The character of land for tax purposes is determined by its actual use at the time of sale, not subsequent intentions; thus, agricultural land retains its classification despite later development.

JUDGMENT

S.V. Bhatti, J.

The Commissioner of Income Tax-1, Kochi/Revenue is the appellant. M/s. Cochin Malabar Estates & Industries Ltd, Kochi/assessee is the respondent.

2. The Revenue being aggrieved by the order dated 28.03.2014 in ITA No.582/Coch/2011 of the Income Tax Appellate Tribunal (for short 'the Tribunal'), Cochin has filed the present appeal under Section 260A of the Income Tax Act 1961 (for short 'the Act'). The issues arise out of the returns filed by the assessee for the Assessment Year 1996-97. The Revenue and the assessee are contesting the levy and demand of capital gains on the land sold by the assessee through sale deed dated 16.03.1996 in favour of Kerala State Industrial Development Corporation Limited (for short ‘KSIDC’).

2.1 The assessee is a public limited company engaged in a range of activities such as cultivation, processing, and trading in tea, rubber, aquaculture; providing engineering services, etc. On 01.12.1995 the assessee entered into a Memorandum of Agreement (MoA) with KSIDC for the sale of schedule of property appended to the MoA dated 01.12.1995. Keeping in perspective the nature and extent of controversy between the parties in this behalf, in the present narrative, this Court prefers to refer to the subject matter of MoA as schedule property, instead of referring as capital asset or agricultural land. The details of the schedule property read thus:

SCHEDULE PROPERTY

2.2 On 16.03.1996 the assessee executed and registered a regular deed of conveyance in favour of KSIDC. On 29.11.1996 the assessee filed return for the Assessment Year 1996-97 disclosing a loss of Rs.3,11,96,323/-. On 28.10.1997 income tax return was processed and a refund of Rs.6,08,136/- was ordered in favour of the assessee. Subsequently, scrutiny notice under Section 143 (2) of the Act was issued to the assessee. The Assessing Officer, in the scrutiny assessment, examined the sale of schedule property by MoA dated 01.12.1995 read with sale deed dated 16.03.1996 for a sum of Rs.6,13,74,563/- and noted that the said amount was credited to the P&L Account. According to the Revenue, the assessee converted the schedule property as non-agricultural land for enabling the purchase of schedule property by KSIDC. The KSIDC purchased the schedule property for further development as an industrial estate. Hence, the claim of assessee for exemption from payment of capital gains tax on the sale consideration received from the sale of schedule property from KSIDC is attracted and that schedule property is not agricultural land for the purpose of Section 2 (14) of the Act.

3. The case of the assessee is that the schedule property is situated in Kinalur and Kanthalad Villages in Quilandi Taluk, Kozhikode District but not within the area as notified by the Central Government under the provisions of Section 2 (14)(iii)(b) of the Act. The schedule property sold in favour of KSIDC is not a capital asset under (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 Assessing Officer refers to one of the clauses of MoA dated 01.12.1995, which is to the effect that the assessee agreed to deliver to KSIDC 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 above clause and the cutting of trees by the assessee have been appreciated by the Assessing Officer as converting the schedule property into non-agricultural land, facilitating purchase by KSIDC. Thus, the obje