1999 (10) TMI 2 - SC - Income Tax

Supreme Court clarifies tax treatment of agricultural land sales

Union of India and Others Versus S. Muthyam Reddy

The Supreme Court allowed the appeal, setting aside the High Court's order regarding the taxation of capital gains from the sale of land used for ... By the Finance Act, 1989, Explanation to section 2(1A), inserted with effect from April 1, 1970clearly declares that the revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in section 2(14)(iii)(a) or (b). The upshot of the same is that income derived from sale of such agricultural lands cannot be treated as 'agricultural income' Issues Involved:Interpretation of sections 2(1A) and 2(14) of the Income-tax Act, 1961 regarding agricultural income and capital gains from land used for agricultural purposes.Analysis:The Supreme Court heard an appeal against a High Court order regarding the taxation of capital gains from the sale of land used for agricultural purposes. The High Court had held that such gains would be considered 'agricultural income' and could not be taxed by Parliament. The Court considered various arguments challenging the High Court order and noted conflicting decisions on the matter. An amicus curiae was appointed to assist in the case.The Court highlighted that the Finance Act, 1989, introduced an Explanation to section 2(1A) with retrospective effect, clarifying that income derived from the sale of certain agricultural lands cannot be treated as 'agricultural income.' This clarification contradicted the basis of the High Court's decision, leading the Supreme Court to set aside the order.The amicus curiae emphasized that the artificial definition introduced into the Act regarding agricultural income must be adhered to. He also discussed the constitutional provisions related to agricultural income, supporting the position that the income from the sale of agricultural lands should not be considered as agricultural income.The appellants' counsel argued that the divergence of opinions among High Courts regarding the interpretation of section 2(14)(iii) led to the introduction of the Explanation in the Finance Act, 1989. This Explanation aimed to resolve conflicts and align with the views of certain High Courts, thereby validating the provision.The Supreme Court, noting the absence of a challenge to the validity of the Explanation introduced by the Finance Act, 1989, refrained from examining its correctness. The Court concluded by allowing the appeal, setting aside the High Court's order, and not awarding any costs in the matter.