1973 (11) TMI 39 - HC - Income Tax

Court upholds constitutionality of Income-tax Act provision, grants appeal certificate

The court dismissed the special civil applications, holding that section 2(14)(iii) of the Income-tax Act, 1961, was constitutionally valid. It found that ... Agricultural Land, Capital Asset, Capital Gains Issues Involved:1. Constitutional validity of section 2(14)(iii) of the Income-tax Act, 1961.2. Legislative competence of Parliament to enact section 2(14)(iii).3. Violation of Article 14 of the Constitution.Issue-wise Detailed Analysis:1. Constitutional Validity of Section 2(14)(iii) of the Income-tax Act, 1961:The core issue in these 24 special civil applications is the constitutional validity of section 2(14)(iii) of the Income-tax Act, 1961, amended by Act 19 of 1970. This amendment included certain agricultural lands within the definition of 'capital assets,' thereby subjecting them to capital gains tax. The petitioners argued that this amendment was unconstitutional on various grounds, primarily focusing on the legislative competence of Parliament and the alleged violation of Article 14 of the Constitution.2. Legislative Competence of Parliament to Enact Section 2(14)(iii):The petitioners contended that the power to impose tax on agricultural income, including capital gains from the transfer of agricultural lands, falls within the exclusive legislative power of the State legislature as per entries 18, 46, and 49 of List II in the Seventh Schedule of the Constitution. They argued that such power does not fall under entries 82 or 86 of List I and cannot be enacted under the residuary entry 97 of List I.The court analyzed the relevant constitutional provisions and entries in the Seventh Schedule. It noted that under Article 246(1), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I. Article 248 grants Parliament exclusive power to legislate on any matter not enumerated in List II or List III, including any tax not mentioned in either of those Lists.The court referred to the Supreme Court's decision in Second Gift-tax Officer, Mangalore v. D. H. Nazareth, which clarified that the entries in the Lists in Schedule VII to the Constitution include the whole of the power of taxation. The court held that the tax on capital gains is not a tax imposed directly upon lands and buildings but is a tax upon the profits or gains arising from the transfer of a capital asset, which may include lands and buildings. Therefore, it falls within the scope of entry 82 of List I, which pertains to taxes on income other than agricultural income.The court further noted that the definition of 'agricultural income' in Article 366(1) includes income as defined for the purposes of the enactments relating to Indian income-tax. The amendment to section 2(14)(iii) was within the legislative competence of Parliament as it pertained to taxing income other than agricultural income. The court concluded that Parliament was competent to enact section 2(14)(iii) under entry 82 of List I.3. Violation of Article 14 of the Constitution:The petitioners argued that the classification made by section 2(14)(iii) was irrational and violated Article 14 of the Constitution, which guarantees equality before the law. They contended that the non-exclusion of agricultural lands prevented by law from urbanization from the operation of section 2(14)(iii) treated unequals as equals.The court emphasized that legislatures have wide powers of classification while enacting taxation laws, and the burden of proving discrimination is on the person challenging the legislation. The court referred to Supreme Court decisions, including East India Tobacco Co. v. State of Andhra Pradesh and Twyford Tea Co. v. State of Kerala, which recognized the wide range of selection and freedom in classification in taxation laws.The court held that the classification made by section 2(14)(iii) was based on a rational basis, distinguishing between agricultural lands in rural areas and those in urban or urbanizing areas. The court found that the classification did not violate Article 14 as it treated similarly situated properties equally and unequally situated properties differently.Conclusion:The court dismissed the special civil applications, holding that section 2(14)(iii) of the Income-tax Act, 1961, was constitutionally valid. The court found that Parliament had the legislative competence to enact the provision under entry 82 of List I and that the classification made by the provision did not violate Article 14 of the Constitution. The court granted a certificate under Article 132 for appeal to the Supreme Court but declined to grant a certificate under Article 133. The proceedings before the authorities regarding the petitioners' liability to pay tax on capital gains were stayed for four weeks to enable the parties to appeal to the Supreme Court.