1. These three appeals by revenue pertain to three different assessees and rotate round the common facts and relate to the assessment year 1981-82. For the sake of convenience, these are consolidated together and disposed of by a common order.
2. Shri G.S.R. Murthy, learned counsel for the assessee appeared before us. It was submitted by him that facts of the three cases are identical. During the relevant assessment year, assessees sold agricultural land situated within a distance of 8 km. from Rajahmundry Municipality to various persons and claimed exemption from capital gains. According to learned counsel, in view of the decision of J.Raghottama Reddys no [1988] 169 ITR 174 (AP), capital gains on the sale proceeds of agricultural lands is not exigible to tax. It was further submitted that even after the amendment made in the definition of 'agricultural income' with retrospective effect from 1-4-1970bytheDirect Tax Law Amendment Act, 1989, the ratio laid down in J. Raghottama Reddy's case holds good. To support his contention, he relied on a decision of the Tribunal in Kota Venkata Ramachander Rao v.ITO [IT Appeal No. 389 (Hyd.) of 1986.] 3. (j) Shri V. Sivakumar, learned Departmental Representative submitted before us that the Hon'ble Andhra Pradesh High Court decided the case of J. Raghottama Reddy on 9-10-1987. Hon'ble High Court has held that the mere amendment of the definition of 'Capital asset' is not sufficient to clothe the Parliament with the power to tax agricultural income. For that purpose, the definition of "agricultural income" itself had to be amended, which would then have reflected back into Entry 82 of List I of the Constitution (hereinafter called Constitution).
(ii) By the Finance Act, 1989, a new Explanation has been inserted at the end of Section 2(1A) of the Income-tax Act, 1961 (hereinafter called the Act) with retrospective effect from 1st April, 1970.
According to this Explanation, 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 Section 2(14)(ii)(a) or Section 2(14)(iii)(b) of the Act.
(iii) Thus, as a result of the said Explanation, any capital gain arising from the transfer of any such land is not to be regarded for and from assessment year 1970-71, as agricultural income.
(iv) Shri V. Sivakumar submitted that the ruling rendered by the jurisdictional High Court in the case of J. Raghottama Reddy (supra) has been statutorily superseded in view of the amendment. To support his contention, he placed reliance on the following:-- 4. We have heard rival submissions in the light of material placed before us and precedents relied upon. In the case of J. Raghottama Reddy, profits derived from the sale of agricultural land was construed to be 'revenue' derived from such land within the meaning of Section 2(1)(a) of the Act and was treated as 'agricultural income'. Hon'ble High Court has held that Parliament could not have taxed the profits and gains arising from the transfer of a land used for agricultural purposes whether such land is assessed to land revenue in India or is subject to a local rate assessed and calculated by the Officer of the Government-notwithstanding that such land is situated within the limits of a municipality etc. with a population of not less than 10,000 or is situated within such distance as may be notified not exceeding 8 km.
from such municipal limits. The reason is simple. It is agricultural income. By merely treating such land as a capital asset within the meaning of Section 2(14) Parliament does not get the competence to tax it. The income arising from its transfer is still agricultural income.
The mere amendment of the definition of the 'capital asset' is not sufficient to clothe the Parliament with the power to tax agricultural income. For that purpose, the definition of 'agricultural income' itself had to be amended, which would then have reflected back into Entry 82 of List-I of the Constitution.
5. By the Finance Act, 1989 with retrospective effect from 1-4-1970, a new Explanation has been inserted at the end of Section 2(1 A) which is reproduced here as under:-- 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 (b) or Sub-clause (iii) of Clause 14 of this section.
6. (i) Under Article 366(1) of the Constitution, 'agricultural income' means agricultural income as defined for the purpose of the enactment relating to the Indian Income-tax Act. This definition indicates that it is open to the income-tax enactments in force from time to time to define agricultural income in any particular manner and that would then be the meaning of that term not only for the purpose of such enactments, but also for the purpose of the Constitution. That evidently, is for the purpose of avoiding conflict as to the legislative powers of the States in regard to 'agricultural income'.
(ii) In the case of K.C. Thomas v. Agrl. ITO [1973] 91 ITR 438 (Ker.), the Hon'ble High Court negatived the argument on behalf of the petitioner that it is not open to Parliament which enacted Taxation Laws (Amendment) Act, 1970 (Act 42 of 1970) to define 'agricultural income' in such a way as to depart from the definition of that term in which Indian Income-tax Act, 1922 as it stood on January 26, 1950. This was so because there is no express prohibition in the Constitution as to the amendment from time to time of the definition of the term 'agricultural income' in the Union Laws relating to Income-tax.
It is significant that the words used in Article 366(1) are not as defined by the enactments relating to Indian Income-tax but as defined for the purpose of enactments relating to Indian Income-tax. Entry 82 of the Union List of the 7th Schedule read with Article 246(1) of the Constitution empowers Parliament to make laws with respect to taxes on income other than agricultural income.
7. In the case of Glory Paul cited supra, Hon'ble Kerala High Court has held that the consideration received on the sale of land in municipal areas, which are excluded from the definition of agricultural land under Section 2(1A) of the Income-tax Act, 1961 and included in the definition of capital assets under Section 2(14) of the Act is not income derived from the land but is income derived from the sale of land and therefore the gains arising from such sale is chargeable to tax as capital gains under Section 45 of the Act. This position has been made clear by the insertion of an Explanation to Section 2(1A) of the Act by Section 3 of the Finance Act, 1989 with retrospective effect from 1-4-1970.
8. The decision in the case of J. Raghottama Reddy was rendered prior to the insertion of Explanation in Section 2(1A) of the Income-tax Act, 1961. The Hon'ble Kerala High Court had considered the position consequent upon the amendment. The requirement laid down in the case of J. Raghottama Reddy, that for the purpose, the definition of agricultural income itself had to be amended which would then have reflected back into Entry 82 of List-I was taken into consideration by the Legislature. Accordingly, the definition of agricultural income was amended. It can, therefore, be said that the amended definition have reflected back into Entry 82 of List-1 of the Constitution. Having regard to the fact that Section 2(1A) of the Income-tax Act, 1961 was amended with retrospective effect from 1-4-1970, we are of the opinion that conditions contained in J, Raghottama Reddy's case for bringing into tax the profits from the sale of agricultural lands are being satisfied and accordingly capital gains tax is exigible on the sale of agricultural lands situated within the notified areas.