Commissioner of Income Tax vs L.S. Manickam and another

Thanikkachalam, J.—At the instance of the Department in the case of the two assessees, who are brother, Sri. L. S. Manickam and L. S.

Saravanabhavan, the Tribunal referred the following common question for the assessment year 1974-75 for out opinion u/s 256(1) of the Income

Tax Act, 1961 :

Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 2(14)(iii) of the Income Tax Act, 1961,

the Appellate Tribunal is justified in law in holding that the lands in question cannot be treated as ''capital asset''s if they were used for agricultural

purpose on the date of sale and accordingly remitting it to the Income Tax Officer for competition of the capital gains on that basis for the

assessment year 1974-75 ?

The assessee, Sri L. S. Manickam, sold 26 cents of land claimed to be agricultural lands situated in the town limit in Annathanapatti village for

Rs. 11,310 as per the sale deed dated February 3, 1974. The assessee also sold 97 sends of agricultural lands in the rural limit (panchayat area) of

the aforesaid village for Rs. 41,195 as per the sale deed, dated February 6, 1974. Sri L. S. Saravanabhavan sold 37 cents of land claimed to be

agricultural lands situated in Annathanapatti town and 97 cents situate in Annathanapatti village within eight kilometers from Salem municipal limit

and so, all the lands are only capital assets coming within the ambit of section 2(14)(iii) of the Income Tax act, 1961. The Income Tax Officer

computed the capital gains on sale by the first assessee at Rs. 23,533 and in respect of the second assessee at Rs. 26,640. Both the assessees

filed appeals before the Appellate Assistant Commissioner, who confirmed the computation of capital gains as fixed by the Income Tax Officer.

On further appeals before the Appellate Tribunal, the Tribunal following a decision of the Bombay High Court in the case of Manubhai A. Sheth

and others Vs. N.D. Nirgudkar, 2nd Income Tax Officer, A-II Ward, Bombay and another, held that the sale proceeds of agricultural lands are

not amenable to capital gains tax. However, the Tribunal remitted the cases to the Income Tax Officer to find out whether the lands were used for

agricultural purposes at the time of sale and further directed to follow the decision of the Bombay High Court cited supra for the applicability of

section 2(14)(iii) of the Act.

Before us, learned standing counsel for the Department submitted that in view of the introduction of the Explanation to section 2(1A) inserted by

the Finance Act, 1989, with effect from April 1, 1970, the order of the Tribunal holding that the sale proceeds of agricultural lands within the

municipal limits cannot be take u/s 2(14)(iii) of the Act is incorrect. Learned standing counsel for the Department also submitted that in view of the

fact that the amendment was brought with retrospective effect, the same will be applicable to pending proceedings. He therefore, pleaded that the

order passed by the Tribunal in exempting the sale proceeds of agricultural lands from the purview of section 2(14)(iii) of the Act is liable to the set

aside. The Tribunal, while rendering its order, followed a decision of the Bombay High Court in the case of Manubhai A. Sheth and others Vs.

N.D. Nirgudkar, 2nd Income Tax Officer, A-II Ward, Bombay and another, . A contrary view was taken by the Gujarat High Court an the

Karnataka High Court holding that even under the unamended provisions, the sale proceeds of agricultural lands are amenable to taxation u/s

2(14)(iii) of the Act. In order to dissolve the controversy, and Explanation to section 2(1A) was inserted by the Finance Act, 1989, with effect

from April 1, 1970. According to the said Explanation, the sale proceeds of agricultural lands are also taxable u/s 2(14)(iii) of the Act.

In the case of CIT v. Straw Product Ltd. [1966] ITR 156, the Supreme Court held that it is the duty of the court to answer the reference in

accordance with the amended law, unless the question referred by the Tribunal is not couched in terms of sufficient amplitude to cover and enquiry

into the question in the light of the amendment. This decision was followed by the Gujarat High Court in the case of Commissioner of Income Tax,

Gujarat Vs. C. Shantilala and Co., . The above cited decision of the Supreme Court was also followed by the Allahabad High Court in the case of

Commissioner of Income Tax Vs. Raza Buland Sugar Co. Ltd., . In view of the foregoing decisions and the Explanation inserted by the amending

Act, the order passed by the Tribunal holding that the sale proceeds of agricultural lands within the municipal limits cannot be brought to tax u/s

2(14)(iii) of the Act is not correct. In that view of the matter, we answer the question referred to us in the negative and in favour of the Department

in both the references. However, there will be no order as to costs.