S. Hidhayathullah Sahib vs Commissioner of Income Tax

Ramanujam, J.—The following two questions have been referred to this court for its consideration at the instance of the assessee by the

Income Tax Appellate Tribunal : -

(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the agricultural lands in Periakuppam

village which had a population of less than 10,000 constitute a capital asset within the meaning of section 2(14) ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the population referred in section 2(14)(iii)

(a) refers to ''municipality'' and not to ''area'' comprised in it ?

The assessee in this case is an individual. On November 2, 1973, the assessee had sold 15 cents of agricultural lands together with a tiled house

situate in Periakuppam village within the Trivellore Municipality for a consideration of Rs. 27,000. Before the Income Tax Officer, the assessee

claimed that the capital gains arising out of the sale of the above land were exempt by virtue of the provisions of section 2(14)(iii) of the Income

Tax Act, 1961, hereinafter referred to as ""the Act"", on the ground that Periakuppam village in which the land is situate had a population of less than

10,000. The Income Tax Officer rejected the said contention on the ground that the land is situate within the municipal limits of Trivellore whose

population is more than 10,000. He, therefore, brought to tax the capital gains computing the same at Rs. 22,575 in respect of the sale of the

above land. On appeal, the Appellate Assistant Commissioner upheld the order of the Income Tax Officer. When the matter went before the

Tribunal, it, following the decision of the Andhra Pradesh High Court in Addl. Commissioner of Income Tax Vs. G.M. Omarkhan, , upheld the

order of the Appellate Assistant Commissioner. Aggrieved by the said order of Tribunal, the assessee has sought and obtained this reference.

From the facts stated above, it will be clear that the case involves the proper interpretation of section 2(14)(iii)(a) of the Act. According to the

assessee, on a proper interpretation of section 2(14)(iii)(a), the lands sold by the assessee could not be classified as capital assets, for, as per the

above provision, only agricultural land in an area within a municipality which has a population of more than 10,000 can be treated as capital asset,

that inasmuch as the population of Periakuppam village where the land is situate is less than 10,000, the agricultural land sold by the assessee is not

a capital asset and that consequently capital gains tax is not exigible. The Revenue, on the other hand, contends that as per the said provision it is

only the population within the municipal limit that is taken into account and not the population in any other local area as the village, ward, street,

etc., and that in this case as the population of the municipality admittedly exceeds 10,000, the lands transferred should be treated as a capital asset.

In this case, it is common ground that the land sold by the assessee is agricultural land situate in Periakuppam village within Trivellore

municipality. As per section 2(14)(iii)(a), agricultural land in an area of a municipality with a population of more than 10,000 would fall within the

term ""capital asset"". Periakuppam village is an area within the Trivellore municipality and admittedly has a population of less than 10,000 though the

municipality has a population of over 10,000. The question is what is the correct and proper interpretation to be placed on section 2(14)(iii)(a) ?

According to the assessee, the limit as to population is to apply to the area and not to the municipality while, according to the Revenue, the limit

applies only to the municipality and not to the area referred to in the said provision.

Section 2(14)(iii)(a) is as follows :

(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;...

According to the assessee, since the land is situated in Periakuppam village which has got a population of less than ten thousand, the land cannot

be treated as a capital asset. A close reading of section 2(14)(iii)(a) seems to suggest that it is the population of the municipality that has to be

taken into account for the purpose of that section and not the population of any area within the municipality. It is no doubt true that the language

used in clause (iii) of section 2(14) is somewhat misleading. The section lays down two criteria : (I) that the agricultural land should be in an area

within the municipality; and (2) that the area should have a population of more than 10,000. The expression ""which has a population of not less

than ten thousand according to the last preceding census"" is intended to quality only the ""area"" and not the ""municipality"". However, it is not

possible to go only by the language used in that provision without having regard to the object and intendment of the provision. If the Legislature

meant to fix a minimum limit of population for any area within a municipality or cantonment Board, it would have specified a particular area such as

village, ward, street, etc., and since the Legislature has left the area in a municipality undefined, it would not have prescribed a limit of population

for such an unspecified or indefinite area within a municipality. It may be that a municipality may comprise of many villages, wards and streets and

each assessee may claim that the limit of population is provided with reference to a village, ward or street. In such an event, the section will have no

uniform application and will lead to many anomalies. Therefore, it is necessary to avoid such an interpretation of the section which leads to

anomalies and which will make it invalid. We have to adopt such a construction which will make the section valid and certain.

The decision of the Andhra Pradesh High Court in Addl. Commissioner of Income Tax Vs. G.M. Omarkhan, , which is directly in point,

supports the view we have taken. In that case, the expression ""which has got a population of more than ten thousand"" was held to qualify only the

municipality or cantonment and not the expression ""in any area"". We are inclined to agree with the reasoning in that case. In this view, we have to

agree with the view taken by the Tribunal and hold that the capital gain arising out of the sale of the above land cannot be exempted u/s 2(14)(iii) of

the Act.

The questions are, therefore, answered in the affirmative and against the assessee. The Revenue will get the costs from the assessee. Counsel''s

fee Rs. 500.