1997 (4) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of the sale of agricultural land as business income.
2. Constitutionality and legislative competence of the retrospective amendment to section 2(1A) of the Income-tax Act by the Finance Act, 1989.
3. Validity of penalty imposition on the writ petitioner.
4. Refusal of stay on penalty recovery by the Income-tax authorities.

Summary:

1. Taxability of the Sale of Agricultural Land as Business Income:
The writ petitioner-firm sold agricultural lands during the relevant assessment year, which were used for agricultural operations. The assessing authority imposed income-tax treating the sale proceeds as business income and imposed penalties for non-payment of advance tax. The petitioner contended that the sale of agricultural lands does not give rise to taxable income u/s 10(1) of the Income-tax Act, as it is considered agricultural income irrespective of the location within or outside municipal limits. The court examined various provisions, including section 2(1A), section 2(14), and section 54B of the Income-tax Act, and concluded that the land in question was not intended for agricultural purposes when brought into the partnership assets, thus losing its character as agricultural land.

2. Constitutionality and Legislative Competence of the Retrospective Amendment:
The petitioner challenged the vires of the Explanation inserted in section 2(1A) by the Finance Act, 1989, with retrospective effect from April 1, 1970, arguing it was illegal, unconstitutional, and beyond legislative competence. The court reviewed the historical background and judicial interpretations, including the decisions in Manubhai A. Sheth v. N. D. Nirgudkar and G. M. Omer Khan v. CIT (Addl.), and concluded that the retrospective amendment was a clarificatory measure to settle judicial controversies. The court upheld the legislative competence of Parliament to define and amend the term "agricultural income" under entry 82 of List I of the Seventh Schedule to the Constitution.

3. Validity of Penalty Imposition:
The petitioner argued that the imposition of penalties for non-payment of advance tax was illegal and without justification, as the retrospective amendment could not confer mens rea. The court held that since the land was not used for agricultural purposes and was treated as stock-in-trade, the penalties imposed were within the due process of law.

4. Refusal of Stay on Penalty Recovery:
The petitioner contended that the refusal of stay on penalty recovery by the Income-tax authorities was illegal. The court noted that the petitioner had not exhausted alternative remedies provided under the Income-tax Act before approaching the court. The court dismissed the writ petition, stating that the petitioner must seek relief on merits before the appropriate forum.

Conclusion:
The court dismissed the writ petition, upholding the taxability of the sale of agricultural land as business income, the constitutionality of the retrospective amendment, and the validity of the penalties imposed. The petitioner was directed to seek relief through the appropriate forum.