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Manubhai A. Sheth and Others Vs. N.D. Nirgudkar, 2nd Income-tax Officer, A-ii Ward, Bombay and Another - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberMiscellaneous Petitions Nos. 1132 of 1973, 1179 of 1973, 211, 212, 213, 214, 215 and 875 of 1974
Judge
Reported in(1981)22CTR(Bom)41; [1981]128ITR87(Bom); [1980]4TAXMAN381(Bom)
ActsIncome Tax Act, 1961 - Sections 2(14)
AppellantManubhai A. Sheth and Others
RespondentN.D. Nirgudkar, 2nd Income-tax Officer, A-ii Ward, Bombay and Another
Excerpt:
- - , quite clearly indicate that such wide meaning was put upon the word 'income' not because of any particular legislative practice either in the united states or in the commonwealth of australia but because such was the normal concept and connotation of the ordinary english word 'income'.its natural meaning embraces any profit or gain which is actually received. 2. 28. on behalf of the respondents it was argued that in the income-tax legislation there was a well-understood and recognised distinction between 'revenue receipt' and 'capital receipt' and that the word 'revenue' in s. we fail to see how this decision supports the case of the respondents. 105 of the transfer of property act, 1882, a transfer of a right to enjoy such property, made for a certain time, express or implied,.....madon, j.1. this group of eight petitions under art. 226 of the constitution of india challenges the constitutionality of sub-cl. (iii) of cl. (14) of s. 2 of the i.t. act, 1961, as substituted by the finance act, 1970 (act 19 of 1970), which read with s. 45 of that act operates to levy capital gains tax on transfer of certain agricultural lands. according to the petitioners, all of them owned agricultural lands situate within the limits of the municipal corporation of greater bombay, and all these lands were at the relevant time subject to payment of land revenue to the government. in some of the petitions, it is averred that at first cultivation of para grass and later of rice and vegetables was carried on on the lands. in the affidavits in reply these facts are either not admitted or.....
Judgment:

Madon, J.

1. This group of eight petitions under art. 226 of the Constitution of India challenges the constitutionality of sub-cl. (iii) of cl. (14) of s. 2 of the I.T. Act, 1961, as substituted by the Finance Act, 1970 (Act 19 of 1970), which read with s. 45 of that Act operates to levy capital gains tax on transfer of certain agricultural lands. According to the petitioners, all of them owned agricultural lands situate within the limits of the Municipal Corporation of Greater Bombay, and all these lands were at the relevant time subject to payment of land revenue to the Government. In some of the petitions, it is averred that at first cultivation of para grass and later of rice and vegetables was carried on on the lands. In the affidavits in reply these facts are either not admitted or the petitioners are put to the strict proof of these facts. Mr. Joshi, learned counsel for the respondents, however, stated before us that for the purpose of these petitions the lands in question in all these petitions may be taken to be agricultural lands.

2. During the accounting years relevant to the assessment years 1972-73 and 1973-74 the petitioners sold at different times of their above holding. They did not include in their income-tax returns filed for the relevant assessment years the profits or gains made by them on the sale of such lands. In the case of the petitioners in Miscellaneous Petition No. 875 of 1974-Jim Rusdin Private Ltd. v. J. M. Mehra and another-assessment orders were made for the years 1972-73 and 1973-74 including in their taxable income profits or gains arising from such sales and levying capital gains tax under s. 45 of the I.T. Act, 1961, thereon. In the case of the petitioners in the other miscellaneous petitioner they apprehended that the profits or gains made by them on the sales of these lands would be made liable to capital gains tax under the said s. 45. All these petitioners filed petitions, under art. 226 of the Constitution, in the High Court challenging the constitutionality of the levy of capital gains tax on the sale of agricultural lands, the petitioners in Miscellaneous Petition No. 875 of 1974 also seeking to quash and have set aside the said orders of assessment. During the pendency of these petitions the income-tax authorities were, by interim orders passed by this High Court, permitted to complete the assessment proceedings for the years in questions as also for subsequent years, but were prohibited from recovering the amount of tax attributable to profits or gains arising from sales of these lands. As the questions raised in these petitions were of considerable importance, these petitions were referred to a Division Bench. All these petitions were heard together. During the course of hearing, as the impugned sub-cl. (iii) of cl. (14) of s. 2 of I.T. Act, 1961, affected the State's power of taxation, the State of Maharashtra applied for leave to intervene, which was grated to it. As the question raised in all these petitions were the same, we have thought if fit to dispose of this entire group of petitions by a common judgment.

3. In order to understand the nature of the controversy between the parties it is necessary to see the legislative history of the tax on agricultural income and on capital gains. In the Indian I.T. Act, 1860, agricultural income was taxed for the first time. This tax was withdrawn in 1865. Under the Indian I.T. Act, 1867, no tax was levied on agricultural income, but in 1869 and Income-tax was levied on all income including agricultural income, but this was again withdrawn in 1873-74. The Indian I.T. Act, 1886 (Act No. 2 of 1886), exempted agricultural income from the levy of income-tax. The definition of 'agricultural income' in the Act of 1886 was very similar to that contained in the Indian I.T. Act, 1922. The reason for exempting agricultural income from tax was that the landlords paid land revenue to the Government and should not, therefore, be asked to contribute to the exchequer more than once, that is, to pay to the Government both land revenue as also income-tax on agricultural income (see CIT v. K. E. Sundara Mudaliar : [1950]18ITR259(Mad) . In addition the landlords also paid a cess on land which corresponded to income-tax and which was not inconsiderable compared to the then low rates of income-tax. The imposition of income-tax would have thus overburdened the land with taxes. When the Indian I.T. Act, 1918, was passed, the government intended to tax agricultural income also, but on account of opposition in the Legislative Council this proposal was dropped. The definition of 'agricultural income' as given in the 1918 Act was very similar to the one contained in the 1886 Act. Under the Indian I.T. Act, 1922, agricultural income was exempt from tax provided it conformed to the definition given in cl. (1) of s. 2 of the 1922 Act. That definition was as follows :

'2. Definitions. -In this Act, unless there is anything repugnant in the subject or context :-

(1) 'agricultural income' means -

(a) any rent or revenue derived from land which is used for agricultural purpose, and is either assessed to land revenue in the taxable territories or subject to a local rate assessee and collected by officers of the Government as such ;

(b) any income derived from such land by -

(i) agriculture, or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator receiver of rent-in-kind to tender the produce raised or received by him fit to be taken to market, or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in sub-clause (ii) ;

(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator, or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any operation mentioned in sub-clause (ii) and (iii) of clause (b) is carried on :

4. Provided that the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator or the receiver of the rent-in-kind by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building.'

5. The exemption from payment of income-tax was brought about by cl. (viii) of sub-s. (3) of s. 4 which provided that agricultural income was not to be included in the total income of the person receiving it.

6. On April 1, 1937, the Govt. of India Act, 1935, came into force. Sub- section (2) of s. 311 of the said Act defined 'agricultural income' as meaning 'agricultural income as defined for the purposes of the enactment relating to Indian income-tax'. By entry 54 in List I (Federal Legislative List) of the Seventh Schedule to the said Act taxes on income other than agricultural income were made a federal subject, while under entry 41 in List II (Provincial Legislative List) of the Seventh Schedule to the said Act taxes on agricultural income were made a Provincial subject. Thus, under the said Act the field of taxation so far as income-tax was concerned was divided between the Centre and the Provinces, income other than agricultural income felling within the federal field, while taxes on agricultural income fell within the Provincial field. Since by the above constitutional position the Federal Legislature was given the power to define 'agricultural income' and thus even extend its own field of taxation s. 141(1) of the said Act provided that ' No. Bill or amendment which imposes or varies any tax or duty in which Provinces are interested, or which varies the meaning of the expression 'agricultural income' as defined for the purposes of the enactments relating to Indian Income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter (that is, Chapter I of Part VII) money are or may be distributable to Provinces or States, or which imposes any such federal surcharge as is mentioned in the foregoing provisions of this Chapter, shall be introduced or moved in either chamber of the Federal Legislature except with the previous sanction of the Governor-General in his discretion.' These features of the Govt. of India Act, 1935, came to be adopted when the Constitution of Indian was passed. Article 366 of the Constitution defines certain terms. Clause (1) of art. 366 is as follows :

''Agricultural income' means agricultural income as defined for the purposes of the enactment relating to Income-tax.'

7. The division of the field to taxation between the Union and the States so far as income-tax is concerned has also been preserved. Entry 82 of List I (Union List) in the Seventh Schedule to the Constitution provides for 'Taxes on income other than agricultural income.' Entry 46 of List II (State List) in the Seventh Schedule to the Constitution provides for 'Taxes on agricultural income'. Article 274(1) corresponds to s. 141(1) of the Government of India Act, 1935, and is as follows :

'274. Prior recommendation of President required to Bill affecting taxation in which States are interested. - (1) No. Bill or amendment which imposes or varies any tax or duty in which State are interested, or which varies the meaning of the expression 'agricultural income' as defined for the purpose of the enactments relating to Indian income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter (that is, Chapter I of Part VII) moneys are or may be distributable to States, or which imposes any such surcharge for the purposes of the Union as is mentioned in the foregoing provisions of this Chapter shall be introduced or moved in either House of Parliament except on the recommendation of the President.'

8. The Indian I.T. Act, 1922, was replaced by the I.T. Act, 1961. Clause (1) of s. 2 of the 1961 Act, as originally enacted, was as follows :

'2. In this Act, unless the context otherwise requires, -

(1) 'agricultural income' means -

(a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessee to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such ;

(b) any income derived from such by -

(i) agriculture ; or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinary employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market ; or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause;

(c) any income derived from any building owned an occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator, or the receiver of rent-in-kind of any land with respect to which or the produce of which any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on :

9. Provided that the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of the rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building.'

10. Sub-clause (a) of cl. (1) and the proviso to cl. (1) were substituted with retrospective effect from the commencement of the 1961 Act by s. 2 of the Taxation Laws (Amend.) Act, 1970. The retrospectively amended definition reads as follows :

'2. Definitions. - In this Act, unless the context otherwise requires, -

(1) 'agricultural income' means -

(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes ;

(b) any income derived from such land by -

(i) agriculture ; or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market ; or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause ;

(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind of any land with respect to which, or the produce of which, any process mentioned in paragraph (ii) and (iii) of sub-clause (b) is carried on;

Provided that -

(i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection which the land, requires as a dwelling house, or as a store-house or other out-building and,

(ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated _

(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; or

(B) in any area within such distance, not being more than eight kilometers from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.'

11. It will be noticed that by the retrospectively amended definition of 'agricultural income' the condition that the rent or revenue derived from land used for agricultural purposes must be form land either assessed to land revenue in India or subject to a local rent assessed and collected by officers of the Government as such has been removed, and now in order to be agricultural income the rent or revenue derived from land situate in India need only be from land used for agricultural purposes. The condition relation to land being assessed to land revenue or being subject to a local rate is, now, by the 1970 Amendment, retrospectively made applicable only in the case of sub-cl. (c), that is, to income derived form any building owned and, occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paras. (ii) and (iii) of sub-cl. (b) is carried on. Because of the constitutional prohibition on the Union Parliament from imposing any tax on agricultural income, cl. (1) of s. 10 of the 1961 Act provides that in computing the total income for a previous year of any person, the agricultural income is not to be included.

12. Capital gains tax, that is, a tax on any profits or gains arising from the transfer of a capital asset, was for the first time introduced for two years only, that is, from April 1, 1946, to March 31, 1948, by the Income-tax and Excess Profits Tax (Amendment) Act, 1947. This was done by inserting a new clause, namely, cl. (4A), defining 'capital asset', adding capital gains as a new head of Income chargeable to tax under s. 6 of the 1922 Act, inserting a new section, namely, s. 12B, providing for the levy of capital gains tax, and including capital gain chargeable under s. 12B, providing for the levy of capital gains tax, and including capital gain chargeable under s. 12B in the definition of 'Income' given in s. 2(6) of the 1922 Act. The definition of 'capital asset' as introduced was :

'(4A) 'capital asset' means property of any kind (other than agricultural land) held by an assessee, whether or not connected with his business, profession or vocation, but does not include -

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business, profession or vocation ;

(ii) personal effects, that is to say, movable property (including wearing apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him.'

13. For the assessment year 1947-48, cl. (4A) of s. 2 was amended by the Act 44 of 1947, so as to read as follows :

'(4A) 'Capital asset' means property of any kind held by an assessee, whether or not connected with his business, profession or vocation, but does not include -

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business, profession or vocation ;

(ii) personal effects, that is to say, movable property (including wearing apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him ;

(iii) any land from which the income derived is agricultural income.'

14. The change thus made was that while originally agricultural land, whether agricultural income was derived from it or not, was excluded from the definition of 'capital asset', by this amendment only such land from which the income derived was agricultural income was excluded from the definition of 'capital asset'. The capital gains tax was again revived y the Finance Act, 1956. In the 1961 Act, which replaced the 1922 Act, the expression 'capital asset', is defined by cl. (14) of s. 2. That definition, as originally enacted, was as follows :

'(14) 'Capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include -

(i) any stock-in-trade, consumable stores or raw material as held for the purposes of his business or profession;

(ii) personal effects, that is to say, movable property (including wearing apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him ;

(iii) agricultural land in India.'

15. Sub-clause (ii) of cl. (14) of s. 2 was substituted by a new sub-clause by the Finance Act, 1972. Sub-clause (iii) was substituted with effect from April 1, 1970, by the Finance Act, 1970, by a new sub-cl. (iii). A new sub-clause, namely, sub-cl. (iv) was inserted by the Taxation Laws (Amend.) Act, 1962, and was again amended in 1965. The definition now reads as follows :

'(14) 'Capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include -

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ;

(ii) personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him ;

Explanation. -For the purposes of this sub-clause, 'jewellery' includes -

(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel ;

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel ;

(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 an 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 ; or

(b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extend of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette ;

(iv) 6 1/2 per cent. Gold Bonds, 1977, or 7 per cent. Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government.'

16. What we are concerned with is the substituted sub-cl. (iii) of cl. (14) of s. 2, because it is the constitutional validity of this sub-clause which is impugned in these petitions. Under the substituted sub-cl. (iii), agricultural lands in India which are situate in any of the areas mentioned in paras. (a) and (b) of sub-cl. (iii) fall within the definition of 'capital asset' and are subject to capital gains tax under s. 45 of 1961 Act and it is only agricultural lands in India not situate within any of these areas which are excluded. Capital gains is also made one of the heads of income chargeable to income-tax under s. 14 of the 1961 Act, and sub-cl. (iv) of cl. (24) of section 2 includes 'any capital gains chargeable under section 45' in the definition of 'income'.

17. Section 45(1) provides as follows :

'45. Capital gains. -(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54C and 54D, be chargeable to income-tax under the head 'capital gains', and shall be deemed to be the income of the previous year in which the transfer took place.'

18. We are not concerned with the provisions of ss. 53, 54 and 54B and 54D (which were inserted by the Finance Act, 1973, with effect from April 1, 1974) and 54E (which was inserted by the Finance (No. 2) Act, 1977, with effect from April 1, 1978), which sections are referred to in s. 45(1). Section 45 also contained, earlier, a reference to s. 54C, which reference was deleted by the Finance Act, 1976, with effect from April 1, 1976. We are equally not concerned with s. 54C. Clause (47) of s. 2 reads as follows :

'(47) 'transfer', in relation to capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.'

19. What is challenged before us is the constitutionality of sub-cl. (iii) of cl. (14) of s. 2 of the I.T. Act, 1961, as substituted by the Finance Act, 1970. This challenge is based on four grounds. They are as follows :

(1) Profits or gains arising from sale of agricultural lands situate in India, even though situate within the areas specified in paras. (a) and (b) of the impugned sub-cl. (iii) of cl. (14) of s. 2, is agricultural income as it is 'revenue derived from land which is situated in India and is used for agricultural purposes', and Parliament has, therefore, no legislative competence to impose a capital gains tax or any tax thereon.

(2) The impugned sub-cl. (iii) of cl. 14 of s. 2, though purporting to be a part of the definition of 'capital asset', is in substance a part of the definition of 'agricultural income' contained in cl. (1) of s. 2 in the nature of an exception clause thereto. Though Parliament has the power under art. 366(1) of the Constitution of India to define what is agricultural income, it cannot so define it as to change its basic or fundamental meaning. To do so would be colourable exercise of Parliament's legislative power and would amount to a fraud on the Constitution. What has been purported to be done by the substitution of sub-cl. (iii) of cl. (14) of s. 2 is to change the basic or fundamental meaning of 'agricultural income', and it is thus a piece of colourable legislation and is unconstitutional and void.

(3) The impugned sub-cl. (iii) of cl. (14) of s. 2 is void because it infringes art. 14 of the Constitution inasmuch as the classification made by it between lands situate in areas mentioned in paras. (a) and (b) of the said sub-cl. (iii) and lands situate outside these areas is artificial having no reasonable nexus to the purpose of the enactment, and discriminates hostilely against owners of lands situate within such areas.

(4) The impugned sub-cl. (iii) of cl. (14) of s. 2 is void as delegating unguided and excessive legislative power to the executive authority.

20. The State of Maharashtra joined in the arguments advanced on behalf of the petitioner in respect of the first two grounds. With respect to the other two grounds the State stated that it was not concerned with them. An additional point on the question of the constitutionality of the impugned sub-cl. (iii) was taken by the State. This point was that the effect of the impugned sub-cl. (iii) was to levy a tax on the transfer of agricultural land and it was, therefore, a tax on land and fell within the exclusive legislative field of the State under entry 49 in List II in the Seventh Schedule to the Constitution of India.

21. So far as the first ground of challenge is concerned, four questions arise for consideration. They are :

(1) Whether profits or gains made on transfer of agricultural land is income ?

(2) If so, whether such income is 'revenue' within the meaning of that word as used in sub-cl. (a) of cl. (1) of s. 2 of the I.T. Act, 1961 ?

(3) If such income is 'revenue' within the meaning of that word as used in s. 2(1)(a), whether it is 'revenue derived from land' ?

(4) Whether the expression 'agricultural land' in s. 2(14)(iii) means the same thing as the expression 'land which is used for agricultural purposes' in s. 2(1)(a) ?

22. The first of these questions presents no difficulty, for it is now definitively decided by the Supreme Court in Navinchandra Mafatlal v. CIT : [1954]26ITR758(SC) that profits or gains arising from the sale of a capital asset are income. Navinchandra's case was an appeal to the Supreme Court from a judgment of the Bombay High Court on a reference made under s. 66(1) of the Indian I.T. Act, 1922. The question raised in that reference was whether s. 12B inserted in the said Act by the Income-tax and Excess Profits Tax (Amendment) Act, 1947, which authorized the imposition of a tax on capital gains, was invalid as being ultra vires the Central Legislature. This question came up by way of a reference because in those days it had not been definitively settled that the High Court could not decide the validity of a taxing statute or any of its provisions in a reference made under that taxing statute. The same question had come up earlier for decision before the Bombay High Court in another reference, namely, J. N. Duggan v. CIT : [1952]21ITR458(Bom) . In that case a Division Bench of the Bombay High Court held the imposition of capital gains tax to be intra vires the Central Legislature. However, each of the two judges who composed the Division Bench based their finding on different grounds. Chagla C.J. held the imposition of tax by the Central Legislature was valid as it fell within entry 55 in List I in the Seventh Schedule to the Govt. of India Act, 1935. The said entry 55 provided as follows :

'55. Taxes on the; capital value of the assets, exclusive of agricultural land, of individuals and companies, and taxes on the capital of companies.'

23. The corresponding entry in the Constitution of India is entry 86 in List I of the Seventh Schedule to the Constitution. Tendolkar J., on the other hand, held that the tax fell within entry 54 in the said List I of the Seventh Schedule of the Govt. of India Act. We have already set out earlier the said entry 54 and the corresponding entry 82 in List I of the Seventh Schedule to the Constitution of India. Both these entries refer to 'Taxes on income other than agricultural income'. The Supreme Court approved the view taken by Tendolkar J. In view of this judgment of the Supreme Court it was not disputed by the respondents that the profits or gains on the transfer of agricultural lands would be income, but in view of certain other arguments advanced before us on the other questions arising in connection with the consideration of the second ground of challenge mentioned above, it is necessary to refer to the Supreme Court judgment in Navinchandra's case : [1954]26ITR758(SC) in some detail. It was sought to be argued before the Supreme Court on behalf of the appellant-assessee that the word 'income' did not signify capital gains either according to its natural import or common usage or according to judicial interpretation of relevant legislation both in England and in India. It was further argued that English lawyers and English jurists as also English legislative practice always recognised a clear line of demarcation between 'income' and 'capital', and, therefore, the British Parliament which enacted the Govt. of India Act, 1935, must be regarded as having understood and used the word 'income' in entry 54 in that sense. After examining this argument the Supreme Court pointed out that what was relied upon by the appellant-assessee as being legislative practice was nothing but judicial interpretations of the word 'income' as appearing in fiscal statutes and that a perusal of those cases revealed that they were concerned with ascertaining the meaning of that word in the context of the income-tax legislation. The Supreme Court referred with approval of the following observations of Lord Wright in Kamakshya Narain Singh v. CIT [1943] 11 ITR 513 :

'Income, it is true, is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation.'

24. The Supreme Court held that it would be wrong to interpret the word 'income' in the said entry 54 in the light of any supposed English legislative practice. The Supreme Court also pointed out that in the English Income Tax Act of 1945, capital gains had been included as taxable income. The Supreme Court further pointed out that in construing an entry in a legislative list the widest possible construction according to their ordinary meaning must be put upon the words used therein. The following passage from the judgment of the Supreme Court is relevant and requires to be reproduced in extenso (p. 764 of 26 ITR) :

'What, then, is the ordinary, natural and grammatical meaning of the word 'income' According to the dictionary it means 'a thing that comes in'. (See Oxford Dictionary, Vol. V, p. 162; Stroud, Vol. II, pp. 14-16). In the United States of America and in Australia, both of which also are English speaking countries, the word 'income' is understood in a wide sense so as to include a capital gain. Reference may be made to Eisner v. Macomber [1919] 252 USR 189 ; 64 L Ed. 521, Merchant's Loan & Trust Co. v. Smietanka [1920] 225 USR 509 ; 65 L Ed. 751 and United States of America v. Stewart [1940] 311 USR 60 ; 85 L Ed. 40 and Resch v. Federal Commissioner of Taxation [1943] 66 CLR 198. In each of these cases very wide meaning was ascribed to the word 'income' as its natural meaning. The relevant observations of the learned judges deciding those cases, which have been quoted in the judgment of Tendolkar J., quite clearly indicate that such wide meaning was put upon the word 'income' not because of any particular legislative practice either in the United States or in the Commonwealth of Australia but because such was the normal concept and connotation of the ordinary English word 'income'. Its natural meaning embraces any profit or gain which is actually received. This is in consonance with the observations of Lord Wright to which reference has already been made....... The argument founded on an assumed legislative practice being thus out of the way, there can be no difficulty in applying its natural and grammatical meaning to the ordinary English word 'income'. As already observed, the word should be given its widest connotation in view of the fact that it occurs in a legislative head conferring legislative power.'

24. We now turn to consider whether profits or gains on sale of agricultural land would be revenue within the meaning of that word as used in s. 2(1)(a) of the I.T. Act, 1961. For the purpose of this discussion, we will treat the expression 'agricultural land' as if it were synonymous with the expression 'land which is used for agricultural purposes'. Murray's Oxford English Dictionary, inter alia, defines 'revenue' as 'that which comes in to one as a return from property or possessions, esp., of an extensive kind ; income from any source (but esp., when large and not directly earned).' The Concise Oxford Dictionary, inter alia, defines the word 'revenue' as 'income, esp., of large amount, from any source'. That the word 'revenue' in sub-cl. (a) of cl. (1) of s. 2 has been used in a very wide sense is shown by that sub-clause itself. That sub-clause states, 'any rent or revenue derived from land.....'. The word 'any' qualifies not merely the word 'rent' but also the word 'revenue'. The word 'any', when used affirmatively, means 'whichever, of whatever kind, of whatever quantity' (See Murray's Oxford English Dictionary). The Shorter Oxford Dictionary defines it as 'every one of the sort named'. Thus, the expression 'any revenue' would mean income of every kind. Under cl. (1) of s. 2 'agricultural income' is divided into three categories. Sub-clause (a) speaks of 'any rent or revenue derived from land which is situated in India and is used for agricultural purposes'. Sub-clause (b) speaks of any income derived from such land by one of the three modes specified in that sub-clause (c) speaks of 'any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mention in paras. (ii) and (iii) of sub-cl. (b) is carried on'. The proviso to sub-cl. (c) lays down the conditions subject to which such income under sub-cl. (c) would become agricultural income. Thus, sub-cl. (b) and (c) deal with specific types of income derived from land situate in India and used for agricultural purposes. Sub-clause (a) deals with two types of income, namely, (1) rent, and (2) revenue derived from land which is situate in India and used for agricultural purposes. The word 'revenue' is not used in sub-cl. (a) merely as a synonym for the word 'rent'. It is used to cover every type of income which does not fall under the heading 'Rent' or does not come under sub-cls. (b) and (c) provided such income is derived from land which is situate in India and is used for agricultural purposes. The word 'rent' has a technical connotation and implication. As Lord Uthwatt said in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 :

'Rent is a technical conception, its leading characteristic being that it is a payment in money or in kind by one person to another in respect of the grant of a right to use land.'

25. In CIT v. V. T. S. Sevuga Pandia Thevar : [1933]1ITR78(Mad) , it was observed that the word 'revenue' is a word of wider import than the word 'rent'. It was for this reason that in sub-cl. (a) of s. 2(1) of the Indian I.T. Act, 1922, it was used separately and is so used in s. 2(1)(a) of the I.T. Act, 1961. The Scheme of cl. (1) of s. 2 shows that it is not used synonymously with 'rent' but, on the other hand, is used in contradistinction to it. That 'revenue' is the same as 'income' is also shown by the judgment of the Federal Court in Hulas Narain Singh v. Province of Bihar [1942] 10 ITR 115 . In that case, a suit was filed in the Court of the First Subordinate Judge, Patna, to challenge the validity of the Bihar Agrl. I.T. Act, 1938. The suit was transferred for hearing and disposal to the Patna High Court and a Special Bench of that High Court dismissed the suit. An appeal against that judgment was dismissed by the Federal Court. One of the contentions urged was that the definition of 'agricultural income' in the Bihar Act was in some respects wider and in other respects narrower than the definition in the Indian I.T. Act, 1922, and that this departure from the definition of 'agricultural income' in the Indian I.T. Act, 1922, used the words 'rent or revenue', the words used in the Bihar Act were 'rent or income'. Before the Federal Court it was conceded by the appellants that this variation was immaterial. Though this point was conceded, on a perusal of the judgment of the Federal court it was conceded by the appellants that this variation was immaterial. Though this point was conceded, on a perusal of the judgment of the Federal Court, it will appear that according to the Federal Court this point was rightly conceded. It appears that in addition to the suit from which the above appeal to the Federal Court was filed other similar suits were also filed in the Court of the First Subordinate Judge, Patna, and were transferred to the Patna High Court and disposed of by a Special Bench of the Patna High Court. The judgment of the Patna High Court in one of these cases, which judgment seems to have governed the decision of all the other suits, is reported as Jhalak Prasad Singh v. Province of Bihar : [1941]9ITR386(Patna) . The point that 'revenue' and 'income' meant the same thing was not conceded before the Patna High Court. The Patna High Court considered the point and repelled the contention that revenue was something different from income. Harries C.J., in the course of his judgment, said (at p. 396) :

'In my view the word 'revenue' in the Income-tax Act is used to denote income or a revenue receipt as opposed to a capital receipt and therefore covers all income from agricultural land other than rent. No real distinction can be drawn between the expression 'rent or revenue' and 'rent or income', and in my view it cannot be said that by the use of the words 'rent or income' the Provincial Government are taxing something more than is permissible by the definition in the Income-tax Act.'

26. Fazal Ali J., in a concurring judgment, observed (p. 431) :

'But as revenue in clause (a), Income-tax Act, is used in the same sense as income, the difference in the two provisions is merely a difference in phraseology and not a difference in substance.'

27. The above decisions fortify us in the conclusion we have reached that the word 'revenue' in s. 2(1)(a) of the 1961 Act is not as a synonym for the word 'rent' but is used in contradistinction to it and to cover all income from land which is used for agricultural purposes other than rent and income of the types specified in sub-cls. (b) and (c) of cl. (1) of s. 2.

28. On behalf of the respondents it was argued that in the income-tax legislation there was a well-understood and recognised distinction between 'revenue receipt' and 'capital receipt' and that the word 'revenue' in s. 2(1)(a) of the I.T. Act, 1961, was intended to apply to revenue receipts and that profits or gains arising from the transfer of agricultural land was not a revenue receipt but a capital receipt. In this connection, reference was made to the decision of the Supreme Court in CIT v. Maheshwari Devi Jute Mills Ltd. : [1965]57ITR36(SC) , where it was observed that the distinction between 'capital receipt' and 'revenue receipt' in income-tax law is fundamental. Reliance was also placed upon Kanga and Palkhivala's The Law and Practice of Income Tax, 7th Edn., Vol. I, at pp. 123 to 128, and the decisions cited therein. Reliance was also placed upon Halsbury's Laws of England, 4th Edn., Vol. 5, p. 3, para. 1. On the basis of the above citations, it was argued on behalf of the respondents that revenue is the amount which one receives from the use of a capital asset and not by its realization. In our opinion, not only is the argument that capital gains made on the sale of capital assets are not income not sustainable in view of the judgment of the Supreme Court in Navinchandra's case : [1954]26ITR758(SC) , but the argument is based on a fallacy and a mixing up of different concepts. The sale price received on the sale of a capital asset would be capital receipt. This is, however, a wholly different thing from saying that the profits or gains arising from the sale of a capital asset is a capital receipt. Such profits or gains are income. Not only cl. (24) of s. 2 of the 1961 Act, which defines the word 'income', by sub-cl. (iv) includes 'any capital gains chargeable under section 45' within the meaning of the word 'income', but the Supreme Court also has in Navinchandra's case : [1954]26ITR758(SC) , held such capital gains to be income. It is also pertinent to bear in mind that under the proviso to sub-s. (3) of s. 10 of the 1961 Act capital gains chargeable under the provisions of s. 45 are expressly excluded from receipts which are of a casual and non-recurring nature. Thus, capital gains statutory provisions and in view of the judgment of the Supreme Court in Navinchandra's case : [1954]26ITR758(SC) , it is not open to the respondents to argue that capital gains are capital receipt and not a revenue receipt. The reference to the Commentary on the Income Tax Act by Kanga and Palkhivala is equally fallacious. That Commentary is on the topic : 'Annuities and annual instalments of capital'. The reference to Halsbury's Laws of England is equally a misconception. In the passage from Halsbury's relied upon it is stated :

'Capital gains tax is a separate and distinct tax from both income-tax and corporation tax. In principle it is a tax on principal gains which, because they are capital, do not come into charge to income-tax, or corporation tax, as income, profits or gains.'

29. The position in England legislatively is thus wholly different from the position in India. Under the I.T. Act, 1961, capital gains have been statutorily made income. In Navinchandra's case : [1954]26ITR758(SC) it was expressly held by the Supreme Court that the word 'income' must be given its widest connotation and would include gains or profits made by the sale of a capital asset. Further, it was pointed out by the Supreme Court in that case that the English decisions have no relevance because they turned upon the construction of the particular fiscal statutes in operation in the United Kingdom.

30. It was next argued on behalf of the respondents that even if capital gains on sale of land are income or revenue, it cannot be said to be 'revenue derived from land' within the meaning of that expression in s. 2(1) (a) of the I.T. Act, 1961. It was argued that revenue must be derived from land, while under s. 45 capital gains would be any profits or gains arising from the transfer of a capital asset. It was submitted that any profits or gains arising from the could not be said to be revenue derived from land. In CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 , Lord Uthwatt, while delivering the opinion of the Judicial Committee, said (p. 328) :

'The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered.'

31. The question in that case was whether interest on arrears of rent payable in respect of lands used for agricultural purposes was agricultural income within the definition of that expression in s. 2(1) of the 1922 Act and was, therefore, exempt from income-tax. The Privy Council held that interest on arrears of rent payable in respect of such land was neither rent nor revenue derived from land. The Privy Council pointed out that interest was not rent because rent is a technical conception, its leading characteristic being that it is a payment in money or in kind by one person to another in respect of a grant of a right to use the land, and interest on rent in arrears was not such a payment. The Privy Council held that it was equally clear that interest on rent was revenue, but it was not revenue derived from land. The Privy Council pointed out that in the genealogical tree of the interest land appears in the second degree, but immediate and effective source was rent, which had suffered the accident of non-payment and rent was not land within the meaning of the definition in question. Thus, according to the Privy Council, when tracing the genealogical tree of interest on arrears of rent, rent stood in the first degree and land in the second degree, that is, rent was derived from land and interest was revenue derived from rent by reason of its non-payment. It was the non-payment of rent which was the immediate and effective source from which interest was derived. As rent was not land, the immediate and effective source was not land. This was an authority upon which considerable reliance was placed on behalf of the respondents. We fail to see how this decision supports the case of the respondents. If one were to trace the genealogy of gains or profits arising from transfer of land, the immediate and effective source of such gains or profits, which are revenue, would be land. This revenue would not have been earned but for the land which has been sold. The fact that s. 45 of the I.T. Act, 1961, uses the word 'arising from the transfer of a capital asset' makes no difference. From this it does not follow that profits or gains arising from the transfer of land is not revenue derived from land. Under sub-cl. (a) rent must also be derived from land. Though the words used are 'any rent derived from land', rent is also earned by reason of the transfer of a limited interest in land, namely, to quote the language of s. 105 of the Transfer of Property Act, 1882, 'a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity'. Such transfer would be either for 'a price paid or promised', which price is called 'the premium' or in consideration 'of money, a share of crops, service, or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms', such moneys, share, service or other thing to be so rendered being called 'the rent'. Thus, rent is also profits or gains arising from a transaction relating to a capital asset, namely, the transfer of an interest in land, though it may not be the transfer of the total interest therein as in the case of a sale of land ; but in both cases the profits or gains made would be income, in the first case it being rent derived from land, in the other case it being revenue derived from land. To ascertain the immediate and effective source of revenue is not a question of semantics. It is a question of the substance of the transaction. To seek to make out a distinction between the words 'derived from' and 'arising from' is to indulge in hair-splitting and philological acrobatics. Rent is derived from a lease of land in the same way as capital gains is derived from the sale of land, but the immediate and effective source of both is land itself. To say that in one case, namely, in the case of sale, it is a transaction of sale, and in the other case it is land and not a transaction of lease, is to ignore the substance of the matter.

32. Another decision relied upon by the respondents in support of this contention was Mrs. Bacha F. Guzdar v. CIT : [1955]27ITR1(SC) . In that case 60% of the income of certain tea companies was exempt from tax as agricultural income under s. 4(3)(iii) of the Indian I.T. Act, 1922. The assessee was a shareholder in these companies. She claimed that 60% of the dividend income received by her on these shares should also be exempt from tax as agricultural income. The Supreme Court held that such dividend income was not agricultural income but was income assessable under s. 12. The Supreme Court pointed out that the dividend was derived from the investment made in the shares of the company and the foundation of it rested on the contractual relations between the company and its shareholders. The Supreme Court further pointed out that a shareholder who buys shares does not buy any interest in the property of the company, for the company is a juristic person entirely distinct from the shareholders. The Supreme Court held (p. 1 of 27 ITR) : 'Agricultural income as defined in the Act is intended to refer to the revenue received by direct association with the land which is used for agricultural purposes and not by indirectly extending it to cases where that revenue or part thereof changes hands either by way of distribution of dividends or otherwise'. We fail to see in what manner this decision helps the respondents. If the owner of the land has not a direct association with the land, who else has it The profits or gains received by the owner of the land by sale of such land is revenue received by him by reason of his direct association with the land. It is not that this revenue was received by someone else and thereafter changed hands, as in the case of dividends. In the case of a land owned by a company it is the company which is the owner of the land and not the shareholders, and any profits or gains or revenue received is received by the company, and it is thereafter that the company may distribute such profits amongst its shareholders.

33. There were other decisions which were also relied upon on behalf of the respondents. To our mind, none of them touch the point which we have to decide or are relevant to the determination of the question before us. We will, therefore, briefly refer to them and point out how they are easily distinguishable. The first case was Maharajkumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237 . In that case, the assessee, who owned a nine annas share in an estate, with the object of discharging his debts and for obtaining for himself an adequate income for his life, conveyed the greater portion of his estate to his son-in-law's mother who was the owner of the remaining seven annas share in the estate. The consideration for this transfer was three-fold : (1) the payment of the assessee's debts aggregating to a particular amount; (2) certain cash payment ; and (3) an annual payment of Rs. 2,40,000 to the assessee for life. The question arose with reference to the annual payment to be made to the assessee. The Privy Council held that the annual payment was not agricultural income as it was not rent or revenue derived from land but money payable under a contract imposing a personal liability on the covenantor, the discharge of which was secured by a charge on land. It was further held that this was a case where the owner of an estate had exchanged a capital asset, inter alia, for a life annuity which was income in his hands and not a case in which he had exchanged his estate for a capital sum payable in instalments, and the income was, therefore, taxable under the 1922 Act. This is a case which turned upon its own facts. The question of capital gains did not arise in this case because at that time no capital gains tax had been leviable. The question was whether the receipt of the entire sum of Rs. 2,40,000 was a capital receipt or a revenue receipt, and if a revenue receipt whether it was derived from land. The basis for the Privy Council holding that this was not agricultural income was that this was income which was not derived from land but was money payable under a contract containing a personal liability.

34. The second authority relied upon was a decision of the Privy Council in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 . In that case, the assessee had leased for 999 years the underground coal mining rights of certain lands. In return the lessees were to pay to the assessee a sum by way of salami or premium and an annual sum as royalty computed at a certain rate per ton on the amount of coal raised and coke manufactured, subject always to a minimum annual sum. The question was whether these were payments received on capital account or by way of income. The Privy Council held that salami or premium was a capital asset inasmuch as it was a single payment made the acquisition of the right to enjoy the benefits granted by the lease and that such a general right should be regarded as a capital asset and money paid to purchase it as payment on capital account. The Privy Council further held that the annual royalties including the amount of minimum royalty were, however, not payment received on capital account. This case turned upon the question whether a receipt of a particular amount was in the nature of a capital receipt and hence not subject to income-tax or whether it was in the nature of a revenue receipt and hence subject to income-tax. It did not touch the point of what is 'revenue derived from land' in the sense in which this phrase is used in the definition of 'agricultural income' in the I.T. Act, 1961. The leases were not agricultural leases at all. The question whether any part of the amount received by the lessor was agricultural income or not did not arise for consideration nor was the question whether any part of the payment received was capital gains. In this very judgment, however, Lord Wright pointed out (p. 523) : 'Income is not necessarily the recurrent return from a definite source, though it is generally of that character.'

35. The third authority relied upon by the respondents was yet another decision of the Privy Council in Raja Mustafa Ali Khan v. CIT [1948] 16 ITR 330. The facts of that case were that during the days of the Nawabs of Oudh, the ancestors of the assessee, the Raja of Utraula, was recognised as the pargana lord and such retained the right to a small feudal tribute and to manorial dues. There was, however, continuous warfare between the Raja's ancestors and the neighbouring estates. During this period, the Raja's ancestors made grants or sold a large number of villages to certain persons for monetary consideration surrendering all their zamindari and proprietary rights and losing all their title to real property in respect of these villages. They, however, retained the right to a small annual cash payment by virtue of their position as the old pargana lord. This cash allowance came to be called malikana. Apart from this payment, the villages became quite independent and the exclusive property of the purchasers, grantees or transferees. The amount of malikana was fixed by a settlement decree and was not variable and was payable whether the land on which it was supposed to be a charge was used for agricultural purposes or not. The Privy Council held that malikana was not rent or revenue derived from the land but it was paid to the assessee because his ancestors, the original proprietors, had relinquished their claim to their land and it represented the consideration for their relinquishment and the land was, therefore, in no real sense the source of that payment to the assessee and in the assessee's hands it could not be said to be rent or revenue derived from the land. This case also turned upon its own facts. The question was whether the full amount of malikana was agricultural income or not. The right to the lands had been relinquished not by the assessee but by his ancestors. The question was of the character of the amounts received by the assessee and not by his ancestors. While dealing with this question the Privy Council said (p. 337) :

'It may be conceded that it would never have become payable to the ancestors of the assessee had they not been feudal proprietors of the land. But that does not mean that it is now rent or revenue derived from the land : on the contrary it is paid just because the original proprietors relinquished their claims to the land and it represents the consideration for that relinquishment.'

36. To rely upon this authority as supporting the respondents' contention is to confuse between the sale price of a capital asset and that part of it which is profits or gains and which is income by reason of its being included in the definition of 'income' in cl. (24) of s. 2 of the 1961 Act and the decision of the Supreme Court in Navinchandra's case : [1954]26ITR758(SC) . It should also be borne in mind that this decision was given before the inclusion of capital gains in the definition of 'income' and before us on behalf of the petitioners that the entire receipt of sale price is agricultural income. What is contended is that the profits or gains made by them on the sale of agricultural lands is income and because the lands are agricultural lands it is 'revenue derived from land' within the meaning of that expression in s. 2(1)(a) of the 1961 Act.

37. The next authority relied upon by the respondents was Member for the Board of Agricultural Income-tax v. Sindhurani Chaudhurani : [1957]32ITR169(SC) . In that case, the Supreme Court held that salami paid by a prospective tenant to a landlord was not 'rent' within the meaning of the word used in the definition of 'agricultural income' in s. 2(1)(a) of the Assam Agrl. I.T. Act, 1939, and that it had all the characteristics of a capital payment and was not revenue and, therefore, it was not 'agricultural income' as defined in the said Assam Act. The Supreme Court pointed out that salami was a lump sum non-recurring receipt of money by a landlord from a tenant before making a settlement of the holding and that it was charged whenever a settlement was made and that salami was, therefore, a payment by a tenant to a landlord antecedent to the constitution of the relationship of landlord and tenant. This case again does not touch the point. The question before the Supreme Court in that case was whether salami was liable to agricultural income-tax on the ground that it was 'agricultural income' within the meaning of s. 2(1)(a) of the Assam Agrl. I.T. Act. In the course of its judgment, the Supreme Court referred to several other decision in which payments by way of salami were held to be agricultural income. The Supreme Court did not hold that those cases were wrongly decided but distinguished those cases, some on the ground that the question arising in them was decided under the Indian I.T. Act, 1922, and the question whether it was a capital receipt or a revenue receipt and, therefore, exempt from the levy of agricultural income-tax did not arise because the Provincial Agricultural Income-tax Acts were passed subsequently, and the others on the ground that the payment of salami was held to be agricultural income because the moneys were paid after the relationship of landlord and tenant had come into existence.

38. In state of Kerala v. Karimtharuvi Tea Estate Ltd. : [1966]60ITR275(SC) , yet another decision relied upon by the respondents, the facts were that the owners of certain tea estates planted grevelia trees, not for the purpose of deriving any income therefrom but solely for the purpose of providing shade for the tea plants, such shade being essential for the proper cultivation of tea. After the trees had become useless, they were cut down and sold. The State of Kerala contended that the sale proceeds derived by sale as firewood's of these trees constituted 'agricultural income' under the Kerala Agrl. I.T. Act, 1950, and was, therefore, liable to tax under that Act. The Supreme Court negatived this contention on the ground that these trees constituted capital assets and the proceeds therefrom by sale as firewood would not, therefore, constitute agricultural income under the said Act. In relying upon this authority what has been overlooked by the respondents is that what was sought to be taxed was the entire sale proceeds and not merely that part of it which constituted profits or gains arising from transfer of a capital asset. The Kerala Agrl. I.T. Act did not levy a capital gains tax on sale of land used for agricultural purposes, and the question, therefore, whether capital gains made on sale of land used for agricultural purposes was revenue derived from such land and, therefore, liable to agricultural income-tax did not arise for consideration in that case.

39. Yet another authority relied upon by the respondents was a decision of the Gujarat High Court in Amritlal Chhaganlal v. CIT : [1972]84ITR677(Guj) . Here the question again was whether a particular receipt was capital receipt or revenue receipt. The receipt in question was the money consideration paid to the assessee for entering upon the assessee's hands and digging and removing earth therefrom. The question was whether the amount received by the assessee was by way of rent or compensation for use and occupation of the land for the purpose of digging and removal of the earth or whether it represented the price of the earth dug and removed. The Gujarat High Court found that on the facts and circumstances of the case the transaction could not be regarded as one granting occupation and use of the land for the purpose of digging and removal of the earth but was one of sale of earth to be dug and removed, and the amount received by the assessee was by way realization of the value of earth dug and removed and was thus by way of realization of a portion of the capital assets and was not rent or compensation for the use of it. Here again the question whether any particular part of such receipt was income on the ground that it was capital gains did not arise for consideration.

40. The respondents then relied upon a decision of the Supreme Court of the United States in United States of America v. Ashby Oliver Stewart [1940] 85 L Ed 40 ; 311 US 60. The question before the United State Supreme Courts was whether under the provisions of s. 26 of the Federal Farm Loan Act the 'income derived' from farm loan bonds issued by joint stock land banks under the said Act should be exempt from federal income-tax applied to capital gains arising out of the purchase and subsequent sale or surrender of such bonds. Section 22(a) of the Revenue Act of 1928 included in gross income 'gains, profits, and income derived from......sales, or dealing in property, whether real or personal'. Section 22(b)(4) of the Revenue Act exempted from taxation 'interest upon......securities issued under the provisions of the Federal Farm Loan Act, or under the provisions of such Act as amended'. The United States Supreme Court held that if the above two provisions alone were to apply, the gains made on the sale of farm loan bonds would fall squarely within the definition of 'gross income' contained in s. 22(a) and would not be 'interest' within the meaning of s. 22(b)(4). The court then dealt with the respondents point based upon s. 26 of the Federal Farm Loan Act under which farm loan bonds issued under the provisions of that Act were to be deemed and held to be instrumentalities of the Govt. of the United States, and as such they and the income derived therefrom were to be exempted from Federal State, municipal and local taxation, the respondent's contention being that the gains made on sale of these bonds was 'income derived' from the bonds within the meaning of the said s. 26. The earlier Revenue Act, namely, the Revenue Act of 1916, passed by Congress shortly after the passing of the Farm Loan Act and in the same session, contained provisions identical with s. 22(a) and s. 22(b)(4) of the 1928. The United States Supreme Court held that all Acts in pari materia should be taken together as if they were one law and that the two Acts, namely, the Federal Farm Loan Act and the Revenue Act of 1916 were in pari materia because both dealt with precisely the same subject-matter, namely, the scope of the tax exemption afforded to farm loan bonds, and the later Act, namely, the Revenue Act of 1916, could, therefore, be regarded as a legislative interpretation of the earlier Act. The United States Supreme Court, therefore, held that the gains made on sale of farm loan bonds were subject to federal income-tax. The case turned upon the construction of the relevant fiscal legislations of the United States, and it was on this construction that it was held that the capital gains were income taxable under the Revenue Act of 1928. What was, however, relied upon were certain observation in the course of that judgment saying that an exemption of an income derived from a security did not embrace income derived from transaction in that security. These observations must be read in the context of that case and cannot help us in deciding the question before us. The question of the legislative competence of the United State Congress to impose capital gains tax on farm loan bonds did not arise for consideration. The question turned upon the construction of two different clauses of s. 2 of the Revenue Act of 1928 and the Farm Loan Act, both of which were Acts passed by the Congress and according to the rules of construction as laid down in American judicial decisions, the Supreme Court held that two statutes in pari material should be read together as if they were one law and the relevant provisions of the later statute which were identical with the provisions of the statute which it replaced and which statute was passed soon after the Farm Loan Act and in the same session of the Congress should be regarded as a legislative interpretation of the earlier Act. What the United State Congress could be said to have exempted from its taxing power was interest on farm loan bonds and not capital gains. This decisions is, therefore, wholly irrelevant.

41. It was next argued on behalf of the respondents that 'derived from hand' means the same thing as 'springs from land' and that the only thing which spring from lands is crops and, therefore, profit or gain made on sale of land used for agricultural purposes should not be said to be derived from such land and would not be revenue within the meaning of s. 2(1)(a) of the I.T. Act, 1961. According to the respondents, what would be revenue would be only the profit or gain made by sale of crop. To our mind, there are two fallacies in this argument. Income derived from land used for agricultural purpose by agriculture or by the performance of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market or by the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him in respect of which no process had been performed other than a process referred to above are separate heads of agricultural income coming under s. 2(1)(b). They would fall not under sub-cl. (a) of s. 2(1) but under sub-cl. (b) of s. 2(1). The term 'revenue' in the sense in which it is used in sub-cl. (a) of s. 2(1) embraces all income derived from land which is used for agricultural purposes other than rent, income derived from such land by any f the processes mentioned in sub-cl. (b) of s. 2(1) and income derived from any building falling under sub-cl. (c) of s. 2(1). The second fallacy in this argument is in considering that the gains made from sale of such land do not spring from the land. In Sevantilal Maneklal Sheth v. CIT : [1968]68ITR503(SC) , the assessee made a gift of certain preference shares to his wife. These preference shares were subsequently converted by the company into ordinary shares. The shares were thereafter sold by the wife. A question arose as to whether capital gains earned on the sale of such shares be included in the total income of the husband by reason of the provisions of s. 16(3)(a) (iii) of the Indian I.T. Act, 1922, under which in computing the total income of and individual for the purpose of assessment so much of the income of the wife of such individual 'as arises directly or indirectly from assets transferred' directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart is to be included. It was argued that what came within the ambit of s. 16(3)(a)(iii) was 'the income from the assets', that is, income which the asset produces while it continues to remain in the hands of the assessee, and does not include the gain which is made as a result of the transferee selling the assets and parting with the possession of it. Rejecting this argument, the Supreme Court said (p. 507) :

'We see no justification for this argument. In our opinion, there is no logical distinction between income arising from the asset transferred to the wife and arising from the sale of the assets so transferred. The profits or gains which arise from the sale of the asset would arise or spring from the asset, although the operation by which the profits or gains is made to arise out of the asset is the operation of the sale. If the asset is employed, say by way of investment and produce income, the income arises or spring from the asset ; the operation, which cause the income to spring from the asset, is the operation of the investment. In the operation of the investment, income is produced while the assets continues to belong to the assessee, while in the operation of a sale, gain is produced, which is still income, but in the process the title to the assets is parted with. Although the processes involved in the two cases are different, the gain which has resulted to the owner of the assets, in each case, is the gain, which has sprung up or arisen from the asset. There is hence no warrant for the argument that the capital gain is not income arising from the assets, but it is income, which arises from a source which is different from the assets itself.'

42. Thus, according to the Supreme Court, income arising from an asset and arising from the sale of an asset is income which arises from the same source. The Supreme Court has used the words 'arise from the assets' as being synonymous with 'spring from the asset.' If, according to the respondents, 'derived from land' means 'springs from land', then the gains made on sale of such land would be derived from such land. Apart from repelling the above argument of the respondents, this decisions of the Supreme Court fortifies us in the view which we have taken that the source of capital gains is the same source as the source of other types of agricultural income referred to ins. 2(1), namely, the land, and it is gin which has sprung up or arisen from land like any other gain or income referred to in. 2(1)(a).

43. We will now refer to a decision of the Privy Council and two decisions of the Calcutta High Court which also fortify us in this conclusion which we have reached. In CIT v. Sir Kameshwar Singh [1935] 3 ITR 305 , the assessee's father, who carried on an extensive money-lending business, made a loan of over Rs. 18,00,000 under an indenture described as 'zarpeshgi lease with use fractural mortgage'. By this deed the less or mortgagor conveyed to the lessee-mortgage certain properties for a period of 15 years. A certain portion of the rent was reserved to the mortgagor as 'thika rent' and the mortgagee was allowed to take the balance of the profits after deducting the expenses as thika profits in consideration of the loan. It was held that the thika profits received by the assessee as mortgagee-lessee was exempt from income-tax, being agricultural income. It will be noticed that in this case the balance of the profits taken by the lessee-mortgagee was by reason of and under the transaction of usufructary mortgagee in the form of a zarpeshgi lease. None the less, these profits were held to be agricultural income. In Nawabzadi Mehar Bano Khanum v. Secretary of State for India in Council : AIR1925Cal929 , a Full Bench of five judges of the Calcutta High Court held that Nazar or salami paid by a tenant to a landlord for the recognition of a non-transferable holding was rent or revenue within the meaning of the expression as it occurred in s. 2(1)(a) of the Indian I.T. Act, 1922, and was exempt from assessment to income-tax. It was admitted by counsel for the respondent that nazar was revenue, but what was argued was that although it was revenue it was not revenue derived from land but from the transaction, that is, from the recognition of the transfer, and that it was an incidence of the transfer and not of the tenancy and, therefore, did not flow from the land. The Full Bench held that the admission that nazar or salami was rent or revenue within the meaning of s. 2(1)(a) of the 1922 Act was rightly made. The Full Bench further held that it was money which came to the landlord by virtue of the fact that he was the owner of the land and that, viewed in this light, it was clearly derived from the land and was agricultural income. Thus, according to the Full Bench of the Calcutta High Court, not only was the admission made on behalf of the Secretary of State that nazar or salami was revenue was rightly made but such revenue, even though it was derived from the transaction of the recognition of the transfer of a non-transferable holding, was still revenue derived from land.

44. The second Calcutta case is CIT v. All India Tea & Trading Co. Ltd : [1978]113ITR545(Cal) . The Assam Legislature passed in 1948 the Assam Land (Requisition and Acquisition) Act, 1948, in order to accommodate refugees and other landless persons. Under that Act land could be requisitioned as also acquired, and compensation for requisition and acquisition was payable. The assessees' lands which were used for agricultural purposes were requisitioned under the said Act and the assessee were paid a sum of Rs. 1,24,638 as compensation. In their income-tax assessment the assessees claimed that the said sum was exempt from tax is was agricultural income. This contention was rejected by the ITO but upheld by the AAC. The Income-tax Tribunal upheld the contention of the assessee and dismissed the department's appeal. A reference was made to the Calcutta High Court at the instance of the department. After considering the earlier Privy Council cases and the Supreme Court case in Mrs. Bacha F. Guzdar v. CIT : [1955]27ITR1(SC) , the Calcutta High Court held that the general principles applicable for determining whether a particular income is agricultural income are : (1) rent or revenue which is directly derived from any land which is used for agricultural purposes will be agricultural income for purposes of income-tax ; (2) revenue which is derived must also be directly and not indirectly associated with the land which is used for agricultural purposes before it can be said to be agricultural income ; and (3) the effective source is the decisive factor. The court held that the payment of compensation under the said Assam Act was directly associated with the requisition of land itself and that under the said Assam Act requisition and compensation went together and were so interlocked or interwoven that one could not be dissected from the other. The court further held that the source of compensation was the land itself and though payment of compensation was a statutory liability, none the less it was a liability which arose directly from the requisition of the agricultural land and the amount of compensation paid under the Assam Act was, therefore, agricultural income and exempt from income-tax. Though the judgment does not say so in so many words, it is obvious upon a reading of the judgment that according to the Calcutta High Court the lump sum payment of compensation was revenue derived from land which was used for agricultural purposes and, therefore, agricultural income within the meaning of s. 2(1)(a) of the I.T. Act, 1961.

45. The conclusion that capital gains made on sale of agricultural land would be 'revenue derived from land' within the meaning of that expression in s. 2(1)(a) of the I.T. Act, 1961, is, however, not decisive of the matter. What sub-cl. (iii) of s. 2(14) speaks of is 'agricultural land in India', while the words used in s. 2(1)(a) are 'land which is situated in India and is used for agricultural purposes'. Thus, there are two qualifications to the word 'land' in s. 2(1)(a), namely, (1) the land must be situated in India, and (2) the land must be used for agricultural purposes. The first qualification, namely, with respect to the location of the land in India, is the same as in s. 2(14)(iii) and need not trouble us, but the question which arises is whether land which is used for agricultural purposes is the same as agricultural land. It is obvious that the land which is used for agricultural land. But is the converse true Is agricultural land the same as land which is used for agricultural purposes It is not that agricultural land must always be and always is used for agricultural purposes. Agricultural land can be and is at times used for non-agricultural purposes. In Raja Mustafa Ali Khan v. CIT [1948] 16 ITR 330 , the Privy Council held that whether exemption was claimed under s. 2(1)(a) or s. 2(1)(b) of the Indian I.T. Act, 1922, the primary condition must be satisfied that the land 'is used for agricultural purposes'. The Privy Council further held that unless there was some measure of the cultivation of the land, some expenditure of skill and labour upon it, cannot be said to be used for agricultural purposes within the meaning of the Income-tax Act. In CIT v. Raja Benoy Kumar Sahal Roy : [1957]32ITR466(SC) , the Supreme Court considered the meaning of the 'agricultural purposes'. It held that those operation which the agricultural had to resort to and which were absolutely necessary for the purpose of the effectively raising produce from the land, operations which were to be performed after the produce sprouted from the land such as weeding, digging the soil around the growth, removal of undesirable undergrowth, and all operations which fostered the growth the preservation of the same not only from insects and pests but also from depredation from outside, tending, pruning, cutting harvesting and rendering the produce fit for the market, would all be agricultural operation when taken in conjunction with the basic operation of agriculture, namely, agricultural in its primary sense denoting the cultivation of the field by tilling of the land, sowing of the seeds and planting and similar operations of the land. The Supreme Court further held that the mere performance of these subsequent operations on the products of the land, where such products had not been raised on the land by the performance of the basis operation, would not be enough to characterize them as agricultural operations and in order to invest them with the character of agricultural operations the subsequent operations must necessarily be in conjunction with and in continuation of the basic operation which were the effective cause of the products being raised from the land. The Supreme Court further held that the subsequent operations, divorced from the basis operations, could not constitute by themselves agricultural operations. According to the Supreme Court, it is only where this integrated activity is undertaken and performed in regard to any land that the land can be said to have been used for 'agricultural purposes' and the income therefrom said to be 'agricultural income' derived from the land by agriculture under s. 2(1)(b) of the Indian I.T. Act, 1922. The question before the Supreme Court in that case was whether income derived from certain forest land was income derived from land which was used for agricultural purposes by agriculturists and, therefore, agricultural income within the meaning of s. 2(1)(b). Thus, unless agricultural operations are carried on upon land in the sense defined by the Privy Council and the Supreme Court in the above cases, land cannot be said to have been used for agricultural purposes even though it may be agricultural land.

46. In this connection, we must refer to a decision of the Andhra Pradesh High Court in Pydah Suryanarayana Murty v. CIT : [1961]42ITR83(AP) , relied upon by the respondents. In that case certain lands of the assessee on which a large number of mango, palmyra, cashew-nut, coconut and other fruit-bearing trees stood, were requisitioned for military purposes under the Defence of India Act, 1939, and compensation determined by arbitration under Rules framed under the said Act was paid to the assessee. The military authorities had not carried on any agricultural operations on the requisitioned lands. In view of this, the Andhra Pradesh High Court held that the compensation received by the assessee was not agricultural income within the meaning of s. 2(1)(a) or s. 2(1)(b)(i) of the Indian I.T. Act, 1922. It was argued before the Andhra Pradesh High Court that the land as agricultural land and that the relationship of landlord and tenant was established between the military authorities and the assessee and, therefore, the amount paid by the military authorities was 'rent' within the meaning of s. 2(1)(a). This arguments was negatived by the Andhra Pradesh High Court. It was next contended that though the amount way not be rent in the strict technical sense in which that word was used in s. 105 of the Transfer of Property Act, 1882, it was 'revenue' within the meaning of s. 2(1)(a) and that the words 'is used for agricultural purposes ' in s. 2(1)(a) were descriptive of the nature of the land from which the income is derived and did not mean or imply that the income must be derived by the actual carrying on of agricultural operations. The court rejected these arguments also. The court held that whether the amount of compensation received was rent or revenue, the language of s. 2(1)(a) required that it must be derived from the land which is used for the agricultural purposes. Relying upon the Supreme Court decision in Raja Benoy Kumar Sahas Roy : [1957]32ITR466(SC) , the court pointed out that where agricultural land is let out for purposes other then agriculture, such as for the use of potteries or as brick field, or as stone quarries, or for erecting shops, the income derived therefrom would be indirectly referable to land, but it would not be agricultural income because it was not served from the carrying on of agricultural operations. Though we are in agreement with the conclusion arrived at by the Andhra Pradesh High Court, with respect to the learned judges who decided that case, we are not in agreement with the observations in that judgment (p. 88), namely : 'In other words, the income whether one calls it rent or revenue must be derived as a result of and in consequence of agricultural operations.' We are also unable to agree that the words 'is used for agricultural purposes' are not descriptive of the land. If one looks at sub-cl. (a), omitting the unnecessary words, it would read ' any rent or revenue derived from land which......is used for agricultural purposes.'. Thus, it is the land which must be used for agricultural purposes. Rent or revenue cannot be the result of agricultural operations. Rent is the amount which would be paid by a lessee to the owner of land which is used for agricultural purposes and is received by the owner of the land under the lease and not as a result of agricultural operations carried on by him. Similarly, revenue cannot be the result of agricultural operations. If it were, such income would fall under sub-cl. (b) and not sub-cl. (a). If land which is used for agricultural purposes is let out or used for non-agricultural purposes, it then cannot be said to be rent or revenue derived from land which is used for agricultural purposes, and this itself was sufficient to dispose of the reference before the Andhra Pradesh High Court. The point which arose for the decisions of the Supreme Court in Raja Benoy Kumar Sahas Roy's case : [1957]32ITR466(SC) , was whether derived from certain land was agricultural income falling within s. 2(1)(b) of the 1922 Act. The question before the Supreme Court was whether certain operations on land carried on by the owner of the land were agricultural operations. These operations were carried on by owner himself. Rent or revenue of land used for agricultural purposes cannot and is not derived as a result of or in consequence of agricultural operations. It is derived by the owner of the land by reason of a transaction in respect of land which is used for agricultural purposes. It is not any agricultural operation which yield rent or revenue, but agricultural operations will have to be performed on the land so that sent or revenue derived from such land would be agricultural income within the meaning of s. 2(1)(a). Though at first sight it would appear that this decisions of the Andhra Pradesh High Court is in conflict with the decisions of the Calcutta High Court in the case of All India Tea & Trading Co. Ltd. : [1978]113ITR545(Cal) , referred to earlier, if one marks the distinction between the two cases the apparent conflict vanished. In the Calcutta case, the compensations was a lump sum compensation paid once and for all. The lands at the time of requisitioning were used for agricultural purposes. In the Andhra Pradesh case compensation was paid periodically by the military authorities for use and occupation of the land for non-agricultural purposes.

47. In our opinion, capital gains made on sale of land situate in India, which land is used for agricultural purposes, would be revenue derived from such land and, therefore, agricultural income within the meaning of s. 2(1) of the I.T. Act, 1961, and Parliament would have no legislative competence to tax such agricultural income. Therefore, to the extent that the impugned sub-cl. (iii) of s. 2(14) read with s. 45 of the I.T. Act, 1961, would make the profits or gains arising from the transfer of such lands situate in the areas mentioned in paras. (a) and (b) of the said sub-cl. (iii) subject to the levy of capital gains tax by Parliament, it would be beyond the legislative competence of Parliament inasmuch as capital gains or transfer of lands used for agricultural purposes and situate within these areas would fall within the legislative field of State Govt. by reason of entry 46 in List II of the Seventh Schedule to the Constitution of India.

48. Does it follow this that the whole of the impugned sub-clause must be struck down as being ultra vires It is a well-settled rule of construction of statutes that where the constitutionality of a statute or some of its provisions are challenged and there are two interpretations possible, according to one of which the law would be valid and according to the other, void, the court would lean in favour of the former construction. Sinha C.J., in Kedar Nath Singh v. State of Bihar : AIR1962SC955 , put this rule thus :

'It well settled that if certain provisions of law construed in one way would make them consistent with the Constitution, and another interpretation would render them unconstitutional, the court would lean in favour of the former construction.'

49. If necessary, the court will uphold the validity of the Act by reading down the provisions in question. There are a large number of cases in which this has been done, but the case most in point is the opinion of the Federal Court in In re Hindu Women's Right to Property Act, 1937, and the Hindu Women's Rights to Property (Amendment) Act, 1938 [1941] FCR 12 ; [1941] 4 FLJ 1 , a reference made to it under s. 213 of the Government of India Act, 1935. The Central Legislature passed these two Acts dealing with succession and devolution by survivorship of properties of Hindus conferring certain rights upon Hindu widows. Under entry 21 in List II of the Seventh Schedule to the Government of India Act, 1935, laws with respect to devolution of agricultural land could be enacted only by the Provincial Legislatures, while wills, intestacy and succession except with respect to agricultural land came under entry 7 in List III, namely, the Concurrent Legislative List, in the said Schedule. Relying upon the observation of Lord Esher M.R., in Colquhoun v. Heddon [1890] 25 QBD 129, and upon the decision of the Judicial Committee in Blackwood v. Queen [1882] 8 App Cas 82 and Macleod v. Attorney-General for New South Wales [1891] AC 455 , Gwyer C.J., speaking for the court, observed as follows (pp. 26 & 27-see also [1941] 4 FLJ 1 :

'No doubt if the Act does affect agricultural land in the Governors' Provinces, it was beyond the competence of the Legislature to enact it ; and whether or not it does so must depend upon the meaning which is to be given to the word 'property' in the Act. If that word necessarily and inevitably comprises all forms of property, including agricultural land, then clearly the Act went beyond the powers of the Legislature ; but when a Legislature with limited and restricted powers makes use of a word of such wide and general import, the presumption must surely be that it is using it with reference to that kind of property with respect to which it is competent to legislate and to no other. The question is thus one of construction, and unless the Act is to be regarded as wholly meaningless and ineffective, the court is bound to construe the word 'property' as referring only to those forms of property with respect to which the Legislature which enacted the Act was competent to legislate; that is to say, property other than agricultural land. On this view of the matter, the so-called question of severability, on which a number of Dominion decisions, as well arguments, does not arise. The court does not seek to divide the Act into two parts, viz., the part which the Legislature was competent, and the part which it was incompetent, to enact. It holds that, on the true construction of the Act and especially of the word 'property' as used in it, no part of the Act was beyond the Legislature's powers.'

50. In the opinion of the Federal Court the two Acts did not operate to regulate succession to agricultural land in the Governments' Provinces and operated to regulate devolution by survivorship of properties other than agricultural land. In a large number of other cases this principle has been adopted by the Supreme Court. It is unnecessary to refer to all of them. We need mention only the latest, namely, State of Karnataka v. Ranganatha Reddy, : [1978]1SCR641 , in which some of the earlier decisions, including the above Federal Court decisions, were referred to and the same principle reiterated. In view of the above decisions we are not in a position to hold the impugned sub-cl. (iii) of s. 2(14) to be ultra vires. Instead we held that it does not operate to levy a capital gains tax on profits or gains arising from transfer of land which is situate in any of the areas mentioned in para (a) or (b) of the said sub-clause should be so read that land which is used for agricultural purposes, and the said sub-clause should be so read that land which is used for agricultural purposes forms an exception to paras. (a) and (b) and that the words '(other than land which is used for agricultural purposes)' should be read into the said sub-cl. (iii) is forming an exception to the said paras. (a) and (b). In other words, the opening words of the said sub-clause should be read as 'agricultural land in India, not being land (other than land which is used for agricultural purposes) situate'.

51. We now turn to the second ground of challenge to the vires of s. 2(14)(iii) of the I.T. Act, 1961. On this count the petitioners' submission was that the impugned sub-cl. (iii) of s. 2(14) constituted a separate head of agricultural income and that by amending it by the Finance Act, 1970, so as exclude from it agricultural lands which are situate in the areas mentioned in paras. (a) and (b) of the said sub- cl. (iii), Parliament has sought to tax agricultural income by a colourable exercise of legislative powers. It was submitted that as held in Navinchadra's case : [1954]26ITR758(SC) , a tax on capital gains was a tax on income and, therefore, a tax on capital gains arising from transfer of agricultural land was a tax on agricultural income and the powers conferred by cl. (1) of art. 366 of the Constitution upon Parliament to define 'agricultural income' was not a power to change the basic or fundamental meaning of that expression as used in the relevant entries in List I and II of the Seventh Schedule to the Constitution but it was to define 'agricultural income' in respect of such types of income with respect to which there could be a controversy. It was said that there were certain types of income which indisputably were agricultural income taking the expression in its broad sense and certain other types of income which were equally indisputably non-agricultural income, but there was a certain zone lying between these two areas a agricultural income and non-agricultural income with respect to which a constant controversy arises as is shown by decided cases as t whether that particular income is agricultural income or not, and it was in this area of conflict that Parliament's power under art. 366(1) could be exercised. It was submitted that in giving an artificial definition to the expression 'agricultural income' by amending the said sub-cl. (iii), Parliament had overstepped its permissible field of legislation with respect to defining 'agricultural income' and such exercise of legislative power by Parliament was a fraud on the Constitution.

52. When it is said that a particular statute is a fraud on the Constitution, what is really meant is that it is a colourable exercise of legislative power. The doctrine of colourable legislation fell for detailed examination by the Supreme Court in K. C. Gujapati Narayan Deo v. State of Orissa, : [1954]1SCR1 . In that case, the court held that the doctrine of colourable legislation did not involve any question of bona fides or mala fides on the part of the legislature, but the whole doctrine resolved itself into the question of competency of a particular legislature to enact a particular law. The Court further observed that if the constitution of a State distributes the legislative powers amongst different bodies, which bodies have to act within their respective spheres marked out by specific legislative entries, or if there are limitations on the legislative authority in the shape of fundamental right, question do arise as to whether the legislature in a particular case has or has not, in respect of the subject-matter of the statute or in method of enacting it, transgressed the limits of its constitutional powers. The court pointed out that although apparently a legislature in passing a statute purported to act within the limits of its power, yet in substance and in reality it transgressed these powers, the transgression being veiled by what appears, on proper examination, to be a mere pretence or disguise, it would be a case of colourable legislation. The court further pointed out that the legislature cannot violate the constitutional prohibitions by employing an indirect method and that in cases such as these the inquiry must always be as to the true nature and and character of the challenged legislation and it is determine as to whether or not it relates to a subject which is within the powers of the legislative authority.

53. On behalf of the respondents reliance was placed upon the case of CIT v. Raja Benoy Kumar Sahas Roy : [1957]32ITR466(SC) , in which it was said that 'agricultural income' has been defined in the Constitution in art. 366(1) to mean 'agricultural income as defined for the purposes of the enactments relating to Indian income-tax' and the definition of 'agricultural income' was to be found in s. 2(1) of Indian I.T. Act, 1922, and, therefore, in order to determine what was agricultural income one had to look to the terms of the definition itself and to construe the same regardless of any other consideration. The petitioners sought to distinguish this authority on the ground that in that case there was no question of any colourable exercise of legislative power and the question which had fallen for determination was whether income of a particular type was agricultural income or not and now the expression 'agricultural income' in s. 2(1) should be construed and that is was in this context that the above observations were made.

54. Another authority relied upon by the respondents was a decisions of the Gujarat High Court in Ambalal Maganlal v. Union of India : [1975]98ITR237(Guj) . In that case also the constitution validity of the substituted sub-cl. (iii) of s. 2(14) of the I.T. ACT, 1961, was, inter alia, challenged on the ground of legislative incompetency, and that challenge was negatived. What was contended in that case on the point of legislative incompetency was that the definition in art. 366(1) of the Constitution could not be looked at for the purpose of finding out the scope and amplitude of the entries in the three Lists in the Seventh Schedule and that the power to levy taxes on income other than agricultural income had been conferred upon Parliament by entry 82 of List I, that is, the Union List, and that very Parliament could not, by virtue of art. 366(1), so define 'agricultural income' for the purpose of any of the enactments relating to Indian income-tax as to vary the content of the entries in the State List or the Union List. The court held that Parliament had the power to define what was meant by 'agricultural income' and that by virtue of entry 82 in List I, namely, the Union List, it had the power to levy a tax on income other than agricultural income as thus defined. With respect to this authority also it was submitted on behalf of the petitioners that the question of colourable legislation did not arise in that case. That is true, but the other arguments are very similar. We may, however, point out that this authority proceeds upon the basis (see pp. 247-8) as if the proviso to sub-cl (c) of cl. (1) of s. 2 of the 1961 Act was a proviso to the whole of cl. (1). With respect, this appears to us to be an erroneous reading of the said cl. (1) A bare reading of the said clause is enough to show that the proviso is only a proviso to sub-cl. (c) and not to the whole of cl. (1). To emphasize what we are saying we will set out only the material words in cl. (1) :

'(1) 'agriculture income' means -

(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes ;

(b) any income derived from such land by - ......

(c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land......

Provided that -

(i) the building is on or in the immediate vicinity of the land,...... and

(ii) the land is either assessee to land revenue in India or is subject to local rate......or where the lands is not so assessed to land revenue or subject to a local rate, it is not situated -

(A) in any area which is comprised within the jurisdiction of a municipality......or

(B) in any area within such distance,......'

55. The bare skeletal framework of cl. (1) which we have set out above clearly shows that the proviso can only go with sub-cl. (c) and not with the whole of cl. (1). It must be said in fairness to learned counsel for the respondents that he did not argue that it was a proviso to the whole of cl. (1) and not to sub-cl. (c) only.

56. We do not find it possible to accept the contention that income from all agricultural lands is agricultural income, even taking the expression 'agricultural income' in its broad sense. When agricultural land is used for non-agricultural purpose, the income derived from such use of the land cannot be said to be agricultural income even apart from the definition of 'agricultural income' given in cl. (1) of s. 2 of the I.T. Act, 1961, and using the expression 'agricultural income 'in its ordinary sense. That the expression 'agricultural land' is wider than the expression 'land which is used for agricultural purpose' is also shown by the decisions of the Supreme Court in CWT v. Officer-in-Charge (Court of Wards), Paigah : [1976]10ITR133(SC) . That was a case under the W.T. Act, 1957. The definition of 'assets 'in s. 2(e) of the said Act excludes from it, inter alia, 'agricultural land'. Just as in the case of the I.T. Act, the W.T. Act also does not define 'agricultural land'. The meaning of this expression came up for consideration by the Supreme Court in that case. The Supreme Court held that the expression 'agricultural land' does not mean all land which is capable of being used for agriculture, because such a wide meaning would exclude from the definition of 'assets' practically every type of land including land covered by buildings. The Supreme Court further held that the determination of the character land according to the purpose for which it is meant or set apart and can be used is a matter which ought to be determined on the facts of each particularly case and what is really required to be shown is a connection with an agricultural purpose and user and not the mere possibility of such user by some possible future owner or possessor ; it is not the mere potentiality, which will only effect its valuations as part of 'assets', but its actual conditions and intended user which is to be seen for the purpose of exemption from wealth-tax. The intention to use it for agricultural purposes should be the intention of the owner or possessor and not of any future owner or possessor. The Supreme Court further held that entries in revenue records were goods prima facie evidence but they gave rise to a presumption which could be rebutted. Thus, according to this judgment, land which is intended to be used for agricultural purposes would be agricultural land, but the land of which the income would be agricultural income within the meaning of s. 2(1) of the I.T. Act, 1961, is however, statutorily confined to land which is used for agricultural purpose. The use of the present tense shows that what is required for the land to qualify for the purposes of s. 2(1) is its present user and not any future or intended user even by the present owner or possessor of the land. In the context of the present subject of out discussion it is pertinent to note that under s. 2(1) of the Indian I.T. Act, 1922, as also under the original sub-cl (a) of cl (1) of s. 2 of the 1961 Act before it was retrospectively substituted by the present sub-clause by the Taxation Laws (Amend.) Act, 1970, income from land which 'is used for agricultural purposes' per se was not agricultural income. The land had, in addition, to be assessed to land revenue or subject to a local rate assessed and collected by officer of the Government as such. If this requirement were not fulfilled, income from such land would not be 'agricultural income' within the meaning of s. 2(1) either for the purpose of exemption from income-tax or for levy of agricultural income-tax by a State : [See Hulas Narain Singh v. Province of Bihar [1942] 10 ITR 115. When the Constituent Assembly was framing the Constitution of India it had before it the definition of 'agricultural income' given in cl. (1) of s. 2 of the Indian I.T. Act and knew that in the enactment relating to Indian income-tax 'agricultural income' had not only to be income from land used for agricultural purposes but also that such land had to satisfy the further requirement of being assessee to land revenue or a local rate. Had the Constituent Assembly not wanted to leave to Parliament the power to define 'agricultural income' so as to enable it to restrict its meaning, as in fact had been done by s. 2(1) of the 1922 Act, it would not have enacted cl. (1) of art. 366 of the Constitution repeating the exact phraseology of sub-s. (1) of s. 311 of the Govt. of India Act, 1935, or would have used different language in cl. (1) of art. 366. By not doing so the Constituent Assembly clearly showed its intention to leave it to Parliament to define 'agricultural income'. In Karimtharuvi Tea Estate Ltd. v. State of Kerala : [1963]48ITR83(SC) , it was pointed out that by reason of art. 366(1) of the Constitution, the power of a State Legislature to make a law levying a tax on agricultural income is circumscribed by the definition of 'agricultural income' as defined by Parliament for the purpose of the enactments relating to Indian income-tax.

57. Where, however, the definition of 'agricultural income' is so amended as to contract to almost nothing the field of agricultural income left to the taxing power of the State, it may be possible to argue that such amendment is a colourable exercise of legislative power. It may also be possible to argue that the restriction of the introduction of any such Bill provided by art. 274(1) of the Constitutions is not the same as the one which was contained in s. 141(1) of the Govt. of India Act, because under that section such a Bill could not be introduced or moved except with the previous sanction of the Governor-General in his discretion, while under art. 274(1) of the Constitution such a Bill cannot be introduced or moved except on the recommendation of the President. Legislation is usually introduced as a rule by the Government, that is, the ruling party. Unlike under the Govt. of India Act, under art. 74(1) the President acts on the advice of the council of ministers in the exercise of his functions, and by the amendment made to cl. (1) of art. 74 by the Constitution (Forty-second Amendment) Act, 1976, the advice of the council of ministers is binding upon the President, and, therefore, the recommendation could be said to be the decision of the Government which is introducing or moving the Bill. However, none of these question arise for our determination in these petitions as we will immediately point out and we express no opinion thereon.

58. We do not find it necessary to discuss this question further, for, in our opinion, the argument of the petitioners on this count are based on a wholly erroneous basis, that sub-cl (iii) of s. 2(14) prior to its amendment by the Finance Act, 1970, provided for a separate head of agricultural income. Clause (14) of s. 2 has nothing to do with income. It defines the expression 'capital assets'. It is true that this definition has been inserted for the purpose of making leviable to income-tax profits or gains arising from the transfer of a capital asset. The exclusion of 'agricultural land in India ' made by sub-cl. (iii) was, however, not because agricultural land in India was not capital assets. Agricultural land is also a capital asset, but so far as the levy of income-tax is concerned, if it is land which is used for agricultural purposes, its income cannot be made subject to a levy of any Union income-tax. It is pertinent to bear in mind that the exclusion from the definition of 'capital asset' of agricultural lands is not the only exclusion. Stock-in-trade, consumable stores or raw materials held for the purposes of an assessee's profession, business or vocation, personal effects and gold bonds have also been excluded by other sub-clauses. From this it does not follow that such stock-in-trade, consumable stores, raw materials, personal effects or gold bonds are not capital assets or the profits or gain arising from the transfer thereof are not capital gains. They are capital assets, and profits or gains arising from their transfer would have been exigible to capital gains tax are not, because these particular capital assets have been excluded from the definition of 'capital asset' as Parliament did not want to levy capital gains tax on their transfer. It is also pertinent to bear in mind that in the 1922 Act the exclusion from the definition of 'capital asset' was not of agricultural land but of land from which the income derived was agricultural income, and, therefore, if there was any agricultural land the income derived from which was not agricultural income, profits or gains arising from the transfer of such land was subject to capital gains tax. Merely because certain assets are excluded from the definition of 'capital assets', it does not mean that they are not capital assets. The Government is not bound to tax income derived from each and every source. It is free to exempt some sources of income and to levy tax on other sources of income. It has equally the power to withdrawn an exemption and levy a tax on the sources of income which had till then been exempted : [See Bhola Nath Kesari v. Director of State Lotteries, U. P. : [1974]95ITR171(All) ]. Parliament had given a blanket exemption to agricultural land in India until the amendment of sub-cl. (iii). From this it does not follow that income arising from agricultural land, if it was not agricultural income, could not be subsequently made exigible to taxation by Parliament. In amending sub- cl. (iii) Parliament was not amending directly or indirectly the definition of 'agricultural income'. In so far as this amendment would operate to levy a capital gains tax on transfer of land which is used for agricultural purpose, such amendment is, as we have already held, inoperative and the said sub-cl. (iii) must be read down so as not to make it operate on such land.

59. We will now deal with the challenge under art. 14 of the Constitution. At the outset it was submitted that the impugned sub-cl. (iii) violated art. 14 because its effect was to make liable to levy f capital gains tax transfer of certain lands and exclude transfer of some other lands. It was submitted that the Government can tax profits or gains made on transfers of all lands and not some lands. In support of this submission reliance was placed upon S. K. Dutta, ITO v. Lawarence Singh Ingty [1968] ITR 272 . Under s. 4(3)(xxi) of the Indian I.T. Act 1922, and s. 10(26) of the I.T. Act, 1961, members of Scheduled Tribes who were Government servants were excluded from the exemption given to members of Scheduled Tribes from levy of income-tax. The validity of this exclusion was challenged. On behalf of the Government it was contended that Government servants were excluded on the ground of administrative convenience as it was easy to collected taxes from them. This contention was rejected. The court held that the case of Government servants did not stand on a footing different from that of employees in statutory corporations or even well recognised firms. If further held that administrative convenience which could afford a just basis of classification must be a real and substantial one. We fail to see how this authority in any way supports the petitioners argument. In that very authority it has been pointed out that it is now well settled that taxation laws must also pass the test of art. 14 and in deciding whether a taxation law is discriminatory or not it is necessary to bear in mind that the State has a wide discretion in selecting persons or objects to be taxed and that a statute is not open to attack on the ground that it taxes some persons or objects and not others and it is only when within the range of its selection the law operates unequally and cannot be justified on the basis of any valid classification that it would be violative of art. 14. The court observed (p. 275) :

'It is well settled that a State does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably.'

60. It was next submitted that the criterion of taxation under the I.T. Act is the quantum of income and, therefore, the size of the population or the situation of the land cannot be the criterion of taxation as is sought to be done by paras. (a) and (b) of the impugned sub. cl. (iii) and the classification based on such a criterion is arbitrary and unreasonable. The quotation from the Supreme Court decision in S. K. Dutta, ITO v. Lawarence Singh Ingty : [1968]68ITR272(SC) reproduced above is a complete answer to this contention.

61. It was then submitted there is no valid classification between lands situate in areas mentioned in paras. (a) and (b) of the impugned sub- cl. (iii) and lands outside those areas. We are unable to see any substance in this argument also. Paragraph (a) refers to areas within the jurisdiction of a municipality, whether such municipality is known as a municipality, municipal corporation, notified area committee, town areas committee, or by any other name, or of a cantonment board, and which has a population not less than ten thousand according to the last proceeding census of which the relevant figures have been published before the first day of the previous year. Paragraph (b) refers to any area within such distance, not being more than eight kilometers, from the local limits referred to in para. (a) as the Central Govt., having regard to the extent of, and scope for urbanization of that area and other relevant considerations, may specify in this behalf by notification in the Official Gazette. It is thus obvious that para. (a) is intended to deal with agricultural lands in urban areas which have urban potentialities. There is a valid, definite and well-recognised distinction between urban and potentially urban areas on the one hand and rural areas on the other. It is common knowledge that in urban areas by reason of industrial and other development the land prices have been rising. The land, even though it may be agricultural land, is used for various purposes which are non-agricultural, and there is considerable scope for business dealings in land. The same position does not prevail in rural areas. It is also pertinent to bear in mind that what capital gains tax does is to levy a tax on the profits and gains arising from the transfer of a capital asset. The amount of capital gain tax which would be required to be paid would depend upon the profits and gains made from such transfers, and in the case of assessees, other than companies, where the capital gains do not exceed the limit laid down in s. 80T, no capital gains tax would be payable. Thus, lands which have not been sold in order to make substantial profits or gains do not become liable to capital gains tax. The object of the impugned sub-cl. (iii) is to make liable to capital gains tax the profits or gains arising from transfer of lands where the profits and gains would be substantial, leaving untouched such lands in the case of which the profits or gains arising their transfers would be substantial.

62. It is not as if the only distinction made in the I.T. Act between urban and potentially urban areas on the one hand and rural areas on the other is by the impugned sub-cl. (iii). For example, under s. 35CC a company or a co-operative society incurring any expenditure on any programmed of rural development is allowed a deduction of the amount of such expenditure incurred during the previous year. Under cl. (a) of the Explanation to that section 'programme of rural development' includes any programme for promoting the social and economic welfare of, or the uplift of, the public in any rural area, and the expression 'rural area' is defined by cl. (b) of the Explanation as meaning any area other than the areas set out in paras. (i) and (ii) of the said cl. (b). The said paras (i) and (ii) repeat the exact words used in paras. (a) and (b) of the impugned sub-cl. (iii) of s. 2(14). Under s. 35CCA, expenditure by way of payment to approved association for carrying out any programme of rural development is allowed to be deducted. In this section, the expression 'programme of rural development' has the same meaning as in s. 35CC. Section 80GGA provides for deduction in respect of donations to any association or institution, which has its object the undertaking of any programme for rural development, to be used for carrying out any programme for rural development approved for the purposes of s. 35CCA. Section 80HH deals with deduction in respect of profits or gains from newly established industrial undertakings or hotel business in backward areas.

63. In Ambalal Maganlal v. Union of India : [1975]98ITR237(Guj) , a case we have already referred to earlier in another context, the validity of the impugned sub-cl. (iii) was also assailed on the ground of art. 14. That challenge was repelled by the Gujarat High Court. It would be useful to reproduce the relevant portion of that judgment. It is as follows (p. 253) :

'Thus, it is only when the same class of property similarly situated is differently dealt with that the question of violation of article 14 will arise if there is no rational basis for such classification. In the instant case, what is sought to be done by section 2 (14)(iii) which is the impugned piece of legislation is to provide for classification between land in rural areas and land within the area of municipalities having jurisdiction over the area having more than ten thousand population and enabling the Government to extend the operation of this provisions to a limit up to eight kilometers by a notification. The whole idea is that lands in the vicinity of urban centres or in or near the urban centres, though agricultural operations may be for the time being carried on such lands, stand in a different category from lands in villages where similar agricultural operations also have been carried on. Though the property is similar or same class of property, it is not similarly situated and thus, in the light of the decision in K. T. Moopil Nair v. State of Kerala, : [1961]3SCR77 , it is obvious that article 14 cannot be invoked against this piece of legislation which treats same kind of property which is not similarly situated. The result, therefore, is that the challenge on the basis of article 14 cannot be sustained since equals are not being treated unequally nor are unequals being treated equally.'

63. In this connection, it will be also useful to refer to a decision of the Full Bench of the Punjab and Haryana High Court in Colonel, His Highness Raja Sir Harinder Singh Brar Bans Bahadur v. Union of Indian . In that case the distinction made between urban assets and non-urban assets in the W.T. Act, 1957, was, inter alia, challenged on the on the ground of its being discriminatory. The court pointed out that urban assets as defined in the W.T. Act, 1957, formed a class by themselves and were clearly distinguishable from non-urban assets as they were capable of yielding better returns in the form of income and were the objects of larger amounts of investment because of their potentiality of more rapid appreciation in capital value, resulting in a larger amount of unearned wealth for their owners than the non-urban assets and that, therefore, if Parliament had subjected these assets to a higher rate of wealth-tax, Parliament had not acted in a discriminatory manner or in violation of art. 14 of the Constitution.

64. An authority relied upon by the petitioners was State of Kerala v. Haji K. Kutty Naha, : [1969]1SCR645 . In that case, the charging section of the Kerala Building Tax Act, 1961, was held to be void as infringing art. 14. Under that Act the only basis of taxation was the floor area of the building belonged, the nature of construction, the purpose for which it was used, its situations, its capacity for profitable user and other relevant circumstance. The Supreme Court held that there was no attempt at any rational classification by the Legislature. This authority stands on an entirely different footing from the case before us and is wholly distinguishable. The classification made in that case was arbitrary, while in the instant case it is a classification based on an intelligible differential having a rational nexus to the object sought to be achieved by the Act.

65. The other argument advanced by the petitioners was that selecting a limit of a population of 10,000 for the purpose of para. (a) was arbitrary and reasonable as was selecting a radius of eight kilometres in para. (b). It was said that the law of one State may require a population limit of 15,000 for constituting a municipality while the law of another State may require a population limit of 10,000 or even less and, therefore, an areas in the former case, even though more urbanized and having a population of more than 10,000 but under 15,000, would not fall within the mischief of para. (a) while an area in the second case would, even though it was much less urbanized and has a smaller population. Such anomalies may occur, but that per se is not sufficient to make a classification arbitrary or discriminatory. Classification can never be made with exact scientific or mathematical precision. If such an argument were to hold good, : it can well be said in every case that the rates of taxation or of exemption limits are arbitrary. It can then be argued that why should income falling in a particular bracket be taxed at a certain percentage or why should persons earning a certain amount be exempted from paying income-tax and other earning a negligible amount above that limit be taxed. These cannot be valid arguments. Whenever there is classification there is bound to be a certain amount of inequality and certain borderline cases. What has to be seen is whether persons or objects grouped under one class possess common properties and common characteristics. Each and every property and characteristic need not be held in common. In In re Special Courts Bills, : [1979]2SCR476 , Chandrachud C.J. observed as follows (p. 509 (1)) :

'......classification need not be constituted by an exact or scientific exclusion or inclusion of person or things. The courts should not in insist on delusive exactness or apply doctrinaire tests for determining the validity of classification in any given case. Classification is justified if it is not palpably arbitrary......

By the process of classification, the State has the power of determination who should be regarded as a class for purposes of legislation and in relation to a law enacted on a particular subject. This power, no doubt, in some degree is likely to produce some inequality; but if a law deals with the liberties of a number of well-defined classes, it is not open to the charge of denial of equal protection on the ground that it has no application to other persons. Classification thus means segregation in classes which have systematic relation, usually found in common properties and characteristics. It postulates a rational basis and does not mean herding together of certain persons and classes arbitrarily.'

66. We thus find the arguments advanced to invalidate sub-cl. (iii) on the ground that it is violative of art. 14 of the Constitution, unconvincing and unsustainable.

67. The last head of the petitioners' challenge was on the ground of excessive and unguided delegation of legislative power to the executive authority. It was said that there was a double delegation in the impugned sub-cl. (iii) : (1) under paragraph (a) there was an indirect delegation because it was left to the State to notify any area as a municipal area, and (2) a direct delegation in para. (b) which permitted the Central Govt. to notify certain areas within a distance of not more than eight kilometres from the local limits of any municipality or cantonment board.

68. We find the argument of indirect delegation with respect to para. (a) farfetched and fanciful. Paragraph (a) does not delegate any power to any authority. Under entry 5 list II in the Seventh Schedule; to the Constitution of India 'Local Government, that is to say, the constitution and powers of municipal corporations, improvement trusts, district boards, mining settlement authorities and other local authorities for the purpose of local self-government or village administration ' is an exclusively State subject. The power conferred upon State Govts. to constitute municipalities is thus derived from the Constitution and not by virtue of any delegation made by para. (a). In order to demarcate urban areas and areas with urban potentialities, some basis of demarcation or classification has to be selected, and there can be hardly any demarcation more convenient or logical for this purpose than a municipality or a cantonment board. After all, States do not constitute municipalities just for the sake of constituting them or for the purpose of making areas situate in the State territories subject to levy of Union capital gains tax. The purpose and object of constituting municipalities is to provide for local self-government, and in doing so various factors have to be taken into account by the State. States do not constitute municipalities for the purpose of contracting their own field of taxation. This argument of indirect delegation thus only required to be stated in order to be rejected.

69. So far as the argument of direct delegation in para. (b) is concerned, it is not as if in a taxing statute there can be no delegation of legislative power. The Legislatures in India are competent to delegate with the spheres of their legislative powers a part of their functions to other authorities, even to the executive government. It is not possible for a Legislature, particularly in today's increasingly complex society, to envisage every situation which may arise or every detail that administrative exigencies may require to be provided for. The Legislatures, therefore, frequently resort to delegating subsidiary or ancillary powers to delegates of their own choice. In Municipal Corporation of Delhi v. Birla Cotton, Spinning and Weaving Mills : [1968]3SCR251 , Wanchoo C.J. observed (p. 1244 (1)) :

'A review of these authorities, therefore, leads to the conclusion that so far as this court is concerned the principle is well established that essential legislative function consists of the determination of the legislative policy and its formulation as a blinding rule of conduct and cannot be delegated by the Legislature.

Nor is there any unlimited right of delegation inherent in the legislative power itself. This is not warranted by the provisions of the constitution. The Legislature must retain in its own hands the essential legislative functions and what can be delegated is the task of subordinate legislation necessary for implementing the purposes and objects of the Act. Where the legislative policy is enunciated with sufficient clearness or a standard is laid down, the courts should not interfere.'

69. In Tata Iron and Steel Co. Ltd. v. Workmen of Tsys Iron & Steel Co. Ltd. : (1972)IILLJ259SC , the Supreme Court enunciated the principle as follows (p. 1922 (1)) :

'The delegation of legislative power is permissible only when the legislative policy and principle are adequately laid down and the delegate is only empowered to carry out the subsidiary policy within the guidelines laid down by the Legislature. The Legislature, it must be borne in mind, cannot abdicate its authority and cannot pass on to some other body the obligation and the responsibility imposed on it by the Constitution. It can only utilise other bodies or authorities for the purpose of working out the details within the essential principles laid down by it.'

70. It was argued that the power delegated to the Central Govt. was an uncontrolled and uncanalized power and no guidelines were laid down. This argument is not correct. Paragraph (b) itself states the relevant considerations upon which the delegatee, namely, the Central Govt., is to act in issuing notifications. The Central Govt. is to have regard to the extent of, and scope for, urbanization of such areas and other relevant considerations. Thus, the principles upon which the Central Govt. is to act are laid down and Guidelines prescribed for it, and it cannot be said that this is a case of excessive or unguided delegation of legislative power. We, therefore, find no substance in the above contention. In our opinion, not only are the guidelines and principles upon which such areas are to be notified by the Central Govt. laid down in para. (b) but this is matter which eminently fit to be delegated to executive authority. With thousands and thousands of municipalities and a number of cantonment boards all over the country, Parliament would hardly come to know which areas adjoining municipal and cantonment areas have acquired such urban potentialities as would require the profits or gains arising from transfer of land situated within them to be made subject to the levy of capital gains tax nor would it be feasible for Parliament to list such areas in a schedule to the I.T. Act and keep on amending the schedule time and again. Whether an area adjoining a municipality or cantonment board has acquired such a degree of urban potentiality or not is a matter which can property be judged by the executive authority and not by Parliament.

71. We will now turn to the contention raised by the State that the power to levy a tax on land was that of the State and did not fall within the Union legislative field and, therefore, the levy of a tax on the profits or gains arising from a transfer of land fell within the State field of taxation. In support of this submission reliance was placed upon entries 18 and 49 in List II in the Seventh Schedule to the Constitution of India. These two entries are as follows :

'18 Land, that is to say, rights in or over land, land tenures including the relation of landlord and tenant, and the collection of rents ; transfer and alienation of agricultural land ; land improvement and agricultural loans ; colonization.

49. Taxes on lands and buildings.'

72. The fallacy in this argument lies in considering levy of capital gains tax arising on transfer of land as a tax on land. Capital gains tax is not a tax on land or any other capital asset. It is a tax on the profits or gains which arise on the transfer of a capital asset. It is a tax on the profits or gains which arise on the transfer of a capita asset. It was then submitted on behalf of the State that levy of capital gains tax arising on transfer of land, though it may not directly fall under either of the two entries, would be incidental and subsidiary to the legislative power conferred by these two entries. It is now well settled that although legislative power includes all incidental and subsidiary power, the power to impose a tax is not an incidental and subsidiary power under our Constitution. (See M. P. V. Sundaraminer & Co. v. State of Andhra Pradesh : [1958]1SCR1422 The contentions of the State must, therefore, stand negatived.

73. For the reasons given above, we hold that profits or gains arising from transfer of land which is used for agricultural purposes is revenue derived from such land within the meaning of sub-cl. (a) of cl. (1) of s. 2 of the I.T. Act, 1961, and is, therefore, agricultural income within the meaning of the said cl. (1), and not exigible to a levy of income-tax, including capital gains tax, by Parliament. We further hold that sub-cl. (iii) of cl. (14) of s. 2 of the said Act does not operate, read with the other relevant sections of the said Act, to levy a capital gains tax on profits or gains arising from transfer of land which is used for agricultural purposes and must be read down so as to exclude from the operation of the said subclause land which is used for agricultural purposes even though it may be situated in any of the areas mentioned in para. (a) or para. (b) of the said sub-cl. (iii), or, in other words, the said sub-cl. (iii) should be read as if the brackets and words ' (other than land which is used for agricultural purposes) 'occurred in the said sub-clause after the words 'not being land'. We further hold that read in this manner the impugned sub-cl. (iii) is not beyond the legislative competence of Parliament. We also hold that the said sub-cl. (iii) is neither void as infringing art. 14 of the Constitution of India nor void on the ground that it delegates to the executive authority unguided and excessive legislative power. We also hold that a tax on the profits or gains arising from the transfer of agricultural land in India is not a tax on land but a tax on income.

74. What now finally falls to be considered is the effect of the conclusion which we have reached upon the petitions before us. This requires a somewhat closer scrutiny of the factual position. So far as the pleadings are concerned, the petitions before us fall in two distinct categories. The first category consists of Miscellaneous Petitions Nos. 1132 of 1973 and 214 and 215 of 1974. In each of these three petitions it is averred by the petitioner that all the lands in question are agricultural in nature and at the time when they were purchased the lands were forest lands abounding with numerous hillocks but after a few years the forest trees were cut down, many of the hillocks leveled and the lands were gradually brought under cultivation. It has been further averred that in the beginning para grass was cultivated on these lands but thereafter due to the shortage of water supply the cultivation was switched over to the cultivation of rice and vegetables in rainy season. It has also been averred that the agricultural income derived by the petitioners from these lands was subject to agricultural income-tax. In the affidavit-in-reply in each of these petitions these averments are neither denied nor stated to be not admitted. All that is done by these affidavits is to put the petitioners to the strict proof of these facts. In our opinion, such a statement made in an affidavit-in-reply neither amounts to a denial nor a non-admission of what is alleged in the petition. These petitions were filed prior to the amendment of s. 141 of the Code of Civil Procedure, 1908, by the Code of Civil Procedure (Amend.) Act, 1976 (Act 104 of 1976). Under the unamended s. 141, the procedure provided in the Code in regard to suits was to be followed so far as it could be made applicable to all proceedings in any court of civil jurisdiction. By the Explanation which was inserted in the said section by Act 104 of 1976, it has been provided that the expression 'proceeding 'will not include any proceedings under art. 226 of the Constitution. However, these petitions before us, having been filed much prior to the amendment of s. 141, will be governed by the procedure provided in the Code. Under r. 3 of O. VIII of the Code it is not sufficient for a defendants in his written statement to deny generally the grounds alleged by the plaintiff, but the defendant must deal specially with each allegation of fact of which he does not admit the truth, except damages. Under r. 4 of the said Order where a defendant denies an allegation of fact in the plaint, he must not do so evasively, but answer the point of substance. Under r. 5 of O. VIII every allegation of fact in the plaint, if not denied specifically or by necessary implication, or stated to be not admitted in the pleading of the defendant, is to be taken to be admitted except as against a person under disability. Apart from what is expressly provided in O. VIII, the above rules contain the general principles of pleadings. In Harris v. Gamble [1878] LR 7 Ch D 877, a defendant had admitted the facts alleged in the statement of claim and the plaintiffs were, therefore, entitled to judgment, without adducing any evidence in support of their case. In M. Gordhandas & Co. v. D. Arvind Mills : (1974)76BOMLR119 , Vimadalal J. held that except in clear cases of a direct inconsistency between the respective versions of the parties, there is no scope for inferring that a particular averment in a plaint has been denied in the written statement by necessary implication for the purpose of O. VIII, r. 5, of the Code of Civil Procedure. Now, in these three petitions, it was admitted at the hearing before us on behalf of the respondents that para grass does not grow spontaneously but has to be grown or cultivated. The cultivation of para grass will, therefore, constitute an agricultural operation. It is not, as it cannot be, disputed that cultivation of rice and vegetables is also cultivation brought about by agricultural operation. There is thus no dispute in these three petitions that at the dates of the sales mentioned in these petitions the lands in question were being used for agricultural purposes. No capital gains tax can, therefore, be levied on profits or gains arising from the transfer of these lands.

75. Turning now to the other category of petitions, in Miscellaneous Petition No. 1179 of 1973 it is averred in the petition that the lands are agricultural in nature and at the date of the purchase were forest lands abounding with numerous hillocks but after a few years the forest trees were cut down and many of the hillocks levelled. It is further averred that the said lands were the subject-matter of land revenue during the petitioners' ownership. In the affidavit-in-reply, it is pointed out that one of the objects of the petitioner-company in purchasing the land was to construct a building thereon and to made other dispositions of the said land and that on a part of land aggregating to one and a half acres buildings were constructed and interest was claimed on the total investments on buildings and land and the same was allowed every year as business expenses as evidence to show that there was any agricultural operation carried on the land prior to its purchase by the petitioner-company. It is further specifically averred that after the purchase of the land no agricultural operation was carried on at any time on the said land. It is further averred that the land revenue paid was of a very small amount, namely, a sum of Rs. 34, and it was paid only till the assessment year 1959-60 when the area was included within the jurisdiction of the Municipal Corporation of Greater Bombay. It has been further averred that in respect of these lands business losses were also claimed by the petitioner-company and were allowed by the ITO. There is thus no admission that these lands had at any time been used for agricultural purposes. In fact, it is in terms averred by the respondents that they were not being so used. In Miscellaneous Petitions Nos. 211, 212 and 213 of 1974, the petitioners aver that the lands were agricultural in nature and were being assessed to land revenue which was being paid year after year and the agricultural income from the said lands was subject to agricultural income-tax. What agricultural operation or cultivation was being carried on the said lands has not, however, been mentioned. Here again the affidavits-in-reply merely put the petitioners to the strict proof of these facts, but in view of the absence of averment as to any agricultural operations being carried on the said lands, it cannot be said that the position that the lands were at the relevant time used for agricultural purposes has been admitted by the respondents. In Miscellaneous Petition No. 875 of 1974 it is merely averred that the lands in question were agricultural lands and subjected to agricultural land revenue. This is not admitted in the affidavit-in-reply. Here again there is no averment whatever that the lands were used for any agricultural purposes. The position, therefore, is that while Miscellaneous Petitions Nos. 1132 of 1973 and 214 of 1974 it is an admitted position that the lands were being used for agricultural purposes at the dates of the sales of the lands, in other petitions the position is not admitted. Except in Miscellaneous Petition No. 875 of 1974, at the date of the filing of the petitions, assessment orders including the profits and gains made on the sales these lands in the total income of the petitioners and assessing them to capital gains tax on such profits and gains had not been made and these petitioners approached this court prior to the making of the assessment orders apprehending that such assessment orders would be made. By consent interim orders made in all these petitions the respondents were permitted to complete the assessments and issue a notice of demand but were restrained from recovering the amount of tax attributable to such profits and gains. We are informed that assessment orders were thereafter made and under them capital gains tax was assessed on the sales of lands in question. In making the assessment orders the assessing authorities have not applied their mind to the question whether the lands, which were the subject-matter of the sales, were being used for agricultural purpose or not. Except in Miscellaneous Petitions Nos. 1132 of 1973 and 214 and 215 of 1974, this position requires to be investigated, while in Miscellaneous Petitions Nos. 1132 of 1973 and 214 and 215 of 1974, the assessment orders require to be modified by deleting therefrom the profits and gains made on the sale of land in question.

76. In the result, we make the following order :

We declare that sub-cl. (iii) of cl. (14) of s. 2 of the I.T. Act, 1961, as substituted by the Finance Act, 1970, read with the other relevant sections of the said Act, does not operate to levy a tax under the I.T. Act, 1961, on the profits or gains arising from the transfer of lands which are used for agricultural purposes, and the said sub-cl. (iii) must be read as if the this operation, or, in other words, the said sub-cl. (iii) must be read as if the brackets and words ' (other than land which is used for agricultural purposes)' occur in the said sub-clause after the words' agricultural land in India not being land'. We quash and set aside all assessment orders made against the petitioners in which profits or gains of the lands in question have been included in the total income, and we direct fresh assessment to be made for the relevant years. In Miscellaneous Petitions Nos. 1132 of 1973 and 214 and 215 of 1974, the assessing authorities will made such fresh assessments after excluding from the total income the profits of gains made on the sales of lands mentioned in the said petitions. In the other petitions the assessing authorities will made fresh assessment order after determining whether the sales of any of the lands mentioned in those petitions were in respect of lands which were at the dates of the sales used for agricultural purposes. If the assessing authorities come to the conclusion that they were so used, they will not include the profits or gains arising from such sales in the total income of the petitioners. If they come to the conclusion that the lands were not so used, they will include such profits or gains in the total in come of these petitioners, and if such profits or gains are otherwise exigible to capital gains tax under the said I.T. Act, they will proceed to include them in the taxable income of these petitioners. In making the fresh assessment orders all that the assessing authorities will do, so far as the assessment in respect of the relevant years in which the sales which are the subject-matter of Miscellaneous Petitions Nos. 1132 of 1973 and 214 and 215 of 1974 are concerned, will be to delete the item of profits or gains arising from such sales; and so far as the assessments relating to the relevant years in which the sales which are the subject-matter of the other petitions are concerned, all that the assessing authorities will do will be to consider and decide only the point whether the land in question was, at the date of the sale, being used for agricultural purposes. None of the other points which have been determined in the assessment orders which we have set aside will be reconsidered by the assessing authority nor any point other than the one which we have mentioned will be considered or decided.

78. Before parting with these petitions, we would like to express our appreciation of learned counsel on both sides for their meticulous preparation of the case and the lucid arguments advanced by them and ready assistance afforded by them in the discussion between the Bar and the Bench which must inevitably take place in a matter such as this, particularly when some of the points involved have not fallen for determination before.

79. There will be no order as to the costs of these petitions.

80. After this judgment was pronounced, learned counsel for both the petitioners and the respondents applied orally for a certificate under arts. 131(1) and 133(1) of the Constitution of India. Article 134, which was inserted by the Constitution (Forty-fourth Amendment) Act, 1978, permits such an oral application to be made immediately after the passing or making, inter alia, of the judgment or final order. In our opinion, these petitions involve a substantial question flaw as to the interpretation of the Constitution and of general importance which needs to be decided by the Supreme Court, and, accordingly, we grant to the petitioners as well as to the respondents a certificate both under art. 132(1) of the Constitution to enable them to file an appeal to the Supreme Court.


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