Ahmad Fareed, A.M. ORDER These two appeals by assessee and two appeals by Department, directed against orders of CIT(A), dt. 26th May, 2006 for asst. yr. 2001-02 and dt. 30th May, 2006 for asst. yr. 2002-03, were heard together and therefore these are being disposed of by common order for sake of convenience. 2. facts of case and issues involved in both these appeals by assessee AOP, for asst. yrs. 2001-02 and 2003-04, are identical. 3. assessee AOP, bought agricultural land admeasuring about 51.195 acres, during period from financial years 1989-90 to 1994-95 in Chemmancherry village near Chennai, incurring total expenditure of Rs. 1,01,89,241. members of AOP contributed Rs. 10,00,000 and balance was allegedly borrowed. 3.1 major part of above land, admeasuring 44.415 acres was sold during previous year relevant to asst. yr. 2001-02 for consideration of Rs. 4,44,15,000. balance of land was sold in subsequent two years. It was claimed that impugned land was agricultural land within meaning of cl. (iii) of s. 2(14) of Act. Also, assessee made alternative claim, before AO, in respect of interest on funds, borrowed for buying impugned land, paid to lenders/creditors, during previous year relevant to asst. yr. 2001- 02. 3.2 return for asst. yr. 2001-02 was filed on 31st July, 2001 showing nil income, which was processed/accepted under s. 143(1) of Act. Subsequently proceedings were initiated under s. 147 by issue of notice under s. 148 on 15th Dec., 2002, and in return filed in response to this notice, total income was shown as nil . In assessment order passed under s. 147 for asst. yr. 2001-02 on 31st March, 2003, total income was assessed at Rs. 2,79,36,856 as under : Amount Amount Particulars Particulars (Rs.) (Rs.) Sale proceeds from 4,44,15,000 sale of land on cent basis Less : 1. Cost of : Purchase of 83,96,694 land 2. 2,57,479 Fencing 3. Road 12,267 information 4. Well 31,000 and borewell 86,97,440 Indexed cost for 1,64,78,144 above Long-term capital 2,79,36,856 gains Total income 2,79,36,856 4. CIT(A) allowed part relief and his order has been challenged by assessee as well as by Department in these appeals. Ground No. 1 "1. order of CIT(A) inasmuch as it is against appellant, is opposed to law and contrary to facts of case." 5. This ground is general in nature and does not require adjudication. Ground No. 2 "2. Jurisdiction in reopening under s. 147 [pp. 7 and 8 of order of CIT(A)] 2.1 CIT(A) grossly erred in upholding reopening of assessment under s. 147. 2.2 CIT(A) ought to have appreciated that AO did not have jurisdiction to reopen assessment by invoking provisions of s. 148. 2.3, CIT(A) ought to have appreciated that entire reassessment was based on change of opinion." 6 . We have considered rival submissions in light of material on record. It was pointed out by Shri Shaji P. Jacob, learned Departmental Representative that this issue was squarely covered in favour of Department and against assessee by decision of Supreme Court in case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 210 CTR (SC) 30 : (2007) 291 ITR 500 (SC). In this case, Court held as under : "Taxing income escaping assessment in case of intimation under s. 143(1)(a) is covered by main provision of s. 147 as substituted w.e.f. 1st April, 1989, and initiating reassessment proceedings in case of intimation would be covered by main provision of s. 147 and not proviso thereto. Only one condition has to be satisfied. Failure to take steps under s. 143(3) will not render AO powerless to initiate reassessment proceedings when intimation under s. 143(1) has been issued." 7. In present case, return filed by assessee for asst. yr. 2001-02 was accepted under s. 143(1) and then notice under s. 148 was issued before expiry of four years from end of asst. yr. on 15th Dec., 2002. Therefore, we are of opinion that decision of Supreme Court in case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra), is squarely applicable to facts of present case. We respectfully follow precedent and uphold order of CIT(A). ground No. 2 is accordingly rejected. Ground No. 3 "3. Agricultural land [pp. 9 to 15 of order of CIT(A)] 3.1 CIT(A) erred in holding that land sold by appellant was non-agricultural land at time of transfer and grossly erred in further holding that gains arising on transfer thereof gave rise to taxable capital gains. 3.2 CIT(A) having undisputedly held that land was situated beyond 8 kms. of municipal limits of Municipal Corporation of Chennai and village having population of less than 10,000 ought to have appreciated that appellant squarely fell under s. 2(14)(iii) of IT Act. 3.3 CIT(A) ought to have appreciated that land was purchased as agricultural land and that appellant had in fact carried on agricultural activities and further appellant had never changed usage of land or converted it into non-agricultural land ought to have held that land was agricultural land on date of transfer. 3.4 CIT(A) ought to have held that by transfer of land by way of sale, appellant is not liable to capital gains tax. 8 . Shri M.P. Senthil Kumar, learned Authorised Representative reiterated arguments which were put forward on behalf of assessee before AO and CIT(A). submissions made by him are summarized below : that land sold by assessee was agricultural land within meaning of s. 2(14)(iii) of IT Act, 1961. that Chemmancherry was village Panchayat having population of less than 10,000 and was situated at distance of more than 8 kms. from local municipal limits. that sale deed clearly spelt out that land which was sold was agricultural land . that land was purchased as agricultural land and assessee had carried on agricultural activities thereon. that assessee had never changed usage of land or converted it into non-agricultural land. that sale consideration was not liable to capital gains tax. 9. Shri Shaji P. Jacob, learned Departmental Representative supported orders of lower authorities. submissions made by him are summarized below : that members of assessee AOP belong to one family, were engaged in business and were not family of agriculturist. that land purchased by assessee was barren land, having no irrigation facilities and was not fit for agricultural operation. that in such vast piece of land, there was only one borewell that too had salty water not fit for irrigation. that land was situated in developed area where industries and colleges were coming up. that land was sold by assessee AOP to co-operative housing society for construction of houses. that during period of nine to ten years that land was in possession of assessee AOP, total sum of about Rs. 20,000 was shown as agricultural income. 10. We have considered rival submissions in light of material on record. profits and gains arising from transfer of capital asset effected in previous year is chargeable to income-tax under head Capital gains under s. 45 of IT Act, 1961. expression capital asset has been defined in s. 2(14) of Act. It is seen that upto asst. yr. 1969-70, agricultural land was only excluded from definition of capital asset and for and from asst. yr. 1970-71, new sub-cl. (iii) of s. 2(14) was substituted bringing within term capital asset agricultural land under certain situations mentioned in cls. (a) and (b) thereof. 11. In present case, AO and CIT(A) were of opinion that impugned land, purchased and sold by assessee, was not agricultural land . expression agricultural land is not defined in IT Act, 1961, and therefore it has to be given meaning as understood in ordinary parlance. In this connection, CIT(A) has placed reliance on decision of Gujarat High Court in case of CIT vs. Siddharth J. Desai (1982) 28 CTR (Guj) 148 : (1983) 139 ITR 628 (Guj). 11.1 In case of Siddharth J. Desai (supra), Gujarat High Court, on conspectus of decided cases has enumerated certain major factors which have bearing on determination of question whether piece of land was agricultural land , as under : (1) Whether land was classified in revenue records as agricultural and whether it was subject to payment of land revenue ? (2) Whether land was actually or ordinarily used for agricultural purposes at or about relevant time ? (3) Whether such user of land was for long period or whether it was of temporary character or by way of stop gap arrangement ? (4) Whether income derived from agricultural operations carried on in land bore any rational proportion to investment made in purchasing land ? (5) Whether, permission under s. 65 of Bombay Land Revenue Code was obtained for non-agricultural use of land ? If so, when and by whom (the vendor or vendee) ? Whether such permission was in respect of whole or portion of land ? If permission was in respect of portion of land and if it was obtained in past, what was nature of user of said portion of land on material date ? (6) Whether land, on relevant date, had ceased to be put to agricultural use ? If so, whether it was put to alternative use ? Whether such cessor and/or alternative user was of permanent or temporary nature ? (7) Whether land, though entered in revenue records, had never been actually used for agriculture, that is, it had never been ploughed or tilled ? Whether owner meant or intended to use it for agricultural purposes ? (8) Whether land was situate in developed area ? Whether its physical characteristics, surrounding situation and use of lands in adjoining area were such as would indicate that land was agricultural ? (9) Whether land itself was developed by plotting and providing roads and other facilities ? (10) Whether there were any previous sales of portions of land for non- agricultural use ? (11) Whether permission under s. 63 of Bombay Tenancy and Agricultural Lands Act, 1948, was obtained because sale or intended sale was in favour of non-agriculturist ? If so, whether sale or intended sale to such non-agriculturist was for non-agricultural or agricultural user ? (12) Whether land was sold on yardage or on acreage basis ? (13) Whether agriculturist would purchase land for agricultural purposes at price at which land was sold and whether owner would have ever sold land valuing it as property yielding agricultural produce on basis of its yield ? 11.2 Court has, however, noted that not all of above factors would be present or absent in any case, that in each case, one or more of these factors may make appearance and that ultimate decision will have to be reached on balanced consideration of totality of circumstances. This decision of Gujarat High Court in case of Siddharth J. Desai (supra) was approved by Supreme Court in case of Smt. Sarifabibi Mohmed Ibrahim & Ors. vs. CIT (1993) 114 CTR (SC) 467 : (1993) 204 ITR 631 (SC). 11.3 In case of Smt. Sarifabibi Mohmed Ibrahim & Ors. (supra) Supreme Court held that entering into agreement to sell land for housing purposes, applying for and obtaining permission to sell land for non-agricultural purposes, and its sale soon thereafter and fact that land was not cultivated for period of four years prior to its sale, coupled with its location and price at which it was sold, established that land was not agricultural land when it was sold, that assessee had no intention to bring it under cultivation at anytime after 1965-66 and certainly not after they entered into agreement to sell land to hosing co-operative society, and High Court was right in holding that land was not agricultural land at time of its sale and profit arising from its sale was liable to capital gains tax. 12. In present case undisputed facts are that impugned land, purchased by assessee AOP, was barren land having no irrigation facilities, that it was not fit for agricultural operation, that in such vast piece of land there was only one borewell that too had salty water and not fit for irrigation, that land was situated in developed area where industries and colleges were coming up, that land was sold by assessee AOP to co-operative housing society for construction of houses, that during period of nine to ten years that land was in possession of assessee AOP, total sum of about Rs. 20,000 was shown as agricultural income. In view of above discussion, we are of considered opinion that decision of Supreme Court in case of Smt. Sarifabibi Mohmed Ibrahim & Ors. (supra) is squarely applicable to facts of this case. Therefore, we follow precedent and uphold order of CIT(A). ground No. 3 is, accordingly, rejected. Ground Nos. 4 and 5 "4. Indexation in computation of capital gains [p. 15 of order of CIT(A)] 4.1 CIT(A) erred in holding that appellant is not entitled for benefit of adding interest on borrowals for acquiring land and for carrying out necessary improvements on land, in cost of acquisition for benefit of indexation, while computing capital gains. 4.2 CIT(A) ought to have held that appellant is entitled for benefit of replacing cost of acquisition in form of interest on borrowals for acquiring land and for carrying out necessary improvements on land. 4.3 CIT(A) grossly erred in holding that expenses on manure/fertilizers and other maintenance and administrative expenses as not allowable as deduction in computation of taxable capital gains. 5. Interest on borrowed funds as cost of acquisition [p. 23 of order of CIT(A)] 5.1 CIT(A) grossly erred in restricting claim of deduction of Rs. 1,21,18,549 to Rs. 97,12,738, towards interest payment on moneys borrowed for purpose of acquiring capital asset, as cost of acquisition . 5.2 CIT(A) ought to have allowed entire claim of interest payment amounting to Rs. 1,21,18,549 5.3 CIT(A) erred in holding that compound interest payment to M/s Ambadi Enterprises Ltd. being interest on interest, is not allowable as deduction. 5.4 CIT(A) ought to have allowed claim of appellant, since payment of interest and usage of amount for purchase of land were not doubted, even if it is compound interest." 13. It is seen that before AO assessee made alternative claim for considering, in computation of capital gains, sum of Rs. 1,14,10,456, representing development expenses , as part of cost of acquisition and also for allowing benefit of indexation thereon. AO rejected this claim for reasons given in paras 24 and 25 of his order, as under : 24. There is no agreement between lenders and recipients as to date of repayment, rate of interest for which money is lent, etc. After sale of lands is over some ad hoc rates of interest have been adopted for different parties and has been claimed to have been paid. In group concerns transfers are possible on no interest basis also. In this case in absence of agreement it becomes clear that interest has been calculated from dates of borrowal to date of sale on some ad hoc basis and paid after sale is over. This is only afterthought to reduce capital gains tax liability. abovementioned concerns should have been following mercantile accounting and interest should have been admitted every year on monies lent to assessee and paid tax have been admitted every year on monies lent to assessee and paid tax on interest credited. This is highly doubtful when details in this regard have not been furnished by assessee. In absence of these also interest claimed deserves to be disallowed. 25. Further, s. 43(1) as quoted by AOP is only applicable for capital assets brought into business for earning revenue income and expenditure incurred in initial year of acquisition before putting asset into use is capitalized and depreciation allowed. But purchase cost is subject to cost indexation principle under head capital gains. Principle of indexation is modern and novel concept brought into account element of inflation while computing cost. Even after indexing cost of land for inflation, allowing further capitalization of interest payable would amount to artificially inflating cost and therefore disallowed. 14. AO s action was challenged by assessee before CIT(A) through ground Nos. 21 and 22, as under : "21. AO cannot suo motu conclude that since benefit of indexation i s allowed to asset, interest paid on loans taken to acquire such asset cannot be capitalized, is grossly unjust and unfair. It is agreed that indexation of asset is to take care of inflation in cost of asset over period of time. But, correlating it with interest on borrowing to bring asset into existence is not correct. From commercial point of view and principles of accountancy, one should arrive at actual cost of asset by including expenditure that are incurred for bringing such asset into existence. 22. AO failed to consider entire land development expenses of Rs. 1,14,10,456 as part of land cost and instead allowed only expenses relating to fencing, well and borewell and road formation. Land development expenses are incurred to add fertility and value to land, without which agricultural operations are not feasible. Hence land development expenses in toto should be considered as part of land cost and indexation allowed thereon." 15. CIT(A), relying on decision of Madras High Court in case of CIT vs. K. Raja Gopala Rao (2002) 172 CTR (Mad) 533 : (2001) 252 ITR 459 (Mad), has held that interest on borrowed funds formed part of cost of acquisition for purpose of computation of capital gains . He has noted in his order that interest component forming part of aforesaid development charges was Rs. 1,21,18,549, and that part of it was compound interest. corresponding simple interest was worked out at Rs. 1,10,91,394, out of which he allowed Rs. 97,12,738, in proportion to area of land sold during year. 15.1 CIT(A) rejected benefit of indexation in respect of aforesaid amount of interest. 15.2 other components of development charges represented cost of fencing of Rs. 2,57,478, cost of laying roads of Rs. 12,267, and cost of borewell Rs. 31,000 which were allowed by AO himself. balance amount represented expenses on manure/fertilizer, and other day-to-day maintenance/administrative expenses. There was neither any detail of these alleged expenses nor was there any evidence that claim was admissible under cl. (ii) of s. 48 of Act, and therefore, it was held by CIT(A) as not allowable. 1 5 . 3 assessee has challenged through ground Nos. 4 and 5, reproduced above, aforesaid decisions of CIT(A) in relation to interest allegedly paid on borrowed funds. 16. We have considered rival submissions in light of material on record. AO has noted in his order that assessee did not produce any evidence to show whether there was any agreement between assessee and t h e lenders of money with regard to rate of interest, and date of repayment. AO has expressed serious doubts about genuineness of arrangement of raising of funds on which interest was allegedly paid. order of CIT(A) is silent on deficiencies pointed out by AO. It has to be noted that payment of interest to lenders of funds allegedly took place after about ten years in year of sale of land. In view of these facts we are of considered opinion that matter needs to be remitted back to file of AO. He has to examine genuineness of payment of interest. 16.1 CIT(A) has noted in his order that entire interest of Rs. 1,21,18,549 was claimed to have been paid during previous year relevant to asst. yr. 2001-02. In other words cost of acquisition in this case had two components one was paid to owners of impugned land at time of its purchase and other, representing interest on borrowings, was allegedly paid in year in which sale took place. benefit of indexation of cost of acquisition is intended to prevent payment of tax on gains caused by inflation. Therefore, above interest component of cost of acquisition , which was allegedly paid in year of sale of asset cannot be considered for indexation . order of CIT(A) on this point is upheld. 16.2 next issue is about allowability of payment of compound interest on borrowed funds. If it is found that funds had to be borrowed by assessee for buying impugned land then interest actually paid as per terms and conditions agreed between parties has to be allowed. In our opinion reasons given by CIT(A) for restricting claim to simple interest has no merit. However AO will re-examine claim in respect of interest, in light of directions given in above para, and will pass afresh order after giving adequate opportunity of being heard to assessee. 16.3 It is seen that some balancing amount was claimed to have been incurred on manure/fertilizer, and on other day-to-day maintenance/ administrative expenses. There was neither any detail of these alleged expenses nor was there any evidence that claim was admissible under cl. (ii) of s. 48 of Act, and therefore, it was rightly held by CIT(A) as not allowable. We, accordingly sustain his order on this point. 17. In result both appeals filed by assessee are partly allowed. ITA Nos.1909and 1910/Mad/2006 (by Department) Asst. yrs. 2001-02 and 2002-03 18. In both these appeals Department has raised identical grounds as under : 1. order of learned CIT(A) is contrary to law and facts of case. 2. learned CIT(A) is not justified in allowing claim of interest payment on moneys borrowed for purpose of acquiring capital asset as cost of asset while computing capital gains. 3. learned CIT(A) has erred in following jurisdictional High Court s decision in case of CIT vs. K. Raja Gopala Rao (2002) 172 CTR (Mad) 533 : (2001) 252 ITR 459 (Mad), as facts are distinguishable in this case, inasmuch as decision rendered in that case related to period prior to introduction of concept of indexation cost. 4. CIT(A) has grossly erred in concluding that "machinery provisions for computing benefit of indexation simply falls/breaks down" therefore assessee is not entitled to such benefit and yet allowing deduction of interest claimed by assessee even while holding that "interest could not form part of cost of acquisition for purpose of indexation". 5. CIT(A) has failed to appreciate fact that principle of indexation is modern and novel concept and therefore even after indexing cost of land for inflation, allowing further capitalization of interest would amount to inflating cost which is against concept. 6. For these and other grounds that may be adduced at time of hearing, it is prayed that order of learned CIT(A) may be set aside and that of AO restored. 19. Department has challenged order of CIT(A), insofar as it relates to his decision that interest allegedly paid, on funds borrowed for buying impugned land, would form part of cost of acquisition for purpose of cl. (ii) of s. 48 of Act. 20. It is seen that CIT(A), while holding that interest paid on funds borrowed for buying impugned land was part of cost of acquisition , placed reliance on decision of Madras High Court in case of CIT vs. K. Raja Gopala Rao (supra). In this case Court held as under : "Held, that cost of acquisition to assessee was not merely amount that he had paid to vendor, but also cost of borrowing made by him for purpose of paying vendor and obtaining sale deed. by him for purpose of paying vendor and obtaining sale deed. fact that mortgage was executed after sale deed was obtained even though both documents were signed and registered on same day did not render mortgage and theborrowing made thereunder irrelevant to task of determining cost of acquisition. As assessee had not made purchase with his own funds he was required to pay interest for borrowed fund and secure borrowing by creating mortgage. Such mortgage could not have been created earlier as he had to first acquire title before encumbering same. Payment of consideration for sale having been made with borrowed funds, borrowing directly related to acquisition and interest paid thereon would form part of cost of acquisition." 21. Madras High Court has held in case of K. Raja Gopala Rao (supra) that if borrowing of funds directly related to acquisition of asset then interest paid thereon would form part of cost of acquisition , whereas benefit of indexation of cost of acquisition is intended to prevent payment of tax on gains caused by inflation. If assessee does not have his own funds to buy asset and he has to borrow, in that case cost that he incurs increases by amount of interest that he has to pay on borrowed funds. logic behind ground Nos. 3, 4 and 5, raised by Department, are not quite clear to us. 22. In our considered opinion, issue involved and facts of case, in present appeals by Department, are covered by decision of Madras High Court in case of K. Raja Gopala Rao (supra). Therefore, we uphold order of CIT(A) on this point. But this decision of ours is subject to directions given by us in above paras, asking AO to examine genuineness of alleged payment of interest. 23. In result both appeals filed by Department are dismissed. *** CHEMMANCHERRY ESTATES CO. v. INCOME TAX OFFICER