Commissioner of Income Tax vs Umrao Singh

R.C. Lahoti, J.

(1) This is a reference under 256(I) of the Income Tax Act, at the instance of the Revenue arising out of the assessment year 1976-77 seeking opinion of the High Court on the question of law :

"WHETHER, on the facts and in the circumstances of the case, the Tribunal was correct in following the Bombay High Court ruling in 128 Itr 87 and deleting the capital gains tax on compulsory acquisition of agricultural land?"

(2) During the accounting year ending 31.3.1976 the assessed had received compensation and interest on compulsory acquisition of his agricultural land. The assessed did not declare any capital gains on the ground that it was outside the ambit of capital assets as defined in the Income Tax Act, 1961. The Itr, however, observed that capital gains were taxable and brought them to tax. The Aac upheld the order of assessment. The Tribunal relying on Bombay High Court decision in Manubhai A. Sheth and others Vs. N.D. Nirgudkar, 2nd Income Tax Officer, A-II Ward, Bombay and another, held that capital gains could not be taxed on transfer of agricultural land in this case.

(3) The law had changed with retrospective effect by the amendment incorporated in Sub-section (14) of Section 2 of the Income Tax Act by the Finance Act, 1970 w.e.f. 1.4.1970 and the Explanation added to Sub-section (1-A) of Section 2 of the Income Tax Act defining the agricultural income by the Finance Act, 1989 giving retrospective effect from 1.4.1970. The effect of the amendment is that the revenue derived from land shall not include and shall be deemed never to have included any income arising from transfer of any lands referred to in item (a) or item (b) of Sub-clause (iii) of Clause (14) of Section 2. Admittedly in the case at hand, the land was situated in the Municipal limits.

(4) In GM. Omer Khan v. Cit (Addl.) 196 Itr 269, their Lordships of the Supreme Court have held that the agricultural land situated within Municipal limits was a capital asset within the meaning of Section 2(14)(iii)(a).

(5) Two Division Bench decisions mainly Commissioner of Income Tax Vs. Kaziamunnisa Begum and Another, and Commissioner of Income Tax Vs. Hardelia Chemical Ltd., have held that in view of the amendment in the law w.e.f. 1.4.1970, as noticed hereinabove, the profits and gains arising from the transfer of such agricultural land will be assessable to capital gains tax. The amendments have thus nullified the view of the law taken by the Bombay High Court in Manubhai A. Sheth and others Vs. N.D. Nirgudkar, 2nd Income Tax Officer, A-II Ward, Bombay and another, .

(6) For the foregoing reasons, it is held that the Tribunal was not right in deleting the capital gains tax on compulsory acquisition of agricultural land. The question is thus answered in the negative i.e. in favor of the Revenue and against the assessee. No order as to the costs.