decipherable from the following paragraph:** **"The claim of the respondent during the Assessment Year 1958-59, with which we are concerned in this appeal, was that the amount of compensation received was exempt from levy of income tax as this amount represented the respondent’s agricultural income. The Income Tax Officer did not accept this claim. On appeal, however, the Appellate Assistant Commissioner found that the respondent was using the requisitioned land for agricultural purposes at the time of requisition and also earlier to that. He, therefore, held that the compensation received by the respondent was its agricultural income and, therefore, not liable to tax. The department then filed an appeal before the Tribunal, but without success. Upholding the order of the Appellate Assistant Commissioner, the Tribunal found as a fact that after requisition the Government of Assam had given that land to refugees who continued to cultivate the same. In other words, the finding of fact of the Tribunal was that the land in question was being used by the respondent for agricultural purposes in the relevant accounting year, and also in the earlier years, and the said land even after requisition, was being cultivated by the refugees. Therefore, the agricultural character of the land did not undergo any change".** **- 16 -** **I.T.A.No.238/2012** **The Supreme Court affirmed the view of the High Court which accepted the findings of the Tribunal. The subsequent events were also noticed in the last paragraph:** **14. Before concluding we may note that the respondent’s land which was requisitioned was subsequently acquired by the State of Assam and compensation was paid. In** _**CIT**_ **v.** _**All India Tea and Trading Co. Ltd.**_ **[5(1979) 117 ITR 525(Cal)] it was held that as the land in question was agricultural land which was being used for agricultural purposes, even after its being requisitioned, the amount of compensation paid on its acquisition was not taxable under the head “capital gains” as the said land was not a capital asset. It is clear, therefore, that at no point of time or at least till its acquisition the land lost its character of agricultural land. Therefore, compensation paid for the use by the refugees of the said land for agricultural purposes can only be regarded as agricultural income which admittedly is not taxable".** **18. The Hon'ble Supreme Court referred to the subsequent events only to find that the land had not lost the character of agricultural land after requisition and till the acquisition was made. As to the finding of the Calcutta High Court that even on acquisition the** **- 17 -** **I.T.A.No.238/2012** **compensation paid would not be taxable under the head 'capital gains', it is in tune with the finding of the A.P. High Court, referred above. But, we have our own doubts, which we would state hereinafter and we also are bound by the decision of a Division Bench of this Court** _**T.K. Sarala Devi**_ **[supra] which held to the contrary.** **19.** _**Singhai Rakeshkumar**_ **[supra] also considered the issue of sale of agricultural lands, which were situated within the municipal limits. The declaration was as hereunder:** _**“The position, as a result, is that income arising from the transfer of agricultural land that falls within the terms of items (a) and (b) of sub-clause(iii) of clause (14) of Section 2 falls outside the ambit of revenue derived from land and therefore, outside the ambit of “agricultural income”. Such income, therefore, is liable to capital gains tax chargeable under Section 45 of the 1961 Act.”**_ **The Hon’ble Supreme Court held categorically that the sale of agricultural land coming within items (a) and (b) of Section 2(14)(iii) of the Act would stand outside the ambit of agricultural income. We cannot draw a necessary corollary from the aforesaid declaration that sale of agricultural lands not coming within items (a) and (b) of Section 2(14)(iii) of the Act would be agricultural income.** **- 18 -** **I.T.A.No.238/2012** **20. We also notice the Madras High Court’s decision, which was correctly distinguished by the learned Senior Standing Counsel, Government of India [Taxes]. That was with respect to an exemption as available under Section 54EC. The Division Bench found that the exemption available under Section 54EC has to be interpreted in the context of the provisions under Section 115JB, which is a self-contained code of assessment. The tax as leviable under Section 115JB, is on the book profits after effecting various upward and downward adjustments as provided therein. Sub-section (5) of Section 115JB makes applicable all other provisions of the Act to every assessee being a Company mentioned in that section. Interestly, it is to be observed; Section 115JB is a** _**non-obstante**_ **clause, wherein again sub-section (5) is incorporated. There is an over riding effect given to the provision, but by a sub-section the applicability, of the other provisions of the statute, enabled to the companies covered under the provision. In such circumstances, the other provisions of the IT Act, would be applicable to a Company who is sought to be taxed under the provisions of Section 115JB, only if such provisions do not conflict with those under Section 115JB. It is in this background we have to look at the contentions of the Revenue as also the assessee.** **- 19 -** **I.T.A.No.238/2012** **21. We see from Section 10 of the Act that agricultural income is granted an exemption under the Income Tax Act. Sub-clause (2) of the first Explanation to Section 115JB, provides a downward adjustment of the profits as revealed from the books of accounts, to that income, to which any of the provisions of Sections 10, 10A, 10B, 11 or 12 applies. Hence, if any portion of the profits as reflected in the books of accounts relates to agricultural income, then there is a clear exemption provided under Section 10. In view of the exemption under Section 10, any revenue from agricultural land would have to be reduced from the profits in computing the 'minimum alternate tax' (MAT) under Section 115JB. Explanation-1 of Section 2(1A) however specifically excludes any income derived from transfer of land, referred to in item (a) & (b) of Section 2(14)(iii) from the definition of revenue derived from land. This exclusion brought in by way of abundant caution, as is evident from the words employed: “For the removal of doubts...”; cannot lead to a corollary being drawn of inclusion of sale of agricultural land as agricultural income or as revenue derived from land. Obviously the Explanation was brought in, to render invalid the declaration of the A.P High Court in** _**S.Muthiyam Reddy**_ **[** _**supra**_ **]. The question then arises as to whether the** **- 20 -** **I.T.A.No.238/2012** **consideration on sale of agricultural land not coming within Section 2(14)(iii) (a) & (b) would be agricultural income as defined under Section 2(1A); as a revenue derived from land.** **22. Agricultural income as defined under Section** **2(1A)** _**inter alia**_ **takes within its ambit “any rent or revenue derived from land, which is situated in India and is used for agricultural purposes”. The question arises as to whether on sale of agricultural land, it could be said that there is an agricultural income derived by the owner of the land, who sells such property. We revert back to** _**All India Tea & Trading Co. Ltd..**_ **Therein the specific question considered was whether the compensation received on requisition of agricultural land, would come within the definition of capital gains. The Honourable Supreme Court had specifically noticed that the requisition was for the purpose of handing over the lands to the refugees, again for the specific purpose of carrying on agricultural operations. The owner of the land was not divested of the title, till the subsequent acquisition made. The compensation received by the owner was only insofar as the owner being divested of the right to cultivate his lands, which right was granted to the refugees who were handed over the lands requisitioned, for carrying on agricultural** **- 21 -** **I.T.A.No.238/2012** **operations. There, the revenue, definitely could be deemed to be an agricultural income as it is compensation for divesting the owner from his right to cultivate the lands.** **23. Again we notice the inclusion of rent or revenue in sub-clause (a) of Section 2(1A). The words 'revenue derived from land' employed in the sub-clause, according to us, would only take within its ambit the periodic payments or revenue derived, when the owner of the property is not divested of the title and the land is continued to be used for agricultural purposes. When a sale of agricultural land is made, the purchaser is not obliged to carry on agricultural operations, nor can the consideration received on such sale of agricultural land deemed to be agricultural income. We hasten to add that it will not be assessable to income-tax under the I.T. Act unless the land is covered under item (a) & (b) of Section 2(14)(iii), in which event tax would be levied on the capital gains.** **24. We were also taken through the decision of a Division Bench of this Court in** _**(1986) 158 ITR 630 [Commissioner of Income Tax v. Alanickal Company Limited]**_ **. A sale of agricultural area in rural areas came up for consideration before the Division Bench, wherein the Department wanted to split up the sale of land and sale of** **- 22 -** **I.T.A.No.238/2012** **trees as separate sales. The contention of the Department was that though sale of agricultural land in rural area is exempted from capital gains, sale of trees would not be so exempted. It was in this context that the Division Bench held that there can be no splitting up of the single sale transaction when the land was sold with the trees and the** **same has to be considered as a sale of agricultural land in the rural area, which would not be included under the definition of capital gains.** **25. We also notice the judgment of another Division Bench of this Court in** _**(1987) 167 ITR 136 (Ker) [Commissioner of Income Tax v. T.K.Sarala Devi]**_ **. This Court in paragraph No.4 thereof held thus:** _**“4. The reasoning of the Tribunal is that proceeds of sale of land constituted income derived from land. If that proposition was correct, the Tribunal would be justified in saying that proceeds of sale of land used for agricultural purposes were income derived from agricultural land within the meaning of Section 2(1) and, therefore, not chargeable under the Act. But the fallacy of that assumption is that, when land is sold, the sale proceeds do not constitute revenue but capital: (see Commr. of Agrl. 2.T. v. Kailas Rubber & Co. Ltd. MANU/SC/0206/1965 : [1966]60ITR435(SC) and Vishnudatta Antharjanam v. Commr. Of Agrl. I.T.**_ **I.T.A.No.238/2012** ## **- 23 -** _**MANU/SC/0217/1970 : [1970]78 ITR 58(SC). The profits or gains arising from the sale of land constitute income because Section 2(24) of the Act includes as “income” capital gains chargeable under Section 45. Such gain is, nevertheless, not income derived from land; it is income derived by the sale of land. Although land is the source of the income, income is derived not by the use of the land, but by the sale of the land, that is, by conversion of the land into cash. If income results from the sale of agricultural land, it is not “agricultural income” within the meaning of Section 2(1).”**_ **We respectfully follow the dictum as laid down by the Division Bench of this Court in** _**T.K.Sarala Devi**_ **and find that the consideration received on sale of agricultural land in rural area, not coming under Section 2(14)(iii)(a) and (b) would not be income or revenue derived from land. But it has to be added to the profit and loss account and would be reflected in the book profits, for assessment under Section 115JB. There is no statutory provision enabling a downward adjustment of the said sum from the book profits in the computation as provided in Section 115JB.** **26. In this context, we also notice that in the relevant year, there was The Kerala Agricultural Income Tax** **- 24 -** **I.T.A.No.238/2012** **Act, 1991 (AIT Act) applicable to the State and there is no contention raised by the assessee that the amounts received as consideration on sale of estate was offered under that enactment. We also notice the levy under the AIT Act of the State to be 60% for the relevant year, which is a lot higher than the levy under the Income Tax Act. We, in such circumstances, answer question number (viii) in favour of the Revenue and against the assessee.** **The appeal is, hence, partly allowed. Parties are left to suffer their respective costs.** **Sd/K.VINOD CHANDRAN JUDGE Sd/ASHOK MENON JUDGE** **Vku/sp.** **- 25 -** **I.T.A.No.238/2012** ## **APPENDIX** ## **APPELLANT'S ANNEXURES:** **ANNEXURE A** **COPY OF THE ASSESSMENT ORDER U/S.143(3) PASSED BY THE ASSESSING OFFICER ON 26.12.2008 FOR AY 2006-07.** **ANNEXURE B COPY OF THE CIT(A)'S ORDER NO.84/R-I/E/CIT-II/2008-09 DATED 30.11.2009.** **ANNEXURE C** **CERTIFIED COPY OF ITAT'S ORDER NO.ITA NO.77/COCH/2010 DATED 29.6.2012.** ## **[ true copy ]**