Commissioner of Income Tax vs Gurcharan Singh and Sons

Ashok Bhan, J.—At the instance of the Commissioner of Income Tax, Jalandhar (Revenue), the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as "the Tribunal"), has referred the following question of law u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), to this court for its opinion :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in upholding the decision of the Appellate Assistant Commissioner that capital gains arising from transfer of agricultural land located within the municipal limits is not liable to capital gains tax ?"

The assessee is a Hindu undivided family by status and in the accounting period ending on March 31, 1981, relevant to the assessment year 1981-82, sold agricultural land on February 12, 1981, and February 27, 1981, for a consideration of Rs. 65,100. The agricultural land sold was situated within the municipal limits of Bhatinda city. The assessee did not disclose any income under the head "Capital gains" by relying upon the decision of the Bombay High Court in Manubhai A. Sheth and others Vs. N.D. Nirgudkar, 2nd Income Tax Officer, A-II Ward, Bombay and another, . The Income Tax Officer, however, considered that the assessee was governed by two other decisions mentioned in the assessment order, viz., Ambalal Maganlal Vs. Union of India and Another, and Union of India v. Harbhajan Singh Dhillon, (1972) 83 ITR 582 (SC) , and held that the surplus realised on the sale of agricultural land was liable to capital gains tax. He computed the gross capital gains at Rs. 50,000 and net capital gains after giving statutory deductions at Rs. 33,750.

The assessee filed an appeal before the Appellate Assistant Commissioner which was accepted. It was held by the Appellate Assistant Commissioner that there was no capital gains liable to tax by applying the Bombay High Court decision in Manubhai A. Sheth and others Vs. N.D. Nirgudkar, 2nd Income Tax Officer, A-II Ward, Bombay and another, . The Appellate Assistant Commissioner was of the opinion that the sale of land situated in an urban and semi-urban area used for agricultural purposes would be agricultural income within the meaning of Section 2(1) of the Act and that even after the amendment of Section 2(14)(iii) with effect from April 1, 1970, the income or gains arising from the sale of agricultural land within the municipal limits would not be taxable u/s 45 of the Act.

The Revenue filed an appeal before the Tribunal which was dismissed. Relying upon Manubhai A. Sheth and others Vs. N.D. Nirgudkar, 2nd Income Tax Officer, A-II Ward, Bombay and another, , the Tribunal held that capital gains was not exigible to tax. The Revenue has come up in reference before this court.

Mr. B.S. Gupta, learned counsel appearing for the Revenue, relying upon a judgment of this court in Tuhi Ram Vs. Land Acquisition Collector and Another, , contended that the sale of agricultural land situated within the municipal limits would come within the ambit of a capital asset and the transfer of the same would attract capital gains.

We find force in the submission of Mr. Gupta. This court in Tuhi Ram Vs. Land Acquisition Collector and Another, specifically differed from the view taken by the Bombay High Court in Manubhai A. Sheth and others Vs. N.D. Nirgudkar, 2nd Income Tax Officer, A-II Ward, Bombay and another, and held that the Explanation inserted in Section 2(1A) by the Finance Act, 1989, with effect from April 1, 1970, has brought about a change in the law and after that date the sale made of certain specified agricultural lands situated in the municipal limits would attract capital gains. It was held as under (reproduced from the headnote) :

"Compulsory acquisition of agricultural land under any law for the time being in force is a transfer within the meaning of Section 2(47) of the Income Tax Act, 1961. The expression ''capital asset'' means property of any kind held by the assessee, whether or not connected with his business or profession. It, however, does not include agricultural land in India except the class of ''lands included in items (a) and (b) of Section 2(14)(iii). In order to qualify for such exemption, it is not enough that the land was once agricultural land. It must be agricultural land even at the time of sale or transfer. By the Finance Act, 1970, with effect from the assessment year 1970-71, certain specified lands situate in urban areas or semi-urban areas were brought within the definition of capital asset, when a capital asset is sold and if profit or gain results from such a sale, it is chargeable, not because it is revenue, but because the statute specifically charges the resulting capital gain by including it as income. Although land is the source of income, income is derived not by the use of land, but by the sale of the land, that is, by conversion of the land into cash. The resultant income is not agricultural income. The Explanation inserted in Section 2(1A) by the Finance Act, 1989, with effect from April 1, 1970, makes the position clear when it declares that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of Sub-clause (iii) of Clause (14) of Section 2. The Explanation completely renders ineffective the ratio of the decision in Manubhai A. Sheth and others Vs. N.D. Nirgudkar, 2nd Income Tax Officer, A-II Ward, Bombay and another, ."

Following the view taken by this court in Tuhi Ram Vs. Land Acquisition Collector and Another, , it is held that the Tribunal was not right in law in holding that the capital gains arising on the transfer of agricultural land situated within the municipal limits was not chargeable to Income Tax in the assessee''s hands and the question referred to us is answered in the negative, i.e., in favour of the Revenue and against the assessee. No costs.