Bombay H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in exempting capital gains arising out of transfer of land situated within the municipal limits of Rajkot City ?

High Court Of Bombay

CIT vs. Mrs. Kamla S. Asrani

Sections 256, 256(2), 2(1A)

Asst. Year 1980-81

Mrs. Sujata V. Manohar & D.R. Dhanuka, JJ.

IT Appln. No. 47 of 1990

10th August, 1990

Counsel Appeared

G.S.Jetley with K.C.Sidhwa, Mrs.Manjula Singh, for the Revenue: S.E.Dastur with F.V.Irani i/b Madhu Munim & Co., S.N.Inamdar with G.Krishnan , for the Assessee

MRS. SUJATA V. MANOHAR, J. :

Both these IT applications seek to raise a common question as to whether the income derived by the assessees by way of capital gains from the sale of agricultural land can be considered as income from agriculture and, therefore, not taxable as capital gains. The assessee in IT Application No. 47 of 1990 owns certain lands within the municipal limits of Rajkot, State of Gujarat. She sold a part of the lands to a co-operative housing society. In respect of the capital gains arising from the sale of these lands, the assessee claimed that the lands were agricultural lands and hence capital gains from the sale of these lands were not taxable under the IT Act, 1961. The capital gains arose in the asst. yr. 1980-81. The dispute between the assessee and the Department was ultimately taken before the Tribunal. The Tribunal, relying upon the decision of our High Court in the case of Manubhai A. Sheth vs. N. D. Nirgudkar, ITO (1981) 22 CTR (Bom) 41:(1981) 128 ITR 87 (Bom), held that the capital gains were not taxable under the IT Act as they constitute agricultural income. The Tribunal declined to refer the following question to us on the ground that the question is squarely covered by the decision of our High Court in 128 ITR 87 : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in exempting capital gains arising out of transfer of land situated within the municipal limits of Rajkot City ?”

2. In IT Application No. 48 of 1990, the assessee had agricultural lands at Malegaon. These lands were laid out as plots as per permission obtained from the Collector. The lands were acquired by the State and an award was made on January 30, 1981, granting to the assessee and others a total compensation of Rs. 4,04,869. The assessee’s share in this compensation was 50per cent. The assessee claimed exemption from capital gains on the ground that this was agricultural income, relying upon the decision of our High Court in Manubhai A. Sheth vs. N. D. Nirgudkar, ITO (supra). The disputes between the assessee and the Department were carried to the Tribunal. The Tribunal upheld the claim of the assessee relying upon the above decision. The application of the Department to raise the following question and refer it to us has been rejected by the Tribunal on the ground that the issue is covered by the above decision:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that Rs. 42,064 was income from agriculture and not taxable as ‘capital gains’ ?”

3. In this connection, it is necessary to note the relevant provisions of s. 2(14) of the IT Act, 1961. Under s. 2(14)(iii), a capital asset does not include, inter alia, agricultural land in India not being land situated in any are which is comprised within the jurisdiction of a municipality or a cantonment board, etc. This amendment to s. 2(14) was introduced by the Finance Act, 1970, w.e.f. April 1, 1970. The constitutional validity of this amendment whereby land situated, inter alia, within the jurisdiction of a municipality was excluded from “agricultural land” was challenged before our High Court in Manubhai A. Sheth vs. N. D. Nirgudkar (supra). Our High Court held that profits or gains on sale of agricultural land would be “revenue” within the meaning of s. 2(1)(a) of the IT Act, 1961. In this section, “agricultural income” is defined to mean, inter alia, “any rent or revenue derived from land which is situated in India and is used for agricultural purposes”. The Court said that capital gains from sale of agricultural land would constitute revenue derived from agricultural land and, therefore, would come within the definition of “agricultural income”. It also said that, in view of entry 82 in List I of the Seventh Schedule to the Constitution, Parliament has no competence to levy tax on agricultural income. Therefore, the amendment to s. 2(14)(iii) (a) should be read down so as to exclude from its operation capital gains arising from the sale of agricultural land, even though such land may be situated within the jurisdiction of a municipality or any other board, etc., as set out in that clause.

4. Sec. 2(1A), which defines “agricultural income”, has, however, now been amended by adding an Explanation to it by the Finance Act, 1989, with retrospective effect from April 1, 1970. Under this Explanation, it is provided as follows : “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-cl. (iii) of cl. (14) of this section ;”

5. As a result of this Explanation, therefore, any income arising from the transfer of any agricultural land is not to be considered as revenue derived from agricultural land. This amendment was not in existence at the time when the Tribunal decided not to refer the question to us. It was, however, introduced with retrospective effect from April 1, 1970, and is now in existence.

6. It is contended by Mr. Dastur, learned counsel for the assessee in IT Application No. 47 of 1990, that for the purpose of deciding an application under s. 256(2) of the IT Act, 1961, we have to examine the state of the law as it existed at the time when the Tribunal decided the appeal. If the order of the Tribunal is in accordance with law which was in existence at the time when the Tribunal decided the appeal, no referable question of law would arise and, therefore, we should not direct the Tribunal to refer any question to us in exercise of our jurisdiction under s. 256(2). In other words, it is submitted that the Tribunal’s refusal under s. 256(1) to refer the question, when it is a correct decision in view of the then prevailing law, should not be interfered with by exercising jurisdiction under s. 256(2).

7. In support of his argument, Mr. Dastur has relied upon a decision of the Andhra Pradesh High Court in the case of Addl. CIT vs. M. J. Devda 1976 CTR (AP) 237: (1977) 109 ITR 484 (AP). The Andhra Pradesh High Court has held that the correctness or otherwise of the decision of the Tribunal will have to be decided only in the light of the law that was in force when the Tribunal rendered the decision ; otherwise it will be violating the very meaning and spirit of s. 256(2). It said that a retrospective amendment of the law in force at the time when an application under s. 256(2) is decided cannot be taken into account even though it is deemed to be in force when the Tribunal’s decision came. If the question, however, is already referred to the High Court under s. 256(1), at the time of answering the question, the High Court will be bound to apply the amended law, because the Court has to decide how the questions referred should be answered, whereas, under sub-s. (2), what has to be considered is whether the Tribunal’s decision was wrong. Hence, the High Court cannot direct the Tribunal to refer a question in the light of a subsequent retrospective amendment of the law. We have been informed that this is the only applicable decision on the nature of jurisdiction under s. 256(2) of the IT Act, 1961. To examine the correctness of the submissions made before us in the light of the above decision, it is first necessary to look at the language of ss. 256(1) and 256 (2) to ascertain whether there is any distinction between the nature of the jurisdiction under s. 256(1) and under s. 256(2). Under s. 256(1), the assessee or the CIT may require the Tribunal to refer to the High Court “any question of law arising out of such order”. Under s. 256(2), if the Tribunal, on an application under sub-s. (1), refuses to state the case “on the ground that no question of law arises”, the assessee or the Commissioner may apply to the High Court and the High Court may, “if it is not satisfied with the correctness of the decision of the Tribunal”, require the Tribunal to state the case and refer it to the High Court. The correctness of the decision of the Tribunal has reference to the decision under s. 256(1), viz., the decision that no question of law arises. Under both the sub-sections, therefore, the High Court has to consider whether a question of law arises from the order of the Tribunal in appeal. Under s. 256(2), if the High Court is not satisfied with the correctness of the decision of the Tribunal (viz., that no question of law arises), it may require the Tribunal to state a case.

8. The question is, on what basis should the High Court decide whether it is satisfied or not with the correctness of the decision of the Tribunal under s. 256(2) ? What has to be examined is, of course, the question of law decided by the Tribunal both under s. 256(1) and s. 256(2). In a case where the law is amended with retrospective effect, when the High Court decides an application under s. 256(2), is it open to the High Court to ignore such retrospective amendment of the law which is deemed to have been in force when the Tribunal decided the appeal ? It is an accepted position that, when the law is amended with retrospective effect, the Court, when it decides any proceeding, has to apply such retrospectively amended law as if it were in force at all material times. Therefore, for example, when a reference under s. 256(1) is being decided, the High Court has to take into account any retrospective amendment of the law which may have taken place after the Tribunal’s decision and during the pendency of the reference. On this aspect, there is no dispute. Even the Andhra Pradesh judgment Addl. CIT vs. M. J. Devda (supra) clearly states that, while deciding a reference under s. 256(1), the Court must take into account such retrospective legislation. In the case of CST vs. Satyanarain Singh (1974) 33 STC 187, the Allahabad High Court considered this question in respect of a reference made under the U. P. ST Act, s. 11. It said that when a question has been referred to the High Court and , in the meanwhile, the law is amended with retrospective operation, it would be the duty of the High Court to apply the law so amended. The application of the relevant law to the problem raised in the reference before the High Court normally is not excluded merely because at the date when the Tribunal decided the question, the relevant law was not or could not be brought to its notice. There is nothing so peculiar in the nature of a reference under the ST Act that in deciding it the High Court is compelled to apply the law which, since the date of the reference made by the Tribunal, has been superseded by the Legislature. There are similar observations of the Calcutta High Court in Union of India vs. Addl. Member, Board of Revenue, (1975) 36 STC 61 and of the Punjab and Haryana High Court in Sheo Karan Dass Bhoj Raj vs. State of Haryana (1974) 34 STC 94 (FB).

The Supreme Court , in the case of State of U. P. vs. Modi Industries Ltd. (1977) 40 STC 73, was required to consider a case where, after the reference was decided by the High Court and before the Tribunal could act upon it, the law was amended retrospectively. The Tribunal, thereupon, did not act on the basis of the decision of the High Court under the reference. On the assessee moving he High Court under Art. 226 of the Constitution of India, the High Court took the view that the revising authority was not free to take a different view from the one expressed by the High Court on any ground whatsoever, including any subsequent amendment in the law, and that it was bound to decide the case in conformity with the judgment of the High Court. The Supreme Court set aside the decision of the High Court, holding that the retrospective amendment clearly indicated the intention of the legislature of restoring the assessments and orders made earlier and hence the Tribunal was entitled to take such retrospective amendment into account. The Supreme Court observed that, under the amending Act, assessments at the enhanced rate were valid notwithstanding any judgment or order of any Court. Hence the Tribunal was entitled to ignore the High Court’s decision in the reference. The decision, therefore, turns on the special provisions of the amending Act. Nevertheless, it is clear that a Court cannot ignore the retrospective operation of a law which is in existence when it decides a matter.

We do not see how a different view can be taken while deciding an application under s. 256(2). The Andhra Pradesh High Court in Addl. CIT vs. M. J. Devda (supra), felt that, in deciding an application under s. 256(2), the High Court could decide the correctness or otherwise of the Tribunal’s decision only in the light of the law which was in force when the Tribunal rendered the decision. In our view, this is not the correct way of reading s. 256(2). When a law is amended retrospectively so that it is deemed to have been in force at the time when the Tribunal decided the question, full effect has to be given to such a deeming provision and the High Court is bound to consider the law so amended retrospectively as being in force at the time when the Tribunal decided the question. The correctness of the Tribunal’s decision will, therefore, have to be judged in the light of the law amended retrospectively by giving effect to the deeming provision. If, in the light of such retrospective amendment, a question of law does arise, and if the Tribunal’s view that no such question arises is incorrect in the light of such retrospectively amended law, the Court cannot refuse to direct the Tribunal to frame a question and refer the case merely because the Tribunal’s decision on the question of law, as it stood when the Tribunal decided it, was correct when the law was unamended. In our view, this would be drawing an artificial distinction between s. 256(1) and s. 256(2). With all respect, therefore, to the Andhra Pradesh High Court, in our view, we cannot ignore any retrospective amendment in the law while considering an application under s. 256(2).

It was urged by Mr. Dastur that we should not readily depart from the view taken by another High Court in order to maintain uniformity in the decisions of different High Courts. We agree that, as far as possible, there should be uniformity in the decisions of different High Courts in interpreting the provisions of fiscal statutes. In the present case, however, we feel that the decision of the Andhra Pradesh High Court is contrary to the well-accepted principles of statutory interpretation. With some reluctance, we, therefore, differ from the view taken by the Andhra Pradesh High Court. In our view, when the law is amended retrospectively, the advisory jurisdiction under s. 256(2) should be exercised in the light of the law as it is deemed to stand at the date when the Tribunal decided the appeal and not on the basis of the law at it stood at the time when the Tribunal decided the appeal.

The Expln. to s. 2(1A) has been added with retrospective effect from April 1, 1970, by the Finance Act, 1989. As a result of this Explanation, revenue derived from the transfer of agricultural land is not considered as agricultural income. It is possible that the ratio of the decision of our High Court in Manubhai A. Sheth vs. N. D. Nirgudkar, ITO (supra) may apply to this amendment also. In fact, in an earlier application, being IT Application No. 29 of 1988 (CIT vs. Leenaben J. Sheth) we (myself and Sugla, J.) had on July 25, 1990, declined the application on this ground. It is, however, now urged before us that the constitutional validity of the amendment, as a result of which this Explanation was introduced with retrospective effect in s. 2(1A), cannot be gone into in a reference application and that the assessees have not filed writ petitions challenging the constitutional validity of the Explanation. Whether, by virtue of the reasoning given by our High Court in Manubhai A. Sheth vs. N. D. Nirgudkar (supra), this amendment can be automatically ignored or not is itself a question which would require some consideration. We do not express any view one way or the other on how the question will be ultimately decided. But, in our view, in the light of the submissions which have been now made before us, a referable question of law would arise. Hence, both the applications are allowed and the rules are made absolute.

[Citation : 189 ITR 359]

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