Introduction: 

Tax Deducted at Source (TDS) is one of the modes of recovery of income tax. Chapter XVII of the Income Tax Act, 1961 contains the provisions relating to deduction of tax at source from salaries, payment to contractors, interest etc… 

The Finance Act, 2012 has made an amendment to the definition of the term “Royalty” with retrospective effect from 01-06-1976. The amendment was made by inserting Explanation 4, 5 and 6 to the section 9(1) (VI). 

This change has an impact on the payments made for internet charges, mobiles bills, telephone charges etc. 

Issue after the Amendment: 

whether TDS has to be deducted from internet bills, mobile bills etc.. as payment for broadband services, mobile services would amount “Royalty” after the amendment made by the Finance Act, 2012 retrospectively?

Analysis: 

The relevant section that merits our consideration is Section 194J. Section 194J is attracted when the payment is made to a Resident. 

The Relevant Portion of Provisions: 

Section 194J: It provides that any person, not being an individual or Hindu undivided family, who is responsible for paying to a resident any sum by way of 

• “ Fees for professional services” or 

• “Fees for technical services” or 

• ……………………………. Or 

• “Royalty” or 

• …………… 

shall , at the time of credit of such sum to the credit of payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode , whichever is earlier, deduct an amount equal to 10% of such sum as income – tax on income comprised therein;

Explanation: For the purpose of this section- 

“Professional Services” means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or the technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purpose of section 44AA or of this section; 

The services of Internet facility, mobile phone services are not professional services as per the above definition. 

“Fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of section 9(1). 

Explanation 2 to Section 9(1)(vii) – For the purpose of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under head “Salaries”.) 

In CIT v Bharati Cellular Ltd (2008) 175 Taxmann 573 (Delhi) it was held that the word 'technical' is preceded by word 'managerial' and is succeeded by the word 'consultancy'. Since the expression 'technical services' is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. This would mean that the word 'technical' would take colour from the words 'managerial' and 'consultancy' between which it is sandwiched. On going through the dictionary meaning the words 'managerial' and 'consultancy' involve a human element and both managerial and consultancy services are provided by humans. Consequently, applying the rule of noscitur a sociis, the word 'technical' have to construe as involving a human element. It would not include any service provided by the machines. 

The services of Internet facility, mobile phone services are not provided by human beings, this part of the section is also not applicable. 

Now, we turn our attention to the term “Royalty” 

The explanation to Section 194J provides that Royalty shall have the same meaning as in Explanation 2 to Section 9(1)(vi). 

The Explanation 2 to Section 9(1)(vi) reads as under: 

For the purpose of this clause, “Royalty” means consideration (including any lump sum consideration but 

excluding any consideration which would be the income of the recipient chargeable under the head

“Capital gains”) for— 

(i)     The transfer of all or any rights (including the granting of a license) in respect of a patent, invention,  model, design, secret formula or process or trade mark or similar property; 

(ii) The imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; 

(iii) The use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iv)         The imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; 

(iva)     The use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB; 

(v)          The transfer of all or any rights (including the granting of a license) in respect of any copyright, 

literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or 

(vi)         The rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), 

(iva) and(v). 

This definition of “Royalty” has been amended by inserting Explanation 4,5 and 6 to section 9(1)(vi) by Finance Act, 2012 with retrospective effect from June 1^st , 1976. 

Explanation 4 clarifies that royalty includes transfer of all or any right for use (or right to use) a computer software (including granting of a licence) irrespective of medium through which such right is transferred. 

Explanation 5 clarifies that royalty includes any consideration in respect of any right, property or information, whether or not--- 

1. The possession or control of such right, property or information is with the payer;
2. Such right, property or information is used directly by the payer; 
3. The location of such right, property or information is in India. 

Explanation 6 clarifies that the expression “ Process” includes transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fiber, or by any other similar technology, whether or not such process is secret. 

For the purpose of section 194J, “Royalty” means royalty as given in explanation 2 to section 9(1)(vi). When explanation 4,5 and 6 inserted in section 9(1)(vi) by the Finance Act 2012, a reference of these explanations was not simultaneously incorporated in section 194J. 

The amount payments made for telephone bills, internet bills etc does not constitute payment towards 

Royalty as per above Explanation 2 to section 9(1)(vi) for following reasons:

• There is no transfer of rights or grant of license in respect of any patent, invention, model, design, secret formula, process or trademark or similar property. 

The telecom companies or internet service providers do not impart any information concerning the working of or use of a patent, invention, model, design, secret formula, process or trademark or similar property.

• There is no payment for the use of any patent, invention, model, design, secret formula, process or trademark or similar property. 

• The telecom companies or internet service providers do not impart any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. 

• The payment is not for use or right to use any industrial, commercial or scientific equipment. 
• The payment is not for transfer of all or any rights including grant of license in respect of any copyright, literary, artistic or scientific work.
• The payment is not for rendering of any services in connection with the activities referred to above. 

It is relevant to note that 'right' is referred to in Explanation 2(i), (iva) and (v). In the instant case, there is no question of applicability of (i) and (v). Clause (iva) deals with industrial, commercial or scientific equipment. A telephone apparatus is a mobile instrument or other items at best can be instruments or appliances and not industrial/commercial/ scientific equipment 

The Supreme Court in the case of BSNL Vs. UOI (2006) 145 STC 91, at Para 78 has held that providing access or telephone connection does not put the subscriber in possession of the electromagnetic waves any more than a toll collector puts a road or bridge into the possession of the toll payer by lifting the toll gate. Of course, the toll payer will use the road or bridge in one sense. But the distinction with the sale of goods is that the user would be of the thing or goods delivered. The delivery may not be simultaneous with the transfer of right to use. But the goods must be in existence and deliverable when the right is sought to be transferred. 

The Supreme Court also held that the nature of the transaction involved in providing the telephone connection may be a composite contract of service and sale. It is possible for the State to tax the sale element provided there is a discernible sale and only to the extent relatable to such sale. 

It is a settled position of law that a particular provision refers to a term and the said term is referred to in another provision, only that other provision can be read. Nothing further can be read into the definition. In the instant case, Section 194J provides that Royalty shall have the same meaning as in Explanation 2 to Section 9(1)(vi). Therefore, nothing else can be read and since the applicability of Explanation 2 to Section 9(1)(vi) has been ruled out in respect of payments towards telephone bills, mobile phone bills and internet bills, Section 194J has no application. 

Conclusion: 

In our view, payments towards telephone bills, mobile bills and internet services, such payments cannot be considered as payment by way of Royalty and hence Section 194J in the context of Royalty has no application. 

As such the provisions of section194J are not applicable to the payment made towards Internet, Mobile Phone Service etc.

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Borrowed Funds form a kay part in the running the business, and the Companies Act, 2013, has robed in more checks and balances, compliances fortransparency and good governance. An effort has been made the list out the provisions as to Borrowings and related compliances thereof. 

Section 180 of the Companies Act, 2013 corresponds to section 293 of the Companies Act, 1956, notified to be effective from 12.09.2013, accordingly, compliance of the provisions of Section 180 is to be seen with effect from that date. 

The provisions of Section 180 are applicable to all Companies, including OPC/Small Companies, as there is no specific exemption provided.

The earlier section 293 and the new section 180 pertain to restrictions on powers of the Board of Directors i.e., items/acts/limitsfor which permission of the members is to be obtained at a general meeting.

The discussion in this article is restricted to provisions of Section 180 (1)(a) & (c), other related provisions thereto, and compliances thereunder so as to be in line with the title of the article. 

Pursuant to Section 180 (1): The Board of Directors of a company shall exercise the following powers only with the consent of the company by a Special Resolution: 

(a) to sell, lease or otherwise dispose of:

èthewholeorsubstantially the whole of the undertaking of the company or; 

èwherethecompany owns more than one undertaking, of the whole or substantially the whole of any of such undertakings. 

For the purpose of the sub-section, the terms “Undertaking” and “Substantially the whole of the undertaking” has been explained as below: 

“Undertaking” shall mean an undertaking in which the investment of the company exceeds 20 % of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates 20 % of the total income of the company during the previous financial year; 

“Substantially the whole of the undertaking” in any financial year shall mean 20 % or more of the value of the undertaking as per the audited balance sheet of the preceding financial year; 

1. C) to borrow money: 

èwherethemoney to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capitaland free reserves, apart from temporary loans obtained from the company's bankers in the ordinary course of business. 

èEverySpecial Resolution passed by the company in general meeting in relation to the exercise of power by the Board of Directors relating to borrow monies, shall specify the total amount up to which monies may be borrowed by the Board of Directors. 

For the purpose of the sub-section, the term “Temporary Loans” has been explained as below: 

“Temporary Loans” means loans repayable on demand or within six months from the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature. 

Borrowing not to be included - Exemption to Banking Company under Section 180 (1)(C): 

The acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the banking company. 

NON-COMPLIANCE / PENALTIES / RELIEF 

From the above, it is clearly evident that prior Special Resolution of the members is to be obtained by the Board of Directors to exercise the powers beyond the limits. Now, we will have a peek in to the consequences for non-compliance. 

Penalties for non-compliance:

Similar to Section 293 under the Companies Act, 1956, Section 180 of the Companies Act, 2013, also does not provide for any penalties for non-consequence i.e., obtaining of approval of Members for acting in excess of the limits. 

Apart from this, there is also no concept of ratification either under the Old Section or under the new section. 

So, it is to be presumed that if the authorities under the Companies Act, identify the contravention, the provisions of Section 450 of the Companies Act, 2013, will be applicable i.e., Punishment where no specific penalty or punishment is provided, as per which 

èacompanyor; 

èanyofficerof a company or;

èanyotherperson; 

contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to Rs.10,000/-, and where the contravention is continuing one, with a further fine which may extend to Rs.1,000/- for every day after the first during which the contravention continues. 

The only question remains is, who will identify the contravention on the first hand, to penalise under Section 450. 

What about the validity of the excess loan amount ? 

Under both the Sections i.e., 293 of the CA, 1956 and 180 of CA, 2013, it is categorically stated that :

“No debt incurred by the company in excess of the limit imposed by the respective sub-clauseshall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded. 

Relief to the Banker/Lender: 

The above is a relief to the Banker/Lender, and he will definitely take the shelter available in the sections. 

CLARIFICATIONS BY MINISTRY ON SECTION 180

After the notification of the said section effective from 12.09.2013, there were some queries raised by the stakeholders, which were clarified by the Ministry through its circulars. 

1. Query Sought - EGM notices dispatched before 12.09.2013, for passing of resolutions under Section 

• (1) (a) & (d) – Whether Ordinary Resolution to be passed or Special resolution to be passed ? 

Clarification given by Ministry – Vide General Circular No.15/2013, Dated:13.09.2013, the Ministry had clarified queries raised by the stakeholders on various sections notified effective from 12.09.2013, one of the said clarifications pertains to Section 180, wherein it was clarified that if the EGM Notice for passing of resolutions under Section 293 (1) (a) and (d), were dispatched before 12.09.2013, then passing of Ordinary resolution is enough.

2. Query Sought - Validity of Resolutions passed under Section 293(1) (a) & (d) – after the commencement of Section 180 from 12.09.2013. Whether new resolutions to be passed even though there is no variation in limits exercised ?

Clarification given by Ministry –Vide General Circular No.04/2014, Dated:25.03.2014, the Ministry had clarified that the vvalidity of resolutions passed prior to12.09.2013, shall be for one year from the date of notification of Section 180 i.e., one year from 12.09.2013 = 11.09.2014. 

It is opined that the above clarification as to the validity of the resolution may not be applicable to Private Companies, as in the first instance, they would not have obtained the approval of the members pursuant to Section 293 (1) (a) & (d), and accordingly, they would have to comply with the provisions of Section 180 with effect from 12.09.2013. 

PRACTICAL ASPECTS AS TO BORROWINGS AND COMPLIANCES THEREUNDER

As already discussed at the beginning of the Article, the provisions ofSection 293 of the Companies Act, 1956 were applicable only to Public Company and to Private Company which is a subsidiary of a Public Companyi.e. Pure Private Limited Companies were exempted from the compliance and therefore they could borrow any sums of money without any limit without the need of seeking any approval from the members of the company. 

Whereas, the provisions of Section 180 of the Companies Act, 2013, is applicable to all companies i.e. public as well as private. So effective from 12.09.2013, even private companies intending to borrow monies in excess of their paid up share capital and free reserves, have to seek the approval of their members by way of a Special Resolution. 

Practical Situation: 

One of your client comes to you in connection with availing of Credit facilities from Bank? Assuming that the client is either a Private Company or an unlisted Public Company, the following steps would be required from the Secretarial side, to be in compliance with the provisions of Companies Act, 2013.

èConveningof Board meeting and passing of Board resolution for the proposed Borrowings pursuant to Section 179 (3) (d), and filing of Form MGT-14^(*) with the Registrar of Companies, within 30 days from the passing of the resolution. 

èIftheproposal to borrow money, where the money to be borrowed, together with the money already borrowed by the company will not exceed the aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company's bankers in the ordinary course of business, then directly we can proceed ahead with making loan application. 

If not, then approval of the members to be obtained by way of Special resolution for the limits pursuant to Section 180 (1) (c). In case any of the immovable properties of the Company are proposed to be given as security to the Bank/FI for the limits as proposed under Section 180 (1) (c), then approval of the members, under 180 (1)(a), will also need to be obtained. 

Accordingly, convening and holding of EGM, passing of the resolutions, and filing of Resolutions in form MGT-14, with Registrar of Companies, within 30 days from the passing of the EGM resolution. 

èCompletion of Loan documentation, filing of Charge Creation/modification forms with the Registrar of Companies, within 30 days from the date of creation/modification as the case may be. 

èRegistrationof Charge. 

èMakingentries in the Register of Charges – in CHG-7 

GREY AREA: 

Section 179 (3) (d) – to borrow monies:

According to the section, in order to borrow monies, approval of the Board is to be obtained at a Board meeting, and a copy of the said resolution is to be filed with the Registrar of Companies, in Form MGT-14, [Section 117] 

Query: Whether RENEWAL of a existing CC facility, with out any enhancement in the limits, will amount to a borrowal of monies, and whether the Board resolution given to the Bank for renewal, is required to be filed with ROC.

Answer: There is no Clarity. To be on a safe side, it is better to file the resolution with ROC. 

• - In the recent Companies Amendment Bill, 2014, passed by the Loksabha on 17.12.2014, awaiting approval of Rajya Sabha, amendments have been proposed that the resolutions filed pursuant to Section 179 (3) will not be available for inspection and even certified copies of the same cannot be obtained. 

FILING OF CHARGE DOCUMENTS

Chapter VI [Sections 77-87]– Registration of Charges, deal with the various provisions as to filing of forms for creation of Charges.

Charge creation/modification (Form CHG-1) – to be filed within 30 days from the date of creation/modification, and can be filed with additional fee upto a period of 300 days, by filing an application. However, it seems there is no provision provided for filing application for delay, and the ROC is accepting forms even filed with delay, by mentioning the reasons for the filing delay in the Form CHG-1 itself.

In case of delay beyond 300 days, then a Petition needs to be filed with the Central Government [Powers delegated to the concerned Regional Director, vide Gazette Notification S.O. 1352(E), Dated:21.05.2014. 

Satisfaction of Charge (Form CHG-4) – to be filed within 30 days from the date of satisfaction, and can be filed with additional fee upto a period of 300 days, by filing an application. However, it seems there is no provision provided for filing application for delay, and the ROC is accepting forms even filed with delay, by mentioning the reasons for the filing delay in the Form CHG-4 itself. 

Creation/Modification of Charge on Debentures (CHG-9)– In respect of secured Debentures, this form is to be filed 

Filing of Charge Creation/Modification/Satisfaction forms by the Chargeholder himself: 

Unlike under the Companies Act, 1956, wherein only the Company was to file the forms in support of Creation/Modification/Satisfaction of Charges, the Companies Act, 2013, enables the Charge holder/Trustees (in case of debentures), also to file the forms with ROC. 

By including this facility, if the Company delays or does not file the forms with ROC either for Creation/Modification/Satisfaction, then the Charge holder himself/themselves can file the forms, without any requirement from the company side, by attaching the already executed documents, thereby protecting their interests.

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

In the changed landscape of Company Law, we have thought it fit to cover the critical aspects of allotment of shares, its related regulations under Foreign Exchange Management Act, 1999 vis-à-vis Companies Act, 2013 read with rules made there-under. For keeping the topic simple and useful, we have listed out relevant provisions of respective law 

Foreign Exchange Management Act, 1999 read with FEM (Transfer or Issue of Security by a person resident in India) Regulations, 2000 [Notification No. 20/2000], (as amended from time to time), normally referred as FEMA FDI Regulations, Foreign Investment is prohibited in the following sectors3:

Note: Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

Process flow under the FEMA and the Companies Act, 2013: 

1. Board Approval: Convening of Board Meeting to consider issue of shares to Investor and calling of EGM for obtaining approval from Members (Section 42 read with Rules made there under) 

2. Valuation Report:

1. The company has to obtain valuation report from a Chartered Accountant to arrive at the value of shares proposed to be issued
2. In case of listed company the valuation >= the value decided under SEBI regulations
3. In case of Unlisted Companies, the valuation has to be done as per internationally recognized method of valuation (RBI A. P. (DIR Series) Circular No. 4, dated 15/07/2014 and for justification of issue price, pursuant to provision to Sub rule (2) 

(a) of Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 

3. Intimation to ROC: The company shall File Form MGT-14 with ROC within 30 days of Board Resolution
4. Shareholders Meeting:

1. The company needs to call General Meeting (EGM/AGM) to obtain the approval of members by way of special resolution
2. The company shall File Form MGT-14 with ROC within 30 days of Shareholder approval

5. Letter of Offer (LOO): The Board has to approve Letter of Offer (in PAS-4) along with share application (serially numbered) to be sent to the investor(s). The number of proposed offer to the investors cannot exceed 200 persons aggregate in a FY. 

6. Filing of LOO with ROC: Company has to prepare the details/record of Letter of Offer (LOO) in Form PAS-5, and file the same with ROC along with the LOO, within 30 days of circulation of LOO. The value of such offer or invitation per person shall be with a minimum investment size of 20,000/- of face value of the securities

7. Open Escrow Bank Account: The company has to open separate bank account (escrow account) to receive the proposed subscription and can adjust such money only either for allotment of shares or for refund of money

8. Remittance: The investor remits the amount into the Company in eligible currency

9. Intimation to RBI:

1. The company shall intimate RBI through AD within 30 days of remittance

2008. The intimation to be made in Annexure II of Circular 44 dated 30/05/2008. The said annexure has been attached as Annexure 5 to DIPP Circular 1/2014 and Annexure 6 to RBI Master Circular dated 01/07/2014

10. KYC:

1. The company needs to facilitate the AD to obtain KYC information of the remitter from their counterpart bank

2008. The KYC format is prescribed vide Annexure III of Circular 44 dated 30/05/2008. The said annexure has been attached as Annexure 6 to DIPP Circular 1/2014 and Annexure 7 to RBI Master Circular dated 01/07/2014

11. UIN:

1. RBI upon receipt of the intimation allots Unique Identification Number (UIN) for each such remittance and intimates the company

1. This UIN has to be quoted at the time of filing the FC-GPR / refund of the money

12. Allotment / Refund: The company shall allot Shares / CCPS / CCD within 60 days⁵ of the remittance failing which the money shall be refunded within 15 days thereafter (Section 42 of Companies Act, 2013 read with rules made there under)

13. PAS-3: Return of allotment is required to be filed with the ROC within 30 days in Form PAS-3, along with the prescribed details/information[Filing pursuant to Sec. 42(9) and Rule 14

• of the Companies (Prospectus and Allotment of Securities) Rules, 2014]
• Though it is 180 days as per Proviso to Paragraph 8 (ii) of Schedule 1 FEM (Transfer or Issue of Security by a person resident in India) Regulations, 2000 [Notification No. 20/2000], (as amended from time to time), the time stands reduced to 60 days due to rule of Harmonious Construction. 

14. Form FC-GPR:

1. The company after allotting the shares/ CCPS/CCD shall file form FC-GPR with AD who have received the remittance

2014. The intimation to be made in Annexure I of Circular 102 dated 11/02/2014. (Previous format has been attached as Annexure 1 to DIPP Circular 1/2014 and Annexure 8 to RBI Master Circular dated 01/07/2014) 

Intimation from RBI: Upon receipt of the Form FC-GPR RBI after scrutiny of the form, allots registration no. for FC-GPR which shall be used at the time repatriation by the investor

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Section 45 of the Income Tax Act, 1961 provides for chargeability of Capital Gain on transfer of a “Capital Asset”. 

Capital Gain arises only when a capital asset is transferred. If the asset transferred is not a capital asset, it will not be covered under the head “Capital Gains”. 

The term “Capital Asset” is defined U/S 2(14) as property of any kind held by the assessee, whether or not connected with his business or profession but does not include interalia agricultural land in rural area.

Rural area for this purpose is any area which is outside the jurisdiction of municipality or cantonment board having a population² of 10,000 or more and also which does not fall within distance (measured aerially) given below- 

• 2 KM from the local limits of municipality or cantonment board- If the population of municipality or cantonment board is more than 10,000 but not more than 1 lakh; 
• 6 KM from the local limits of municipality or cantonment board- If the population of municipality or cantonment board is more than 1lakh but not more than 10 lakh;
• 8 KM from the local limits of municipality or cantonment board- If the population of municipality or cantonment board is more than 10lakh.

(As Amended by FA 2013)

To attract charge of capital gain, the property transferred must be a capital asset on the date of transfer and it is not necessary that it should have been capital asset also on the date of acquisition by the assesseeⁱ.

If the concerned asset does not fall within the definition of capital asset on the date of transfer, no capital gain can be leviedⁱⁱ. 

• Population means population according to the last preceding census of which relevant figures have been published before the first day of the previous year. 

As the Rural Agricultural Land is not a Capital Asset, capital gain on transfer of the same is not subject to tax. 

It is the usage of seller of the land that will decide the nature of land.

Now, the question is whether this contention is valid when the buyer of the agricultural land has intention to use for commercial purpose after the transfer?

The above question was answered in the following case: 

Commissioner of Income-tax, Panaji-Goa v. Smt. Debbie Alemao

The assessee’s were co-owners of the land. They purchased said land for a sum of Rs. 8 lakhs as an agricultural land. Later on, they sold the said land to ‘V’ Ltd. for a sum of Rs. 73 lakhs. The assessee’s filed separate returns of income wherein capital gain arising out of the sale of agricultural land was claimed by each of them to be exempt.

The Assessing Officer held that the said land had non-agricultural potential and the fact that it was sold at a price which was nearly 10 times the purchase price within two years from its purchase and, moreover, it was purchased for the purpose of a beach resort showed that the said land was not an agricultural land. Consequently, he held that the profit arising out of the sale of the said land was assessable to the tax as capital gain. On appeal, the Commissioner (Appeals) set aside the assessment order. The Tribunal upheld the order of the Commissioner (Appeals). 

Aggrieved by the decision of the ITAT the revenue preferred appeal to High Court

Before the High Court:

The learned Counsel for the appellant contended that the Respondents had not shown any agricultural income during the period of two years from the date of the purchase till the date of the sale, arising out of the said land. This also showed that the land was not an agricultural land.

The Counsel for the appellant submitted that the Commissioner of Income-tax (Appeals) as well as the ITAT committed a gross error, bordering on perversity, in holding that the said land was an agricultural land.

The High Court held that the assessing officer has note that the land was noted in the revenue records as agricultural land and ITAT also held that the land was recorded in the revenue records as agricultural land. This fact is not disputed by the revenue. 

It is however contended that the land was not actually used for agriculture inasmuch as no agricultural income was derived from this land and was not shown by the respondents in their Income-tax return. 

This was explained by the respondents by saying that there were coconut trees in the land but the agricultural income derived by sale of the coconuts was just enough to maintain the land and there was no actual surplus and hence, no agricultural income was shown from this land.

The High Court held that if an agricultural operation does not result in generation of surplus that cannot be a ground to say that the land was not used for the agricultural purpose. It is not disputed that the land was shown in the revenue record to be used for agricultural purpose and no permission was ever obtained for non-agricultural use by the respondents.

The permission for non-agricultural use was obtained for the first time by the Varca Holiday Beach Resort Private Limited the purchaser after it purchased the land.

Thus, the finding recorded by the two authorities below that the land was used for the purpose of agriculture is based on appreciation of evidence and by application of correct principles of law. As a result the High Court dismissed the appeal.

Note: The Tribunal has relied upon two unreported decisions of this Court in CIT v. Minguel

Chandra Pais/ Smt. Maria Leila Tovar Furtado [2006] 282 ITR 618/ [2005] 149 Taxman 131 (Bom.) which involved identical issue. In those appeals, this Court has upheld the order of the Tribunal holding that the land was agricultural land and its sale did not invite the payment of capital gain. 

Similar view was also expressed by Gujrat High Court in case of Commissioner of Income-tax v. Rajshibhai Meramanbhai Odedra [2014] 42 taxmann.com 497 (Gujarat)

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.