Union of India Vs. S.Muthyam Reddy  INSC 380 (1 October 1999)
R.C.Lahoti RAJENDRA BABU, J. :
appeal is by special leave against an order passed by the High Court of Andhra
Pradesh in a batch of cases. By that order, the High Court considered the
effect of a combined reading of Sections 2(1A) and 2(14) of the Income Tax Act,
1961 [hereinafter referred to as the Act] and has held that (i) capital gains
arising from sale of land used for agricultural purposes would be revenue
derived from such land and, therefore, agricultural income within the
definition under Section 2(1A) of the Act with the result that Parliament would
have no legislative competence to tax such agricultural income; and (ii)
amended Section 2(14)(iii) should be read down to preserve its
constitutionality. All land used for agricultural purposes whether situated in
areas mentioned in Section 2(14)(iii)(a) and (b) should be held to be excluded
from the definition of capital asset. Thus Section 2(14)(iii) should read as excluding
from capital asset agricultural land in India, not being land situated in the areas mentioned therein. Upon such
interpretation, Section 2(14)(iii) does not enable levy of tax on capital gains
arising from transfer of land which is used for agricultural purposes wherever
it may be situated.
this appeal, challenge to this order is based on many grounds and our attention
has been drawn to several decisions not only taking similar but also a contrary
respondents having remained ex-parte, we requested Shri Dhruv Mehta, learned
Advocate, to assist the Court as amicus curiae. We are beholden for the
valuable assistance rendered by him to the Court.
Finance Act, 1989, Explanation to Section 2(1A) is inserted with effect from
1.4.1970 to supersede the view expressed in the order under appeal and several
decisions setting out similar ratio. This declaratory amendment having
retrospective operation though coming into force during the pendency of this
appeal must be given effect to.
said Explanation clearly declares 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 Section 2(14)(iii)(a) or (b).
upshot of the same is that income derived from sale of such agricultural lands
cannot be treated as agricultural income. Thus, the whole basis of the decision
has been lost and, therefore, the order under appeal cannot be sustained and
deserves to be set aside.
Mehta pointed out that by an artificial definition introduced into the Act what
is agricultural income cannot be treated otherwise. He also sought to explain
the scheme of the entries in the different Lists of the Constitution in support
of his contention.
learned counsel for the appellants pointed out that under Article 366(1) of the
Constitution agricultural income has the same meaning as defined under
enactments relating to income tax. There is divergence of opinion amongst the
High Courts as to the effect of Section 2(14)(iii) of the Act, as amended by
Finance Act, 1970, and hence the Parliament introduced the Explanation by
Finance Act, 1989 stating the meaning thereto which is in conformity with the
view expressed by some High Courts. He submitted, therefore, doubts arising as
to interpretation by reason of conflict of decisions of the High Courts is
resolved by law and such a provision cannot be invalid.
as there is no challenge to the validity of the Explanation to Section 2(1A)
inserted into the Act by Finance Act, 1989, we are afraid, we cannot examine
the correctness of the said submission. We leave open this question to be
raised for consideration in an appropriate proceeding.
result, we allow this appeal and set aside the order of the High Court. No
order as to costs.