Income-tax---

----Capital gains---Sale of agricultural land---Capital asset---Agricultural land covered by S.2(14)(iii)(a) & (b)---Gains on sale of such agricultural land are liable to tax under S.45---Indian Income Tax Act, 1961, Ss.2(14) & 45.

The expression "capital asset" means property of any kind held by the assessee whether or not connected with his business or profession. It however, does not include agricultural land in India except the classes of land included in items (a) and (b) of section 2(14)(iii) of the Income Tax Act, 1961. By the Finance Act, 1970, with effect from the assessment year 1970-71, certain specified lands situate in urban areas or semi-urban areas, were brought within the definition of "capital asset":

Held accordingly, that the Tribunal was not right in holding that capital gains could not be levied on transfer of agricultural land located within the municipal limit. However the Tribunal before giving effect to this order should satisfy itself regarding the remaining two ingredients mentioned in section 2(14)(iii)(a) regarding population not being less than ten thousand according to the last preceding census of which the relevant figures had been published before the first day of the previous year relatable to the assessment year in question. If these two ingredients were satisfied then the assessee would be liable to pay capital gains tax and not otherwise.

Manubhai A. Sheth v. N. D. Nirgudkar, SecondITO (1981) 128 ITR 87 (Bom.) and Tuhi Ram v. Land Acquisition Collector (1993) 199 ITR490 (P&H) ref.

R. P. Sawhney, Senior Advocate and Rajesh Bindal for the Commissioner.

B. S. Gupta, Senior Advocate and Sanjay Barisal for the Assessee.

JUDGMENT

ASHOK BHAN, J.---At the instance of the Commissioner of Income-tax, Jalandhar, the Income-tax Appellate Tribunal, Amritsar Bench.. Amritsar (hereinafter referred to as "the Tribunal"), has referred the following questions of law along with the statement of the case to this Court for its opinion:

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in upholding the decision of the Appellate Assistant Commissioner, that capital gains arising from the transfer of agricultural land located within municipal limit is not liable to capital gains tax?"

The respondent-assessee is a dealer in petrol and diesel and is assessed in the status of a Hindu undivided family. The assessment year involved is 1971-72 the previous year of which ended on March 31, 1971. The agricultural land measuring 25 Kanals, 1 Maria, situated within the municipal limits of Muktsar was purchased by the assessee on January 1, 1957, for Rs.8,000. This land was acquired by the Punjab Government for a public purpose, i.e., for construction of a water works by issuing notification under section 4 of the Land Acquisition Act, 1894, published in the Gazette dated December 31, 1970. The Income-tax Officer, assessed capital gains amounting to Rs.26,650 arising out of this transaction while making the assessment for the year 1971-72. The case of the assessee was that capital gains was not exigible on the sale of agricultural lands which was not accepted. Aggrieved against the order of the Income-tax Officer, an appeal was filed by the assessee before the Appellate Assistant Commissioner. The appellate authority following the decision of the Bombay High Court in Manubhai A. Sheth v. N. D. Nirgudkar, 2nd ITO (1981) 128 ITR 87, held that the profits and gains received from the. agricultural land is revenue within the meaning of section 2(lA) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), as the agricultural income was not taxable under the Act, capital gains tax on the sale of agricultural land could not be levied.

The Revenue aggrieved against the order of the appellate authority for not subjecting the sale of agricultural land to capital gains tax situated within the municipal area of Muktsar preferred an appeal before the Tribunal which was dismissed on June 13, 1986.

Section 2(14) of the Actwhich defines "capital asset" reads as under:

" 'capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include--- ...

(iii) agricultural land in India, not being land situate--

(a) in nary 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 loss 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 airy area within such distance, not being more than eight kilometers, 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;..."

The expression "capital asset" means property of any kind held by the assessee whether or not connected with his business or profession. It, however, does of include agricultural land in India except the classes 'of land included in items (a) and (b) of section 2(14)(iii) of the Act. By the Finance Act, 1970, with effect from the assessment year 1970-71, certain specified lands situate in urban areas or semi-urban areas were brought within the definition of capital asset. Although the Tribunal and the appellate authority had noticed the change which has been brought about by the Finance Act of 1970, but they failed to comprehend its full scope and implication. For taking the view which has been taken by them reliance had been placed upon the decision in Manubhai's case (1981) 128 ITR 87 (Bom). The matter came up for consideration before this Court in Tuhi Ram v. Land Acquisition Collector (1993) 199 ITR 490. The Division Bench, after noticing the change in law brought about by the Finance Act, 1970, held that Manubhai's case (1981) 128 ITR 87 (Bom) was rendered ineffective after amendment. It was held as under (headnote):

"Compulsory acquisition of agricultural land under any law for the time being in force is a transfer within the meaning of section 2(47) of the Income Tax Act, 1961. The expression" capital asset' means property of any kind held by the assessee, whether or not connected with his business or profession. It, however, does not include agricultural land in India except the class of lands included in items (a) and (b) of section 2(14)(iii). In order to qualify for such exemption it is not enough that the land was once agricultural land. It must be agricultural land even at the time of sale or transfer. By the Finance Act, 1970, with effect from the assessment year 1970-71, certain specified lands situate in urban areas or semi-urban areas were brought within the definition of capital asset. When' a capital asset is sold and if profit or gain results from such a sale, it is chargeable, not because it is revenue, but because the, statute specifically charges the resulting capital gain by including it as income. Although land is the source of income, income is derived not by the use of the land, but by the sale of the land, that is, by conversion .of .the land into cash. The resultant income is not agricultural income. The Explanation inserted in section 2(IA) by the Finance Act, 1989, with effect from April 1, 1970, makes the position clear when it declares 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 section 2. The Explanation completely renders ineffective the ratio of the decision in Manubhai A. Sheth v. N. D. Nirgudkar (1981) 128 ITR 87 (Bom.)."

Counsel for the Revenue as well as for the assessee are agreed that by the Finance Act, 1970, which came into effect with effect from the year 1970-71 and in view of the interpretation put by this Court in Thai Ram's case (1993) 199 ITR 490 agricultural land ' which is comprised within the jurisdiction of a municipality or a cantonment board or any agricultural area having 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 would be a capital asset a sale of which would attract capital ,gains tax. Before the said amend sent, agricultural income arising from the transfer of the agricultural land was exempt from tax but by the amendment of 1970, agricultural land situated within the urban areas specified in sub-clause (a) or in their vicinity notified by the Central Government became a capital. asset bringing it within the purview of tax on "capital gains".

Three conditions, namely,(i) the land being agricultural situated within the municipal area;(ii) having a population of not less than ten thousand according to the last preceding census; and (iii) relevant figures of which had been published before the first day of the previous year were to be satisfied before the agricultural land could be treated as a capital asset. The Tribunal concluded that it was an agricultural land situated within the municipal area but did not record any finding regarding the population of the municipal area and the publication of the figures of the preceding census before' the first day of the previous year.

Counsel for the assessee fairly concedes that the agricultural land comprised in a municipal area which satisfied the ingredients of section 2(14)(iii)(a) and (b) would be an asset the sale of which would attract capital gains and, therefore, the question referred by the Tribunal to this Court has to be answered in favour of the Revenue and against the assessee but as the Tribunal has failed to record a finding with regard to the population of the municipal area not being less than ten thousand according to the last preceding census the relevant figures of which had been published before the first day of the previous year, the case be either remanded to the Tribunal or in the alternative a direction be issued to the Tribunal to determine these two factors before holding the assessee to be liable to pay tax on capital gains.

We are not inclined to remand the case to the Tribunal or send for the additional statement of the case to avoid unnecessary delay in disposal of this case. The same has already been delayed much. The question referred to us is answered in the negative and it is held that Tribunal was not right in holding that capital gains could not be levied on transfer of agricultural land located within the municipal limit but with a rider that the Tribunal before giving effect to this order should satisfy itself regarding the remaining two ingredients mentioned in section 2(14)(iii)(a) regarding population not being leas than ten thousand according to the last preceding, census of which the relevant figures had been published before the first day of the previous year relatable to the assessment year in question. If these two ingredients are satisfied then the assessee shall be liable to pay capital gains tax and not otherwise.

We are not concerned with clause (b) of section 2(14)(iii) as the same is not attracted in this case.

For the foregoing reasons, the question of law referred to this Court is answered in favour of the Revenue and against the assessee but the same would be subject to the observations made in the order.

M.B.A./3197/FC Reference answered.