Retrospective exclusion of agricultural land transfer gains from agricultural income overrides contrary interpretation and restores capital gains tax treatment.

A retrospective declaratory amendment to section 2(1A) of the Income-tax Act was treated as effective from 1 April 1970 and as excluding income from transfer of agricultural land referred to in section 2(14)(iii)(a) or (b) from the definition of agricultural income. That statutory change displaced contrary judicial interpretation, so gains from such transfers could not be treated as agricultural income or kept outside capital gains taxation on the earlier reasoning. The challenge to the validity of the Explanation was not examined because no such challenge was before the Court, and the High Court's contrary view was set aside.

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Issues: Whether income arising from transfer of agricultural land could be treated as agricultural income under section 2(1A) of the Income-tax Act, 1961, in the light of the retrospective Explanation inserted by the Finance Act, 1989, and whether the High Court's interpretation of section 2(14)(iii) could be sustained.

Analysis: The Explanation inserted to section 2(1A) was treated as a declaratory and retrospective amendment with effect from 1 April 1970. It expressly provided that revenue derived from land would not include income arising from the transfer of land referred to in section 2(14)(iii)(a) or (b), and therefore such income could not be regarded as agricultural income. As the basis of the High Court's decision stood displaced by the amended law, its interpretation that agricultural land transfer gains were excluded from capital gains taxation could not survive. The challenge to the validity of the Explanation was not examined because no such challenge was before the Court.

Conclusion: The High Court's order was unsustainable and was set aside. The appeal succeeded in favour of the Revenue.

Ratio Decidendi: A retrospective declaratory amendment that expressly excludes income from transfer of specified agricultural land from the definition of agricultural income displaces contrary judicial interpretations and must be given effect to, unless its validity is directly challenged.

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