Retrospective amendment governs taxability of agricultural land sale gains; transfer proceeds are not agricultural income and capital gains tax applies.

On a reference under section 256 of the Income-tax Act, the High Court answered the taxability issue according to the law as retrospectively amended, because a later amendment with retrospective operation governs pending references. The Explanation inserted by the Finance Act, 1989 to section 2(1A) was treated as declaratory and as excluding income arising from transfer of agricultural land from the definition of agricultural income. As a result, capital gains from the sale of agricultural land were not agricultural income and were liable to capital gains tax, with the reference answered against the assessee and in favour of the Revenue.

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Issues: Whether, on a reference under section 256 of the Income-tax Act, 1961, the question of taxability of capital gains from sale of agricultural land must be answered on the basis of the law as retrospectively amended, and whether the Explanation inserted by the Finance Act, 1989 excludes such income from the definition of agricultural income.

Analysis: The question referred to the High Court had to be answered on the law as it stood after the retrospective amendment, because the effect of a subsequent amendment with retrospective operation governs the answer to a pending reference. The Explanation inserted to section 2(1A) by the Finance Act, 1989 declares that revenue derived from land does not include income arising from transfer of land of the kind specified in section 2(14)(iii). That amendment was treated as declaratory and as nullifying the earlier view that such gains could be regarded as agricultural income.

Conclusion: The income derived from the sale of agricultural land was not agricultural income and capital gains tax was leviable. The question was answered against the assessee and in favour of the Revenue.

Ratio Decidendi: On a reference under section 256 of the Income-tax Act, 1961, the High Court must answer the question in accordance with the law as retrospectively amended, and a declaratory Explanation excluding transfer gains from agricultural income applies to pending references.

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