Commissioner of Income Tax, Jaipur vs Omnarain Somani

This Reference has been made by the Income Tax Appellate Tribunal at the instance of the Revenue u/s 256(1) /256(2) of the. income tax Act, 1961 pertaining to the assessment year 1984-85 seeking opinion of this Court on the following question of law:- whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the (capital gains tax cannot be levied on the assessee in respect of sale of agricultural land even though it was situated within the Municipal limits?

Heard learned counsel for the party as.

Learned counsel for the Revenue has pressed into service the judgment of Apex Court delivered in the case titled as Singhai Rakesh Kumar Vs. Union of India and Others, , wherein, the issue was similar and identical. Dealing with this proposition, Supreme Court held as under:- Under the terms of the Constitution, Parliament is empowered to legislate to say what ''agricultural income'' means. What Parliament says in this regard in the statute then current relating to income tax is the definition of ''agricultural income'' for the purposes of the constitution. In regard to such agricultural income the States may legislate. I regard to all other income it is for Parliament to legisiate. [see The Karimtharuvi Tea Estates Ltd., Kottayam and Another Vs. State of Kerala and Others, ]

It is in this background that the impugned amendments in the 1961 Act may be seen. Clause (1A) of section 2 defined ''agricultural income'' to mean, inter alia, ''any rent or revenue derived from land which is situated in India and is used for agricultural purposes''. Clause (14) of section 2 defined ''capital asset'' to mean ''property of any kind held by an assessee....but does not include agricultural 1and in India.... The words ''agricultural land in India'' were substituted by the Finance Act, 1970, with effect from April 1, 1970, to read thus:

(iii) ''agricultural'' land India, not being land situate-

(a) in any area which comprised within the jurisdiction a municipality (whether known as 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 kilometers, 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 beha1f by notification in the Official Gazette;

It appears that by reason of 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, , an Explanation was added by the Finance Act, 1989, with effect from April 1, 1970, to clause (1A) of section 2 which read thus:

Explanation.-For the removal of doubts, it is hereby declared 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 this section;

The position, as a result, is that income arising from the transfer of agricultural land that falls within the terms of items (a) and (b) of sub-clause (iii) of clause (14) of section 2 fal1s outside the ambit of revenue derived from land and therefore, outside the ambit of ''agricultural income''. Such income, therefore, is liable to capital gains tax chargeable u/s 45 of the 1961 Act.

Parliament has, as aforestated, the power to define what agricultural income is in the 1961 Act; the amendment of clauses (1A) and (14) of section 2 thereof in the manner aforestated are, therefore, good in law. The effect is that the assesses is liable to pay capital gains tax on the sales of this lands within the municipal limits of Bina.

The Reference is accordingly answered in favour of the Revenue.