M.G. Mukherji, C.J. - (1.) THIS writ application has been filed by the Mahaveer Enterprises, Pindwara, District Sirohi, impugning certain assessment orders whereby the taxing authority levied tax on the writ petitioner as regards the sale of agricultural lands by the writ petitioner. There was a further prayer for quashing of the impugned penalty orders and a further prayer directing the respondents to refund the entire amount of tax, interest and penalty recovered from the petitioner on this account with interest. A general prayer was made so as to hold that the sale of agricultural lands does not give rise to any taxable income under the Income-tax Act irrespective of the fact of the location of the agricultural lands within or outside the municipal limits. There was a challenge to the vires of the Explanation inserted in Section 2(1A) of the Income-tax Act incorporated by the 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.
(2.) 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 levy of tax on the sale of agricultural lands. The agricultural lands are admittedly within the municipal limits of Pindwara. The writ petitioner also submits that it had sold it as agricultural lands to various persons, who, of course, got it later converted into purposes other than agricultural, but the writ petitioner-firm was in no way connected with such later activities. Such later activities were so done with the help of another concern, Arihant Enterprises, and the writ petitioner is not by any stretch of imagination disputing the liability of that firm, Arihant Enterprises, which is a sister concern of the writ petitioner-firm for its income being treated as business income. The main question involved in the present writ application is whether on the sale of agricultural land it could give rise to taxable business income/capital gains under the Income-tax Act. In order to understand the implication of the contentions, it would be necessary for us to advert to the appropriate provisions of the Income-tax Act pertaining to agricultural income which are quoted hereinbelow : "2. (1A) '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 process mentioned in paragraphs (ii) and (iii) of Sub-clause (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 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 from April 1, 1970, and the same is quoted hereinbelow : "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." Under Section 2(14) of the Income-tax Act, we find the definition of "capital asset". Section 2(14) is quoted hereinbelow : "(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 of 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 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 ; (iv) 61/2 per cent. Gold Bonds, 1977, or 7 per cent. Gold Bonds, 1980, or National Defence Gold 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 ;"
(3.) 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 be dealt with in accordance with the following provisions of this section, that is to say,-- (i) if the amount of the capital gain is greater than the cost of the land so purchased (hereinafter referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under Section 45 as the income of the previous year ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase, the cost shall be nil ; or (ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under Section 45 ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase, the cost shall be reduced by the amount of the capital gain. (2) The amount of the capital gain which is not utilised by the assessee for the "purchase of the new asset before the date of furnishing the return of income under Section 139, shall be deposited by him before furnishing such return (such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under Sub-section (1) of Section 139), in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and, for the purposes of Sub-section (1), the amount, if any, already utilised by the assessee for the purchase of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset : Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase of the new asset within the period specified in Sub-section (1), then,-- (i) the amount not so utilised shall be charged under Section 45 as the income of the previous year in which the period of two years from the date of the transfer of the original asset expires ; and (ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid." We quote hereinbelow the impugned amendment effected by the Finance Act, 1989 (see [1989] 177 ITR (St.) 167, 172) : "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 Income-tax 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. ;