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PETITIONER: UNION OF INDIA

       Vs.

RESPONDENT: S.MUTHYAM REDDY

DATE OF JUDGMENT:       01/10/1999

BENCH: S.R.Bubu, R.C.Lahoti

JUDGMENT:

RAJENDRA BABU, J.  :

     This  appeal  is  by special leave  against  an  order passed  by  the High Court of Andhra Pradesh in a  batch  of cases.   By that order, the High Court considered the effect of  a  combined reading of Sections 2(1A) and 2(14)  of  the Income  Tax Act, 1961 [hereinafter referred to as the Act] and  has  held that (i) capital gains arising from  sale  of land used for agricultural purposes would be revenue derived from  such land and, therefore, agricultural income within the  definition  under  Section 2(1A) of the  Act  with  the result  that Parliament would have no legislative competence to  tax such agricultural income;  and (ii) amended  Section 2(14)(iii)   should   be   read   down   to   preserve   its constitutionality.   All land used for agricultural purposes whether situated in areas mentioned in Section 2(14)(iii)(a) and (b) should be held to be excluded from the definition of capital  asset.   Thus  Section 2(14)(iii)  should  read  as excluding from capital asset agricultural land in India, not being  land  situated in the areas mentioned therein.   Upon such interpretation, Section 2(14)(iii) does not enable levy of  tax on capital gains arising from transfer of land which is  used  for  agricultural  purposes  wherever  it  may  be situated.

     In  this  appeal, challenge to this order is based  on many  grounds  and our attention has been drawn  to  several decisions  not only taking similar but also a contrary view. The  respondents having remained ex-parte, we requested Shri Dhruv Mehta, learned Advocate, to assist the Court as amicus curiae.   We  are  beholden   for  the  valuable  assistance rendered by him to the Court.

     By  Finance Act, 1989, Explanation to Section 2(1A) is inserted  with  effect from 1.4.1970 to supersede  the  view expressed  in  the order under appeal and several  decisions setting  out  similar  ratio.   This  declaratory  amendment having  retrospective  operation  though coming  into  force during  the pendency of this appeal must be given effect to. The  said  Explanation  clearly declares  that  the  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 Section 2(14)(iii)(a)  or  (b). The  upshot of the same is that income derived from sale  of

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such  agricultural lands cannot be treated as  agricultural income.   Thus,  the whole basis of the decision  has  been lost  and,  therefore,  the  order under  appeal  cannot  be sustained and deserves to be set aside.

     Shri  Dhruv  Mehta pointed out that by  an  artificial definition  introduced  into  the Act what  is  agricultural income  cannot  be  treated otherwise.  He  also  sought  to explain  the scheme of the entries in the different Lists of the Constitution in support of his contention.

     The  learned  counsel for the appellants  pointed  out that  under Article 366(1) of the Constitution agricultural income  has  the same meaning as defined  under  enactments relating  to  income  tax.  There is divergence  of  opinion amongst  the  High  Courts  as  to  the  effect  of  Section 2(14)(iii)  of the Act, as amended by Finance Act, 1970, and hence  the Parliament introduced the Explanation by  Finance Act, 1989 stating the meaning thereto which is in conformity with  the view expressed by some High Courts.  He submitted, therefore,  doubts arising as to interpretation by reason of conflict  of decisions of the High Courts is resolved by law and such a provision cannot be invalid.

     Inasmuch  as there is no challenge to the validity  of the  Explanation  to Section 2(1A) inserted into the Act  by Finance  Act,  1989,  we are afraid, we cannot  examine  the correctness  of  the  said submission.  We leave  open  this question  to  be raised for consideration in an  appropriate proceeding.

     In  the result, we allow this appeal and set aside the order of the High Court.  No order as to costs.