TaxTMI 
TaxTMI 
1987 (10) TMI 47
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....f it in July, 1976, for a consideration of Rs. 45,000. He did not submit a return showing any income on that account. Even otherwise, he is not an income-tax assessee. The Income-tax Officer, D-Ward, Nellore, issued a notice under section 139(2) of the Act, in response to which the petitioner filed a return declaring an income of Rs. 5,630 as capital gain arising out of the said transaction and Rs. 2,500 as agricultural income. The Income-tax Officer, by his order dated January 30, 1980, determined the capital gain in the hands of the petitioner at Rs. 26,630 and levied a tax of Rs. 5,746. According to the petitioner, the land sold was always put to agricultural use and paddy was grown at the time of sale. 3. In the counter-affidavit filed by the respondents, the facts stated above are not denied. It is, however, submitted that the petitioner ought to have filed an appeal against the order of assessment and that the writ petition filed one year after the service of assessment order suffers from laches. 4. We may mention that in the other writ petitions, there is no specific allegation that the lands were being cultivated and were put to agricultural use at the time of transfe....
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....Act with effect from the same date, "any transfer of agricultural land in India effected before the first day of March, 1970" was exempted from capital gains tax, with the result that not all transfers of agricultural land effected in the previous year relevant to the assessment year 1970-71 attracted capital gains tax; only the transfers which took place during the month of March, 1970, became so liable. 7. The expression "agricultural income" is defined in clause (1) of section 2. Prior to the amendment of this definition by the Taxation Laws (Amendment) Act, 1970, with retrospective effect from April 1, 1962, the definition read as follows: (1) 'agricultural income' means - (a) any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such; (b) any income derived from such land by (i) agriculture ; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised o....
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....as a store-house, or other outbuilding, and (ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to local rate, it is not situated - (A) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or (B) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette." 9. It may be noted that the proviso substituted by the Amendment Act is in two....
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....h power belong to the State Legislature alone, as provided by entry 46 in the State List, which reads "taxes on agricultural income". The expression "agricultural income" is defined in clause (1) of article 366 of the Constitution, to mean agricultural income as defined for the purposes of the enactments relating to the Indian Income-tax Act, 1922". At the time of the framing of the Constitution, the Income-tax Act in force was the Indian Income-tax Act, 1922, but by virtue of the General Clauses Act, the words "Indian Income-tax Act" in the said definition would now refer to the Income-tax Act, 1961, which means that the expression "agricultural income" occurring in the aforesaid entries in the Seventh Schedule should be understood in the manner, and in the sense defined by clause (1) of section 2 of the Income-tax Act. According to sub-clause (a) of the said definition in the Income-tax Act, "any ...... revenue derived from land which is situated in India and is used for agricultural purposes" constitutes agricultural income. Income derived by transfer of land is also revenue derived from land, as held by the Supreme Court. If so, taxing such agricultural income is beyond the leg....
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....er name called) having a population of not less than 10,000 and within such distance as may be notified, not exceeding a distance of 8 kilometres from its limits, became a "capital asset" within the meaning of the said definition. For the purposes of this definition, it is immaterial whether the agricultural land is actually under cultivation or not. According to the definition as amended by the Finance Act (19 of 1970), all agricultural lands situate within municipalities and within such distance as may be notified, not exceeding 8 kilometres' radius, became capital assets. 12. The question then arises whether the profits and gains arising from the transfer of an agricultural land-even where it is called a capital asset-is "agricultural income"? If it is agricultural income, Parliament cannot tax it by merely calling the agricultural land "capital asset". Learned counsel for the petitioners contends that even the income derived from the sale of agricultural land is "revenue derived from land" within the meaning of clause (a) of the definition of it agricultural income "in section 2(1) of the Act. The contention is that if the land is used for agricultural purposes, within t....
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...."agricultural income" in the 1935 Act and our Constitution are identical. Similarly, the definition of "agricultural income" in the 1922 Act was the same as in the 1961 Act; the amendment in 1970 has no relevance on this aspect). In Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503 (SC) the question was whether the capital gains derived by the wife of the assessee by the sale of assets (shares) transferred to her by him can be included in the total income of the assessee under section 16(3)(a)(iii) of the Indian Income-tax Act, 1922. The contention was that "so much of the income of a wife...... as arises directly or indirectly...... from assets........" occurring in the said provision means only the income which the asset produces while it continues to remain in the hands of the assessee and does not include the gain made by selling the asset and parting with its possession. This argument was rejected by the Supreme Court in the following words (at page 507): " In our opinion, there is no logical distinction between income arising from the asset transferred to the wife and arising from the sale of the assets so transferred. The profits or gains which arise from the sale ....
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.... to do, in our opinion, since so long as the income from agricultural lands situated within the municipal limits, etc., is not made non-agricultural income by amending the definition, it will continue to be "agricultural income" even for the purpose of entry 82 in List I of the Seventh Schedule and cannot be taxed by Parliament. All that was necessary for Parliament to do was to amend the said definition in the same manner as it has amended the definition of "Capital asset". It could have said that the income arising from agricultural lands situated within the municipal limits with a population of 10,000, etc., shall not be treated as agricultural income and there the matter would have ended. But, unfortunately, the exercise done by Parliament has failed to achieve the said objective if indeed that was the objective. May be it is a case of bad draftsmanship; may be not. The result, however, is that the income from agricultural lands which are used for agricultural purposes, even though situated within the municipal limits with more than 10,000 population and within the notified limits thereof, continues to be agricultural income. 16. Turning to the definition of "agricultural in....
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....the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to local rate, it is not situated - (A) in any area which is comprised within the jurisdiction of municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or (B) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette". 18. We are not concerned herein with proviso (i) for the reason that, admittedly, it is applicable only to a building connected with land. ....
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....in the limits of a municipality, etc., is not agricultural income, we have to (1) change the placement of proviso (ii) : we have to place it after sub-clauses (a) and (b), and before sub-clause (c), and (2) bend and strain the language of proviso (ii), so as to read the exceptions mentioned in (A) and (B) as qualifying both the categories of land mentioned therein. We are of the opinion that such an exercise, more so in the context of a taxing enactment, may, not be warranted, that too at the hands of the High Court. 20. The conclusion that follows from the above discussion is that Parliament could not have taxed the Profits and gains arising from the transfer of a land used for agricultural Purposes-whether such land is assessed to land revenue in India or is subject to a local rate assessed and collected by the officers of the Government-notwithstanding that such land is situated within the limits of a municipality, etc., with a Population of not less than 10,000 or is situated within such distance as may be notified, not exceeding 8 kilometres from such municipal limits. The reason is simple-it is agricultural income. By merely treating such land as a "capital asset" within t....
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....d before the first day of the previous year, or in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in the earlier item as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette. Thus income derived from any such land as is referred to in the proviso, clause (ii), sub-clauses (A) and (B) of section 2(1) is not 'agricultural income' and, therefore, for the purposes of article 366(1) and hence for the purposes of entries in the Seventh Schedule, income derived from such lands is also not agricultural income. It is in the light of this definition of 'agricultural income' which came into force with effect from April 1, 1970, that one has to consider the submissions made regarding the legislative competence of Parliament to enact section 2(14)(iii) of the Income-tax Act, 1961." 23. Firstly, the retrospective effect given to the definition of "agricultural income" in section 2(1) is not from April 1, 1970, but with effect from April 1,....
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....central income-tax. Apart from this, in several States, lands up to specified limits have been exempted from land revenue assessment. Hence, income derived by the performance of agricultural operations on such land in these States would also come within the purview of central income taxation. 93. As the character of the income derived by agricultural operations remains the same whether or not the land is subject to land revenue or a local rate, it would be anomalous to subject to Central income-tax such income in those cases where there is no land revenue assessment while exempting income of the same nature in other cases. With a view to removing this anomaly and providing tax relief to the agriculturists who cultivate forest lands, lands in terai areas or cantonments or in States which have abolished land revenue on small holdings, the definition of 'agricultural income' in clause (1) of section 2 has been amended so as to drop the condition that the land from which the income is derived should be assessed to land revenue or any local rate. This change will bring within the purview of the expression 'agricultural income', income derived from cultivation of....
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....ment of the definition of agricultural income, as explained in the preceding paragraphs, is retrospective and is deemed to have taken effect from April 1, 1962, i.e., the date on which the Income-tax Act came into force. Accordingly, where income derived by agricultural operations on land which is not assessed to land revenue or any local rate has been subjected to Central income-tax, the relevant assessment should now be rectified and the tax charged on such income refunded or remitted, as the case may be. Where assessment proceedings have been initiated for bringing such income to tax, these should be dropped. 27. We may also refer to the other circular referred to in the judgment of the Karnataka High Court, i.e., Circular No. 45, dated September 2, 1970, explaining the meaning and object behind the amendment of the definition of "capital asset" in section 2(14). It reads thus (at p. 199) : " 29. Capital gains arising from the transfer of a capital asset have been chargeable to income-tax for several years past. Where the transfer of the capital asset is effected within a period of 24 months from the date of its acquisition by the assessee, the capital gain is treate....
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....n will be issued by the Central Government having regard to the extent of, and scope for, urbanisation of such area, and, when any such area is notified by the Central Government, agricultural land situated within such area will stand included within the term 'capital asset'. Agricultural land situated in rural areas, i.e., areas outside any municipality or cantonment board having a population of not less than ten thousand and also beyond the distance notified by the Central Government from the limits of any such municipality or cantonment board, will continue to be excluded from the term 'capital asset'. 31. The amendment to section 2(14), as stated in the preceding paragraph, applies from 1st April, 1970, i.e., f or and from the assessment year 1970-71. However, by an amendment to section 47 of the Income-tax Act, it has been specifically provided that no capital gain or loss will be computed with reference to any transfer of agricultural land in India effected before 1st March, 1970. 32. The effect of the amendments to section 2(14) and section 47, as stated above, will be that capital gains arising from transfer of agricultural lands situated i....