IMPORTANT POINT
Explanation to sub-section (1A) and clause (iii) of sub-section (14) of Section 2 of the Income Tax Act, 1961 inserted by Finance Act, 1989 with effect from 1-4-1970 bringing gains arising on transfer of agricultural land within municipal area to capital gains tax is constitutionally valid.

Headnote:Income Tax Act, 1961-Section45 read with Explanation to sub-section (1A) and clause (iii) of sub-section (14) of Section 2-Capital gains -Chargeability of-Constitutional validity of Explanation to sub-section 1A and sub-section (14) of Section 2 -Parliament has power to define what agricultural income is in Income-tax Act-Agricultural income means agricultural income as defined in Income-tax Act, 1961 and not as defined in Indian Income Tax Act, 1922-Impugned provision constitutionally valid-Capital gains arising out of agricultural land within Municipal limits cannot escape capital gains tax.
       The argument that agricultural income in clause (1) of Article 366 must be read only as it was defined in 1950 when the Constitution came into force: that is to say, in the manner indicated in Section 2(1)(A) and 2(4)(A)(iii) of the 1922 Act cannot be accepted. The definition of agricultural income under Article 366(1) of the Constitution means "agricultural income as defined for the purposes of the enactments relating to Indian Income-tax". The definition does not say that agricultural income means "agricultural income as defined in the 1922 Act". It does not even say that it means "agricultural income as defined for the purposes of the enactment relating to Indian Income-tax". It says that it means "agricultural income as defined for the purposes of the enactments relating to Indian Income-tax". The use of the plural enactments is very relevant. It means that agricultural income for the purposes of the Constitution means agricultural income as it is defined at the relevant time in the enactment that then relates to Income-tax. (Paras 5 & 6)
       It appears that by reason of the decision of the Bombay High Court in Manubhai A. Sheth & Ors. v. N.D. Nirgudkar, 2nd Income-Tax Officer, A-II Ward, Bombay & Anr. [128 I.T.R. 87], an Explanation was added by the Finance Act, 1989, with effort from 1st April, 1970, to clause (1A) of Section 2. The position, as a result, is that income arising from the transfer of agricultural land that falls within the terms of items (a) and (b) of sub-clause (iii) of clause (14) of Section 2 falls outside the ambit of revenue derived from land and therefore, outside the ambit of agricultural income . Such income, therefore, is liable to capital gains tax chargeable under Section 45 of the 1961 Act. Parliament has, as aforestated, the power to define what agricultural income is in the 1961 Act; the amendment of sub-sections (2) and (14) of Section 2 thereof in the manner aforestated are, therefore, good in law. The effect is that the assessee is liable to pay capital gains tax on the sales of his lands within the municipal limits of Bina. (Paras 8, 9 & 10)

JUDGMENT

Bharucha, J.-Under challenge are the orders of a Division Bench of the High Court of Madhya Pradesh dismissing a writ petition filed by the appellant-assessee and answering against him a reference made by the Income Tax Appellate Tribunal of the following question :

"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the profit arising from the sale of agricultural lands did not amount to capital gains within the meaning of Income Tax Act, 1961?"

The reference related to the Assessment Years 1981-82 and 1983-84.

2. In the previous years relevant to the Assessment Years 1981-82 and 1983-84 the assessee sold agricultural lands which were situated within the municipal limits of Bina. He made capital gains thereon and the Income Tax Officer made him liable to capital gains tax. The first appellate authority agreed with the Income Tax Officer and the assessee approached the Tribunal. The Tribunal held that the profit on the sale of agricultural lands was not capital gains within the meaning of the provisions of the Income Tax Act, 1961. From the order of the Tribunal the question aforestated was referred to the High Court. Pending the reference, the assessee filed in the High Court the writ petition the order upon which is impugned. The writ petition asked the High Court to declare as unconstitutional the Explanation to sub-section (1A) and clause (iii) of sub-section (14) of Section 2 of the Income Tax Act, 1961. and to declare that capital gains arising from the sale of agricultural lands within a municipal area were not liable to capital gains tax under the Income Tax Act, 1961. The High Court dismissed the writ petition and answered the reference against the assessee.

3. Article 366 defines, in clause (1), agricultural income to mean "agricultural income as defined for the proposes of the enactments relating to Indian Income-tax". Entry 46 of List II of the Seventh Schedule of the Constitution speaks of "Taxes on agricultural income"; in other words, it is for the States to legislate on the subject of taxes on agricultural income. Entry 82 of List I of the Seventh Schedule reads "Taxes on income other than agricultural income"; in other words, it is for the Union to legislate on the subject of taxes on income other than agricultural income.

4. In the Income Tax Act, 1922 agricultural income was defined in clause (1) of Section 2. Sub-clause (a) thereof alone is relevant for our purpose. Thereunder, agricultural income meant "any rent or revenue derived from land which is used for agricultural purposes.....". Section 2(4A) defined capital asset to mean "property of any kind held by an assessee" but not "any land from which the income derived is agricultural income."

5. It was submitted by learned counsel for the assessee that agricultural income in clause (1) of Article 366 must be read only as it was defined in 1950 when the Constitution came into force: that is to say, in the manner indicated in Section 2(1)(A) and 2(4)(A)(iii) of the 1922 Act. To decide the correctness of the submission, it is necessary to give true meaning to clause (1) of Article 366. Agricultural income thereunder means "agricultural income as defined for the purposes of the enactments relating to Indian Income-tax". The definition does not say that agricultural income means "agricultural income as defined in the 1922 Act". It does not even say that it means "agricultural income as defined for the purposes of the enactment relating to Indian Income-tax". It says that it means "agricultural income as defined for the purposes of the enactments relating to Indian Income-tax". The use of the plural enactments is very relevant. It means that agricultural income for the purposes of the Constitution means agricultural income as it is defined at the relevant time in the enactment that then relates to Income-tax.

6. In the judgment of this Court in Bajaya v. Gopikabai & Anr.1 the position in law,

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2000 Supreme(SC) 1899

Cases Referred (2)