Holding

Income arising from the transfer of agricultural land situated within municipal limits is outside the definition of agricultural income and is therefore liable to capital gains tax under Section 45 of the Income Tax Act, 1961.

Summary

The appellant, S.R. Kumar, sold agricultural lands situated within the municipal limits of Bina for the assessment years 1981-82 and 1983-84 and was assessed to capital gains tax. The Income Tax Officer levied tax, the Tribunal held that the profit was not capital gains, and the High Court dismissed the appellant's writ petition, upholding the Tribunal's view. The Supreme Court examined whether income from the transfer of such agricultural land falls within the definition of "agricultural income" under Article 366 of the Constitution and the Income Tax Act, 1961. It held that Parliament has the power to define agricultural income and that the amendments to Section 2(1A) and Section 2(14)(iii) correctly exclude land within municipal limits from the agricultural income definition. Consequently, the profit from the sale is liable to capital gains tax under Section 45 of the Income Tax Act. The Court dismissed the appeal with costs.

Issues considered

Whether profit arising from the sale of agricultural land situated within municipal limits constitutes capital gains under the Income Tax Act, 1961.
Whether the amendment and explanation to Section 2(1A) and Section 2(14)(iii) of the Income Tax Act, 1961 are constitutionally valid.
Whether Parliament has the authority to define "agricultural income" for the purpose of the Constitution.

Legislation cited

Constitution of Indias. Article 366
Finance Act, 1989
Income Tax Act, 1961s. 2(14)(iii)(a), s. 2(14)(iii)(b), s. 2(1A), s. 2(4A), s. 45

Subjects

capital gains taxagricultural incomemunicipal limitsIncome Tax ActSection 2Section 45constitutional definitionparliamentary powerSupreme Court

Judgment

SING HAI RAKESH KUMAR A
v.
UNION OF INDIA AND ORS.

NOVEMBER 28, 2000

[S.P. BHARUCHA, DORAISWAMY RAJU AND RUMA PAL, JJ.] B

Income Tax Act, 1961: Sections 2(/A) and 2(14) (iii) (a) and (bj.

Income Tax-Capital gains tax-AYs 1981-82 and 1983-84-
Agricultural lands situated within municipal limits-Sale of-Profits arising C
from-Exigibility to capital gains tax-Held, income arising from transfer
of agricultural lands falls outside the ambit of 'agricultural income' -Hence,
such income liable lo capital gains tax-Income Tax Act, 1922-ss.2 (1) (A)
and 2(4A) (iii).

Constitution of India, 1950: D

Article 366, Schedule VII list II Entry 46-Agricultural income-
Definition of-Parliament's Power to define-Held: Parliament has power to
define what agricultural income is-Hence, amendment of S.2 (14) of the
Income Tax Act, 1961 is good in law.
E
Words and Phrases:

"Agricultural Income"-Meaning of-In the context of Art. 366(/) of
the Constitution of India, 1950.

Appellant-assessee, in the previous years relating to Assessment Years F
1981-82 and 1983-84, sold agricultural lands, which were situated within a
municipal area and made capital gains thereon. Income Tax Officer made the

- assessee liable to capital gains tax. But the Income Tax Appellate Tribunal
held that the profit on the sale of agricultural lands was not capital gains
under the Income Tax Act, 1961. High Court allowed the Revenue's appeal. G
Hence this appeal.

Dismissing the appeal, the Court

HELD: I. Income arising from the transfer of agricultural land that
111 H
112 SUPREME COURT REPORTS [2000] SUPP. 5 S.C.R.

A falls within the terms of items (a) and (b) of sub-clause (iii) of clause (14) of
Section 2 of the Income Tax Act, 1961 falls outside the ambit of revenue
derived from land and, therefore, outside the ambit of 'agricultural income'
as defined in Article 366(1) of the Constitution oflndia, 1950. Such income,
therefore, is liable to capital gains tax chargeable under Section 45 of the
B Income Tax Act [116-CJ

Manubhai A. Sheth v. ND. Nirgudkar, 128 ITR 87 (Born.), referred to.

2.1. Under the terms of the Constitution, Parliament is empowered to
legislate to say what 'agricultural income' means. What Parliament says in
this regard in the statute then current relating to income tax is the definition
C of 'agricultural income' for the purpose of the Constitution. In regard to
such agricultural income the States may legislate. In regard to all other
incomes it is for the Parliament to legislate. [115-B]

Bajaya v. Gopikabai, [1978) 2 SCC 542 and Karimtharuvi Tea Estates
D Ltd v. State of Kera/a, [1963) 1 Supp. SCR 823, relied on.

2.2. Parliament has the power to define what agricultural income is in
the Income Tax Act; the amendments of sub-sections (2) and (14) of Section
2 of the Income Tax Act are, therefore, good in law. The effect is that the
assessee is liable to pay capital gains tax on the sale of his lands within the
E municipal limits. [116-D)

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 15619-15620
of 1996.

From the Judgment and Order dated 8.4.96 of the Madhya Pradesh High
F Court in W.P. No. 31196 and M.C.C. No. 735 of 1987.

B.Sen, Prakash Shrivastava and Ms. Pradipti Shrivastava for the
Appellant.

M.L. Verma, Pritish Kapoor, S.W.A. Qadri, Dhonajay Kr. Singh and
Sushma Suri for the Respondents.
G
The Judgment of the Court was delivered by

BHARUCHA, J. Under challenge are the orders ofa Division Bench of
the High Court of Madhya Pradesh dismissing a writ petition filed by the
appellant•assessee and answering against him a reference made by the Income
H Tax Appellate Tribunal of the following question :
S.R. KUMAR v. U.O.L [BHARUCHA, .I.] 113

"Whether on the facts and in the circumstances of the case, the A
Tribunal was right in holding that the profit arising from the sale of
agricultural lands did not amount to capital gains within the meaning
of Income Tax Act, 1961 ?"

The reference related to the Assessment Years 1981-82 and 1983-84.
B
In the previous years relevant to the Assessment Years 1981-82 and
1983-84 the assessee sold agricultural lands which were situated within the
municipal limits of Bina. He made capital gains thereon and the Income Tax
Officer made him liable to capital gains tax. The first appellate authority agreed
with the Income Tax Officer and the assessee approached the Tribunal. The
Tribunal held that the profit on the sale of agricultural lands was not capital C
gains within the meaning of the provisions of the income Tax Act, I 961. From
the order of the Tribunal the question aforestated was referred to the High
Court. Pending the reference, the assessee filed in the High Court the writ
petition the order upon which is impugned. The writ petition asked the High
Court to declare as unconstitutional the Explanation to sub-section ( 1A) and D
clause (iii) of sub-section ( 14) of Section 2 of the Income Tax Act, 1961 and
to declare that capital gains arising from the sale of agricultural lands within
a municipal area were not liable to capital gains tax under the Income Tax Act,
1961. The High Court dismissed the writ petition and answered the reference
against the assessee.
E
Article 366 defines, in clause (!), 'agricultural income' to mean
"agricultural income as defined for the purposes of the enactments relating
to Indian Income-tax''. Entry 46 of List II of the Seventh Schedule of the
Constitution speaks of "Taxes on agricultural income"; in other words, it is
for the States to legislate on the subject of taxes on agricultural income. Entry F
82 of List I of the Seventh Schedule reads "Taxes on income other than
agricultural income"; in other words, it is for the Union to legislate on the
subject of taxes on income other than agricultural income.

In the Income Tax Act, 1922 'agricultural income' was defined in clause
(I) of Section 2. Sub-clause (a) thereof alone is relevant for our purpose. G
Thereunder, 'agricultural income' meant ''any rent or revenue derived from
land which is used for agricultural purposes .................... ". Section 2 (4A)
defined 'capital asset' to mean "property of any kind held by an assessee"
but not "any land from which the income derived is agricultural income".

It was submitted by learned counsel for the assessee that 'agricultural H
114 SUPREME COURT REPORTS [2000) SUPP. 5 S.C.R.

A income' in clause (l) of Article 366 must be read only as it was defined in
1950 when the Constitution came into force; that is to say, in the manner
indicated in Section 2(1)(A) and 2(4)(A)(iii) of the 1922 Act To decide the
correctness of the submission, it is necessary to give true meaning to clause
(I) of Article 366. 'Agricultural income' thereunder means "agricultural income
as defined for the purposes of the enactments relating to Indian Income-tax".
B The definition does not say that 'agricultural income' means "agricultural
income as defined in the 1922 Act". It does not even say that it means
"agricultural income as defined for the purposes of the enactment relating to
Indian Income-tax". It says that it means "agricultural income as defined for
the purposes of the enactments relating to Indian Income-tax". The use of the
C plural 'enactments' is very relevant. It means that agricultural income for the
purposes of the constitution means agricultural income as it is defined at the
relevant time in the enactment that then relates to Income-tax.

In the judgment of this Court in Bajaya v. Gopikabai & Anr., [ 1978] 2
sec 542 the position in law, as applicable here, is stated thus:
D
"Broadly speaking, legislation by referential incorporation falls in
two categories: First, where a statute by specific reference incorporates
the provisions of another statute as of the time of adoption. Second,
where a statute incorporates by general reference the law concerning
a particular subject, as a genus. In the case of the former, the
E subsequent amendments made in the referred statute cannot
automatically be read into the adopting statute. In the case of latter
category, it may be presumed that the legislative intent was to include
all the subsequent amendments also made from time to time in the
generic law on the subject adopted by general reference. This principle
F of construction of a reference statute has been neatly summed up by
Sutherland, thus:
A statute which refers to the law of a subject generaJly
adopts the law on the subject as of the time the law is invoked.
s-
This will include all the amendments and modifications of the
law subsequent to the time the reference statute was enacted .
G
Corpus Juris Secundum also enunciates the same principle in these
terms:
....... Where the reference in an adopting statute is to the law
generally which governs the particular subject, and not to any
H specific statute or part thereof, ..... the reference will be held to
S.R. KUMAR v. U.O.l. [BHARUCHA, J.] 115

include the law as it stands at the time it is sought to be applied, A
with all the changes made from time to time, at least as far as
the changes are consistent with the purpose of the adopting
statute."

Under the terms of the Constitution, Parliament is empowered to legislate
to say what 'agricultural income' means. What Parliament says in this regard B
in the statute then current relating to income tax is the definition of 'agricultural
income' for the purposes of the Constitution. In regard to such agricultural
income the States may legislate. In regard to all other income it is for Parliament
to legislate. (See The Karimtharuvi Tea Estates ltd., Kottayam & Anr. v. State
of Kera/a & Ors., (1963) I Supp. SCR 823.
c
It is in this background that the impugned amendments in the 1961 Act
may be seen. Clause (IA) of Section 2 defined 'agricultural income' to mean,
inter alia, "any rent or revenue derived from land which is situated in India
and is used for agricultural purposes". Clause (14) of Section 2 defined
'capital asset' to mean "property of any kind held by an assessee in India D
........... but does not include agricultural land in India.......... ". The words
'agricultural land in India' were substituted by the Finance Act , 1970 with
effect from !st April, 1970 to read thus :

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

(a) in any area which is comprised within the jurisdiction of a
E
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 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 F
of the previous year; or

(b )in any 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, urbanization of that area and G
other relevant considerations, specify in this behalf by notification in
the Official Gazette;"
It appears that by reason of the decision of the Bombay High Court in
Manubhai A. Sheth & Ors. v. ND. Nirgudkar, 2nd Income-Tax Officer, A-fl
Ward, Bombay & Anr., [128 l.T.R. 87], an Explanation was added by the H
116 SUPREME COURT REPORTS [2000) SUPP. 5 S.C.R.

A Finance Act, 1989, with effect from 1st April, 1970, to clause (IA) of Section
2 which read thus :

"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
B referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of
this Section;"

The position, as a resu It, is that income arising from the transfer of
agricultural land that falls within the terms of items (a) and (b) of sub-clause
(iii) of clause ( 14) of Section 2 falls outside the ambit of revenue derived from
C land and therefore, outside the ambit of 'agricultural income'. Such income,
therefore, is liable to capital gains tax chargeable under Section 45 of the 1961
Act.

Parliament has, as aforestated, the power to define what agricultural
D income is in the 1961 Act; the amendment of sub-sections (2) and ( 14) of
Section 2 thereof in the manner aforestated are, therefore, good in law. The
effect is that the assessee is liable to pay capital gains tax on the sales of
his lands within the municipal limits of Bina.

We are of the view, therefore, that the High Court was right in the
E conclusions that it came to. The appeals are dismissed with costs.

V.S.S. Appeals dismissed.