1999 (10) TMI 2 - SC - Income Tax

Capital gains on sale of agricultural-use land: Explanation to s.2(1A) bars 'agricultural income' exemption; appeal allowed

On whether capital gains from transfer of land used for agricultural purposes constitutes 'agricultural income' exempt from tax under a combined reading ... Effect of a combined reading of sections 2(1A) and 2(14) of the Income-tax Act, 1961, ('the Act') - levy of tax on capital gains arising from transfer of land which is used for agricultural purposes - HELD THAT:- By the Finance Act, 1989, Explanation to section 2(1A) is inserted with effect from April 1, 1970, to supersede the view expressed in the order under appeal and several decisions setting out similar ratio. This declaratory amendment having retrospective operation though coming into force during the pendency of this appeal must be given effect to. The said Explanation clearly 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'. Thus, the whole basis of the decision has been lost and, therefore, the order under appeal cannot be sustained and deserves to be set aside Inasmuch as there is no challenge to the validity of the Explanation to section 2(1A) inserted into the Act by the Finance Act, 1989, we are afraid, we cannot examine the correctness of the said submission. We leave open this question to be raised for consideration in an appropriate proceeding. In the result, we allow this appeal and set aside the order of the High Court. 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.