1991 (8) TMI 146 - AT - Income Tax

Summary

Issues:
1. Whether capital gains on the sale of agricultural land are exempt from tax.
2. Impact of the retrospective amendment on the definition of agricultural income.
3. Interpretation of the definition of agricultural income under the Income-tax Act.
4. Applicability of capital gains tax on the sale of agricultural lands within notified areas.

Analysis:
The judgment by the Appellate Tribunal ITAT Hyderabad-B involved three appeals by the revenue concerning the exemption from capital gains tax on the sale of agricultural land during the assessment year 1981-82. The appeals were consolidated and disposed of together. The assessee's counsel argued that based on the decision in J. Raghottama Reddy v. ITO, capital gains on the sale of agricultural land should not be taxable. The counsel also cited a Tribunal decision to support this contention. On the other hand, the Departmental Representative pointed out that the amendment made by the Finance Act, 1989, with retrospective effect from 1-4-1970, inserted an Explanation in the Income-tax Act, stating that revenue derived from certain lands shall not be considered agricultural income for tax purposes.

The Tribunal considered the arguments and precedents presented. It noted that the High Court in the J. Raghottama Reddy case held that profits from the sale of agricultural land should be treated as agricultural income and not subject to tax. However, the Tribunal highlighted that the retrospective amendment in 1989 clarified that capital gains from the transfer of such land should be taxable. The Tribunal discussed the constitutional aspect of defining agricultural income under Article 366(1) and the legislative powers of Parliament in this regard. It referred to a Kerala High Court decision in Glory Paul's case, which emphasized that gains from the sale of land in municipal areas should be taxed as capital gains, not agricultural income.

Ultimately, the Tribunal concluded that the amended definition of agricultural income, reflecting back into the Constitution, satisfied the conditions set in the J. Raghottama Reddy case. Therefore, it held that capital gains tax is applicable to the sale of agricultural lands within notified areas. As a result, the appeals by the revenue were allowed, affirming the taxability of capital gains on the sale of agricultural lands.