TMI Blog1980 (7) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. Mr. Joshi, learned counsel for the respondents, however, stated before us that for the purpose of these petitions the lands in question in all these petitions may be taken to be agricultural lands. During the accounting years relevant to the assessment years 1972-73 and 1973-74 the petitioners sold at different times parts of their above holdings. They did not include in their income-tax returns filed for the relevant assessment years the profits or gains made by them on the sale Of such lands. In the case of the petitioners in Miscellaneous Petition No. 875 of 1974 Jim Rusdin Private Ltd. v. J. M. Mehra and another assessment orders were made for the years 1972-73 and 1973-74 including in their taxable income profits or gains arising from such sales and levying capital gains tax under s. 45 of the I.T. Act, 1961, thereon. In the case of the petitioners in the other miscellaneous petitions they apprehended that the profits or gains made by them on the sale of these lands would be made liable to capital gains tax under the said s. 45. All these petitioners filed petitions, under art. 226 of the Constitution, in the High Court challenging the constitutionality of the levy of ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian I.T. Act, 1918, was passed, the Government intended to tax agricultural income also, but on account of opposition in the Legislative Council this proposal was dropped. The definition of " agricultural income " as given in the 1918 Act was very similar to the one contained in the 1886 Act. Under the Indian I.T. Act, 1922, agricultural income was exempt from tax provided it conformed to the definition given in cl. (1) of s. 2 of the 1922 Act. That definition was as follows: " 2. Definitions.-In this Act, unless there is anything repugnant in the subject or context:- (1) 'agricultural income' means (a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government as such; (b) any income derived from such land by (i) agriculture, or (ii) the performance by a cultivator or receiver of 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-k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Chapter (that is, Chapter I of Part VII) moneys are or may be distributable to Provinces or States, or which imposes any such federal surcharge as is mentioned in the foregoing provisions of this Chapter, shall be introduced or moved in either chamber of the Federal Legislature except with the previous sanction of the Governor-General in his discretion ". These features of the Govt. of India Act, 1935, came to be adopted when the Constitution of India was passed. Article 366 of the Constitution defines certain terms. Clause (1) of art. 366 is as follows: " 'Agricultural income' means agricultural income as defined for the purposes of the enactments relating to Indian income-tax." The division of the field of taxation between the Union and the States so far as income-tax is concerned has also been preserved. Entry 82 of List I (Union List) in the Seventh Schedule to the Constitution provides for "Taxes on income other than agricultural income", Entry 46 of List II (State List) in the Seventh Schedule to the Constitution provides for " Taxes on agricultural income Article 274(1) corresponds to s. 141(1) of the Government of India Act, 1935, and is as follows: " 274. Prior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the proviso to cl. (1) were substituted with retrospective effect from the commencement of the 1961 Act by s. 2 of the Taxation Laws (Amend.) Act, 1970. The retrospectively amended definition reads as follows : " 2. Definitions.-In this Act, unless the context otherwise requires, (1) '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 of 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 any 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in paras. (ii) and (iii) of sub-cl. (b) is carried on. Because of the constitutional prohibition on the Union Parliament from imposing any tax on agricultural income, cl. (1) of s. 10 of the 1961 Act provides that in computing the total income for a previous year of any person, the agricultural income is not to be included. Capital gains tax, that is, a tax on any profits or gains arising from the transfer of a capital asset, was for the first time introduced for two years only, that is, from April 1, 1946, to March 31, 1948, by the Incometax and Excess Profits Tax (Amendment) Act, 1947. This was done by inserting a new clause, namely, cl. (4A), defining " capital asset ", adding capital gains as a new head of income chargeable to tax under s. 6 of the 1922 Act, inserting a new section, namely, s. 12B, providing for the levy of capital gains tax, and including capital gain chargeable under s. 12B in the definition of " income " given in s. 2(6C) of the 1922 Act. The definition of of capital asset " as so introduced was: " (4A) 'capital asset' means property of any kind (other than agricultural land) held by an assessee, whether or not connected with his business, professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amended in 1965. The definition now reads as follows: " (14) 'Capital asset' means property of any kind held by an assessee, whether or not connected 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 situate (a) in any area which is comprised within the jurisdiction of municipality (whether known as a municipality, municipal corporation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h effect from April 1, 1976. We are equally not concerned with s. 54C. Clause (47) of s. 2 reads as follows : " (47) 'transfer', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law." What is challenged before us is the constitutionality of sub-cl. (iii) of cl. (14) of s. 2 of the I.T. Act, 1961, as substituted by the Finance Act, 1970. This challenge is based on four grounds. They are as follows: (1) Profits or gains arising from sale of agricultural lands situate in India, even though situate within the areas specified in paras. (a) and (b) of the impugned sub-cl. (iii) of cl. (14) of s. 2, is agricultural income as it is It revenue derived from land which is situated in India and is used for agricultural purposes ", and Parliament has, therefore, no legislative competence to impose a capital gains tax or any tax thereon. (2) The impugned sub-cl. (iii) of cl. (14) of s.. 2, though purporting to be a part of the definition of " capital asset " is in substance a part of the definition of " agricultural income " contained in cl. (1) of s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is used for agricultural purposes " in s. 2(1)(a) ? The first of these questions presents no difficulty, for it is now definitively decided by the Supreme Court in Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 that profits or gains arising from the sale of capital asset are income. Navinchandra's case was an appeal to the Supreme Court from a judgment of the Bombay High Court on a reference made under s. 66(1) of the Indian I.T. Act, 1922. The question raised in that reference was whether s. 12B inserted in the said Act by the Incometax and Excess Profits Tax (Amendment) Act, 1947, which authorised the imposition of a tax on capital gains, was invalid as being ultra vires the Central Legislature. This question came up by way of a reference because in those days it had not been definitively settled that the High Court could not decide the validity of a taxing statute or any of its provisions in a reference made under that taxing statute. The same question had come up earlier for decision before the Bombay High Court in another reference, namely, J. N. Duggan v. CIT [1952] 21 ITR 458. In that case a Division Bench of the Bombay High Court held the imposition of capital gains t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutes and that a perusal of those cases revealed that they were concerned with ascertaining the meaning of that word in the context of the income-tax legislation. The Supreme Court referred with approval to the following observations of Lord Wright in Kamakshya Narain Singh v. CIT [1943] 11 ITR 513, 521 (PC): "Income, it is true, is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation." The Supreme Court held that it would be wrong to interpret the word income " in the said entry 54 in the light of any supposed English legislative practice. The Supreme Court also pointed out that in the English Income Tax Act of 1945, capital gains had been included as taxable income. The Supreme Court further pointed out that in construing an entry in a legislative list the widest possible construction according to their ordinary meaning must be put upon the words used therein. The following passage from the judgment of the Supreme Court is relevant and requires to be reproduced in extenso (p. 764 of 26 ITR): "What, then, is the ordinary, natural and grammatical meaning of the word 'income'? According to the dictionary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue " in sub-cl. (a) of cl. (1) of s. 2 has been used in a very wide sense is shown by that sub-clause itself. That 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" any when used affirmatively, means " whichever, of whatever kind, of whatever quantity " (See Murray's Oxford English Dictionary). The Shorter Oxford Dictionary defines it as " every one of the sort named Thus, the expression " any revenue " would mean income of every kind. Under cl. (1) of s.2 "agricultural income" is divided into three categories. Sub-clause (a) speaks of " any rent or revenue derived from land which is situated in India and is used for agricultural purposes ". Sub-clause (b) speaks of any income derived from such land by one of the three modes specified in that sub-clause. Sub-clause (c) speaks of " any income derived from any 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 paras. (ii) and (iii) of sub-cl. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort of this contention was that while the definition of " agricultural income " in the Indian I.T. Act, 1922, used the words rent or revenue ", the words used in the Bihar Act were " rent or income". Before the Federal Court it was conceded by the appellants that this variation was immaterial. Though this point was conceded, on a perusal of the judgment of the Federal Court, it will appear that according to the Federal Court this point was rightly conceded. It appears that in addition to the suit from which the above appeal to the Federal Court was filed other similar suits were also filed in the Court of the First Subordinate judge, Patna, and were transferred to the Patna High Court and disposed of by a Special Bench of the Patna High Court. The judgment of the Patna High Court in one of these cases, which judgment seems to have governed the decision of all the other suits, is reported as Jhalak Prasad Singh v. Province of Bihar [1941] 9 ITR 386 (Pat) [FB]. The point that " revenue " and " income " meant the same thing was not conceded before the Patna High Court. The Patna High Court considered that point and repelled the contention that revenue was something different from inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that capital gains made on the sale of capital assets are not income not sustainable in view of the judgment of the Supreme Court in Navinchandra's case [1954] 26 ITR 758, but the argument is based on a fallacy and a mixing up of different concepts. The sale price received on the sale of a capital asset would be capital receipt. This is, however, a wholly different thing from saying that the profits or gains, arising from the sale of a capital asset is a capital receipt. Such profits or gains are income. Not only cl. (24) of s. 2 of the 1961 Act, which defines the word " income ", by sub-cl. (vi) includes. " any capital gains chargeable under section 45 " within the meaning of the word " income ", but the Supreme Court also has in Navinchandra's case [1954] 26 ITR 758, held such capital gains to be income. It is also pertinent to bear in mind that under the proviso to sub-s. (3) of s. 10 of the 1961 Act capital gains chargeable under the provisions of s. 45 are expressly excluded from receipts which are of casual and a nonrecurring nature. Thus, capital gains statutorily are income and are revenue receipts which are not of a casual and nonrecurring nature. In view of these statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds used for agricultural purposes was agricultural income within the definition of that expression in s. 2(1) of the 1922 Act and was, therefore, exempt from income-tax. The Privy Council held that interest on arrears of rent payable in respect of such land was neither rent nor revenue derived from land. The Privy Council pointed out that interest was not rent because rent is a technical conception, its leading characteristic being that it is a payment in money or in kind by one person to another in respect of a grant of a right to use the land, and interest on rent in arrears was not such a payment. The Privy Council held that it was equally clear that interest on rent was revenue, but it was not revenue derived from land. The Privy Council pointed out that in the genealogical tree of the interest land appears in the second degree, but immediate and effective source was rent, which had suffered the accident of non-payment and rent was not land within the meaning of the definition in question. Thus, according to the Privy Council, when tracing the genealogical tree of interest on arrears of rent, rent stood in the first degree and land in the second degree, that is, rent was derive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gical aerobatics. Rent is derived from a lease of land in the same way as capital gains is derived from the sale of land, but the immediate and effective source of both is land itself. To say that in one case, namely, in the case of sale, it is a transaction of sale, and in the other case it is land and not a transaction of lease, is to ignore the substance of, the matter. Another decision relied upon by the respondents in support of this contention was Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 (SC). In that case 60% of the income of certain tea companies was exempt from tax as agricultural income under s. 4(3)(viii) of the Indian I.T. Act, 1922. The assessee was a shareholder in these companies. She claimed that 60% of the dividend income received by her on these shares should also be exempt from tax as agricultural income. The Supreme Court held that such dividend income was not agricultural income but was income assessable under s. 12. The Supreme Court pointed out that the dividend was derived from the investment made in the shares of the company and the foundation of it rested on the contractual relations between the company and its shareholders. The Supreme Court further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le under a contract imposing a personal liability on the covenantor; the discharge of which was secured by a charge on land. It was further held that this was a case where the owner of an estate had exchanged a capital asset, inter alia, for a life annuity which was income in his hands and not a case in which he had exchanged his estate for a capital sum payable in instalments, and the income was, therefore, taxable under the 1922 Act. This is a case which turned upon its own facts. The question of capital gains did not arise in this case because at that time no capital gains tax had been leviable. The question was whether the receipt of the entire sum of Rs. 2,40,000 was a capital receipt or a revenue receipt, and if a revenue receipt whether it was derived from land. The basis for the Privy Council holding that this was not agricultural income was that this was income which was not derived from land but was money payable under contract containing a personal liability. The second authority relied upon was a decision of the Privy Council in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC). In that case, the assessee had leased for 999 years the undergr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to real property in respect of these villages. They, however, retained the right to a small annual cash payment by virtue of their position as the old Pargana lord. This cash allowance came to be called malikana. Apart from this payment, the villages became quite independent and the exclusive property of the purchasers, grantees or transferees. The amount of malikana was fixed by a settlement decree and was not variable and was payable whether the land on which it was supposed to be a charge was used for agricultural purposes or not. The Privy Council held that malikana was not rent or revenue derived from the land but it was paid to the assessee because his ancestors, the original proprietors, had relinquished their claim to their land and it represented the consideration for their relinquishment and the land was, therefore, in no real sense the source of that payment to the assessee and in the assessee's hands it could not be said to be rent or revenue derived from the land. This case also turned upon its own facts. The question was whether the full amount of malikana was agricultural income or not. The right to the lands had been relinquished not by the assessee but by his ances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord and tenant. This case again does not touch the point. The question before the Supreme Court in that case was whether salami was liable to agricultural income-tax on the ground that it was " agricultural income " within the meaning of s. 2(1)(a) of the Assam Agrl. I.T. Act. In the course of its judgment, the Supreme Court referred to several other decisions in which payments by way of salami were held to be agricultural income. The Supreme Court did not hold that those cases were wrongly decided but distinguished those cases, some on the ground that the question arising in them was decided under the Indian I.T. Act, 1922, and the question whether it was a capital receipt or a revenue receipt and, therefore, exempt from the levy of agricultural income-tax did not arise because the Provincial Agricultural Income-tax Acts were passed subsequently, and the others on the ground that the payment of salami was held to be agricultural income because the moneys were paid after the relationship of landlord and tenant had come into existence. In State of Kerala v. Karimtharuvi Tea Estate Ltd. [1966] 60 ITR 275 (SC), yet another decision relied upon by the respondents, the facts were that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital assets and was not rent or compensation for the use of it. Here again the question whether any particular part of such receipt was income on the ground that it was capital gains did not arise for consideration. The respondents then relied upon a decision of the Supreme Court of the United States in United States of America v. Ashby Oliver Stewart [1940] 85 L Ed 40; 311 US 60. The question before the United States Supreme Court was whether under the provisions of s. 26 of the Federal Farm Loan Act the " income derived from farm loan bonds issued by joint stock land banks under the said Act should be exempt from federal income-tax applied to capital gains arising out of the purchase and subsequent sale or surrender of such bonds. Section 22(a) of the Revenue Act of 1928 included in gross income " gains, profits, and income derived from ...... sales, or dealings in property, whether real or personal ". Section 22(b)(4) of the Revenue Act exempted from taxation " interest upon ...... securities issued under the provisions of the Federal Farm Loan Act, or under the provisions of such Act as amended ". The United States Supreme Court held that if the above two provisions alone wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, both of which were Acts passed by the Congress and, according to the rules of construction as laid down in American judicial decisions, the Supreme Court held that two statutes in pari materia should be read together as if they were one law and the relevant provisions of the later statute which were identical with the provisions of the statute which it replaced and which statute was passed soon after the Farm Loan Act and in the same session of the Congress should be regarded as a legislative interpretation of the earlier Act. What the United States Congress could be said to have exempted from its taxing power was interest on farm loan bonds and not capital gains. This decision is, therefore, wholly irrelevant. It was next argued on behalf of the respondents that " derived from land " means the same thing as "springs from land " and that the only thing which springs from land is crops and, therefore, profit or gain made on sale of land used for agricultural purposes could not be said to be derived from such land and would not be revenue within the meaning of s. 2(1)(a) of the I.T. Act, 1961. According to the respondents, what would be revenue would be only the profit or gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. In our opinion, there is no logical distinction between income arising from the asset transferred to the wife and arising from the sale of the assets so transferred. The Profits or gains which arise from the sale of the asset would arise or spring from the asset, although the operation by which the Profits or gains is made to arise out of the asset is the operation of the sale. If the asset is employed, say by way of investment and produces income, the income arises or springs from the asset; the operation, which causes the income to spring from the asset, is the operation of the investment. In the operation of the investment, income is produced while the asset continues to belong to the assessee, while in the operation of a sale, gain is produced, which is still income, but in the process the title to the asset is parted with. Although the processes involved in the two cases are different, the gain which has resulted to the owner of the asset, in each case, is the gain, which has sprung up or arisen from the asset. There is hence no warrant for the argument that the capital gain is not income arising from the assets, but it is income, which arises from a source which is differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T. Act, 1922, and was exempt from assessment to income-tax. It was admitted by counsel for the respondent that nazar was revenue, but what was argued was that although it was revenue it was not revenue derived from land but from the transaction, that is, from the recognition of the transfer, and that it was an incidence of the transfer and not of the tenancy and, therefore, did not flow from the land. The Full Bench held that the admission that nazar or salami was rent or revenue within the meaning of s. 2(1)(a) of the 1922 Act was rightly made. The Full Bench further held that it was money which came to the landlord by virtue of the fact that he was the owner of the land and that, viewed in this light, it was clearly derived from the land and was agricultural income. Thus, according "to the Full Bench of the. Calcutta High Court, not only was the admission made on behalf of the Secretary of State that nazar or salami was revenue was rightly made but such revenue, even though it was derived from the transaction of the recognition of the transfer of a non-transferable holding, was still revenue derived from land. The second Calcutta case is CIT v. All India Tea Trading Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, agricultural income within the meaning of s. 2(1)(a) of the I.T. Act, 1961. The conclusion that capital gains made on sale of agricultural land would be " revenue derived from land " within the meaning of that expression in s. 2(1)(a) of the I.T. Act, 1961, is, however, not decisive of the matter. What sub-cl. (iii) of s. 2(14) speaks of is " agricultural land in India ", while the words used in s. 2(1)(a) are " land which is situated in India and is used for agricultural purposes ". Thus, there are two qualifications to the word " land " in s. 2(1)(a), namely, (1) the land must be situated in India, and (2) the land must be used for agricultural purposes. The first qualification, namely, with respect to the location of the land in India, is the same as in s. 2(14)(iii) and need not trouble us, but the question which arises is whether land which is used for agricultural purposes is the same as agricultural land. It is obvious that the land which is used for agricultural purposes is agricultural land. But is the converse true ? Is agricultural land the same as land which is used for agricultural purposes ?. It is not that agricultural land must always be and always is u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormed in regard to any land that the land can be said to have been used for " agricultural purposes " and the income therefrom said to be " agricultural income " derived from the land by agriculture under s. 2(1)(b) of the Indian I.T. Act, 1922. The question before the Supreme Court in that case was whether income derived from certain forest land was income derived from land which was used for agricultural purposes by agriculturists and, therefore, agricultural income within the meaning of s. 2(1)(b). Thus, unless agricultural operations are carried on upon land in the sense defined by the Privy Council and the Supreme Court in the above cases, land cannot be said to have been used for agricultural purposes even though it may be agricultural land. In this connection, we must refer to a decision of the Andhra Pradesh High Court in Pydah Suryanarayana Murty v. CIT [1961] 42 ITR 83, relied upon by the respondents. In that case certain lands of the assessee on which a large number of mango, palmyra, cashew-nut, coconut and other fruit-bearing trees stood, were requisitioned for military purposes under the Defence of India Act, 1939, and compensation determined by arbitration under Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the land. If one looks at sub-cl. (a), omitting the unnecessary words, it would read any rent or revenue derived from land which ...... is used for agricultural purposes. ". Thus, it is the land which must be used for agricultural purposes. Rent or revenue cannot be the result of agricultural operations. Rent is the amount which would be paid by a lessee to the owner of land which is used for agricultural, purposes and is received by the owner of the land under the lease and not as a result of agricultural operations carried on by him. Similarly, revenue cannot be the result of agricultural operations. If it were, such income would fall under sub-cl. (b) and not sub-cl. (a). If land which is used for agricultural purposes is let out or used for non-agricultural purposes, it then cannot be said to be rent or revenue derived from land which is used for agricultural purposes, and this itself was sufficient to dispose of the reference before the Andhra Pradesh High Court. The point which arose for the decision of the Supreme Court in Raja Benoy Kumar Sahas Roy's case [1957] 32 ITR 466, was whether income derived from certain land was agricultural income falling within s. 2(1)(b) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the impugned sub-clause must be struck down as being ultra vires ? It is a well-settled rule of construction of statutes that where the constitutionality of a statute or some of its provisions are challenged and there are two interpretations possible, according to one of which the law would be valid and according to the other, void, the court would lean in favour of the former construction. Sinha C.J., in Kedar Nath Singh v. State of Bihar [1962] AIR 1962 SC 955, 969(1), put this rule thus: "It is well settled that if certain provisions of law construed in one way would make them consistent with the Constitution, and another interpretation would render them unconstitutional, the court would lean in favour of the former construction. " If necessary, the court will uphold the validity of the Act by reading down the provisions in question. There are a large number of cases in which this has been done, but the case most in point is the opinion of the Federal Court in In re Hindu Women's Rights to Property Act, 1937, and the Hindu Women's Rights to Property (Amendment) Act, 1938 [1941] FCR 12; [1941] 4 FLJ I (FC), a reference made to it under s. 213 of the Government of India Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and especially of the word 'property' as used in it, no part of the Act was beyond the Legislature's powers." In the opinion of the Federal Court the two Acts did not operate to regulate succession to agricultural land in the Governors' Provinces and operated to regulate devolution by survivorship of properties other than agricultural land. In a large number of other cases this principle has been adopted by the Supreme Court. It is unnecessary to refer to all of them. We need mention only the latest, namely, State of Karnataka v. Ranganatha Reddy, AIR 1978 SC 215, 231, in which some of the earlier decisions, including the above Federal Court decision, were referred to and the same principle reiterated. In view of the above decisions we are not in position to hold the impugned sub-cl. (iii) of s. 2(14) to be ultra vires. Instead we hold that it does not operate to levy a capital gains tax on profits or gains arising from transfer of land which is situate in any of the areas mentioned in para. (a) or (b) of the said sub-clause where the land is used for agricultural purposes, and the said sub-clause should be so read that land which is used for agricultural purposes forms an except ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such exercise of legislative power by Parliament was a fraud on the Constitution. When it is said that a particular statute is a fraud on the Constitution, what is really meant is that it is a colourable exercise of legislative power. The doctrine of colourable legislation fell for detailed examination by the Supreme Court in K. C. Gajapati Narayan Deo v. State of Orissa, AIR 1953 SC 375. In that case, the court held that the doctrine of colourable legislation did not involve any question of bona fides or mala fides on the part of the legislature, but the whole doctrine resolved itself into the question of competency of a particular legislature to enact a particular law. The court further observed that if the Constitution of a State distributes the legislative powers amongst different bodies, which bodies have to act within their respective spheres marked out by specific legislative entries, or if there are limitations on the legislative authority in the shape of fundamental rights, questions do arise as to whether the legislature in a particular case has or has not, in respect of the subjectmatter of the statute or in the method of enacting it, transgressed the limits of its co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of finding out the scope and amplitude of the entries in the three Lists in the Seventh Schedule and that the power to levy taxes on income other than agricultural income had been conferred upon Parliament by entry 82 of List I, that is, the Union List, and that very Parliament could not, by virtue of art. 366(1), so define " agricultural income for the purposes of any of the enactments relating to Indian income-tax as to vary the content of the entries in the State List or the Union List. The court held that Parliament had the power to define what was meant by "agricultural income " and that by virtue of entry 82 in List I, namely, the Union List, it had the power to levy a tax on income other than agricultural income as thus defined. With respect to this authority also it was submitted on behalf of the petitioners that the question of colourable legislation did not arise in that case. That is true, but the other arguments are very similar. We may, however, point out that this authority proceeds upon the basis (see pp. 247-8) as if the proviso to sub-cl. (c) of cl. (1) of s. 2 of the 1961 Act was a proviso to the whole of cl. (1). With respect, this appears to us to be an err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in that case. The Supreme Court held that the expression " agricultural land does not mean all land which is capable of being used for agriculture, because such a wide meaning would exclude from the definition of " assets " practically every type of land including land covered by buildings. The Supreme Court further held that the determination of the character of land according to the purpose for which it is meant or set apart and can be used is a matter which ought to be determined on the facts of each particular case and what is really required to be shown is a connection with an agricultural purpose and user and not the mere possibility of such user by some possible future owner or possessor; it is not the mere potentiality, which will only affect its valuation as part of " assets ", but its actual condition and intended user which is to be seen for the purpose of exemption from wealth-tax. The intention to use it for agricultural purposes should be the intention of the owner or possessor and not of any future owner or possessor. The Supreme Court further held that entries in revenue records were good prima facie evidence but they gave rise to presumption which could be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arimtharuvi Tea Estates Ltd v. State of Kerala [1963] 48 ITR (SC) 83,86 to 88, it was pointed out that by reason of art. 366(1) of the Constitution, the power of a, State Legislature to make a law levying a tax on agricultural income is circumscribed by the definition of " agricultural income as defined by Parliament for the purposes of the enactments relating to Indian income-tax. Where, however, the definition of " agricultural income is so amended as to contract to almost nothing the field of agricultural income left to the taxing power of the State, it may be possible to argue that such amendment is a colourable exercise of legislative power. It may also be possible to argue that the restriction on the introduction of any such Bill provided by art. 274(1) of the Constitution is not the same as the one which was contained in s. 141(1) of the Govt. of India Act, because under that section such a Bill could not be introduced or moved except with the Previous sanction of the Governor-General in his discretion, while under art. 274(1) of the Constitution such a Bill cannot be introduced or moved except on the recommendation of the President. Legislation is usually introduced as ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levy capital gains tax on their transfer. It is also pertinent to bear in mind that in the 1922 Act the exclusion from the definition of " capital asset " was not of agricultural land but of land from which the income derived was agricultural income, and, therefore, if there was any agricultural land the income derived from which was not agricultural income, profits or gains arising from the transfer of such land was subject to capital gains tax. Merely because certain assets are excluded from the definition of "capital asset", it does not mean that they are not capital assets. The Government is not bound to tax income derived from each and every source. It is free to exempt some sources of income and to levy a tax on other sources of income. It has equally the power to withdraw an exemption and levy a tax on the sources of income which had till then been exempted: [See Bhola Nath Kesari v. Director of State Lotteries, U.P. [1974] 95 ITR 171 (All)]. Parliament had given blanket exemption to agricultural land in India until the amendment of sub-cl. (iii). From this it does not follow that income arising from agricultural land, if it was not agricultural income, could not be subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would be violative of art. 14. The court observed (p. 275): " It is well settled that a State does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably." It was next submitted that the criterion of taxation under the I.T. Act is the quantum of income and, therefore, the size of the population or the situation of the land cannot be the criterion of taxation as is sought to be done by paras. (a) and (b) of the impugned Sub-cl. (iii) and a classification based on such a criterion is arbitrary and unreasonable. The quotation from the Supreme Court decision in S. K. Dutta, ITO v. Lawarence Singh Ingty [1968] 68 ITR 272 reproduced above is a complete answer to this contention. It was then submitted that there is no valid classification between lands situate in areas mentioned in paras. (a) and (b) of the impugned subcl. (iii) and lands outside those areas. We are unable to see any substance in this argument also. Paragraph (a) refers to areas within the jurisdiction of a municipality, whether such municipality is known as a municipality, municipal corporatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mple, under s. 35CC a company or a co-operative society incurring any expenditure on any programme of rural development is allowed a deduction of the amount of such expenditure incurred during the previous year. Under cl. (a) of the Explanation to that section " programme of rural development " includes any programme for promoting the social and economic welfare of, or the uplift of, the public in any rural area, and the expression " rural area " is defined by cl. (b) of the Explanation as meaning any area other than the areas set out in paras. (i) and (ii) of the said cl. (b). The said paras. (i) and (ii) repeat the exact words used in paras. (a) and (b) of the impugned subcl. (iii) of s. 2(14). Under s. 35CCA, expenditure by way of payment to approved association for carrying out any programme of rural development is allowed to be deducted. In this section, the expression " programme of rural development " has the same meaning as in s. 35CC. Section 80GGA provides for deduction in respect of donations to an association or institution, which has as its object the undertaking of any programme for rural development, to be used for carrying out any programme for rural development app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut that urban assets as defined in the W.T. Act, 1957, formed a class by themselves and were clearly distinguishable from non-urban assets as they were capable of yielding better returns in the form of income and were the objects of larger amounts of investments because of their potentiality of more rapid appreciation in capital value, resulting in a larger amount of unearned wealth for their owners than the non-urban assets and that, therefore, if Parliament had subjected these assets to a higher rate of wealth-tax, Parliament had not acted in a discriminatory manner or in violation of art. 14 of the Constitution. An authority relied upon by the petitioners was State of Kerala v. Haji K. Haji K. Kutty Naha, AIR 1969 SC 378. In that case, the charging section of the Kerala Buildings Tax Act, 1961, was held to be void as infringing art. 14. Under that Act the only basis of taxation was the floor area of the building irrespective of all other considerations such as the class to which a building belonged, the nature of construction, the purpose for which it was used, its situations, its capacity for profitable user and other relevant circumstances. The Supreme Court held that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of classification in any given case. Classification is justified if it is not palpably arbitrary ...... By the process of classification, the State has the power of determining who should be regarded as a class for purposes of legislation and in relation to a law enacted on a particular subject. This power, no doubt, in some degree is likely to produce some inequality; but if a law deals with the liberties of a number of well-defined classes, it is not open to the charge of denial of equal protection on, the ground that it has no application to other persons. Classification thus means segregation in classes which have a systematic relation, usually found in common properties and characteristics. It postulates a rational basis and does not mean herding together of certain persons and classes arbitrarily." We thus find the arguments advanced to invalidate sub-cl. (iii) on the ground that it is violative of art. 14 of the Constitution, unconvincing and unsustainable. The last head of the petitioners' challenge was on the ground of excessive and unguided delegation of legislative power to the executive authority. It was said that there was a double delegation in the impugn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may require to be provided for. The Legislatures, therefore, frequently resort to delegating subsidiary or ancillary powers to delegates of their own choice. In Municipal Corporation of Delhi v. Birla Cotton, Spinning and Weaving Mills [1968] AIR 1968 SC 1232, Wanchoo C.J. observed (p. 1244(1) ): " A review of these authorities, therefore, leads to the conclusion that so far as this court is concerned the principle, is well established that essential legislative function consists of the determination of the legislative policy and its formulation as a binding rule of conduct and cannot be delegated by the Legislature. Nor is there any unlimited right of delegation inherent in the legislative power itself. This is not warranted by the provisions of the Constitution. The Legislature must retain in its own hands the essential legislative functions and what can be delegated is the task of subordinate legislation necessary for implementing the Purposes and objects of the Act. Where the legislative policy is enunciated with sufficient clearness or a standard is laid down, the courts should not interfere. " (Emphasis has been supplied by us.) In Tata Iron and Steel Co. Ltd. v. Wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention raised by the State that the power to levy a tax on land was that of the State and did not fall within the Union legislative field and, therefore, the levy of a tax on the profits or gains arising from transfer of land fell within the State field of taxation. In support of this submission reliance was placed upon entries 18 and 49 in List II in the Seventh Schedule to the Constitution of India. These two two entries are as follows: "18. Land, that is to say, rights in or over land, land tenures including the relation of landlord and tenant, and the collection of rents ; transfer and alienation of agricultural land; land improvement and agricultural loans; colonization. 49. Taxes on lands and buildings." The fallacy in this argument lies in considering levy of capital gains tax arising on transfer of land as a tax on land. Capital gains tax is not a tax on land or any other capital asset. It is a tax on the profits or gains which arise on the transfer of a capital asset. It was then submitted on behalf of the State that levy of capital gains tax arising on transfer of land, though it may not directly fall under either of the two entries, would be incidental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ategories. The first category consists of Miscellaneous Petitions Nos. 1132 of 1973 and 214 and 215 of 1974. In each of these three petitions it is averred by the petitioner that all the lands in question are agricultural in nature and at the time when they were purchased the lands were forest lands abounding with numerous hillocks but after a few years the forest trees were cut down, many of the hillocks levelled and the lands were gradually brought under cultivation. It has been further averred that in the beginning para grass was cultivated on these lands but thereafter due to the shortage of water supply the cultivation was switched over to the cultivation of rice and vegetables in rainy seasons. It has also been averred that the agricultural income derived by the petitioners from these lands was subject to agricultural income-tax. In the affidavit-in-reply in each of these petitions these averments are neither denied nor stated to be not admitted. All that is done by these affidavits is to Put the petitioners to the strict proof of these facts. In our opinion, such a statement made in an affidavit-in-reply neither amounts to a denial nor a non-admission of what is alleged in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Para grass does not grow spontaneously but has to be grown or cultivated. The cultivation of Para grass will, therefore, constitute an agricultural operation. It is not, as it cannot be, disputed that cultivation of rice and vegetables is also cultivation brought about by agricultural operation. There is thus no dispute in these three petitions that at the dates of the sales mentioned in these petitions the lands in question were being used for agricultural purposes. No capital gains tax can, therefore, be levied on profits or gains arising from the transfer of these lands. Turning now to the other category of petitions, in Miscellaneous Petition No. 1179 of 1973 it is averred in the petition that the lands are agricultural in nature and at the date of the purchase were forest lands abounding with numerous hillocks but after a few years the forest trees were cut down and many of the hillocks levelled. It is further averred that the said lands were the subject-matter of land revenue during the petitioners' ownership. In the affidavit-in-reply, it is pointed out that one of the objects of the petitioner-company in purchasing the land was to construct a building thereon and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1973 and 214 and 215 of 1974 it is an admitted position that the lands were being used for agricultural purposes at the dates of the sales of the lands, in other petitions the position is not admitted. Except in Miscellaneous Petition No. 875 of 1974, at the date of the filing of the petitions, assessment orders including the profits and gains made on the sales of these lands in the total income of the petitioners and assessing them to capital gains tax on such profits and gains had not been made and these petitioners approached this court prior to the making of the assessment orders apprehending that such assessment orders would be made. By consent interim orders made in all these petitions the respondents were permitted to complete the assessments and issue a notice of demand but were restrained from recovering the amount of tax attributable to such profits and gains. We are informed that assessment orders were thereafter made and under them capital gains tax was assessed on the sales of lands in question. In making the assessment orders the assessing authorities have not applied their mind to the question whether the lands, which were the subject-matter of the sales, were be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essments in respect of the relevant years in which the sales which are the subject-matter of Miscellaneous Petitions Nos. 1132 of 1973 and 214 and 215 of 1974 are concerned, will be to delete the item of profits or gains arising from such sales; and so far as the assessments relating to the relevant years in which the sales which are the subject-matter of the other petitions are concerned, all that the assessing authorities will do will be to consider and decide only the point whether the land in question was, at the date of the sale, being used for agricultural purposes. None of the other points which have been determined in the assessment orders which we have set aside will be reconsidered by the assessing authority nor any point other than the one which we have mentioned will be considered or decided. Before parting with these petitions, we would like to express our appreciation of learned counsel on both sides for their meticulous preparation of the case and the lucid arguments advanced by them and the ready assistance afforded by them in the discussion between the Bar and the Bench which must inevitably take place in a matter such as this, particularly when some of the poin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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