INCOME TAX OFFICER v. JIFRI AND KAREEM
[Citation -1987-LL-0907-4]

Citation 1987-LL-0907-4
Appellant Name INCOME TAX OFFICER
Respondent Name JIFRI AND KAREEM
Court ITAT
Relevant Act Income-tax
Date of Order 07/09/1987
Assessment Year 1978-79
Judgment View Judgment
Keyword Tags cost of acquisition • agricultural income • written down value • movable properties • long-term capital • valuation report • stock-in-trade • original cost • going concern • sale price • plant
Bot Summary: The cost of these rosewood trees will have to be deducted from the original cost of Rs. 25 lakhs paid for the estate inclusive of these trees. The first contention of the Department is that the coffee estate, shade trees and the growing crop thereon should not be considered as agricultural and the levy of capital gains thereon should have been upheld. The Department drawing inspiration from the decision in Travancore Tea Estates Co. Ltd. vs. CIT 93 ITR 314, contended that the standing rubber trees in the estate did not form part of the land and were capital assets. The assessee company had sold the coffee estate, i.e., the land along with the coffee crop and the shade trees. The standing trees in the estate has to be treated as part of the land and since they are agricultural it cannot be brought to tax for capital gains. To the shade trees are also as much part of the rubber estate as the coffee crop. We have held that there would be no capital gains in respect of the coffee estate, shade trees and coffee bushes.


K.S. VISWANATHAN, A.M. This is Departmental appeal. main issue is whether CIT (A) was justified in holding that no capital gains would be leviable in respect of transfer of coffee estate along with accessories, buildings, etc. 2 . assessee is registered firm. This firm had purchased in 1970 coffee estate known as Kuppamudi Estate. total consideration was Rs. 25 lakhs. There were several rosewood trees standing in that estate. After purchase of estate, assessee cut and sold several rosewood trees and realised sum of Rs. 13,86,714. 3 . During accounting year under consideration assessee sold estate for total consideration of Rs. 35 lakhs. In Deed of Assignment consideration is allocated among various assets as follows: Rs. Value of immovable properties i.e. (i) 17,00,000 coffee land and estate Value of buildings, structures, etc. (ii) 1,50,000 therein Value of articles of machinery, (iii) furniture, stock-in-trade and other 50,000 movable properties (iv) Value of coffee bushes as they are 16,00,000 35,00,000 4. assessee-firm had not admitted any capital gains from this sale. ITO, however, was of opinion that capital gains arose from transfer. For this purpose, he had to ascertain cost of estate when it was purchased in 1970. It may be recalled that rosewood trees standing in estate were cut and removed and sold for Rs. 13 lakhs. cost of these rosewood trees will have to be deducted from original cost of Rs. 25 lakhs paid for estate inclusive of these trees. ITO found that rest of estate other than rosewood trees could be valued at Rs. 9,40,540. This is based on valuation report given by approved valuer. Since property was sold for Rs. 35 lakhs, capital gains arising therefrom was Rs. 25,59,460. assessee had taken certain objections against proposal for including capital gains but ITO did not accept those objections as valid. We will deal with objections at later stage. actual computation of capital gains was worked out under four different heads. These are given below: Long-term Capital gains on sale of (i) Shade trees: Rs. Sale price as 13,06,000 discussed above Less:Cost as 3,44,000 discussed above 9,62,000 (ii) Coffee plants: Sale price 16,00,000 Less:Cost as 4,38,940 discussed above 11,61,060 Building structures, etc. (iii) Sale price 1,50,000 Less:Cost 1,00,000 50,000 Articles of (iv) machinery, vehicles, etc. Sale price 50,000 Less:Cost 34,127 15,873 5 . assessee appealed. It was contended before CIT (A) that asset which was transferred was running business of coffee estate as whole which was agricultural property and, therefore, there was no question of any capital gains arising therefrom. It was true that consideration was divided among various assets but irrespective of that substance of transaction was to transfer estate as whole. CIT (A) accepted this contention and he held that in sale of coffee estate by assessee there cannot be any capital gains in respect of coffee bushes and standing trees. These have to be treated as integral part of estate which cannot be severed or segregated from one another. 6 . With regard to transfer of buildings and machineries, however, he held that this gives rise to capital gains. So he held that computation of capital gains made by assessee in respect of these items is correct. 7 . It was also contended before CIT(A) that transfer was not effected by firm but by partners individually and, therefore, no capital gains would arise in hands of firm. This contention was rejected by CIT (A). 8 . next issue is to be considered was cost of acquisition of assets. He found that on re-working cost would come to Rs. 16,15,730 in respect of estate as whole. 9. final question before CIT (A) was whether assessee would be entitled to exemption under s. 54E. He found that partners had deposited Rs. 18 lakhs on 21st Feb., 1979 for period of 63 months. Admittedly deposits have been made out of sale proceeds of estate. He accepted contention that in respect of firm deposits can be in names of partners and, therefore, requirements of s. 54E are satisfied. He, therefore, held that assessee would be entitled to exemption under s. 54E. 10. Against these findings, Department has now come on appeal. first contention of Department is that coffee estate, shade trees and growing crop thereon should not be considered as agricultural and, therefore, levy of capital gains thereon should have been upheld. Now, this would take us to consideration of question whether coffee estate as whole has been sold or whether various items alone are sold. If coffee estate as whole has been sold, then, it may not be proper to segregate various items and consider these items, for purpose of capital gains. In this connection, Shri Warrier, appearing for assessee had referred to decision of Kerala High Court in case of CIT vs. Alanickal Co. Ltd. (1986) 52 CTR (Ker) 24 7 : (1986) 158 ITR 630. That was case where assessee had sold rubber estate. Department drawing inspiration from decision in Travancore Tea Estates Co. Ltd. vs. CIT (1974) 93 ITR 314 (Ker.), contended that standing rubber trees in estate did not form part of land and were capital assets. Therefore, value of trees could be subjected to capital gains. In case of Alanickal Co. Ltd. (supra) High Court has distinguished in Travancore Tea Estates Co. Ltd.'s case (supra). It was pointed out that in Travancore Tea Estates Co. Ltd.'s case (supra) assessee sold shade trees separately from land. Where land is sold along with trees, ratio laid down in Travancore Tea Estates Co. Ltd.'s case (supra) would not be applicable. We find in this case facts are identical. assessee company had sold coffee estate, i.e., land along with coffee crop and shade trees. shade trees are not sold separately. Therefore, they are sold along with land as accretion of land. They have to be treated as agricultural only since coffee estate is agricultural. 11. We may also cite in this connection another Kerala High Court decision in CAIT vs. George Varghese & Co. (1973) 90 ITR 496. There High Court was considering sale of old rubber trees standing in rubber estate. question before High Court was whether sale of these rubber trees represented agricultural income or not. Tribunal had held that there was no intention that trees which were to be cut and removed should continue to draw sustenance from land. At p. 499 High Court observed as follows: draw sustenance from land. At p. 499 High Court observed as follows: "We think that in substance what Tribunal has held is that under agreement there has been no intention on part of contracting parties that trees which were permitted to be slaughter-tapped, cut and removed, should derive sustenance from land and continue to afford income to transferee, assessee before us. provisions in agreement that we have read would clearly show that definite intention was to have trees annihilated. There was out and out sale of trees and considering extent of land on which trees stood, 303 acres, it is quite conceivable that removing of trees would take considerable time and provisions in agreement that assessee had three years time to remove them does not at all imply any intention that trees should continue to receive nourishment from land and afford agricultural income to assessee. most apt passage that we have been able to find which can be applied to facts of case is that contained in Marshall V. Green. passage is in these terms: "The principle of these decisions appears to be this, that wherever at time of contract it is contemplated that purchaser should derive benefit from further growth of thing sold, from further vegetation and from nutriment to be afforded by land, contract is to be considered as for interest in land; but where process of vegetation is over, or parties agree that thing sold shall be immediately withdrawn from land, land is to be considered as mere warehouse of thing sold, and contract is for goods'." This is principle to be applied in this case. assessee sold coffee estate in its entirety. It is, therefore, reasonable to conclude that it was contemplated that purchaser should derive benefit from further growth of thing sold, i.e., of coffee estate sold and from further vegetation and from nutriment to be afforded by land. Therefore, standing trees in estate has to be treated as part of land and since they are agricultural it cannot be brought to tax for capital gains. 12. There is ample evidence from Deed of Assignment that entire estate is being transferred as going concern. In operative part of deed it is stated as follows: ".... Vendors hereby grant, convey and assign unto purchasers their right, title and interest as aforementioned in all these pieces or parcels of land comprising KUPPAMUDI (COOPAMUDY) and ARATTUPARA Estate more particularly described in Schedule below TOGETHER with plantations, buildings, bungalows, stores, Outhouses, cooly lines, Coffee lines, Electric fittings, Plant, machinery, fixtures, vehicles, tools, implements and equipments, shrubs, trees and other properties, both movable and immovable and all hedges, ditches, ways, waters, water courses, easements, advantages, appurtenances whatsoever to said properties thereto and all estate, right, title, interest, property, claims and demands of Vendors unto or upon same; TO HAVE AND TO HOLD same UNTO and to use of purchasers." It is also further stated that vendors have paid and discharged all wages, bonus and other emoluments payable to staff workers and other employees. Such clause is unnecessary if intention was not for buyers to continue coffee estate as business. 13. next question is whether fact that separate consideration is mentioned to land, buildings and coffee bushes would make any difference. In this connection, we would refer to Supreme Court decision in case of Associated Clothiers Ltd. vs. CIT (1967) 63 ITR 2 24 . This case is exception to Rule that where going concern is transferred in slump sale separate assets should not be considered individually for purpose of ascertaining whether capital gains arises or not. case of CIT vs. Mugneeram Bangur & Co. (1965) 57 ITR 299 (SC), which is authority for slump sale is distinguished in Associated Clothiers Ltd.'s case (supra). In this Associated Clothiers Ltd.'s case (supra) assessee was carrying on business of clothiers and tailors. They had transferred assets and liabilities to another company in consideration of allotment of shares and some cash. Under terms of agreement assessee purported to transfer 7 items of property described in Schedules annexed to deed. In agreement properties sold were allotted specific values. consideration for building transferred was in excess of its original cost and question was whether difference between original cost of building and its written down value would be deemed profits under s. 10(2)(vii) of old Act corresponding to s. 41(2) of new Act. It was submitted before Supreme Court that this was slump sale and there was no separate sale of each of property comprised in business. decision in case of Mugneeram Bangur & Co. (supra) was relied on. Supreme Court observed as follows: "That principle has however no application here. In present case it is true that entire assets of appellant-company were sold to Phelps & Co. Ltd. There was no separate sale of different items, but consideration of each item of property sold was expressly mentioned in agreement of sale. contention that transaction of sale was mere attempt to readjust business position of transferor was never raised before Tribunal and does not arise out of order of Tribunal." Now, it will be seen therefrom that under certain circumstances even when business is sold as going concern it would be possible to separate individual assets for consideration of capital gains. We have to see, therefore, whether this principle laid down in Associated Clothiers Ltd.'s case (supra) would be applicable to facts here. In our opinion, this will not be applicable. Now, main asset we have to consider is coffee bushes and shade trees. Now, coffee bushes has value only so long as it is part of land and is growing crop. Once it is severed from land it has no value. In this respect, it is different from rubber estates where old rubber trees can be cut and sold because it has value in market. Coffee crop when severed from land has no such value. Therefore, its value arises only because of its attachment to land. Therefore, even though coffee bushes are separately valued at Rs. 16 lakhs it has no meaning. This value has to be considered along with value of land. Similarly, to shade trees are also as much part of rubber estate as coffee crop. Therefore, fact that separate value has been given to shade trees and coffee crop does not make decision any different. 14. We have held that there would be no capital gains in respect of coffee estate, shade trees and coffee bushes. Let us assume that this decision is not final. Then, it would be necessary to find out cost of acquisition of this estate. ITO had fixed cost of acquisition at Rs. 9,40,540 only. Now, it is seen that from estate purchased in 1970, only rosewood trees have been removed. These rosewood trees were sold for Rs. 13 lakhs and odd. What we have to see is cost of these trees sold for Rs. 13 lakhs. issue of cost for which these trees were acquired had figures in assessment of assessee for year 1971-72. In that assessment ITO after going into issue, gave finding that cost of rosewood trees would be Rs. 10,09,270. It is this figure which had been accepted by CIT(A). We are of opinion that this figure is reasonable figure and is based on assessment order for year 1971-72. Therefore, if at all capital gains have to be computed, figure fixed by CIT(A) should be taken as cost of acquisition. 1 5 . next question is whether assessee is entitled to deduction under s. 54E. Now, we have held earlier that capital gains will not accrue on sale of land, shade trees and coffee bushes. There are two other types of assets still left, i.e., building structures on which capital gains of Rs. 50,000 had been computed and machineries, vehicles, etc., on which capital gains of Rs. 15,873 is fixed. CIT(A) has upheld this and assessee had not come on appeal thereon. In respect of these capital gains assessee is claiming exemption under s. 54E. It is not disputed that assessee had deposited Rs. 18 lakhs on 21st Feb., 1979 for period of 63 months. However, this deposit is in names of partners of assessee. Department's contention is that deposit must be in name of assessee, i.e., firm itself. This contention is not very valid, and as CIT(A) has pointed out, assets of firm can stand in names of partners. What is to be seen is whether partners hold asset on behalf of firm or on their own behalf. 16. In result, Departmental appeal is dismissed. *** INCOME TAX OFFICER v. JIFRI AND KAREEM
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