1994 (11) TMI 30 - HC - Income Tax

Summary

Issues:
Interpretation of section 2(14)(iii) of the Income-tax Act, 1961 regarding taxation of sale proceeds of agricultural lands within municipal limits.

Analysis:
The High Court of Madras addressed the issue of whether the sale proceeds of agricultural lands within municipal limits are subject to taxation under section 2(14)(iii) of the Income-tax Act, 1961. The case involved two brothers, each selling agricultural lands in different locations. The Income-tax Officer computed capital gains on the sales, which were confirmed by the Appellate Assistant Commissioner. However, the Appellate Tribunal, following a Bombay High Court decision, held that the sale proceeds of agricultural lands are not taxable under capital gains. The Tribunal referred the case to the Income-tax Officer to determine if the lands were used for agricultural purposes at the time of sale.

The Department argued that an Explanation to section 2(1A) inserted by the Finance Act, 1989, with retrospective effect from April 1, 1970, clarified that the sale proceeds of agricultural lands within municipal limits are taxable under section 2(14)(iii) of the Act. The Department contended that the Tribunal's decision based on the Bombay High Court ruling was incorrect. The High Court noted conflicting views from the Gujarat and Karnataka High Courts on this matter. The High Court cited the Supreme Court decision in CIT v. Straw Products Ltd., where it was held that the court must interpret the law as amended unless the question referred is not broad enough to cover the amendment.

Considering the Explanation in the Finance Act, 1989, and previous judicial decisions, the High Court concluded that the sale proceeds of agricultural lands within municipal limits are indeed taxable under section 2(14)(iii) of the Act. Therefore, the High Court ruled in favor of the Department, overturning the Tribunal's decision. The judgment emphasized the importance of interpreting the law in light of amendments and established precedents. No costs were awarded in this case.