Rajasthan H.C : This writ application has been filed by Mahaveer Enterprises, Pindwara, District Sirohi, impugning certain assessment orders whereby the taxing authority levied tax on the writ petitioner as regards the sale of agricultural lands by the writ petitioner.

High Court Of Rajasthan

Mahaveer Enterprises vs. Union Of India & Ors.

Sections 2(1A), 2(14)

Asst. Year 1987-88, 1988-89

M.G. Mukherji, C.J. & Bhagwati Prasad, J.

DB Civil Writ Petn. No. 2205 of 1992

30th April, 1997

Counsel Appeared

Vineet Kothari, for the Petitioner : Sandeep Bhandawat, for the Respondents

M.G. MUKHERJI, C.J.:

This writ application has been filed by Mahaveer Enterprises, Pindwara, District Sirohi, impugning certain assessment orders whereby the taxing authority levied tax on the writ petitioner as regards the sale of agricultural lands by the writ petitioner. There was a further prayer for quashing of the impugned penalty orders and a further prayer directing the respondents to refund the entire amount of tax, interest and penalty recovered from the petitioner on this account with interest. A general prayer was made so as to hold that the sale of agricultural lands does not give rise to any taxable income under the IT Act irrespective of the fact of the location of the agricultural lands within or outside the municipal limits. There was a challenge to the vires to the Explanation inserted in s. 2(1A) of the IT Act incorporated by the Finance Act, 1989, with retrospective effect from 1st April, 1970, contending inter alia that the same was illegal and unconstitutional. There was also a further prayer restraining the respondents from recovering any tax, interest and penalty from the writ petitioner in this perspective.

The writ petitioner, firm sold during the relevant assessment year certain agricultural lands which were being used for agricultural operations. The assessing authority imposed income-tax treating the same as business income of the writ petitioner and also imposed penalty for nonpayment of advance tax. The contention of the writ petitioner is that it has already paid the disputed amount of tax under protest, but it has not paid the penalty in question imposed on the writ petitioner as well as its partners by the assessing authority and the writ petitioner prayed for stay of recovery of such penalty imposed by the assessing authority contending inter alia that the same was illegal and perverse levy and the retrospective amendment of law could not confer any mens rea on the writ petitioner and, therefore, there could be no justification for any penalty. The writ petitioner also disputes the very levy of tax on the sale of agricultural lands. The agricultural lands are admittedly within the municipal limits of Pindwara. The writ petitioner also submits that it had sold it as agricultural lands to various persons, who of course got it later converted into purposes other than agriculture, but the writ petitioner-firm was in no way connected with such later activities. Such later activities were so done with the help of another concern M/s Arihant Enterprises and the writ petitioner is not by any stretch of imagination disputing the liability of that firm M/s Arihant Enterprises which is a sister-concern of the writ petitioner-firm for its income being treated as business income.

The main question involved in the present writ application is whether on the sale of agricultural land it could give rise to taxable business income/capital gains under the IT Act. In order to understand the implication of the contentions, it would be necessary for us to advert to the appropriate provisions of the IT Act pertaining to agricultural income which are quoted hereinbelow : “Sec. 2(1A) “agricultural income” means— (a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes; (b) any income derived from such land by— (i) agriculture; or (ii) the performance by a cultivator or receiver or 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 the building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-cl. (b) is carried on : Provided that— (i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with 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 a 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 kilometre from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.”

Under the Finance Act, 1989, an Explanation was added which was brought into force with retrospective effect from 1st April, 1970 and the same is quoted hereinbelow : “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.” Under s. 2(14) of the IT Act, we find the definition of ‘capital asset’ s. 2(14) is quoted hereinbelow : “(14) “capital asset” means property of any kind held by an assessee, whether or not concerned with his business or profession, but does not include— (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; (ii) personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him. Explanation : For the purposes of this sub-clause, “jewellery” includes— (a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel; (b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel; (iii) agricultural land in India not being land situated— (a) in any area which is comprised within the jurisdiction of a 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.” (iv) 6-1/2 per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government’ (v) Special Bearer Bonds, 1991, issued by the Central Government.”

In computing the total income of previous year of any person, any income falling within any of the following clauses shall not be included as per the provisions contained in s. 10 of the IT Act : “(1) agricultural income;” Similarly, capital gain on transfer of land used for agricultural purposes is not to be charged in certain cases, as per the provisions contained in s. 54B of the IT Act, which is quoted hereinbelow : “54B(1) Subject to the provisions of sub-s. (2), where the capital gain arises from the transfer of a capital asset being land which, in the two years immediately preceding the date on which the transfer took place, was being used by the assessee or a parent of his for agricultural purposes (hereinafter referred to as the original asset), and the assessee has, within a period of two years after that date, purchased any other land for being used for agricultural purposes, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say : (i) if the amount of the capital gain is greater than the cost of the land so purchased (hereinafter referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under s. 45 as the income of the previous year; and for the purpose of computing in respect of new asset any capital gain arising from its transfer within a period of three years of its purchase, the cost shall be nil; or (ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under s. 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years or its purchase, the cost shall be reduced by the amount of the capital gain. (2) The amount of the capital gain which is not utilised by the assessee for the purchase of the new asset before the date of furnishing the return of income under s. 139, shall be deposited by him before furnishing such return (such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-s. (1) of s. 139 in an account of any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-s. (1), the amount, if any, already utilised by the assessee for the purchase of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset : Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase of the new asset within the period specified in sub-s. (1), then— (i) the amount not so utilised shall be charged under s. 45 as the income of the previous year in which the period of two years from the date of the transfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

We quote hereinbelow the impugned amendment effected by the Finance Act, 1989: “3. Amendment of s. 2—In s.

2 of the IT Act as amended by s. 3 of the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), in cl. (1A), the following Explanation shall be inserted at the end and shall be deemed to have been inserted w.e.f. 1st day of April, 1970, namely : “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.” It is thus evident that cl. 3 seeks to amend s. 2 of the IT Act so as to insert an Explanation at the end of cl. (1A) in order to clarify that the 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. It would be necessary for us to understand the historical background as regards the clarificatory amendment of the provisions relating to agricultural income. Prior to 1st April, 1970, the capital gains arising from the transfer of agricultural land was not subjected to tax as the agricultural land was excluded from the definition of ‘capital asset’ in s. 2 (14) of the IT Act. By virtue of amendment of sub-cl. (iii) of cl. (14) of s. 2 w.e.f. 1st April, 1970, the agricultural land situated in any area comprised within the jurisdiction of the municipality or cantonment board (having a population of not less than ten thousand) or in any area outside the limits of the municipality or cantonment board (having a population of not less than ten thousand) upto a maximum distance of 8 kms. from such limits as notified by the Central Government was included in the definition of ‘capital asset’ and hence, any gain arising from transfer of such agricultural land was brought within the purview of capital gains taxation. Some Courts, however, have held that the profits from the sale of agricultural land constitute ‘agricultural income’ and, therefore, it is exempt from tax under s. 10 of the IT Act. Some Courts however, have held a contrary view that such income is taxable. With a view to effecting a settlement as regards the judicial controversy instead of waiting for a final verdict of the Supreme Court which may take a long time and to eliminate uncertainty in law which was not desirable, as a measure of rationalisation, the Parliament proposed to clarify by way of insertion of an Explanation that capital gains arising from the transfer of the agricultural land would not constitute ‘revenue’ within the meaning of s. 2(1A) of the IT Act. This amendment took effect retrospectively from 1st April, 1970 and accordingly, applied in relation to the asst. yr. 1970-71 and subsequent years. It would not be out of place to mention here that Entry 82 in First Part of VIIth Schedule is as regards ‘Taxes on income other than agricultural income’. Entry 46 in List II of VIIth Schedule is as regards ‘Taxes on agricultural income’. Art. 366(1) defines ‘agricultural income’ as (i) “Agricultural income means agricultural income as defined for the purposes of the enactment relating to Indian IT Act”.

6. Mr. Kothari, learned advocate appearing for the writ petitioner cited before us the decision in Manubhai A. Sheth vs. N.D. Nirgudkar, ITO, which was a decision of the Bombay High Court reported in (1981) 22 CTR (Bom) 41 : (1981) 128 ITR 87 (Bom) : TC 20R.604, where it was observed as follows : “Entry 82 in List I of the VIIth Schedule to the Constitution empowers Parliament to levy tax on income other than agricultural income. The word ‘income’ should be given its widest connotation in view of the fact that it occurs in a legislative head which confers legislative power. Clause (24) of s. 2, which defines the word ‘income’, includes within it ‘any capital gains chargeable under s. 45’. Under the proviso to sub-s. (3) of s. 10, capital gains chargeable under s. 45 is not includible in receipts of a casual and non-recurring nature which are not included in the total income. In view of these statutory provisions it cannot be said that capital gains are a capital receipt and not revenue receipt and hence, not income. Profits and gains arising from the transfer of a capital asset are, therefore, income. The decision in Navinchandra Mafatlal vs. CIT (1954) 26 ITR 758 (SC) : TC 20R.121 was relied upon. Profits or gains on sale of agricultural land would be ‘revenue’ within the meaning of s. 2(1)(a). The word ‘revenue’ has been used in a very wide sense as is shown by that sub-clause itself. The sub-clause states ‘any rent or revenue derived from land….’. The word ‘any’ qualifies not merely the word ‘rent’ but also the word ‘revenue’. the word

‘revenue’ means ‘income’, especially of a large amount from any source’. Thus, the expression ‘any revenue’ would mean income of every kind. The word ‘revenue’ is not used as a synonym for the word ‘rent’ but in contradistinction to it and to cover all income from land, which is used for agricultural purposes, other than rent and income of the types specified in sub-cls. (b) and (c) of s. 2(1). The source of capital gains on the transfer of agricultural land is the same as the source of other types of agricultural income referred to in s. 2 (1), namely, the land, and it is gain which has sprung up or arisen from land like any other gain or income referred to in s. 2(1)(a). The decisions in CIT vs. Kameshwar Singh (1935) 3 ITR 305 (PC) : TC 31R.192, Nawabzadi Mehar Bano Khatum vs. Secretary of State for India (1925) ILR 53 Cal 34 : AIR 1025 Cal 929 (FB) and CIT vs. All India Tea & Trading Co. Ltd. (1978) 113 ITR 545 (Cal) : TC 31R.423 were relied upon.

Capital gains arising from sale of land situated in India, which land is used for agricultural purposes, would be revenue derived from such land and, therefore, agricultural income within the meaning of s. 2(1) of the IT Act, 1961, and the Parliament would have no legislative competence to tax such agricultural income. Therefore, to the extent that sub-cl. (iii) of s. 2(14) as amended retrospectively by the Finance Act,. 1970, r/w s. 45 makes the profits or gains arising from the transfer of such lands situate in the areas mentioned in paras (a) and (b) of s. 2(14)(iii), subject to the levy of capital gains tax by Parliament, it would be beyond the legislative competence of Parliament, inasmuch as capital gains on the transfer of lands used for agricultural purposes and situate within these areas would fall within the legislative field of State Governments by reasons of Entry 46 in List II of the VIIth Schedule to the Constitution. Sub-cl. (iii) of cl. (14) of s. 2 does not operate, r/w the other relevant sections of the Act, to levy capital gains tax on profits or gains arising from the transfer of land which is used for agricultural purposes and must be read down so as to exclude from the operation of the said sub-clause land which is used for agricultural purposes even though it may be situate in any of the areas mentioned in paras (a) and (b) of sub-cl. (iii) or, in other words, sub-cl. (iii) of s. 2(14) should be read as if the brackets and words ‘other than land which is used for agricultural purposes’ occurred in the sub-clause after the words ‘not being land’.”

7. In J. Raghottama Reddy vs. ITO reported in (1988) 68 CTR (AP) 99 : (1988) 169 ITR 174 (AP) : TC 20R.646, the Andhra Pradesh High Court held as follows : “The amendment of the definition of ‘agricultural income’ in s. 2(1) by the Taxation Laws (Amendment) Act, 1970, was altogether for a different purpose. As a result of the amendments, the expression ‘capital asset’ includes all agricultural lands situated within the limits of a municipality and a radius of 8 kms. thereof, but the definition of ‘agricultural income’ has not been correspondingly amended. Even today, in spite of the amendment of the definition ‘agricultural income’ in s. 2(1) by the Taxation Laws (Amendment) Act, 1970, the income derived from agricultural land (which includes income derived from sale of such land) situated within the limits of a municipality—and its 8 kilometres’ radius, if notified continues to be agricultural income.” However, in B.S. Jayachandra vs. ITO & Anr. reported in (1986) 54 CTR (Kar) 342 : (1986) 161 ITR 190 (Kar) : TC 20R.558, it was held as follows : “Legislation by Parliament providing for taxation of capital gains, that is, on income within the scope of Entry 82 in List I of the Seventh Schedule, would be a piece of legislation, the pith and substance of which is the tax on income other than agricultural income and if that piece of legislation also affects lands which have ceased to have all the characteristics of agricultural land and thus acquired other characteristics, such encroachment on the other field of legislation is purely incidental and the doctrine of pith and substance would certainly apply to such a piece of legislation. Parliament is, therefore, 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 8 kms. of notified municipal areas, which had ceased to be agricultural lands. Sec. 2(14)(iii) of the IT Act, 1961, is valid.”

The decision of the Kerala High Court in CIT vs. T.K. Sarla Devi reported in (1987) 63 CTR (Ker) 310 : (1987)

167 ITR 136 (Ker) : TC 20R.576 also held a similar view. Mr. Kothari, learned advocate appearing for the writ petitioner admitted that indeed there was divergence of opinion between the various High Courts as to taxability of sale of agricultural lands within the municipal limits, but the sale of agricultural lands outside the municipal limits did not attract the income-tax even now. The writ petitioner produced along with its writ application the following documents which were made annexures to the writ application : Copy of the return of income for asst. yr. 1987-88 was made Annexure 1. Copy of return of income for asst. yr. 1988-89 was made Annexure 2. Copy of assessment order for asst. yr. 1987-88 was made Annexure 3. Copy of assessment order for asst. yr. 1988-89 was made Annexure 4. Copy of first appeal order for asst. yr. 1987-88 and 1988-89 was made Annexure 5. Copy of penalty order under s. 273(2)(b) of IT Act for asst. yr. 1987-88 was made Annexure 6. Copy of penalty order under s. 273 for asst. yr. 1988-89 was made Annexure 7. Copy of penalty order under s. 273(2aa) in the case of the partner for asst. yr. 1988-89 was made Annexure 8. Copy of written submission of assessee before the ITO was made Annexure 9. Copy of memo of appeal before the Tribunal in Form No. 36 for asst. yr. 1988-89 was made Annexure 10. Copy of reply to penalty notice dt. 4th Jan., 1992 was made Annexure 11. Copy of application for grant of stay to Dy. CIT dt. 16th March, 1992 was made Annexure 12. Copy of application for grant of stay to the Dy. CIT dt. 30th March, 1992 was made Annexure Copy of application for grant of stay to the CIT dt. 30th March, 1992 was made Annexure 14. Copy of application for grant of stay to the ITO dt. 30th March, 1992 was made Annexure 15. Copy of order dt. 25th March, 1992 of ITO rejecting the stay application was made Annexure Copy of order of the Dy. CIT dt. 26th March, 1992 rejecting the stay application was made Annexure 17.”

It was thus evident that the respondents authorities refused to grant stay of penalty in question and have resorted to coercive measures for recovery of various penalties imposed by the AO and at that stage the writ petitioner moved this Court contending inter alia that the sale of agricultural lands in question could not give rise to any taxable income under the IT Act and the same being in the nature of revenue from the agricultural lands could not be taxed under the IT Act, 1961. The relevant provisions of the IT Act including the impugned amendment effected by the Finance Act, 1989, with retrospective effect from 1st April, 1970, should, therefore, be declared ultra vires, unconstitutional and without legislative competence. The power to tax agricultural income lies within the State Government as per Entry 46 of List II of Sch. Seven and Entry 82 of List I did not envisage any power to levy income-tax on such agricultural income. The impugned amendment could not even be said to be actually removing the defects or anomalies as pointed out by various High Courts holding inter alia that the profits derived on sale of agricultural lands amounted to revenue from such agricultural lands. It was examined under s. 10(1) of the IT Act. The Parliament had no legislative competence to impose tax on such profits or revenue. It is not that it is merely an incidental encroachment on the legislative field occupied by the State Government, but it was a clear and typical legislation apparently in colourable exercise of power by the Parliament. The profit derived from the sale of agricultural land did not alter the character of the income which continued to be agricultural income and was as good as income derived from agricultural operations. Therefore, if the Parliament could not tax the income derived from agricultural operations, the Parliament could not also impose tax on the sale of agricultural land. The insertion of Explanation by the Finance Act, 1989, which was only clarificatory in nature could not be said to be removing the defects by the legislature as pointed out by the Courts of law. Moreover, if the legislature or Parliament has no legislative competence to enact a particular law much less it can be said to be competent to remove such defects. It was the contention of Mr. Kothari that so long as the income from agricultural land irrespective of the area where it is situated continues to be the agricultural income, the Parliament remains without any legislative competence to impose any tax thereon.

10. It was further urged that the retrospective amendment effected by the Finance Act, 1989, with retrospective effect from 1st April, 1970, was absolutely illegal, confiscatory, ultra vires and unconstitutional. There is no rational nexus for giving retrospective effect to such amendment particularly when it hits prejudicially the persons like the writ petitioner-firm with great hardship and the impugned penalty on the writ petitioner-firm and its partners is only on account of the retrospective effect of the amendment. It is well settled that the penalty could not be imposed with retrospective effect unless the writ petitioner could be said to be imbued with the guilty mind or mens rea. Even the impugned retrospective amendment could not have been envisaged by the writ petitioner- firm and there was no question of paying any advance income-tax on such income. Therefore, the imposition of impugned penalty was wholly illegal and without jurisdiction.

11. It was further urged that there was no rational nexus for the cut off date being given as 1st April, 1970, and, therefore, the said date was without any reasonable basis or rational nexus. There was no justification for making any distinction between one class of agricultural lands merely because some particular agricultural lands fall within or outside the municipal limits. The agricultural land remains the same and partakes the character even though the character of the income derived from the agricultural operations as well as sale of agricultural lands remained the same irrespective of the fact whether it was located within or outside the municipal limits. It was, therefore, urged that there could be no justification for making any discrimination or classification between the two types of such lands similarly situated to each other. It was contended that such discrimination and/or classification would also amount to violation of Art. 14 of the Constitution of India. It was further submitted that the impugned amendment effected in the IT Act particularly with retrospective effect that the sale of agricultural lands situated within the municipal limits would give rise to taxable income and not agricultural income was in colourable exercise of power by the Parliament. There was thus violation of Art. 14 of the Constitution of India.

12. It was further submitted that the income from sale of agricultural lands treated as business income by the assessing authority was obviously illegal and without jurisdiction. Merely because a partnership firm was formed to sell agricultural lands in question where admittedly the agricultural operations were being carried on, the same cannot be converted into or changed into the character of income. There was no prohibition for a partnership firm to derive agricultural income. It was accordingly prayed by the writ petitioner that the impugned assessment orders as also the penalty proceedings be quashed and the amount already realised be refunded back to the writ petitioner.

13. It was further contended that the impugned rejection of the stay application by the authorities of the IT Department by a wholly non-speaking and cryptic order was illegal.

14. The respondents contested the writ application by filing a reply. It was submitted by the respondents that the tax in question was never disputed. It was a legal and valid tax and the penalties imposed were within the due process of law. It was submitted that the assessee-firm did not carry out any agricultural operations on the land in question and the land was contributed by the partners as their capital. The assessee-firm divided the land in suitable sizes of the plots and such plots were sold to a large number of persons and in the process, the assessee- firm earned profits thereon. The process of division/development of the land into smaller plots for the purposes of sale as residential plots amounted to business activity. Moreover, the assessee itself has filed land trading account along with the returns filed wherein the value of the land as opening stock, sale of land, land in closing stock and gross profit has been shown. The other expenses incurred on account of interest and miscellaneous expenses have further been deducted from such profit to arrive at net profit. This shows that the assessee itself has treated the land contributed by the partners as stock-in-trade. Moreover, the aims and objects of the assessee-firm given in the partnership deed also indicated that the firm was constituted for carrying on business of purchase and sale amongst others of agricultural land.

15. It was submitted by the respondents that the controversy has been set at rest by the decision in G.M. Omer Khan vs. Addl CIT reported in (1992) 106 CTR (SC) 288 : (1992) 196 ITR 269 (SC) : TC 20R.536. In the said reported decision, the appellant was the owner of a property known as Khader Bagh comprising buildings and lands measuring 45 acres. This property was situated in a village which had a population of less than ten thousand, but that village was part of Hyderabad Municipality. An extent of this property was under requisition by the Central Government under the Requisitioning and Acquisition of Immovable Property Act, 1952. Later, the Government acquired 36 acres and 22 guntas of the land and passed a formal order on 27th Feb., 1970. The publication of the formal order in the Official Gazette was made on 13th March, 1970. The appellant claimed inter alia, that the land was agricultural land and that it was not a capital asset because it was situated in a village with a population of less than ten thousand and that the transfer for purposes of capital gains took place prior to 1st March, 1970, when the definition of ‘capital asset’ was amended to include certain types of agricultural land. The High Court of Andhra Pradesh held that the land acquired was a ‘capital asset’ within the meaning of s. 2(14)(iii)(a) of the IT Act, 1961, as the words ‘which has got a population of more than ten thousand’ qualified ‘the municipality or cantonment’ and not the expression ‘area’, and that the transfer took place only on 13th March, 1970, on the publication of the order in the Official Gazette. On an appeal to the Supreme Court, it was held affirming the decision of the Andhra Pradesh High Court (i) that the interpretation put upon s. 2(14)(iii)(a) by the Andhra Pradesh High Court was unexceptionable and rational, and (ii) that in view of s. 7(2) of the Requisitioning and Acquisition of Immovable Property Act, 1952, the date of publication of the notification for acquisition was the date when the property vested absolutely in the Government and that was the date of transfer for purposes of capital gains.

16. It was further submitted that the writ petitioner has not exhausted the other remedies as provided under the IT Act before approaching this Court and in view of the alternative remedy being available to the writ petitioner, the present writ application is liable to be dismissed in limine.

17. It was further contended that the sale of agricultural land does give rise to taxable income in view of the amendment incorporated in the statute by the Finance Act, 1989, which came into operation with retrospective effect from 1st April, 1970. It was further contended that the writ petitioner cannot even seek relief on this garb of the land being used for agricultural purposes because it was not so used at all. Art. 366(1) of the Constitution of India defines ‘agricultural income’. For the purposes of Constitution, unless the context otherwise requires, the meaning of the term ‘agricultural income’ had to be gathered from the definition of the term in the IT law of the country as is in force. With this also under Art. 246(1) r/w Entry 82 of List I, Union List as given in the Seventh Schedule to the Constitution, the Union Parliament was competent to define the term for the purposes of the Constitution and the Act and the power to define comprehends in itself the power to amend and modify the same. The legislation by Parliament providing for taxation of capital gains, i.e., on income within the scope of Entry 82 in List I of the Seventh Schedule would be a piece of legislation, the pith and substance of which is the tax on income other than agricultural income and if that piece of legislation also affects lands which have ceased to have all the characteristics of agricultural land and have already acquired other characteristics, such encroachment on the other field of legislation is purely incidental and the doctrine of pith and substance would certainly apply to such a piece of legislation. The Parliament is, therefore, competent to define the term ‘agricultural income’, ‘agricultural land’ and ‘capital asset’ and thus, bring to tax, capital gains arising or accruing from agricultural lands situated within the municipal limits and within 8 kms. of notified municipal areas, which had ceased to be agricultural lands. Thus, it was contended that there was no violation of Art. 14 of the Constitution of India. It was further contended that the AO was right in law in holding the income as a “business income”. The CIT(A) while confirming the order of the ITO has also rightly held that when the land in question was never put to agricultural use, it was always the business income of the assessee. The orders of the Tribunal/CIT(A) cannot be challenged in the High Court in the garb of challenging the vires of the statutory provisions. The writ petitioner had other equal and adequate alternative remedies by way of appeal under the IT Act and hence, the present writ application was liable to be dismissed on this score.

18. In Sarifabibi Momed Ibrahim & Ors. vs. CIT (1993) 114 CTR (SC) 467 : (1993) 204 ITR 631 (SC) : TC 20R.660, it was held by the Supreme Court that whether a piece of land is agricultural land or not is essentially a question of fact. Several tests have been evolved in the decisions of the Supreme Court and the High Courts, but all of them are more in the nature of guidelines. The question has to be answered in each case, having regard to the facts and circumstances of that case. There may be factors both for and against a particular point of view. The Court has to answer the question on a consideration of all of them—a process of evaluation. The inference has to be drawn on a cumulative consideration of all the relevant facts. The appellants in the said reported case were co- owners of a plot of land inherited from an ancestor through their father. On 15th May, 1967, they agreed to sell the land to a housing cooperative society and to enable them to complete the transaction, they applied in June, 1968, and March, 1969, for permission to transfer the land for a non-agricultural purpose and the permission was granted in April, 1969. A number of sale deeds were executed in May, 1969, and the purchasing society applied for conversion of the land to non-agricultural purposes, viz., construction of buildings. The question was whether the profit from the sale of the land was assessable to capital gains tax. The facts in favour of the appellants were that the land was registered as agricultural land in the Revenue records and the land revenue had been paid in respect thereof till the year 1968-69, there was no evidence that the land was put to non-agricultural use and the land was actually cultivated till and including the agricultural year 196465, there was agricultural lands abutting the land and the appellants had no other source of income except the income from those lands. The facts against the appellant were that the land was situated within the municipal limits of the Surat Municipality and at a distance of one kilometre from the Surat railway station, the land was not cultivated from 1965-66 until it was sold in 1969, the appellants had entered into an agreement with a housing co-operative society to sell the land for construction of houses, they had applied in June, 1968, and March, 1969, for permission to sell the land for non- agricultural purposes and soon after obtaining permission they executed the sale deeds in May, 1969, and the land was sold at a rate of Rs. 23 per sq. yard and the purchasing society commenced construction operations within three days of purchase. On a consideration of the contending factors, the Gujarat High Court held that the land was non-agricultural land and tax was leviable on the capital gains arising from the transfer. On an appeal to the Supreme Court, it was held affirming the decision of the High Court that the entering into the agreement to sell the land for housing purposes, the applying for and obtaining permission to sell the land for non-agricultural purposes, and its sale soon thereafter and the fact that the land was not cultivated for a period of four years prior to its sale, coupled with its location and the price at which it was sold outweighed the circumstances appearing in favour of the appellants’ case and established that the land was not agricultural land when it was sold. The appellants had no intention to bring it under cultivation at any time after 1965-66 and certainly not after they entered into the agreement to sell the land to the housing co-operative society. It was further observed by the Supreme Court that the High Court was right in holding that the land was not agricultural land at the time of its sale and the profit arising from its sale was liable to capital gains tax.

The Gujarat High Court in the self-same case being CIT vs. Sarifabibi Mohmed Ibrahim reported in (1981) 24 CTR (Guj) 171 : (1982) 136 ITR 621 (Guj) : TC 20R.669 held that the fact that a particular piece of land is entered as agricultural land in revenue records and assessed as such under the Land Revenue Code would raise a presumption that the land is agricultural land, but the presumption can be rebutted by other circumstances pointing to the contrary conclusion. The fact that agricultural operations were carried on in the past or were carried on currently and that it was not converted to non-agricultural user would also raise a presumption that the land is agricultural. However, these factors are not decisive inasmuch as agricultural crop can be raised even on building sites and sometimes a crop is grown in order to allow the land to remain idle while awaiting sale for non- agricultural purposes or in order to avoid payment of revenue at a higher rate or in order to avoid payment of capital gains tax. The facts that raise a presumption that the land is non-agricultural are— (i) situation of the land, for example, land situated in an urban area within the municipal limits in the proximity of buildings and building sites, (ii) sale of land to a non-agriculturist for non-agricultural purposes, (iii) sale of land on a square yard basis at a price comparable to prices fetched by building sites, (iv) sale at a price at which no bona fide agriculturist would purchase for genuine agricultural operations, and (v) when the price is such that no prudent owner would sell it at a price worked out on the capitalisation method taking into account its optimum agricultural yield in the most favourable circumstances. When the question arises as to the real nature of land in the context of land situated in urban areas, the crucial two-fold test would be to find out if any prudent agriculturist would purchase the land in order to carry on agricultural operations having regard to the price he would have to pay and whether the owner of such land would sell it by valuing it as property yielding agricultural produce on the capitalisation method even on the basis of optimum yield and maximum sale price. The effect of the totality of the circumstances must be considered. It was held in the facts of the case that the land was non-agricultural land and capital gains tax could be levied on the profits arising from its sale and this finding was affirmed by the Supreme Court.

In a similar case in Gopal C. Sharma vs. CIT reported in (1994) 116 CTR (Bom) 377 : (1994) 209 ITR 946 (Bom) : TC 20R.464, where transfer of land used in the past for agricultural purposes situated in the industrial area and not intended for agricultural purposes in future was sought to be the subject-matter of transaction and the question arose as to whether gains on transfer of land would be agricultural income and subject to IT Act, it was observed that the business was in the nature of trade. Even though the lands were acquired by the assessee from his father and part of the lands was subject to the acquisition proceedings and part of lands was subject to sale agreement, the transfer of lands is not an adventure in the nature of trade and the gains are assessable as capital gains. It was further held that the expression ‘agricultural land’ is not defined in the IT Act, 1961. The underlying object of the Act to exempt ‘agricultural income’ from income-tax is to encourage actual cultivation or de facto agricultural operations. The actual user of the land for agricultural purposes or absence thereof at the relevant time is undoubtedly one of the crucial tests for the determination of the issue. It is well settled that the nature and character of land may undergo a change depending upon its situation, growth of the locality or zone in which it is situated and its potentiality. The fact that the land is sold or transferred to a non-agriculturist for a non-agricultural purpose or that it is likely to be used for non-agricultural purposes soon after its transfer is also a relevant factor germane to the determination of the issue. Merely because the land was used for agricultural purposes in the remote past or it continues to be assessed to land revenue as agricultural land is not decisive. In order to ascertain the true character and nature of the land it must be seen whether the land had been put to use for agricultural purposes for a reasonable span of time prior to the relevant date and further as to whether on the date of the transfer the land in question was intended to be put to use by the purchaser for agricultural purposes for a reasonable span of time in future. The profit motive of the assessee selling the land without anything more by itself can never be decisive for determination of the issue as to whether the transaction amounted to an adventure in the nature of trade. The ITO, the AAC and the Tribunal held that the lands could not be considered as agricultural lands. The AAC held that the transfers in question did not constitute adventure in the nature of trade, but that the gains could be taxed as capital gains. The Tribunal held that the transactions concerning the transfer of reference lands constituted adventure in the nature of trade and the profits and gains thereof were liable to be taxed as business income. On a reference, it was held by the Bombay High Court that the finding as arrived at by the AAC and the Tribunal that the lands had not in fact been used or intended to be used for agricultural purposes at the relevant time since several years was such a finding of fact which could not be characterised as perverse or unsupported by evidence or erroneous in law judged from the original inference drawn by the ITO. The lands could not be considered as agricultural lands on the date of transfer. It was further held that the lands did not constitute stock-in-trade of the assessee. As far as the reference lands were concerned, the assessee had no choice, but to complete the sale of lands in favour of the company and file a claim for compensation with the Special Land Acquisition Officer in respect of the lands under acquisition. These transactions did not constitute an adventure in the nature of trade and were liable to be taxed to capital gains tax and not on the footing of ‘business income’.

At one stage, the High Court of Madras in Sarojini Devi vs. Sri Kristna AIR 1944 Mad 401 had taken a view that any land which was capable of being used for agriculture was liable to be considered as agricultural land. This view was in terms overruled by the Supreme Court in its judgment in CWT vs. Officer-in-Charge (Court of Wards), Paigah 1976 CTR (SC) 404 : (1976) 105 ITR 133 (SC). The latest judgment of the Supreme Court in Smt. Sarifabibi Mohmed Ibrahim vs. CIT (supra) clinched the issue. In the former case of CWT vs. Officer-in-Chjarge (Court of Wards), Paigah (ibid), the Constitutional Bench of the Supreme Court had in terms observed that the expression ‘agricultural land’ could not be given the wide meaning as desired by the assessee in view of the underlying object of the Act providing for exemption of land being to encourage cultivation of the land. In this case, the Supreme Court also overruled the Full Bench judgment of the High Court of Andhra Pradesh which was the subject-matter of the appeal before the Supreme Court in the case reported in CWT vs. Officer-in-Charge, Court of Wards (supra). The apex Court emphasised that the object of the legislature in exempting agricultural land from tax was to encourage the cultivation of agricultural land and agricultural operations. The Supreme Court considered the object of the legislature in exempting agricultural land from taxation for purposes of the WT Act, 1957, and it is obvious that the same is the object of exemption for granting exemption in respect of ‘agricultural income’ for purposes of IT Act, 1961, as well. After laying down the narrower test for the purposes ofdetermining the nature and character of land at the time of transfer for the purpose of the IT Act, 1961, and the WT Act, 1957, the apex Court remanded the matter to the Tribunal for fresh determination of the issue in the light of theprinciples laid down. In para. 13 of its judgment, the Supreme Court referred to the judgment of the Bombay High Court in CIT vs. V.A. Trivedi (1988) 72 CTR (Bom) 199 : (1988) 172 ITR 95 (SC) : TC 20R.761 and approved the ratio of the said judgment. In para 14 of its judgment, the Supreme Court referred with approval to the observations made by the Division Bench of the Bombay High Court in CIT vs. V.A. Trivedi (supra) to the effect that to ascertain the true character and the nature of the land, it must be seen whether the land had been put to use for agricultural purposes for a reasonable span of time prior to the relevant date and further as to whether on the date of the transfer the land in question was intended to be put to use by the purchaser for agricultural purposes for a reasonable span of time in future. The relevancy of the test of ‘factual user’ of the land for agricultural purposes was emphasised by the Division Bench of the Bombay High Court in Trivedi’s case (Ibid) after interpreting and applying the ratio of the judgment of the Supreme Court in the case of CWT vs. Officer-In-Charge (Court of Wards), Paigah (supra). The said test was duly approved by the Supreme Court in its latest decision in Sarifabibi’s case (supra). Be that as it may, we do not think that the writ petitioner is entitled to succeed on the question of lack of constitutional vires to the Explanation inserted in s. 2(1A) of the IT Act, 1961, by way of addition of the said explanation that the Revenue derived from the land should not include and should never be deemed 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.

The present writ petition is being instituted by the petitioner when his assessment order passed by the ITO was challenged by him before the CIT(A) and the appeals were dismissed. The appellate order was again challenged by the petitioner before the Tribunal and during the pendency of the appeal before the Tribunal, the Tribunal refused to stay the operation of the order of assessment. The petitioner while challenging the assessment orders in the writ petition raised the question of vires of the amendment inserted by Finance Act of 1989. The ground of challenge to the amendment is “Explanation” added to the statute for removal of doubts whereby it was sought by the legislature that the revenue derived from the land shall not include and should never be deemed to have included any income arising from the transfer of any land referred in certain clauses of the Act. The petitioner has made the basis of its challenge to this Explanation a case decided by the Bombay High Court in the matter of Manu Bhai A. Sheth (supra). The petitioner wants this Court that as the Bombay High Court has read down the Explanation inserted in the year 1970, the present Explanation should also be read down and the income of the petitioner which has come from the source of the sale of agricultural land should not be included in the income. It was on account of the challenge to the vires of the Explanation that the petitioner came to this Court directly before waiting for the result of its appeal before the Tribunal. The contention of the petitioner is that it chooses to come to this Court because unless the Explanation is held to be ultra vires, the result of the appeal before the Tribunal is almost foregone one. The Tribunal cannot go into the question of the constitutionality of the Explanation inserted since the petitioner challenges the legislative competence of the Parliament in introducing the Explanation and under reference, the present writ petition is filed. During the pendency of the present writ petition, the Tribunal decided the appeal of the petitioner and dismissed the same. The petitioner made an application for amendment in the writ petition and sought to implead a challenge to the order of the Tribunal as well. The amendment application filed by the petitioner was opposed by the respondents inter alia on the ground that the order of Tribunal is not liable to be challenged directly in a writ petition and the same can only be challenged before this Court by preferring an application for making reference. The amendment application was not decided and was kept pending, which is being also disposed of along with the writ petition.

23. Fundamental question which determines the fate of this case is the character of the land in question. The land in question was held jointly by five of the nineteen partners of the firm. These five co-owners along with fourteen others entered into a partnership and at the time when the coowners of the land joined the partnership, the land stood transferred to the firm at a consideration of Rs. 21.5 per sq. yard. According to the respondent authorities and the Tribunal, the manner and the mode of bringing in the land into partnership holds out the intention of the petitioner that it never intended to use the land in question for agricultural purpose. It was not in the agricultural denomination that the land was included in the partnership assets. It was included as stock-intrade indenomination of yards. That agricultural land is not measured in yards and the very nature of measurement suggests that the intention of the petitioner was trading activity in land. That being the position, the stock-in-trade in terms of land measured in yards suggests that the land was never intended to be used for agricultural purpose when it was brought into the partnership assets, it was converted into the plots and it had been given measurement in yards. That being the position, the land ceased to have the character of the agricultural land used for agricultural purpose. Since the land has lost the character of agricultural land used for agricultural purpose, the reading down applied by the Bombay High Court of the Explanation inserted in the 1970 offers no guideline as the land has lost itscharacter of being an agricultural land. That being the position, the land having lost its character as an agricultural land, it is not necessary for us to go into the niceties of the interpretation of the definition and adjudge the argument advanced by the petitioner that the definition inserted in 1990 has to be read in the Explanation of 1970. Since we are concurring with the findings of the IT authorities on the basis of the detailed examination of the facts involved in the case, the question sought to be raised by the petitioner regarding the vires is not necessary to be decided. The detailed examination of the facts, the character of land and the memorandum of the incorporation of the firm clearly hold-out that the petitioner firm was to do business in the sale and purchase of agricultural lands and the agricultural produce, etc. The agricultural activities were not defined in its partnership deed and in the trading account filed by the firm, no expenditure was shown to have been incurred on any such operations which has the colour of agricultural operations. Therefore, the character of the land has rightly been held not to be of agricultural nature and in this background, the legislative competence of the Parliament in introducing the Explanation in s. 2 (1A) of the IT Act of 1961 by the Amendment Act of 1989 is not required to be gone into, since the ground which was sought to be raised by the petitioner was the ground of vires of the “Explanation” and on the question ofnature of the land, after a detailed examination, we do not find that it is at all necessary to judge the vires as the land has lost its character as agricultural land, therefore, the writ petition cannot be entertained by this Court. The question of vires, therefore, is not gone into and the petitioner is not permitted to raise this question. Since we have not allowed the amendment and have treated the amendment application as rejected, the judgment of the Tribunal which was sought to be assailed before us in the writ petition, is also not permitted to be assailed in the writ petition. The writ petitioner must seek its relief on merits before the appropriate forum. The writ petition, having no force, is dismissed.

[Citation : 244 ITR 789]

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