1987 (10) TMI 47 - HC - Income Tax

Summary

Issues Involved:
1. Legislative competence of Parliament to levy capital gains tax on transfer of agricultural lands.
2. Validity of the levy under Article 14 of the Constitution.
3. Definition and scope of "agricultural income" and "capital asset" under the Income-tax Act, 1961.

Summary:

Legislative Competence of Parliament:
The petitioners questioned the legislative competence of Parliament to levy capital gains tax on the transfer of agricultural lands situated within the limits of municipalities and within a radius of 8 kilometers thereof. It was argued that Parliament's power to tax income is derived from entry 82 in the Union List, which excludes "agricultural income," a domain reserved for State Legislatures under entry 46 in the State List. The court examined whether the profit or gain arising from the transfer of agricultural land is "agricultural income" within the meaning of section 2(1) of the Income-tax Act, 1961. The court held that the profit or gain resulting from the sale of agricultural land is "revenue derived from land," i.e., it is agricultural income within the meaning of clause (1) in section 2 of the Act. Consequently, Parliament could not tax such income by merely treating the land as a "capital asset."

Validity of the Levy under Article 14:
The court did not find it necessary to consider the attack on the basis of Article 14, given the conclusion reached on the legislative competence issue.

Definition and Scope of "Agricultural Income" and "Capital Asset":
The court analyzed the definitions of "agricultural income" and "capital asset" under the Income-tax Act, 1961. It noted that the definition of "capital asset" was amended by the Finance Act, 1970, to include agricultural lands situated within specified municipal limits. However, the definition of "agricultural income" was not correspondingly amended to exclude such lands. The court observed that merely amending the definition of "capital asset" does not empower Parliament to tax agricultural income. The income from agricultural lands used for agricultural purposes, even if situated within municipal limits, continues to be agricultural income and is not taxable by Parliament.

Conclusion:
The court allowed W.P. No. 2592 of 1981, holding that the profits and gains arising from the transfer of the lands concerned could not be taxed under the Income-tax Act, 1961. For other writ petitions, the court directed the Income-tax Officer to verify whether the lands were used for agricultural purposes at the time of transfer. If so, the income would be "agricultural income" and not subject to capital gains tax. Otherwise, the levy would be proper.

Orders:
Writ Petitions Nos. 9605 of 1981, 5641 of 1980, 1605 of 1986, 2211 of 1986, 2123 of 1986, and 7167 of 1982 were disposed of with the above directions. No order as to costs. Advocate's fee Rs. 100 in each.