1991 (12) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Legislative competence of Parliament to tax agricultural income.
2. Characterization of compensation received on compulsory acquisition of agricultural land.
3. Taxability of interest paid on compensation for compulsory acquisition of land.

Summary:

Legislative Competence of Parliament to Tax Agricultural Income:
The petitioners challenged the vires of section 2(14)(iii) of the Income-tax Act, arguing that Parliament is not competent to legislate on agricultural income, which falls under entry 46, List II of Schedule VII of the Constitution. The court held that Parliament is competent to define "agricultural income" for the purpose of the Constitution and the Income-tax Act. It was concluded that the taxation of capital gains from agricultural land that has lost its agricultural characteristics falls within Parliament's legislative competence.

Characterization of Compensation Received on Compulsory Acquisition of Agricultural Land:
The court examined whether compensation received on compulsory acquisition of agricultural land is a capital asset within the meaning of section 2(14) of the Act and whether profits and gains arising therefrom are taxable. It was held that such compensation is a capital asset and not agricultural income, thus taxable under the Income-tax Act. The court distinguished between compensation paid under the Land Acquisition Act and the Requisition and Acquisition of Immovable Property Act, concluding that both are taxable as capital gains.

Taxability of Interest Paid on Compensation for Compulsory Acquisition of Land:
The court considered whether interest paid on compensation for compulsory acquisition of land is "income" and therefore taxable. It was held that interest under sections 28 and 34 of the Land Acquisition Act is not compensation but is paid for the delayed payment of compensation, making it a revenue receipt liable to tax under the Income-tax Act. The court cited precedents like Dr. Shamlal Narula v. CIT and T. N. K. Govindaraju Chetty v. CIT to support this view.

Additional Observations:
The court noted that interest received should be spread over all the years from the date it became due for the purpose of income-tax assessment, as indicated by the Supreme Court in Rama Bai v. CIT and K. S. Krishna Rao v. CIT. The Land Acquisition Collector is justified in deducting income-tax on interest payable to landholders under section 194A of the Act. The petitions were dismissed, and the impugned notices were held valid, with the court emphasizing that the income accrued as interest should be spread over the relevant accounting years for assessment purposes.