Sale of agricultural land situated within municipal limits after April 1, 1970 attracts capital gains tax.

Ashok Bhan, J.

1. At the instance of the Revenue, the Income-tax Appellate Tribunal, Amritsar (hereinafter referred to as "the Tribunal"), has referred the following question of law under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), to this court for its opinion :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that capital gains arising on the transfer of agricultural lands situated within the municipal limits were not chargeable to income-tax in the assessees hands in accordance with the provisions of Section 2(14) as amended with effect from April 1, 1970, of the Income-tax Act, 1961 ?"

2. The assessee is a Hindu undivided family and the relevant assessment year is 1974-75 for which the accounting period ended on March 31, 1974. It derived income from house property and agricultural land. During the accounting year, it sold agricultural land measuring 20 kanals, 19 marlas, situated within the municipal limits of Abohar Municipality. The return of income for the assessment year 1974-75 was filed voluntarily on January 1, 1975, disclosing the following income :

(a) Income from house property Rs. 1,060

(b) Capital gains Rs.53,435

(c) Net agricultural Income Rs. 1,900

3. During the course of assessment proceedings, the assessee, through a letter, claimed that capital gains of Rs. 53,435 was not liable to tax. The Income-tax Officer did not agree with this contention and held that transfer of agricultural land within the municipal limits would attract capital gains and, therefore, is chargeable to income-tax.

4. The assessee filed an appeal before the Appellate Assistant Commissioner. Relying upon a judgment of the Bombay High Court in Manubhai A, Sheth v. IV. D. Nirgudkar, 2nd ITO [1981] 128 ITR 87, it was contended on behalf of the assessee that capital gains could not be levied as no capital asset had been transferred. The appeal was accepted by the Appellate Assistant Commissioner. The order of the Income-tax Officer was set aside and the amount of Rs. 53,435 was excluded from the assessment of the assessee.

5. The Revenue filed an appeal before the Tribunal. The Tribunal dismissed the appeal relying upon the judgment of the Bombay High Court in Manubhai A. Sheths case [1981] 128 ITR 87, and held that on transfer of agricultural land situated in the municipal limits, no capital gains was attracted.

6. The Revenue has come up in reference before this court.

7. Mr. Sanjay Bansal, learned counsel appearing for the Revenue, relying upon a judgment of this court in Tuhi Ram v. Land Acquisition Collector [1993] 199 ITR 490, contended that the sale of agricultural land situated within the municipal limits would come within the ambit of a capital asset and thus transfer of the same would attract capital gains tax.

8. We find force in the submission of Mr. Bansal. This court in Tuhi Rams case [1993] 199 ITR 490, specifically differed from the view taken by the Bombay High Court in Manubhai A, Sheths case [1981] 128 ITR 87 and held that the Explanation inserted in Section 2(1A) by the Finance Act, 1989, with effect from April 1, 1970, has brought about a change in the law and after that date the sale made of certain specified agricultural lands situated in the municipal limits would attract capital gains tax. It was held as under (reproduced from headnote) :

"Compulsory acquisition of agricultural land under any low for the time being in force is a transfer within the meaning of Section 2(47) of the Income-tax Act, 1961. The expression capital asset means property of any kind held by the assessee whether or not connected with his business or profession. It, however, does not include agricultural land in India except the class of lands included in items (a) and (b) of Section 2(14)(iii). In order to qualify for such exemption it is not enough that the land was once agricultural land. It must be agricultural land even