MADON, J. - (1.) THIS group of eight petitions under Art. 226 of the Constitution of India challenges the constitutionality of sub cl. (iii) of cl. (14) of S. 2 of the IT Act, 1961, as substituted by the Finance Act, 1970 (Act 19 of 1970), which r/w S. 45 of that Act operates to levy capital gains tax on transfer of certain agricultural lands. According to the petitioners, all of them owned agricultural lands situate within the limits of the Municipal Corpn. of Greater Bombay, and all these lands were at the relevant time subject to payment of land revenue to the Govt. In some of the petitions, it is averred that at first cultivation of para grass and later or rice and vegetables was carried on on the lands. In the affidavits in reply these facts are either not admitted or the petitioners are put to the strict proof of these facts. 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.
(2.) DURING the accounting years relevant to the asst. yrs. 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 Misc. Petition No. 875 of 1974 Jim Rusdin Pvt. Ltd. vs. J.M. Mehra & Anr. 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 IT 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 capital gains tax on the sale of agricultural lands, the petitioners in Misc. Petition No. 875 of 1974 also seeking to quash and have set aside the said orders of assessment. During the pendency of these petitions the IT authorities were, by interim orders passed by this High Court, permitted to complete the assessment proceedings for the years in question as also for subsequent years, but were prohibited from recovering the amount of tax attributable to profits or gains arising from sales of these lands. As the questions raised in these petitions were of considerable importance, these petitions were referred to a Division Bench. All these petitions were heard together. During the course of hearing as the impugned sub cl. (iii) of cl. (14) of S. 2 of the IT Act, 1961, affected the State's power of taxation, the State of Maharashtra applied for the leave to intervene, which was granted to it. As the questions raised in all these petitions were the same, we have thought it fit to dispose of this entire group of petitions by a common judgment. In order to understand the nature of the controversy between the parties it is necessary to see the legislative history of the tax on agricultural income and on capital gains. In the Indian IT Act, 1860, agricultural income was taxed for the first time. This tax was withdrawn in 1875. Under the Indian IT Act, 1867, no tax was levied on agricultural income, but in 1869 an income tax was levied on all income including agricultural income, but this was again withdrawn in 1873 74. The Indian IT Act, 1886 (Act No. 2 of 1886), exempted agricultural income from the levy of income tax. The definition of "agricultural income" in the Act of 1886 was very similar to that contained in the Indian IT Act, 1922. The reason for exempting agricultural income from tax was that the landlords paid land revenue to the Govt. and should not, therefore, be asked to contribute to the exchequer more than once, that is, to pay to the Govt. both land revenue as also income tax on agricultural income [See: CIT vs. K.E. Sundara Mudaliar (1950) 18 ITR 259 (Mad) 270 271]. In addition the landlords also paid a cess on land which corresponded to income tax and which was not inconsiderable compared to the then low rates of income tax. The imposition of income tax would have thus overburdened the land with taxes. When the Indian IT Act, 1918, was passed, the Govt. 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 IT 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 Govt. 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 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 sub cl. (ii); (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 operation mentioned in sub cls. (ii) and (iii) of cl. (b) is carried on: Provided that 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 the rent in kind by reason of his connection with the land, requires as a dwelling house, or as a store house, or other out building." The exemption from payment of income tax was brought about by cl. (viii) of Sub S. (3) of S. 4 which provided that agricultural income was not to be included in the total income of the person receiving it. On 1st April, 1937, the Govt. of India Act, 1935, came into force. Sub s. ( 2) of S. 311 of the said Act defined "agricultural income" as meaning "agricultural income as defined for the purposes of the enactments relating to Indian income tax.". By entry 54 in List I (Federal Legislative List) of the Seventh Schedule to the said Act taxes on income other than agricultural income were made a federal subject, while under entry 41 in List II (Provincial Legislative List) of the Seventh Schedule to the said Act taxes on agricultural income were made a Provincial subject. Thus, under the said Act the field of taxation so far as income tax was concerned was divided between the Centre and the Provinces, income other than agricultural income falling within the federal field, while taxes on agricultural income fell within the Provincial field. Since by the above constitutional position Federal Legislature was given the power to define "agricultural income" and thus even extend its own field of taxation, S. 141(1) of the said Act provided that "No Bill or amendment which imposes or varies any tax or duty in which Provinces are interested or which varies the meaning of the expression 'agricultural income' as defined for the purposes of the enactments relating to Indian income tax, or which affects the principles on which under any of the foregoing provisions of this 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. Art. 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". Art. 274(1) corresponds to S. 141(1) of the Govt. of India Act, 1935, and is as follows: "274. Prior recommendation of President required to Bills affecting taxation in which States are interested. No Bill or amendment which imposes or varies any tax or duty in which States are interested, or which varies the meaning of the expression 'agricultural income' as defined for the purpose of the enactments relating to Indian income tax, or which affects the principles on which under any of the forgoing provisions of this Chapter (that is, Chapter I of Part VII) moneys are or may be distributable to States, or which imposes any such surcharge for the purposes of the Union as is mentioned in the foregoing provisions of this Chapter, shall be introduced or moved in either House of Parliament except on the recommendation of the President." The Indian IT Act, 1922, was replaced by the IT Act, 1961. Clause (1) of S. 2 of the 1961 Act, as originally enacted, was as follows: "2. Definitions. In this IT Act, unless the context otherwise requires, (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 India or is subject to a local rate assessed and collected by officers of the Govt. as such; (b) any income derived from such land by (ii) 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 operation mentioned in paragraphs (ii) and (iii) of sub cl. (b) is carried on: Provided that 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 the rent in kind by reason of his connection with the land, requires as a dwelling house or as a store house, or other out building." Sub cl.(a) of cl. (1) and 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 purpose: (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 process mentioned in paras (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 the 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 Govt. 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 municipality, municipal corpn., 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 Govt. 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."
(3.) IT will be noticed that by the retrospectively amended definition of "agricultural income" the condition that the rent or revenue derived from land used for agricultural purposes must be from land either assessed to land revenue in India or subject to a local rate assessed and collected by officers of the Govt. as such has been removed, and now in order to be agricultural income the rent or revenue derived from land situate in India need only be from land used for agricultural purposes. The condition relating to land being assessed to land revenue or being subject to a local rate is, now, by the 1970 Amendment, retrospectively made applicable only in the case of sub cl. (c), that is, to 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. (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.;