TMI Blog1997 (4) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance Act, 1989, with retrospective effect from April 1, 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 non-payment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 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." Under the Finance Act, 1989, an Explanation was added which was brought into force with retrospective effect fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Bonds, 1980, issued by the Central Government ; (v) Special Bearer Bonds, 1991, issued by the Central Government." In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included as per the provisions contained in section 10 of the Income-tax 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 section 54B of the Income-tax Act, which is quoted hereinbelow : "54B. (1) Subject to the provisions of sub-section (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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 : "3. Amendment of section 2.---In section 2 of the Income-tax Act (as amended by section 3 of the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988)), in clause (1A), the following Explanation shall be inserted at the end and shall be deemed to have been inserted with effect from the 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-clause (iii) of clause (14) of this section'." It is thus evident that clause 3 seeks to amend section 2 of the Incometax Act so as to insert an Explanation at the end of clause (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-clause (iii) of clause (14) of this section. 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 April 1, 1970, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a decision of the Bombay High Court, where it was observed as follows : "Entry 82 in List I of the Seventh 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 section 2, which defines the word 'income', includes within it 'any capital gains chargeable under section 45'. Under the proviso to sub-section (3) of section 10, capital gains chargeable under section 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 : Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 (SC) relied on. Profits or gains on sale of agricultural land would be 'revenue' within the meaning of section 2(1)(a). The word 'revenue' has been used in a very wide sense as is shown by that sub-clause itself. The sub-cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for agricultural purposes even though it may be situate in any of the areas mentioned in paras. (a) and (b)of sub-clause (iii) or, in other words, sub-clause (iii) of section 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'." In J. Raghottama Reddy v. ITO [1988] 169 ITR 174, at pages 175 and 176, the Andhra Pradesh High Court held as follows: "The amendment of the definition of 'agricultural income' in section 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 of 'agricultural income' in section 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under section 273(2)(aa) in the case of the partner for the assessment year 1988-89 was made annexure-8. 9. Copy of written submission of the assessee before the Income-tax Officer was made annexure-9. 10. Copy of the memo of appeal before the Income-tax Appellate Tribunal in Form No. 36 for the assessment year 1988-89 was made annexure-10. 11. Copy of reply to penalty notice dated January 4, 1992, was made annexure-11. 12. Copy of the application for grant of stay to the Deputy Commissioner of Income-tax dated March 16, 1992, was made annexure-12. 13. Copy of the application for grant of stay to the Deputy Commissioner of Income-tax dated March 30, 1992, was made annexure-13. 14. Copy of the application for stay to the Commissioner of Incometax dated March 30, 1992, was made annexure-14. 15. Copy of the application for grant of stay to the Income-tax Officer dated March 30, 1992, was made annexure-15. 16. Copy of the order dated March 25, 1992, of the Income-tax Officer rejecting the stay application was made annexure-16. 17. Copy of the order of the Deputy Commissioner of Income-tax dated March 26, 1992, rejecting the stay application was made annexure-17." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agricultural land irrespective of the area where it is situated continues to be agricultural income, Parliament remains without any legislative competence to impose any tax thereon. It was further urged that the retrospective amendment effected by the Finance Act, 1989, with retrospective effect from April 1, 1970, was absolutely illegal, confiscatory, ultra vire and unconstitutional. There is no rational nexus for giving retrospective effect to such amendment particularly when it hits prejudicially 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. It was further urged that there was no rational nexus for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the 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. It was su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne. 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 April 1, 1970. It was further contended that the writ petitioner cannot even seek relief in the garb of the land being used for agricultural purposes because it was not so used at all. Article 366(1) of the Constitution of India defines "agricultural income". For the purposes of the 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 income-tax law of the country as is in force. With this also under article 246(1) read with entry 82 of List 1, the 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey agreed to sell the land to a housing co-operative 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 1964-65, there were 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 railwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... much as agricultural crop can be raised even on building sites and sometimes a crop is grown in order not 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 nonagricultural 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal held that the lands could not be considered as agricultural lands. The Appellate Assistant Commissioner 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 Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax 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 the Income-tax Act, 1961 as well. After laying down the narrower test for the purposes of determining the nature and character of land at the time of transfer for the purpose of the Income-tax Act, 1961, and the Wealth-tax Act, 1957, the apex court remanded the matter to the Tribunal for fresh determination of the issue in the light of the principles laid down. In paragraph 13 (page 640 of 204 ITR) of its judgment, the Supreme Court referred to the judgment of the Bombay High Court in CIT v. V. A. Trivedi [1988] 172 ITR 95 and approved the ratio of the said judgment. In paragraph 14 (page 641 of 204 ITR) of its judgment, the Supreme Court referred with approval to the observations made by the Division Bench of the Bombay High Court in CIT v. V. A. Trivedi [1988] 172 ITR 95 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 transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner 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 Income-tax Appellate 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 Income-tax Appellate Tribunal is almost a forgone one. The Appellate Tribunal cannot go into the question of the constitutionality of the Explanation inserted since the petitioner challenges the legislative competence of Parliament in introducing the Explanation and under reference, the present writ petition is filed. During the pendency of the present writ petition, the Income-tax Appellate 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 Income-tax Appellate Tribunal as well. The amendment application filed by the petitioner was opposed by the respondents, inter ali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings of the income-tax 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 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 Parliament in introducing the Explanation in section 2(1A) of the Income-tax 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 of nature of the land, after a detailed examination, we do not find th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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