Punjab & Haryana H.C : Whether the Tribunal has been right in law in holding that the cost of acquisition or the value should be ascertained as on 28th Feb., 1970, for the purposes of capital gains in view of the provisions of s. 2(14) of the IT Act as amended w.e.f. 1st April, 1970 ?

Counsel Appeared

Ashok Bhan & Ajay Mittal, for the Revenue : M.S. Ratta, for the Assessee

GOKAL CHAND MITAL, J:

In the previous year relating to the asst. yr. 1975-76, Didar Singh sold ancestral agricultural land measuring 3 acres, 3 kanals and 2 marlas for a consideration of Rs. 1,76,625. In the return filed for declaring capital gains, he showed the cost of the agricultural land at Rs. 30,000 per acre as on 28th Feb., 1970, in view of the fact that the agricultural land was brought within the definition of “capital asset” contained in s. 2(14) of the IT Act, 1961 (for short “the Act”), by virtue of the amendment brought on 1st April, 1970. The ITO did not agree with the assessee and held that the cost price as on 1st Jan., 1954, had to be considered and not as on 28th Feb., 1970. This he did in view of s. 55(2) of the Act.

On appeal, the AAC agreed with the assessee and found the price fixed by him to be reasonable. The Tribunal, Chandigarh, agreed with the appellate order and dismissed the appeal filed by the Revenue. At the instance of the Revenue, the Tribunal has referred the following question for opinion :

“Whether the Tribunal has been right in law in holding that the cost of acquisition or the value should be ascertained as on 28th Feb., 1970, for the purposes of capital gains in view of the provisions of s. 2(14) of the IT Act as amended w.e.f. 1st April, 1970 ?”

2. By the Finance Act of 1970, which came into effect from 1st April, 1970, the definition of “capital asset” contained in s. 2(14) of the Act was amended and in place of cl. (iii), a new clause was substituted as a result of which agricultural land which fell within the purview of sub-cls. (a) and (b), came within the ambit of capital asset and became amenable to capital gains tax which hitherto were not amenable to capital gains tax. The word “transfer” in relation to a capital asset is defined in s. 2(47) and includes “sale”. Sec. 45 of the Act defines “capital gains” and is the charging section. Sec. 48 of the Act provides how to compute income chargeable under the head ‘capital gains’. Sec. 49 provides for determining cost with reference to certain modes of acquisition including succession and inheritance. Sec. 55(2) of the Act provides for the cost of acquisition in relation to a capital asset with reference to ss. 48 and 49 of the Act. Sec. 55A provides for making a reference to the Valuation Officer at the instance of the ITO if it is found necessary, subject to the circumstances mentioned in that provision. Here, reproduction of the relevant provisions of s. 55(2), as it stood at the time of the assessment year in question, has become necessary : “Sec. 55(2)—For the purposes of ss. 48 and 49, ‘cost of acquisition’, in relation to a capital asset,— (i) where the capital asset became the property of the assessee before the 1st day of Jan., 1954, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of Jan., 1954, at the option of the assessee; (ii) where the capital asset became the property of the assessee by any of the modes specified in sub-s. (1) of s. 49, and the capital asset became the property of the previous owner before the 1st day of Jan., 1954, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of Jan., 1954, at the option of the assessee.”

3. Admittedly, the assessee acquired the land before 1st Jan., 1954, by inheritance and the case would fall under s.

55(2)(ii) of the Act and the cost of the capital asset has to be taken as on the date of inheritance or the fair market value as on 1st Jan., 1954, at the option of the assessee. The assessee did not opt for the value on the date of death of his father, and, therefore, the fair market value as on 1st Jan., 1954, has to be taken. The argument raised on behalf of the assessee is that the agricultural land of the type in question became a capital asset chargeable to capital gains only because of the Finance Act of 1970, w.e.f. 1st March, 1970, and, therefore, its value as on 28th Feb., 1970, is to be considered and not as on 1st Jan., 1954. This argument needs consideration. Sec. 45 of the Act is the charging sectoon for capital gains and this was on the statute book long before the amendment made in the definition of “capital asset” by the Finance Act of 1970. The effect of the amendment is that agricultural land which was not within the ambit of capital asset was brought within the definition of “capital asset” and was chargeable to capital gains tax on transfer with the result that all the provisions of s. 45 onwards became applicable to it. The result would have been that the transfer of agricultural land made on or before 28th Feb., 1970, would also have been subjected to capital gains tax but by virtue of the same Finance Act, cl. (viii) was inserted in s. 47 of the Act to the following effect : “47. Nothing contained in s. 45 shall apply to the following transfers :…. (viii) any transfer of agricultural land in India effected before the 1st day of March, 1970.” That is why all transfers made of agricultural land of the kind which come within the ambit of capital asset, if made on or after 1st March, 1970, would attract the provisions of s. 45 of the Act, the charging section, and for working out the capital gains, provisions of ss. 46 to 55A of the Act would become applicable. Therefore, in calculating capital gains, reference woll have to be made to s. 55 of the Act and by virtue of sub-s. (2) thereof, the cost of the land as on 1st Jan., 1954, has to be taken. The capital gains would be the difference between that value and the sale proceeds. In this context, the amendments made by the Finance Act of 1970 do not militate against determining the cost of acquisition of the land in accordance with s. 55(2) of the Act as on 1st Jan., 1954. The Finance Act of 1970 brought certain types of agricultural land within the definition of “capital asset” for being subjected to capital gains on transfer. The aforesaid view of ours finds support from the following decisions : Ranchhodbhai Bhaijibhai Patel vs. CIT (1971) 81 ITR 446 (Guj) : TC20R.514, M. Venkatesan vs. CIT (1983) 144 ITR 886 (Mad) : TC20R.581, CIT vs. M. Ramaiah Reddy (1986) 56 CTR (Kar) 121 : (1986) 158 ITR 611 (Kar) : TC20R.786 and CIT vs. Smt. Subaida Beevi (1986) 57 CTR (Ker) 324 : (1986) 160 ITR 557 (Ker) : TC21R.302. Accordingly, we hold that the value of the land as on 1st Jan., 1954, has to be considered and not as on 28th Feb., 1970.

4. Faced with this situation, learned counsel for the assessee raised an argument that the levy of income-tax on agricultural income derived from sale of agricultural land would be ultra vires the legislature powers of Parliament, as this matter falls within the State list and, therefore, the question of imposing tax on capital gains of sale of agricultural land under a Central Act would not arise, and, on this argument, the matter be decided in favour of the assessee. In support of the argument, reliance is placed on the following decisions : Manubhai A. Sheth & Ors. vs. N.D. Nirgudkar, ITO (1981) 22 CTR (Bom) 41 : (1981) 128 ITR 87 (Bom) : TC20R.604 and J. Raghottama Reddy vs. ITO (1988) 68 CTR (AP) 90 : (1988) 169 ITR 174 (AP) : TC20R.646.

5. Counsel for the Revenue in reply submitted that the question of legislative competence, that is, of the vires of the statute, cannot be gone into in reference proceedings and, for that matter, the assessee has to challenge the provisions under Art. 226 of the Constitution of India and for this he has relied upon our decision in IT Ref. No. 31 of 1981 [CIT vs. Ved Prakash Bhatia, decided on 17th Jan., 1989, since reported at (1989) 77 CTR (P&H) 116 : (1989) 178 ITR 322 (P&H)]. In the alternative, it is argued that three High Courts in the following judgments have dissented from the decision of the Bombay High Court in Manubhai A. Sheth’s case (supra), which has been followed by the A.P. High Court in J. Raghottama Reddy’s case (supra), and have held that the imposition of capital gains tax on agricultural land is within the legislative competence of Parliament and is intra vires : Ambalal Maganlal vs. Union of India (1975) 98 ITR 237 (Guj) : TC20R.547, B.S. Jayachandra vs. ITO (1986) 54 CTR (Kar) 342 : (1986) 161 ITR 190 (Kar) : TC20R.558 and CIT vs. T.K. Sarala Devi (1987) 63 CTR (Ker) 310 : (1987) 167 ITR 136 (Ker) : TC20R.576. In view of our decision in Ved Prakash’s case (supra), counsel for the assessee cannot be permitted to raise the question of vires in reference proceedings, as we have no jurisdiction to go into the question of legislative competence, and we have to decide the question referred, considering the provisions as applicable to the case and if the assessee is keen to challenge the legislative competence, that he can do only in a writ petition under Art. 226 of the Constitution of India and not in a reference.

6. For the reasons recorded above, we answer the question in favour of the Revenue, that is, in the negative, and hold that the value of the land as on 1st Jan., 1954, has to be taken into consideration for computing the capital gains.

However, there will be no order as to costs.

[Citation : 179 ITR 208]