1989 (2) TMI 47 - HC - Income Tax

Summary

Issues:
1. Determination of cost of acquisition for calculating capital gains on the sale of ancestral agricultural land.
2. Legislative competence of Parliament to impose tax on capital gains from the sale of agricultural land.

Analysis:
The case involved the determination of the cost of acquisition for computing capital gains on the sale of ancestral agricultural land. The assessee, in the assessment year 1975-76, sold land and declared capital gains based on the land's cost as of February 28, 1970. However, the Income-tax Officer disagreed, citing section 55(2) of the Income-tax Act, which considers the cost price as on January 1, 1954. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the assessee's position. The Tribunal referred the question of determining the cost of acquisition as of February 28, 1970, to the High Court.

The High Court analyzed the relevant provisions of the Income-tax Act, particularly section 55(2), which determines the cost of acquisition concerning a capital asset acquired before January 1, 1954. The Court noted that the land in question became a capital asset chargeable to capital gains due to the Finance Act of 1970. The amendment brought agricultural land within the definition of a capital asset, subjecting it to capital gains tax. The Court referred to various decisions supporting the consideration of the land's value as of January 1, 1954, for calculating capital gains.

Regarding the legislative competence to impose tax on capital gains from agricultural land sales, the assessee argued that such taxation falls under the State list, making it ultra vires for Parliament. Citing precedents, the assessee contended that the matter should be decided in their favor. However, the Revenue argued that the question of legislative competence cannot be raised in reference proceedings. The High Court held that the question of vires should be challenged under Article 226 of the Constitution and not in a reference. The Court referred to its decision in a previous case and noted dissenting judgments from other High Courts on the imposition of capital gains tax on agricultural land.

In conclusion, the High Court ruled in favor of the Revenue, stating that the value of the land as of January 1, 1954, should be considered for computing capital gains. The Court emphasized that the question of legislative competence should be challenged through appropriate legal avenues and not in a reference proceeding. No costs were awarded in the judgment.