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TMI Blog1987 (10) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... ng an income of Rs. 5,630 as capital gain arising out of the said transaction and Rs. 2,500 as agricultural income. The Income-tax Officer, by his order dated January 30, 1980, determined the capital gain in the hands of the petitioner at Rs. 26,630 and levied a tax of Rs. 5,746. According to the petitioner, the land sold was always put to agricultural use and paddy was grown at the time of sale. In the counter-affidavit filed by the respondents, the facts stated above are not denied. It is, however, submitted that the petitioner ought to have filed an appeal against the order of assessment and that the writ petition filed one year after the service of assessment order suffers from laches. We may mention that in the other writ petitions, there is no specific allegation that the lands were being cultivated and were put to agricultural use at the time of transfer. Section 45 of the Act makes the profits or gains arising from the transfer of a capital asset, effected in the previous year, chargeable to income-tax under the head " Capital gains ". Such capital gain is deemed to be the income of the previous year in which the transfer took place. The expression "capital asset " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich took place during the month of March, 1970, became so liable. The expression " agricultural income " is defined in clause (1) of section 2. Prior to the amendment of this definition by the Taxation Laws (Amendment) Act, 1970, with retrospective effect from April 1, 1962, the definition read as follows: (1) 'agricultural income' means (a) any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such; (b) any income derived from such land by (i) agriculture ; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market ; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause ; (c) any income derived from any building owned and occupied by the receiver of the rent or reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mittee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or (B) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette." It may be noted that the proviso substituted by the Amendment Act is in two parts which we may refer to as " proviso (i) " and " proviso (ii) ". Proviso (i) is a reproduction of the pre-existing proviso, while proviso (ii) is an elaboration of the latter half of sub-clause (a). Proviso (ii), however, contains two exceptions which are mentioned as (A) and (B). Exceptions (A) and (B) are verbatim reproduction of subclauses (a) and (b) (exceptions (A) and (B) as they may be called) in clause (iii) of the definition of " capital asset ". The amendment of the definition of " agricu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the words "Indian Income-tax Act " in the said definition would now refer to the Income-tax Act, 1961, which means that the expression " agricultural income " occurring in the aforesaid entries in the Seventh Schedule should be understood in the manner, and in the sense defined by clause (1) of section 2 of the Income-tax Act. According to sub-clause (a) of the said definition in the Income-tax Act, " any ...... revenue derived from land which is situated in India and is used for agricultural purposes " constitutes agricultural income. Income derived by transfer of land is also revenue derived from land, as held by the Supreme Court. If so, taxing such agricultural income is beyond the legislative competence of Parliament. No doubt, the definition of " capital asset " includes all agricultural lands situated within the limits of, a municipality and a radius of 8 Kms. thereof, but the definition of " agricultural income " has not been correspondingly amended. Even today, in spite of the amendment of the definition of " agricultural income " by the Taxation Laws (Amendment) Act, 1970, the income derived from agricultural land (which includes income derived from sale of such land) sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stance as may be notified, not exceeding 8 kilometres' radius, became capital assets. The question then arises whether the profits and gains arising from the transfer of an agricultural land-even where it is called a capital asset-is " agricultural income " ? If it is agricultural income, Parliament cannot tax it by merely calling the agricultural land " capital asset ". Learned counsel for the petitioners contends that even the income derived from the sale of agricultural land is " revenue derived from land" within the meaning of clause (a) of the definition of it agricultural income " in section 2(1) of the Act. The contention is that if the land is used for agricultural purposes, within the meaning of the said clause in the definition, any capital gain arising from the transfer of such land would be agricultural income, and taxing it would, therefore, be beyond the competence of Parliament. Reliance is placed upon the decision of the Supreme Court in Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503 and the decision of the Bombay High Court in Manubhai A. Sheth v. N. D. Nirgudkar, ITO [1981] 128 ITR 87, in support of this proposition. Ex facie this contention appears to be ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 16(3)(a)(iii) of the Indian Income-tax Act, 1922. The contention was that " so much of the income of a wife...... as arises directly or indirectly...... from assets........ occurring in the said provision means only the income which the asset produces while it continues to remain in the hands of the assessee and does not include the gain made by selling the asset and parting with its possession. This argument was rejected by the Supreme Court in the following words (at page 507): " In our opinion, there is no logical distinction between income arising from the asset transferred to the wife and arising from the sale of the assets so transferred. The profits or gains which arise from the sale of the asset would arise or spring from the asset, although the operation by which the profits or gains is made to arise out of the asset is the operation of the sale. If the asset is employed, say by way of investment and produces income, the income arises or springs from the asset; the operation which causes the income to spring from the asset is the operation of the investment. In the operation of the investment, income is produced while the asset continues to belong to the assessee, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said that the income arising from agricultural lands situated within the municipal limits with a population of 10,000, etc., shall not be treated as agricultural income and there the matter would have ended. But, unfortunately, the exercise done by Parliament has failed to achieve the said objective if indeed that was the objective. May be it is a case of bad draftsmanship; may be not. The result, however, is that the income from agricultural lands which are used for agricultural purposes, even though situated within the municipal limits with more than 10,000 population and within the notified limits thereof, continues to be agricultural income. Turning to the definition of " agricultural income ", if one examines the unamended and amended definitions side by side, it would be clear that what we have called proviso (ii) is only an elaboration of the words and is either assessed to land revenue in India or is subject to a local rate assessed and collected by the officers of the Government as such ...... which occurred in sub-clause (a) of the unamended definition. In such case, they should have placed proviso (ii) at the end of sub-clause (b) in which case it would have qualifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to the last preceding census of which the relevant figures have been published before the first day of the previous year; or (B) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette". We are not concerned herein with proviso (i) for the reason that, admittedly, it is applicable only to a building connected with land. We are concerned only with proviso (ii). According to this proviso, the land referred to is either land which is assessed to land revenue in India, or is subject to a local rate assessed and collected by the officers of the Government as such, or where the land is not so assessed to land revenue or subject to a local rate, it is not situated within the limits of the municipality, etc. In other words, proviso (ii) is in two parts. It the land is assessed to land revenue in India, or is subject to a local rate assessed and collected by the officers of the Gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove discussion is that Parliament could not have taxed the Profits and gains arising from the transfer of a land used for agricultural Purposes-whether such land is assessed to land revenue in India or is subject to a local rate assessed and collected by the officers of the Government-notwithstanding that such land is situated within the limits of a municipality, etc., with a Population of not less than 10,000 or is situated within such distance as may be notified, not exceeding 8 kilometres from such municipal limits. The reason is simple-it is agricultural income. By merely treating such land as a " capital asset " within the meaning of section 2(14), Parliament does not get the competence to tax it. The income arising from its transfer is still agricultural income for the reasons stated above. Indeed, it must be held that Parliament never intended to tax such income. (Of course, the position with reference to the income from the building connected with the land situated within the limits of a municipality, etc., is different ; it would not be agricultural income). In the above situation, there is no occasion to strike down any portion of the definition of " capital asset". We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, for the purposes of article 366(1) and hence for the purposes of entries in the Seventh Schedule, income derived from such lands is also not agricultural income. It is in the light of this definition of 'agricultural income' which came into force with effect from April 1, 1970, that one has to consider the submissions made regarding the legislative competence of Parliament to enact section 2(14)(iii) of the Income-tax Act, 1961. " Firstly, the retrospective effect given to the definition of "agricultural income " in section 2(1) is not from April 1, 1970, but with effect from April 1, 1962, i.e., the date of commencement of the Income-tax Act, 1961. Secondly, the defect in the language of the said definition, pointed out by us above, does not appear to have been specifically brought to the notice of the learned judges. It is for this reason that the Bombay High Court has dissented from this opinion in Manubhai A. Sheth v. N. D. Nirgudkar, ITO [1981] 128 ITR 87 (Bom). The Karnataka High Court in B.S. Jayachandra v. ITO [1986] 161 ITR 190, followed the approach of the Gujarat High Court, dissenting from the Bombay view. The Karnataka High Court has referred in extenso to tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cases. With a view to removing this anomaly and providing tax relief to the agriculturists who cultivate forest lands, lands in terai areas or cantonments or in States which have abolished land revenue on small holdings, the definition of 'agricultural income' in clause (1) of section 2 has been amended so as to drop the condition that the land from which the income is derived should be assessed to land revenue or any local rate. This change will bring within the purview of the expression 'agricultural income', income derived from cultivation of forest lands, lands in terai areas and cantonments as also lands in respect of which the State Government does not levy any land revenue. 94. In regard to income attributable to farm buildings, the amended definition of ' agricultural income ' provides that income attributable to such a building will be treated as agricultural income subject to the condition that the building is situated on, or in the immediate vicinity of, land which is assessed to land revenue or a local rate, at present, or, in the alternative, the building is on, or in the immediate vicinity of, land which (though not assessed to land revenue or any local rate) is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a High Court, i.e., Circular No. 45, dated September 2, 1970, explaining the meaning and object behind the amendment of the definition of " capital asset " in section 2(14). It reads thus (at p. 199) : " 29. Capital gains arising from the transfer of a capital asset have been chargeable to income-tax for several years past. Where the transfer of the capital asset is effected within a period of 24 months from the date of its acquisition by the assessee, the capital gain is treated on a par with ordinary income and charged to tax on that basis. Gains arising from the transfer of a capital asset held by the assessee for more than 24 months are charged to tax on a concessional basis. In the case of companies, such gains are taxed at the rate of 40% where they relate to lands and buildings, and at 30% where they relate to other assets. In the case of non-corporate taxpayers, only a certain portion of the capital gains in excess of Rs. 5,000 is included in the taxable income. This proportion is 55% where the gains relate to lands and buildings and 35% where they relate to other assets. 30. Prior to the amendment made by the Finance Act, 1970, the definition of the term 'capital ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the assessment year 1970-71. However, by an amendment to section 47 of the Income-tax Act, it has been specifically provided that no capital gain or loss will be computed with reference to any transfer of agricultural land in India effected before 1st March, 1970. 32. The effect of the amendments to section 2(14) and section 47, as stated above, will be that capital gains arising from transfer of agricultural lands situated in the municipal and other urban areas on or after 1St March, 1970, will become liable to taxation even where such land was held for bona fide agricultural purposes, often as the main source of livelihood. With a view to relieving the burden of taxation on the capital gains in such cases, a provision has been made, in a new section 54B of the Income-tax Act, for exempting from tax the capital gain arising from the transfer of agricultural land in certain circumstances. Under the new section 54B, where the capital gain arises from transfer of land which in the two years immediately preceding the date of transfer was being used by the assessee or a parent of his for agricultural purposes, and the assessee has, within a period of two years after that date pu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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