1985 (6) TMI 11 - HC - Income Tax

Summary

Issues Involved:
1. Constitutionality of the amended provisions of the Income-tax Act, 1961.
2. Applicability of capital gains tax on agricultural land used for agricultural purposes.
3. Delay and laches in filing the petition.
4. Determination of whether the land was used for agricultural purposes at the relevant time.

Detailed Analysis:

1. Constitutionality of the Amended Provisions of the Income-tax Act, 1961:
The petitioners initially challenged the constitutional validity of the amended provisions of sections 2(14) and 47 of the Income-tax Act, 1961, arguing that they were ultra vires the legislative powers of Parliament. However, this contention was no longer pursued due to the binding precedent set by the Division Bench ruling in *Manubhai A. Sheth v. N. D. Nirgudkar* [1981] 128 ITR 87 (Bom), which upheld the constitutional validity of the amendments. The ruling clarified that the amendments did not encroach upon the legislative field of the States and were not colorable legislation.

2. Applicability of Capital Gains Tax on Agricultural Land Used for Agricultural Purposes:
The petitioners contended that the capital gains arising from the sale of agricultural land used for agricultural purposes should be exempt from tax under section 10(1) of the Act, read with section 2(1), as such land was not a "capital asset" within the meaning of section 2(14)(iii). The Division Bench in *Manubhai Sheth's case* held that capital gains from agricultural land used for agricultural purposes constituted "revenue" derived from such land and thus fell within the legislative competence of State Legislatures. Consequently, the amended provisions could not levy capital gains tax on such land, and the provisions must be read down to exclude agricultural land used for agricultural purposes from their operation.

3. Delay and Laches in Filing the Petition:
The respondents argued that the petition should be dismissed due to delay and laches. However, the court found that the petitioners acted diligently by filing the petition in September 1981, shortly after the *Manubhai Sheth* ruling was reported in March 1981. The court noted that citizens cannot be expected to be immediately aware of judicial pronouncements and that the petitioners had approached the court within a reasonable time. The court also referenced the Supreme Court ruling in *D. Cawasji & Co. v. State of Mysore*, which allowed for writ petitions to recover taxes paid under a mistake of law if filed within three years of discovering the mistake. The court concluded that there was no undue delay in this case and rejected the contention of delay.

4. Determination of Whether the Land Was Used for Agricultural Purposes at the Relevant Time:
The court acknowledged that while there was a finding that the land was agricultural, there was no finding on whether the land was used for agricultural purposes at the relevant time. This determination was crucial in light of the *Manubhai Sheth* ruling. Consequently, the court remanded the matter to the Income-tax Appellate Tribunal to consider and decide whether the agricultural land was used for agricultural purposes at or near the relevant time.

Order:
The petition succeeded, and the impugned order dated February 18, 1976, of the Income-tax Appellate Tribunal was set aside. The proceedings were remanded to the Tribunal to rehear both the petitioners' appeal and the Department's counter-appeal, specifically addressing whether the agricultural land was used for agricultural purposes. The finding that the land was agricultural was not to be reopened. The rule was made absolute with no order as to costs.