1990 (6) TMI 98 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of capital gains on the transfer of agricultural land.
2. Justification of action under Section 148 of the Income-tax Act.
3. Determination of whether the capital gain is short-term or long-term.

Issue-wise Detailed Analysis:

1. Taxability of Capital Gains on the Transfer of Agricultural Land:

The primary issue was whether the profit from the sale of agricultural land should be treated as capital gains and thus taxable. The Income Tax Officer (ITO) initiated action against the legal representative of the deceased assessee, asserting that the capital gains from the sale of agricultural land had escaped assessment. The assessee contended that the land sold was agricultural land, and hence, no profit arising on its sale was taxable. Alternatively, if the land was considered a trading asset before its sale, the market value on the date of conversion should be deducted from the sale price to determine the capital gains.

The Appellate Assistant Commissioner (AAC) cancelled the assessment, holding that capital gains from the sale of agricultural land were not taxable. The AAC relied on the Bombay High Court's decision in Manubhai A. Sheth v. N.D. Nirgudkar, which held that profits from the sale of agricultural land were agricultural income under Section 2(1)(a) of the Income-tax Act, 1961, and thus exempt from income tax. This decision was based on the interpretation that agricultural lands within municipal limits included in the definition of capital asset by the Finance Act, 1970, should exclude lands used for agricultural purposes to avoid contradiction.

However, the Departmental Representative cited the Karnataka High Court's dissenting view in B.S. Jayachandra v. ITO, which upheld the amendment's validity and did not expressly consider whether profits from agricultural land sales were agricultural income under Section 2(1)(a).

Given the conflicting judgments and the absence of a jurisdictional High Court decision, the Tribunal preferred the view favorable to the assessee, following the Bombay High Court's judgment that profits from the sale of agricultural land were agricultural income and thus not taxable as capital gains.

2. Justification of Action Under Section 148:

The AAC also held that the ITO was not justified in taking action under Section 148, which pertains to the issuance of a notice for income escaping assessment. Since the primary issue of taxability of capital gains on agricultural land was resolved in favor of the assessee, the Tribunal deemed it unnecessary to decide on the validity of action under Section 147 (which relates to income escaping assessment) and Section 148.

3. Determination of Whether the Capital Gain is Short-term or Long-term:

The ITO considered the capital gain as short-term, as the deceased had acquired bhumidhari rights over the land by depositing the necessary amount on 5-8-1972. However, since the Tribunal concluded that the profit from the sale of agricultural land was agricultural income and not taxable, it did not further address whether the gain was short-term or long-term.

Separate Judgments Delivered by Judges:

The Judicial Member upheld the AAC's order, relying on the Bombay High Court's decision, which favored the assessee, and exempted the capital gain from tax. The Accountant Member, however, followed the Karnataka High Court's decision, which upheld the chargeability of capital gains on the sale of agricultural land. Due to this divergence, the matter was referred to a Third Member.

Third Member's Order:

The Third Member agreed with the Accountant Member, noting that the Finance Act, 1989, introduced an Explanation to Section 2(1)(a) with retrospective effect from 1-4-1970. This Explanation clarified that revenue derived from land does not include income from the transfer of land referred to in Section 2(14)(iii), thus nullifying the Bombay High Court's decision. Consequently, the capital gains arising from the sale of agricultural land were chargeable to tax, and the view of the Accountant Member was accepted.

Conclusion:

The appeal was ultimately decided in favor of the revenue, holding that the profit on the sale of agricultural land was chargeable to capital gains in the relevant assessment year. The matter was then referred back to the regular Bench for disposal according to the majority opinion.