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TMI Blog1986 (3) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... ime, in 1976, the petitioner filed his return under the Act before the Income-tax Officer (Assessment 4A), Circle-11, Bangalore, inter alia, returning a net capital gain of Rs. 17,893 from the said sale transaction valuing the land at Rs. 9,000 per acre as on January 1, 1954. On June 23, 1976, the Income-tax Officer completed the assessment (annexure-A) fixing the net capital gains at Rs. 47,028 and brought the said amount to tax under the Act. Aggrieved by the said order of the Income-tax Officer, the petitioner filed an appeal before the Appellate Assistant Commissioner of Income-tax, Bangalore Range, who by his order dated November 11,1976 (annexure-B), disposed of the same affirming the order of the Income-tax Officer on the determination of capital gains, however, granting him relief on interest imposed by the Income-tax Officer. Aggrieved by the said order of the Appellate Assistant Commissioner and the Income-tax Officer, the petitioner and the Income-tax Department filed second appeals before the Income-tax Appellate Tribunal, Bangalore (" the Tribunal "). On July 19, 1978, the Tribunal disposed of the said appeals by a common order granting some relief to the Department. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that came into force from April 1, 1962 (vide section 1(3) of the Act), closely follows the 1922 Act. Prior to April 1, 1970, the term " agricultural income" and capital asset were defined in sections 2(1) and 2(14) of the Act as hereunder: "2. In this Act, unless the context otherwise requires, (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 revenue of any su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and (ii) the land 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 or where the land is not so assessed to land revenue or subject to a local rate, it is not situated (A) in any area which is comprised within the jurisdiction of municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee 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." Section 2(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , specify in this behalf by notification in the Official Gazette." The scope and effect of this amendment has been explained by the Central Board of Direct Taxes (Board) in its Circular No. 56 dated March 19, 1971, in these words : " 91. Section 10(1) exempts agricultural income from income-tax and also provides for its exclusion in computing the total income of the assessee. The exemption of agricultural income from central taxation is based on the provision in the Constitution according to which Parliament has exclusive power to make laws with respect to taxes on income other than agricultural income, whereas a State Legislature has exclusive power to make laws with respect to taxes on agricultural income, under article 246(1) of the Constitution read with entry 82 of List I (Union List) in the Seventh Schedule, and article 246(3) read with entry 46 of List II (State List). The expression 'agricultural income', for the purpose of the above mentioned entries, means agricultural income as defined for the purpose of the enactments relating to Indian income-tax, vide article 366(1) of the Constitution. Under the definition of 'agricultural income' in clause (1) of section 2, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erived 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, as 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 situated outside 'urban areas', i.e., any area which is comprised within the jurisdiction of any municipality or cantonment board having a population of not less than ten thousand persons (according to the last preceding census of which the relevant figures have been published before the first day of the previous year) or within such distance (up to a maximum of eight kil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being land situate (a) in any area which is comprised within the jurisdiction of municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee 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'." The object of this amendment has been explained in the Notes on Clauses to clause 3 of the Finance Bill of 1970 in these words : " Sub-clause (a) seeks to amend clause (14) of section 2 of the Income-tax Act which defines the term 'capital asset'. The amendment seeks to bring within the term 'capital asset' agricultural land situated within the limits of any municipality ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate 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 asset ' in section 2(14) of the Income-tax Act, 1961, excluded from its scope, inter alia, agricultural land in India. Accordingly, no liability to tax arose on gains derived from transfer of agricultural land in India. This exemption of agricultural land from the scope of levy of tax on capital gains has a historical origin and is not due to any bar in the Constitution on the competence of Parliament to legislate for such levy. Agricultural land situated in municipal and other urban areas is essentially similar to non-agricultural land in such areas in its potentialities for use due to the progress of urbanisation and industrialisation. The Finance Act, 1970, has accordingly amended the relevant provisions of the Income-tax Act so as to bring within the scope of taxation capital gains arising from the transfer of agricultural land situated in certain areas. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 period of two years after that date, purchased any other land (whether in the same area or elsewhere) for being used for agricultural purposes, then the capital gain will not be charged to tax to the extent that it has been utilised for acquiring the fresh land. Where the amount of the capital gain exceeds the cost of acquisition of the fresh land, only the excess will be chargeable to tax. The concession will, however, be forfeited if the assessee transfers the fresh land acquired by him within a period of three years from the date of its purchase. " What emerges from this amendment is that agricultural lands when situated within the limits of a municipality whose population was not less than 10,000 and within the notified area of eight kms. will not be considered as agricultural lands but as non-agricultural lands. The said transformation or change is a statutory transformation and is the inevitable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Bombay High Court, we regret our inability to subscribe to the view expressed in Manubhai A. Sheth's case [1981] 128 ITR 87 (Bom) on this aspect. Article 366 of the Constitution closely follows section 311 of the Government of India Act and the term " agricultural income " defined in that section has been bodily lifted and incorporated as article 366(1) of the Constitution. The distribution of legislative powers in the Constitution, closely follows the distribution of legislative powers in the Government of India Act. Entry No. 54 of List I of the Government of India Act has been bodily lifted and enacted as Entry No. 82 of List I of the Seventh Schedule to the Constitution. Entry No. 41 of List II of the Government of India Act has been bodily lifted and enacted as Entry No. 46 of List II (State List) of the Constitution. Article 366 of the Constitution defines certain terms that constantly occur in the Constitution. As an interpretation clause, article 366 provides that the terms defined therein shall have the meaning ascribed to them unless the context otherwise requires. Article 366(1) defines " agricultural income " as agricultural income as defined for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cognising the force of the above expressions of opinion, we cannot press them into service in favour of the assessee for the simple reason that 'agricultural income' has been defined in the Constitution itself in article 366(1) to mean agricultural income as defined for the purposes of enactments relating to Indian income-tax and there is a definition of ' agricultural income ' to be found in section 2(1) of the Indian Income-tax Act. We have, therefore, got to look to the terms of the definition itself and construe the same regardless of any other consideration, though, in so far as the terms 'agriculture' and 'agricultural purposes' are concerned we feel free, in view of the same not having been defined in the Act itself, to consider the various meanings which have been ascribed to the same in the legal and other dictionaries." What emerges from this enunciation is that the definition of the term " agricultural income " in the Income-tax Act becomes the definition of that term for the purpose of the Constitution. When once it is found that Parliament is competent to define the term " agricultural income " in the Income-tax Act in force, which becomes the definition for purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion, the court, speaking through Raghubar Dayal J., read down the aforesaid provision and expressed thus (at pp. 86, 88, 90, 91 92) : " Entry 46, List II of the Seventh Schedule to the Constitution relates to taxes on agricultural income. In view of clause (3) of article 246, the State Legislature can enact laws about these taxes. Article 366 provides that unless the context otherwise requires, the expression 'agricultural income' in the Constitution means agricultural income as defined for the purpose of the enactments relating to Indian income-tax. Therefore, the agricultural income about which a State Legislature may enact under Entry 46 of List II would be such income as defined in the Indian Income-tax Act ...... It follows, therefore, that the power of the State Legislature to make a law in respect of taxes on agricultural income arising from tea plantations will be limited to legislating with respect to the agricultural income so determined. The State Legislature is free in the exercise of its plenary legislative power to allow further deductions from such computed agricultural income as it considers fit, but it cannot add to the amount of the agricultural income so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, as we have to take the definition of 'agricultural income ' from what it is in the Income-tax Act. The provisions of the Income-tax Act and the Rules made thereunder will control the provisions of the Agricultural Income-tax Act enacted by a State Legislature ...... (at p. 91) We, therefore, construe Explanation 2 to section 5 of the Agricultural Income-tax Act not to extend to the computation of agricultural income derived from tea plantations and hold that in computing such agricultural income for the purpose of taxation under the Agricultural Income-tax Act, the Explanation to section 2 of that Act must be kept in mind and the income must be taken to be as defined for the purposes of the enactments relating to Indian income-tax." (at p. 92) We are of the opinion that on this enunciation, which is in accord with the earlier enunciation made in Raja Benoy Kumar Sahas Roy's case [1957] 32 ITR 466 (SC), the Union Parliament was competent to define the terms " agricultural income ", " agricultural land " and " capital asset " and thus bring to tax capital gains arising or accruing from agricultural lands situated within municipal limits and eight kms. of notified municipal are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctrine of pith and substance would certainly apply to such piece of legislation. Even on this doctrine of pith and substance which is well recognised by now in the field of constitutional law, the power of Parliament to enact section 2(14)(iii) can be upheld and on this ground also it can be said that it was competent for Parliament to enact section 2(14)(iii) and thus bring within the scope of section 45 read with section 47(viii) the gains or profits arising from transfer of capital asset as defined by section 2(14)(iii). The first two submissions made by Mr. Nanavati regarding the legislative competence of Parliament must, therefore, fail. We must point out at this stage that we are not finding power in Parliament to enact section 2(14)(iii) under the residuary article 97 read with article 248 of the Constitution but fairly and squarely in entry No. 82 of List I of the Seventh Schedule." We are in respectful agreement with these views expressed by their Lordships. In Manubhai A. Sheth's case [1981] 128 ITR 87, a Division Bench of the Bombay High Court consisting of Madan J. (as his Lordship then was) and Kania J. first construed the proviso appended to section 2(1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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