Retrospective agricultural income amendment makes capital gains from urban agricultural land taxable under the Income-tax Act.

Capital gains from the transfer of agricultural land situated in specified urban areas are not protected as agricultural income once the retrospective Explanation inserted in section 2(1A) is applied. Agricultural income under section 2(1A) and capital asset treatment under section 2(14) are distinct, and the amendment clarifies that revenue from land does not cover gains arising on transfer of land falling within section 2(14)(iii)(a) and (b). On that basis, such transfer is liable to capital gains tax, and reliance on the earlier Bombay High Court view to cancel penalty was unsustainable.

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Issues: Whether capital gains arising from the transfer of agricultural land situated in the specified urban areas were exempt as agricultural income notwithstanding the retrospective Explanation inserted in section 2(1A) of the Income-tax Act, 1961.

Analysis: Agricultural income under section 2(1A) and capital asset under section 2(14) are distinct concepts. The retrospective Explanation inserted in section 2(1A) by the Finance Act, 1989 declared that revenue derived from land does not include income arising from the transfer of land falling within items (a) and (b) of section 2(14)(iii). In the light of that amendment, the earlier view that capital gains from such land could be treated as agricultural income was no longer sustainable. The transfer of agricultural land in the specified areas was therefore liable to capital gains tax, and the Tribunal was not justified in relying on the earlier Bombay High Court decision to cancel the penalty on that ground.

Conclusion: The question was answered against the assessee and in favour of the Revenue; capital gains arising from the transfer of such agricultural land were exigible to tax.

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