Agricultural land transfer gains within municipal limits are not agricultural income and remain within capital gains law.

Section 2(1A) covers income from agricultural operations, rent or revenue derived from agricultural land, and does not extend to gains from transfer of land itself. Section 2(14)(iii) excludes agricultural land situated within specified municipal limits from the capital asset definition, so its transfer can fall within the capital gains charging framework. Article 366(1) adopts the Income-tax Act definition of agricultural income for constitutional purposes, leaving Parliament competent under entry 82 of List I to amend the tax law. The Finance Act, 1989 Explanation was treated as a clarification of the existing scheme, and the statutory provisions were upheld as valid.

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Issues: Whether the Explanation inserted in section 2(1A) of the Income-tax Act, 1961, and the definition of capital asset in section 2(14)(iii), were within Parliament's legislative competence and whether capital gains arising from transfer of agricultural land situated within municipal limits could be treated as agricultural income.

Analysis: Section 2(1A) protects income derived from agricultural operations, rent or revenue from agricultural land, and not income arising from transfer of land itself. Section 2(14)(iii) excludes agricultural land situated within specified municipal areas from the definition of capital asset, thereby bringing such land within the charging framework for capital gains. Article 366(1) adopts the Income-tax Act definition of agricultural income for constitutional purposes, so the State power under entry 46 of List II extends only to that defined category, while Parliament remains competent under entry 82 of List I to amend the income-tax law. The Explanation inserted by the Finance Act, 1989 merely clarified the existing scheme and did not alter the constitutional division of legislative power.

Conclusion: The Explanation and the related statutory provisions were held to be valid, and capital gains arising from the transfer of agricultural land within municipal limits were not treated as agricultural income. The challenge to Parliament's competence failed.

Ratio Decidendi: Parliament is competent to clarify and tax capital gains on transfer of agricultural land within municipal limits because such gains are not agricultural income within the constitutional and statutory meaning adopted by the Income-tax Act.

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