Bombay High Court
Commissioner Of Income-Tax vs Mrs. Kamla S. Asrani on 10 August, 1990
Equivalent citations: [1991]189ITR359(BOM)
Author: Sujata V. Manohar
Bench: Sujata V. Manohar
JUDGMENT Sujata V. Manohar, J.
1. Both these income-tax applications seek to raise a common question as to whether the income derived by the assessees by way of capital gains from the sale of agricultural land can be considered as income from agriculture and, therefore, not taxable as capital gains. The assessee in Income-tax Application No. 47 of 1990 owns certain lands with in the municipal limits of Rajkot, State of Gujarat. She sold a part of the lands to a co-operative housing society. In respect of the capital gains arising from the sale of these lands, the assessee claimed that the lands were agricultural lands and hence capital gains from the sale of these lands were not taxable under the Income-tax Act, 1961. The capital gains arose in the assessment year 1980-81. The dispute between the assessee and the Department was ultimately taken before the Tribunal. The Tribunal, relying upon the decision of our High Court in the case of Manubhai A. Sheth v. N. D. Nirgudkar, 2nd ITO [1981] 128 ITR 87, held that the capital gains were not taxable under the Income-tax Act as they constitute agricultural income. The Tribunal declined to refer the following question to us on the ground that the question is squarely covered by the decision of our High Court in 128 ITR 87 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in exempting capital gains arising out of transfer of land situated within the municipal limits of Rajkot City ?"
2. In Income-tax Application No. 48 of 1990, the assessee had agricultural lands at Malegaon. These lands were laid out as plots as per permission obtained from the Collector. The lands were acquired by the State and an award was made on January 30, 1981, granting to the assessed and others a total compensation of Rs. 4,04,869. The assessee's share in this compensation was 50%. The assessee claimed exemption from capital gains on the ground that this was agricultural income, relying upon the decision of our High Court in Manubhai A. Sheth v. N. D. Nirgudkar, 2nd ITO [1981] 128 ITR 87. The disputes between the assessee and the Department were carried to the Tribunal. The Tribunal upheld the claim of the assessee relying upon the above decision. The application of the Department to raise the following question and refer it to us has been rejected by the Tribunal on the ground that the issue is covered by the above decision :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that Rs. 42,064 was income from agriculture and not taxable as 'capital gains' ?"
3. In this connection, it is necessary to note the relevant provisions of section 2(14) of the Income-tax Act, 1961. Under section 2(14)(iii), a capital asset does not include, inter alia, agricultural land in India not being land situated in any area which is comprised within the jurisdiction of a municipality or a cantonment board, etc. This amendment to section 2(14) was introduced by the Finance Act, 1970, with effect from April 1, 1970. The constitutional validity of this amendment whereby and situated, inter alia, within the jurisdiction of a municipality was excluded from "agricultural land" was challenged before our High Court in Manubhai A Sheth v. N. D. Nirgudkar [1981] 128 ITR 87. Our High Court held that profits or gains on sale of agricultural land would be "revenue" within the meaning of section 2(1)(a) of the Income-tax Act, 1961. In this section, "agricultural income" is defined to mean, inter alia, "any rent or revenue derived from land which is situated in India and issued for agricultural purposes". The court said the capital gains from sale of agricultural land would constitute revenue derived from agricultural land and, therefore, would come within the definition of "agricultural income". It also said that, in view of entry 82 in List I of the Seventh Schedule to the Constitution, Parliament has no competence to levy tax on agricultural income. Therefore, the amendment to section 2(14)(iii)(a) should be read down so as to exclude from its operation capital gains arising from the sale of agricultural land, even though such land may be situated within the jurisdiction of a municipality or any other board, ect., as set out in that clause.
4. Section 2(1A), which defines "agricultural income", has, however, now been amended by adding an Explanation to it by the Finance Act, 1989, with retrospective effect from April 1, 1970. Under this Explanation, it is provided as follows :
"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 referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of this section;"
5. As a result of Explanation, therefore, any income arising from the transfer of any agricultural land is not to be considered as revenue derived from agricultural land.
6. This amendment was not in existence at the time when the Tribunal decided not to refer the question to us. It was, however, introduced with retrospective effect from April 1, 1970, and is now in existence.
7. It is contended by Mr. Dastur, learned counsel for the assessee in Income-tax Application No. 47 of 1990, that for the purpose of deciding an application under section 256(2) of the Income-tax Act, 1961, we have to examine the state of the law as it existed at the item when the Tribunal decided the appeal. If the order of the Tribunal is in accordance with law which was in existence at the time when the Tribunal decided the appeal, no referable question of law would arise and, therefore, we should not direct the Tribunal to refer any question to us in exercise of our jurisdiction under section 256(2). In other words, it is submitted that the Tribunal's refusal under section 256(1) to refer the question, when it is a correct decision in view of the then prevailing law, should not be interfered with by exercising jurisdiction under section 256(2).
8. In support of his argument, Mr. Dastur has relied upon a decision of the Andhra Pradesh High Court in the case of Addl. CIT v. M. J. Devda . The Andhra Pradesh High Court has held that the correctness or otherwise of the decision of the Tribunal will have to be decided only in the light of the law that was in force when the Tribunal rendered the decision; otherwise it will be violating the very meaning and spirit of section 256(2). It said that a retrospective amendment of the law in force at the time when as application under section 256(2) is decided cannot be taken into account even thought is deemed to be in force when the Tribunal's decision came. If the question, however, is already referred to the High Court under section 256(1), at the time of answering the question, the High Court will be bound to apply the amended law, because the court has to decide how the questions referred should be answered, whereas, under sub-section (2), what has to be considered is whether the Tribunal's decision was wrong. Hence, the High Court cannot direct the Tribunal to refer a question in the light of a subsequent retrospective amendment of the law. We have been informed that this is the only applicable decision on the nature of jurisdiction under section 256(2) of the Income-tax Act, 1961.
9. To examine the correctness of the submissions made before us in the light of the above decision, it is first necessary to look at the language of sections 256(1) and 256(2) to ascertain whether there is any distinction between the nature of the jurisdiction under section 256(1) and under section 256(2). Under section 256(1), the assessee or the commissioner may require the Appellate Tribunal to refer to the High Court "any question of law arising out of such order". Under Section 256(2), if the Tribunal, on an application under sub-section (1), refuses to state the case "on the ground that no question of law arises", the assessee or the Commissioner may apply to the High Court and the High Court may, "if it is not satisfied with the correctness of the decision of the Appellate Tribunal", require the Appellate Tribunal to state the case and refer it to the High Court. The correctness of the decision of the Tribunal has reference to the decision under section 256(1), viz., the decision that no question of law arises. Under both the sub-section, therefore, the High Court has to consider whether a question of law arises from the order of the Tribunal in appeal. Under section 256(2), if the High Court is not satisfied with the correctness of the decision of the Appellate Tribunal (viz., that no question of law arises), it may require the Tribunal to state a case.
10. The question is, on what basis should the High Court decides whether it is satisfied or not with the correctness of the decision of the Tribunal under section 256(2) ? What has to be examined is, of course, the question of law decided by the Tribunal both under section 256(1) and section 256(2). In a case where the law is amended with retrospective effect, when the High Court decides an application under section 256(2), is it open to the High Court to ignore such retrospective amendment of the law which is deemed to have been in force when the Tribunal decided the appeal ?.
11. It is an accepted position that, when the law is amended with retrospective effect, the court, when it decides any proceeding, has to apply such retrospectively amended law as if it were in force at all material times. Therefore, for example, when a reference under section 256(1) is being decided, the High Court has to take into account any retrospective amendment of the law which may have taken place after the Tribunal's decision and during the pendency of the reference. On this aspect, there is no dispute. Even the Andhra Pradesh judgment (Addl. CIT v. M. J. Devda ) clearly states that, while deciding reference under section 256(1), the court must take into account such retrospective legislation. In the case of CST v. Satyanarain Singh [1974] 33 STC 187, the Allahabad High Court considered this question in respect of a reference made under the U.P. Sales Tax Act, section 11. It said that when a question has been referred to the High Court and, in the meanwhile, the law is amended with retrospective operation, it would be the duty of the High Court to apply the law so amended. The application of the relevant law to the problem raised in the reference before the High Court normally is not excluded merely because at the date when the Tribunal decided the question, the relevant law was not or could not be brought to its notice. There is nothing so peculiar in the nature of a reference under the Sales Tax Act that in deciding it the High Court is compelled to apply the law which, since the date of the reference made by the Tribunal, has been superseded by the Legislature. There are similar observations of the Calcutta High Court in Union of India v. Addl. Member, Board of Revenue, [1975] 36 STC 61 and of the Punjab and Haryana High Court in Sheo Karan Dass Bhoj Raj v. State of Haryana [1974] 34 STC 94 [FB].
12. The Supreme Court, in the case if State if U.P. v. Modi Industries Ltd., , was required to consider a case where after the reference was decided by the High Court and before the Tribunal could act upon it, the law was amended retrospectively. The Tribunal, thereupon, did not act on the basis of the decision of the High Court under the reference. On the assessee moving the High Court under article 226 of the Constitution of India, the High Court took the view that the revising authority was not free to take a different view from the one expressed by the High Court on any ground whatsover, including any subsequent amendment in the law, and that it was bound to decide the case in conformity with the judgment of the High Court. The supreme Court set aside the decision of the High Court,holding that the retrospective amendment clearly indicated the intention of the Legislature of restoring amendment clearly indicated the intention of the Legislature of restoring the assessments and orders made earlier and hence the Tribunal was entitled to take such retrospective amendment into account. The Supreme Court observed that, under the amending Act, assessments at the enhanced rate were valid notwithstanding any judgment or order of any court. Hence the Tribunal was entitled to ignore the High Court's decision in the reference. The decision, therefore, turns on the special provisions of the amending Act. Nevertheless, it is clear that a court cannot ignore the retrospective operation of a law which is in existence when it decides a matter.
13. We do not see how a different view can be taken while deciding an application under section 256(2). The Andhra Pradesh High Court in Addl. CIT v. M. J. Devda , felt that, in deciding an application under section 256(2), the High Court could decide the correctness or otherwise of the Tribunal's decision only in the light of the law which was in force when the Tribunal rendered the decision. In our view, this is not the correct way of reading section 256(2). When a law is amended retrospectively so that it is deemed to have been in force at the time when the Tribunal decided the question, full effect has to be given to such a deeming provision and the High Court is bound to consider the law so amended retrospectively as being in force at the time when the Tribunal decided the question. The correctness of the Tribunal's decision will, therefore, have to be judged in the light of the law amended retrospectively by giving effect to the deeming provision. If, in the light of such retrospective amendment, a question of law does arise, and if the Tribunal's view that so such question arises is incorrect in the light of such retrospectively amended law, the court cannot refuse to direct the Tribunal to frame a question and refer the case merely because the Tribunal's decision on the question of law, as it stood when the Tribunal decided it, was correct when the law was unamended. In our view, this would be drawing an artificial distinction between section 256(1) and section 256(2). With all respect, therefore, to the Andhra Pradesh High Court, in our view, we cannot ignore any retrospective amendment in the law while considering an application under section 256(2).
14. It was urged by Mr. Dastur that we would not readily depart from the view taken by another High Court in order to maintain uniformity in the decisions of different High Courts. We agree that, as far as possible, there should be uniformity in the decisions of different High Courts in interpreting the provisions of fiscal statutes. In the present case, however, we feel that the decision of the Andhra Pradesh High Court is contrary to the well-accepted principles of statutory interpretation. With some reluctance, we, therefore, differ from the view taken by the Andhra Pradesh High Court. In our view, when the law is amended retrospectively, the advisory jurisdiction under section 256(2) should be exercised in the light of the law as it is deemed to stand at the date when the Tribunal decided the appeal and not on the basis of the law at it stood at the time when the Tribunal decided the appeal.
15. The Explanation to section 2(1A) has been added with retrospective effect from April 1, 1970, by the Finance Act, 1989. As a result of this Explanation, revenue derived from the transfer of agricultural land is not considered as agricultural income. It is possible that the ratio of the decision of our High Court in Manubhai A. Sheth v. N. D. Nirgudkar, 2nd ITO [1981] 128 ITR 87 may apply to this amendment also. In fact, in an earlier application, being Income-tax Application No. 29 of 1988 CIT v. Leenaben J. Sheth we (myself and Sugla J.) had on July 25, 1990, declined the application on this ground. It is, however, now urged before us that the constitutional validity of the amendment, as a result of which this Explanation was introduced with retrospective effect in section 2(1A), cannot be gone into in a reference application and that the assessees have not filed writ petitions challenging the constitutional validity of the Explanation. Whether, by virtue of the reasoning given by our High Court in Manubhai A. Sheth v. N. D. Nirgudkar [1981] 128 ITR 87, this amendment can be automatically ignored or not is itself a question which would require some consideration. We do not express any view one way or the other on how the question will be ultimately decided. But, in our view, in the light of the submissions which have been now made before us, a referable question of law would arise.
16. Hence, both the applications are allowed and the rules are made abs olute.