Supreme Court upholds Parliament's power to tax capital gains from urban agricultural land transfers.

Case Name:

Ambalal Maganlal v. Union of India

Key Takeaways:

- Parliament can define "agricultural income" for tax purposes under Article 366(1) read with Article 274(1) of the Constitution. - Tax on capital gains from transfer of urban agricultural lands falls under Parliament's power to tax "income other than agricultural income" under Entry 82 of the Union List. - The classification in Section 2(14)(iii) between rural and urban agricultural lands is based on a rational nexus and does not violate Article 14. **Issue:** Whether Section 2(14)(iii) of the Income Tax Act, 1961, which brought certain urban agricultural lands within the scope of capital gains tax, is constitutionally valid? **Facts:** The petitioners were owners of agricultural lands within the limits of the Ahmedabad Municipal Corporation. These lands were acquired by the government, and the compensation received was sought to be taxed as capital gains under Section 2(14)(iii) read with Sections 45 and 47 of the Income Tax Act. The petitioners challenged the constitutional validity of this provision. **Arguments:** Petitioners argued: 1) Power to tax agricultural income, including capital gains from agricultural lands, falls exclusively with State Legislatures under Entries 18, 46, and 49 of the State List. 2) This power does not fall under Entries 82 or 86 of the Union List, and Entry 97 (residuary power) cannot be resorted to. 3) The classification in Section 2(14)(iii) is irrational and lacks a nexus with the intended object. 4) Non-exclusion of agricultural lands prevented from non-agricultural use treats unequals as equals, violating Article 14. **Key Legal Precedents:** - *Second Gift Tax Officer, Mangalore v. D.H. Nazareth* [1970] 76 ITR 713 (SC) - *Navinchandra Mafatlal v. CIT* [1954] 26 ITR 758 (SC) - *K.T. Moopil Nair v. State of Kerala* AIR 1961 SC 552 - *Rasiklal Chimanlal Nagri v. CWT* [1965] 56 ITR 608 (Guj) **Judgment:** The High Court dismissed the petitions, holding: 1) Parliament has the power to define "agricultural income" under Article 366(1) read with Article 274(1). 2) Tax on capital gains from transfer of urban agricultural lands falls under Parliament's power to tax "income other than agricultural income" under Entry 82 of the Union List, as per the definition of "agricultural income" amended in 1970. 3) The classification in Section 2(14)(iii) between rural and urban agricultural lands is based on a rational nexus of urbanization and does not violate Article 14, as per the tests laid down in *K.T. Moopil Nair* and *Rasiklal Chimanlal Nagri* cases. **FAQs:** Q1. What is the significance of this judgment? A1. This judgment upholds Parliament's power to tax capital gains arising from the transfer of urban agricultural lands, which were previously exempt. It clarifies the scope of the definition of "agricultural income" and Parliament's taxation powers under the Constitution. Q2. Why was the classification in Section 2(14)(iii) held to be valid? A2. The classification between rural and urban agricultural lands was based on the rational nexus of urbanization and the potential for non-agricultural use. This did not violate Article 14, as per the tests laid down in the *K.T. Moopil Nair* and *Rasiklal Chimanlal Nagri* cases. Q3. What legal principles were established in this case? A3. The key legal principles established are: (1) Parliament can define "agricultural income" for tax purposes under Article 366(1) read with Article 274(1); (2) Tax on capital gains from transfer of urban agricultural lands falls under Parliament's power to tax "income other than agricultural income" under Entry 82 of the Union List; and (3) The classification between rural and urban agricultural lands based on urbanization is valid under Article 14. Q4. What is the impact of this judgment on the parties involved? A4. The petitioners' challenge to the constitutional validity of Section 2(14)(iii) was dismissed, and they would be liable to pay capital gains tax on the compensation received for the acquisition of their urban agricultural lands.

In this group of 24 special civil applications, same question relating to the constitutional validity of section 2(14)(iii) of the Income-tax Act, 1961, has been urged on various grounds. It may be contented out that section 2(14)(iii ) was amended with effect from April 1, ? by Act 19 of 1970. Prior to this amendment by Act 19 of 1970, agricultural land in India was not included in the words "capital assets" fined by section 2(14) of the Income-tax Act, 1961. But,! as a result he amendment by Act 19 of 1970, land situated 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 which has a population of not less than ten thousand according to the preceding census of which the relevant figures have been published before first day of the previous year, or in any area within such distance, not g more than eight kilometres, from the local limits of any municipality cantonment board referred to earlier, as the Central Government may, relating regard to the extent of, and scope for, urbanisation of that area and are relevant considerations, specify in this behalf by notification in the Official Gazette is not "agricultural land" and, therefore, would be divided in the concept of "capital assets" defined in section 2(14). It is also be pointed out that facts in all these 24 special civil applications similar and in each case the question is of capital gains said to arise as suit of compulsory acquisition of lend by the Government under the provisions oft the Land Acquisition Act, 1894, for the purposes of the, Housing Board. The land in question in each of these 24 special civil; conditions was, prior to the relevant notifications under the Land Acquisition Act being issued, being used for agricultural purposes and in each of the 24 cases, the land is situated within the jurisdiction of the Municipal Corporation of Ahmedabad. However, to take an illustrative case, we will the facts arising in Special Civil Application No. 759 of 1971. The petitioner was the owner of Survey No. 1402 of Vadaj village area of purchased on September 2, 1941, by the petitioner's father for Rs. 3,676-10-0. Since the date of the purchase, the land was put to cultural use and every year crops were being raised on this land since date of the purchase. In 1955, the father of the petitioner died and the son and heir, the petitioner became the owner of the land and he tinued to cultivate the land and raised crops on this land. The en from the revenue records for the years 1961-62 to 1970-71 go to show that the land was being cultivated and crops were being raised by the petitioner himself on this land. With effect from June 20, 1960, this along with several other lands of Vadaj village was brought within limits of the Municipal Corporation of Ahmedabad. By a resolution p by the Municipal Corporation with effect from July 20, 1960, this and the other lands in this group were put in an agricultural zone u the development plan which was formulated by the Municipal Corporation under the provisions of the Bombay Town Planning Act, 1954. October 28, 1963, the Municipal Corporation passed another resolution putting the land of the petitioner in residential zone but by the research of the State Government dated March 4, 1964, this land was put into agricultural zone, that is, non-residential zone, in what is known as Green Belt Scheme. Under this scheme, on the periphery of the Ahmedabad City, a belt was proposed to be imposed where only agricultural activity could be carried on. As a result of this resolution of the State Government, land could only be used for agricultural operations so far as the petitioner concerned. On August 21, 1965, a notification was issued under section 1 of the Bombay Town Planning Act sanctioning the development plan an the development plan the land of the petitioner along with several of lands was reserved for the housing board functioning in the State of Guja On January 15,1970, a notification under section 4 of the Land Acquisition Act, 1894, was issued proposing that the lands of the petitioner and section her persons some of whom are petitioners in these special civil appeal were proposed to be acquired for the development scheme of it Housing Board and on December 19, 1970, a notification was is section 6 of the Land Acquisition Act where also the public purchase the housing board. After the section 6 notification was issued, of Nation amount was determined for the petitioner in Special Civil; appeal No. 759 of 1971, and several other petitioners as well by n. agreement between the housing board and the owner of the land u acquisition. The petitioner in Special Civil Application No. 759 of received Rs.1,58,785.44 plus 15 per cent, solatium in respect of his acres and 2 gunthas of land. It may be pointed out that, as a result of amendment by Act 19 of 1970 in the definition of the term "capital gains" section 2(14) of the Income-tax Act, 1961, by the time the compensation were received from the acquiring body and the acquisition authorities in each of these 24 cases, the provisions of the Income-tax Act, 1961, relating to capital gains were attracted and the main reason why they were so attracted was the amendment in section 2(14)(iii) of the Income-tax Act.

In order to appreciate the contentions urged regarding the constitutional validity of section 2(14)( iii) of the Act, it is necessary to refer to some of the provisions of the Income-tax Act relating to capital gains. Section 45 of the Act provides that 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 and 54B, 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. Section 2(14)(iii) defines what is meant by "capital assets" and it says that "capital assets" means property of any kind held by an assessee whether or not connected with his business or profession, but does not include various types of properties. (Till the amendment by Act 19 of 1970, that is, till April 1, 1970, agricultural land in India was not included within the definition of "capital assets" and, therefore, any capital gains arising from the transfer of agricultural land was not capital gains for the purposes of section 45 and could not be deemed to be the income of the previous year. It may be pointed out that at the time when the proposed amendment was introduced by the Finance Bill, 1970, it was pointed out that it was proposed to extend the levy of income-tax to capital gains arising from transfer of agricultural land situate in urban areas. The Memorandum explaining the provisions of the Finance Bill, 1970, pointed out in paragraph 24 :

"Presently, capital gains arising from the transfer of a capital asset. are chargeable to income-tax. The definition of ' capital asset' excludes from its scope, inter alia, agricultural land in India. Accordingly, no liability to tax arises, on gains derived from transfer of agricultural land in India. This exemption of agricultural land from the scope of the levy of 'tax on capital gains has a historical origin and is not due to any bar in the Constitution on the competence of Parliament to legislate for such levy. Agricultural land situated in municipal and other urban areas is essentially similar to non-agricultural land in such areas in its potentialities for use due to the progress of urbanisation and industrialisation."

and hence it was proposed to bring, within the scope of taxation, capital gains arising from the transfer of agricultural land situated within the limits of any municipality or cantonment board which has a population of not less than 10,000 according to the latest census for which the relevant figures have been published. Power was also being given to the Central Government to bring within the scope of the levy (by notification in the Official Gazette), capital gains arising from transfer of agricultural lands situate outside the limits of any such municipality or cantonment board up to a maximum distance of 8 kilometres, where this was considered necessary having regard to the extent of and scope for urbanisation of that area and other relevant considerations. It was pointed out in the Memorandum that agricultural land which was situated in rural areas would continue to be outside the scope of the provisions regarding tax on capital gains and hence no liability to tax would arise in respect of gains derived from transfer of agricultural land in rural areas. Under section 2, subsection (47) of the Income-tax Act, 1961, "transfer", in relation to a capital asset, includes the compulsory acquisition of the capital asset under any law. Therefore, whenever compensation is received in respect of any capital asset at the time of compulsory acquisition, the amount thus received would be considered for ascertaining profits or gains arising from the transfer of its capital asset and by virtue of section 45 would be deemed to be the income of the previous year in which the transfer took place. Under section 47 of the Income-tax Act nothing contained in section 45 applies to the various types of transfers mentioned in section 47 and by clause (viii), which was introduced by Act 19 of 1970, any transfer of agricultural land in India effected before the 1st day of March, 1970, is not a transfer of a capital asset for the purposes of capital gains. In the instant group of cases, as we have pointed out, the notification under section 6 of the Land Acquisition Act was issued on December 19, 1970, and the transfers would take place necessarily after March 1, 1970 and, therefore, section 47 would not take these transfers of the different pieces of land to the housing board outside the scope of tax on capital gains.

On behalf of the petitioners the main arguments were advanced by Mr. I.M. Nanavati, who is appearing for the petitioner in Special Civil Application No. 759 of 1971, and the rest of the advocates appearing for the different petitioners have supported his arguments. The following four submissions were made by Mr. Nanavati :

(1)Power to impose tax on agricultural income, which includes within its compass the power to impose a tax on capital gains derived from the transfer of agricultural lands, falls within the exclusive legislative power of the State legislature and for this purpose reliance was placed on entries 18, 46 and 49 of List II in the Seventh Schedule of the Constitution.

(2)Power to tax income from, or capital gains arising on transfer of, agricultural land, does not fall under either of the entries 82 or 86 of List I and resort cannot be had for the purpose of enacting the impugned section 2(14)(iii ) of the Income-tax Act, 1961, to the residuary entry 97 of List I.

(3)The classification made by section 2(14)( iii) read with section 46 and section 47(viii) is irrational and is not based on any nexus which can seek to achieve the object intended to be achieved by the impugned provisions.

(4) Non-exclusion of agricultural lands which are prevented by law from the benefit of urbanisation by putting them to any use other than agricultural or from transferring them for a purpose other than agricultural, from the operation of section 2(14)(iii) comes within the vice of treating unequals as equals and non-exclusion of such lands defeats the very object of classification and, therefore, the newly amended section 2(14)(iii) violates article 14.

Thus, on submissions (1) and (2) it was contended that it was not within the legislative competence of Parliament to enact section 2(14)(iii) and on submission (3) and (4) it-was oofttea4gd that, at any rate, the impugned section 2(14)(iii) as amended was violative of article 14 of the Constitution.

At this stage it will not be out of place to refer to some of the provision of the Constitution. Under the scheme of distribution of legislative powers as set out in Chapter I of Part XI of the Constitution, under article 245, subject to the provisions of the Constitution, Parliament may make laws for the whole or any part of the State. No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. Under article 246, clause (1), notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule referred to as the "Union List". Under clause (2), notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule to the Constitution referred to as the "Concurrent List". Under clause (3), subject to clauses (1) and (2), the legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule referred to as the "State List". Under article 248, Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List.

When one turns to the Seventh Schedule, one finds in each List different heads of legislative topics but as has been pointed out by the Supreme Court in Second Gift-tax Officer, Mangalore v. D. H. Nazareth [1970] 76 ITR 713 (SC) in the entries in the Lists in Schedule VII to the Constitution the taxes are separately mentioned and in fact contain the whole of the power of taxation. Unless a tax is specifically mentioned it cannot be imposed except by Parliament in the exercise of its residuary powers. In List I, for example, entries 82 to 92A refer to taxes of different kinds and entry 96 refers to fees in respect of any of the matters in the Union List, but not including fees taken in any court. Entry 97 is "any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists" and this entry 97 confers upon Parliament the residuary power which is referred to in article 248 of the Constitution. Under List II, which is the State List, the taxation entries are from 45 to 63 and these entries confer power upon the State legislature to impose taxes of different kinds as referred to in one or the other of these entries. Entry 66 provides for fees in respect of any of the matters in the said List, but not including fees taken in any court and in the Concurrent List there is no power of taxation and the Concurrent List merely deals with different matters of legislation and entry 47, which is the last entry in the Concurrent List, confers power upon the legislature concerned to levy fees in respect of any of the matters in the Concurrent List, but not including fees taken in court. Thus, Parliament derives power of taxation from two sources; source number one being a specific entry in List I, and the second source is that to the extent to which the power of taxation is not conferred upon the State legislature, by any of the entries 45 to 63 in the State List, Parliament gets power by virtue of article 248 and entry 97 of List I the residuary power including the power of taxation. Entry 82 is as follows: "Taxes on income other than agricultural income" and entry 86 "Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies; taxes on the capital of companies". It is obvious that entry 86 of List I cannot confer power on Parliament to levy a tax on capital gains arising from the transfer of a capital asset and the power to levy capital gains can only be derived from entry 82, namely, taxes on income other than agricultural income or under the residuary power under entry 97 of List I read with article 248. Entry 45 of the State List is "Land revenue, including the assessment and collection of revenue, the maintenance of land records, survey for revenue purposes and records of rights, and alienation of revenues". Entry 46 is "Taxes on agricultural income". We may also point out that under article 366, which is the definition article laying down definitions of the different expressions set out in that article, those expressions have the meanings respectively assigned to them by article 366. Clause (1) of article 366 defines "agricultural income" as follows :

"‘agricultural income’ means agricultural income as defined for the purposes of the enactments relating to Indian income-tax".

and, therefore, when one comes to entry 46 of the State List which empowers the State legislature to levy taxes on agricultural income and to entry 82 in the Union List which empowers the Union legislature to levy taxes on income other than agricultural income, the words "agricultural income" have to be read in the light of the definition for the purposes of enactment relating to Indian income-tax. Mr. Nanavati has submitted before us that the definition in article 366(1) cannot be looked at for the purposes of finding out the scope and amplitude of the entries in the three Lists in the Seventh Schedule. He contended that the power to levy taxes on income other than agricultural income has been conferred upon Parliament by entry 82 of List I, the Union List, and that very Parliament cannot, by virtue of article 366(1), so define "agricultural income" for the purposes 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. We are unable to accept this contention of Mr. Nanavati because the power of Parliament to enact various pieces of legislation has to be read in the light of the provisions of the Constitution as well as the entries in the Lists in the Seventh Schedule and the entries in the Lists in the Seventh Schedule are part of the Constitution and, therefore, the definition in article 366 would govern also the entries in the Lists in the Seventh Schedule. Secondly, the Constitution itself contemplates that the concept of "agricultural income" will be as defined for the purposes of the enactment relating to Indian income-tax. That the Constitution contemplates such power in Parliament is manifest from the provisions of article 274, clause (1), which requires prior recommendation of the President before the introduction or moving in either House of Parliament of a Bill or amendment which varies the meaning of the expression "agricultural income" as defined for the purposes of enactments relating to Indian income-tax and to this extent it is contemplated that with the prior recommendation of the President a Bill or amendment varying the meaning of the expression "agricultural income" can be introduced or moved in either House of Parliament and can be subsequently enacted into legislation. It is, therefore, clear that while trying to ascertain the scope of the entries 18, 46 and 49 in the State List, that is, List II in the Seventh Schedule, one cannot overlook the definition of "agricultural income" in article 366, clause (1). It is important to bear in mind in this connection that the Constitution does not confine the definition of "agricultural income" with reference to the definition in any enactment relating to Indian income-tax as in force at the commencement of the Constitution but to all enactments relating to Indian income-tax. Therefore, whenever there is any provision in any enactment relating to Indian income-tax regarding the definition of "agricultural income" by virtue of article 366, clause (1); that definition will be the definition of "agricultural income" for the purpose of the entries in the Seventh Schedule. With effect from April 1, 1970, the definition of "agricultural income" was amended by the Taxation Laws (Amendment) Act, being Act 42 of 1970, with retrospective effect, that is, from April 1, 1970, so as to provide by virtue of the proviso that agricultural income must not be derived from land situated 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 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 the earlier item 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. Thus income derived from any such land as is referred to in the proviso, clause (ii) sub clauses (A) and (B) of section 2(1) is not "agricultural income" and, therefore, for the purposes of article 366(1) and hence for the purposes of entries in the Seventh Schedule income derived from such lands is also not agricultural income. It is in the light of this definition of "agricultural income" which came into force with effect from April 1, 1970 that one has to consider the submissions made regarding the legislative competence of Parliament to enact section 2(14)(iii) of the Income-tax Act 1961.

The Supreme Court has pointed out in D.H. Nazareth’s case (supra) , the scheme of the three Lists in the Seventh Schedule, and has repelled the argument that by entry 18 of the State List and entry 49 of the same List all taxes in connection with lands and particularly agricultural lands were placed within the exclusive legislative competence of the State legislature. At page 717 of the report, Hidayatullah C.J., delivering the judgment of the Supreme Court, has observed :

"The argument is that by entry 18, ‘land’ of all description is made subject to legislation in the States and by entry 49 taxes of whatever description on lands in that large sense and buildings generally fall also in the jurisdiction of the State. Reference is made to entries 45, 46, 47 and 48 of the State List in which certain taxes are to be imposed on land and agricultural land or income from agriculture exclusively by the States in contrast with entries 82, 86, 87 and 88 where the taxes are imposed on properties other than agricultural land or income from agriculture. It is submitted, therefore, that the general scheme of division of taxing and other entries by which land, particularly agricultural land, and income therefrom is reserved for the States shows that taxes on lands and buildings read liberally must also cover taxes in respect of gifts of land, particularly agricultural land and buildings. If the entry so read can be reasonably said to include the tax, then there can be no question of recourse to the residuary powers of Parliament."

This was the argument and the Supreme Court held that, however attractive the argument, it could not be accepted. At page 718 of the report, Hidayatullah C. J. has pointed out :

"The Constitution divides the topics of legislation into three broad categories : (a ) entries enabling laws to be made, (b) entries enabling taxes to be imposed, and (c) entries enabling fees and stamp duties to be collected. It is not intended that every entry gives a right to levy a tax. The taxes are separately mentioned and in fact contain the whole of the power of taxation. Unless a tax is specifically mentioned it cannot be imposed except by Parliament in the exercise of its residuary powers already mentioned. Therefore, entry 18 of the State List does not confer additional power of taxation. At the most fees can be levied in respect of the items mentioned in that entry, vide entry 66 of the same List. Nor is it possible to read a clear-cut division of agricultural land in favour of the States although the intention is to put land in most of its aspects in the State List. But however wide that entry, it cannot still authorise a tax not expressly mentioned. Therefore, either the pith and substance of the Gift-tax Act falls within entry 49 of the State List or it does not. If it does, then Parliament will have no power to levy the tax even under the residuary powers. If it does not, then Parliament must undoubtedly possess that power under article 248 and entry 97 of the Union List."

It was pointed out by the Supreme Court while dealing with the Gift-tax Act :

"The pith and substance of the Gift-tax Act is to place the tax on the gift of property which may include lands and buildings. It is not a tax imposed directly upon lands and buildings but is a tax upon the value of the total gifts made in a year which is above the exempted limit. There is no tax upon lands or buildings as units of taxation. Indeed, the lands and buildings are valued to find out the total amount of the gift and what is taxed is the gift. The value of the lands and building is only the measure of the value of the gift. A gift-tax is thus not a tax on lands and buildings as such (which is a tax resting upon general ownership of lands and buildings) but is a levy upon a particular use, which is transmission of title by gift. The two are not the same thing an f the incidence of the tax is not the same. Since entry 49 of the State List contemplates a tax directly levied by reason of the general ownership of lands and buildings, it cannot include the gift-tax as levied by Parliament."

Applying the reasoning of the Supreme Court in the gift-tax case in D.H. Nazareth’s case (supra) to the provisions regarding capital gains in section 45 read with section 2(14)(iii) and section 2(47) of the same Act, it is clear that the tax on capital gains is not a tax imposed directly upon lands and buildings but is a tax upon the profits or gains arising from the transfer of a capital asset; which may include lands and buildings. It is a tax upon the profits or gains arising by reason of the transfer of the capital asset made in a year which is above the exempted limit. There is no tax upon lands or buildings as units of taxation, aria since entry 46 of the State List contemplates a tax directly levied on agricultural income, it cannot include the tax on capital gains arising from transfer of land which includes such agricultural land. In our opinion therefore, by virtue of 'the definition in section 2(1) of the Income-tax Act, 1961, as it stood with effect from April 1, 1970, the tax on profits or gains arising from transfer of agricultural lands as mentioned in the definition of "agricultural income", particularly, proviso, clause (ii), sub-clauses (A) and (B) is not within the competence of the State legislature as not being agricultural income but is directly a tax on income other than agricultural income.

After the decision of the Supreme Court in Navinchandra Mafatlal v. Commissioner of Income-tax [1954] 26 ITR 758 , it is clear that the word "income" in entry 54 in List I of the Seventh Schedule to the Government of India Act, 1935, which corresponded to entry 82 in List I of the Seventh Schedule of the Constitution, should be given its widest connotation in view of the face that it occurs in a legislative head conferring legislative power and the word "income" in entry 54 in List I of the Seventh Schedule of the Government of India Act, 1935, and entry 82 in List I of the Seventh Schedule to the Constitution includes a capital gain. The Supreme Court there held that the Indian Income-tax Act, 1922, and the Excess Profits Tax (Amendment) Act which amended the Income-tax Act by enlarging the definition of the term "income" in section 2(6C) so as to include capital gain and adding a new head of income in section 6 and inserting the new section 12B relating to capital gains was intra vires the Central legislature. In view of this decision of the Supreme Court it is obvious that Parliament has, by virtue of entry 82 in List I of the Seventh Schedule, the power to enact a law relating to tax on capital gains and, therefore, also to amend the law relating to tax on capital gains since such a tax would be a tax on income. It is also clear that by amending the appropriate definition in any enactment relating to Indian income-tax, Parliament has the power to define what is meant by "agricultural income" and, by virtue of entry 82, it has power to levy a tax on income other than agricultural income as thus defined. Under these circumstances it was competent for Parliament to enact section 2(14)(iii) so as to provide for tax on capital gains arising from agricultural lands which we under consideration in the present cases.

The same conclusion can be reached by another process of reasoning. The whole idea in enacting section 2(14)(iii) is to provide that land which has acquired some of the characteristics of urban land by acquiring potentiality of being put to industrial use or residential use or commercial use should not be considered agricultural land for the purposes of tax on capital gains. This High Court has held in Rasiklal Chimanlal Nagri v. Commissioner of Wealth-tax [1965] 56 ITR 608 (Guj.), that the true test to be applied for the purpose of determining whether a particular land is agricultural land or not, is not whether the land is capable of being used for agricultural purpose, but whether, having regard to the various relevant factors, the general nature or character of the land is such that it can be regarded as agricultural land. It was there held that if the land is used for agricultural purposes, ordinarily it would be correct to say that the land is agricultural land and vice versa. But even this test may not always furnish a correct answer, for there may be cases where land admittedly non-agricultural (such as a building site) may be used temporarily for agricultural purposes. In that particular case the plots in dispute were situate in a wholly residential area with numerous residential buildings around the plots, and they were situated in an area in respect of which a town planning scheme was in force for some years and three out of the four plots in question were cultivated up to about 1934-35, but had ceased to be cultivated since then, and no agricultural operations were carried on in those plots since about 21 to 22 years, and the assessee had no special reasons for stopping cultivation on those plots other than the intention to use them for non-agricultural purposes. It was held that the plots in question could not be said to be "agricultural land" and were not covered by the exemption in section 2(e)(i) of the Wealth-tax Act.

The real ground, in our opinion, as regards competency of Parliament regarding taxation of income other than agricultural income, is to , consider whether the land on the transfer of which the profits or gains are said to arise is possessed of all the characteristics of an agricultural land; and has not acquired the potentialities of being put to industrial or residential or commercial use. Once the land under consideration has acquired any of these potentialities, it cases to be, in our opinion, agricultural land for the purposes of the entries in the Lists in the Seventh Schedule. In any event the legislation by Parliament providing for taxation of capital gains, that is, on income, within the scope of entry 82 in List I of the Seventh Schedule, would be a piece of legislation, the pith and substance of which is the tax on income other than agricultural income and if that piece of legislation also affects lands which have ceased to have all the characteristics of agricultural land and thus acquired other characteristics, such encroachment on the other field of legislation is purely incidental and the doctrine of pith and substance would certainly apply to such a piece of legislation. Even on this doctrine of pith and substance which is well recognised by now in the field of constitutional law, the power of Parliament to enact section 2(14)(iii) can be upheld and on this ground also can be said that it was competent for Parliament to enact section 2(14)(iii) and thus bring within the scope of section 45 read with section 47(viii) the gains or profits arising from transfer of capital asset as defined by section 2(14)(iii). The first two submissions made by Mr. Nanavati regarding the legislative competence of Parliament must, therefore, fail.

We must point out at this stage that we are not finding power in Parliament to enact section 2(14)( iii) under the residuary article 97 read with article 248 of the Constitution but fairly and squarely in entry 82 of List I of the Seventh Schedule.

As regards submissions (3) and (4) based on article 14, it is well-settled law that legislatures have very wide powers of classification while enacting taxation laws. Under the law it is for the person who assails a legislation as discriminatory to establish that it is not based on a valid classification and this burden is all the heavier when the legislation under attack is a taxing statute. In East India Tobacco Co. v. State of Andhra Pradesh [1962] 13 STC 529 (SC) Venkatarama Aiyar J., delivering the judgment of the Supreme Court, has pointed out that in taxation even more than in other fields, legislatures possess the greatest freedom in classification. The burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it. This principle has also been recognised by the Supreme Court in Twyford Tea Co. v. State of Kerala AIR 1970 SC 1133. There it was held that there is a wide range of selection and freedom in appraisal not only in the objects of taxation and the manner of taxation but also in the determination of the rates applicable. The burden of proving discrimination is always heavy and heavier still when a taxing statute is under attack, and it is on a person complaining of discrimination. The burden is of proving not possible "inequality" but hostile "unequal" treatment. This is more so when uniform taxes are levied. When the legislature reasonably applies a uniform rate after equalising matters between diversely situated persons, differences in treatment must be capable of being reasonably explained in the light of the object for which the particular legislation is undertaken. This must be based on some reasonable distinction between the cases differentially treated. To be able to succeed on the charge of discrimination, a person must establish conclusively that persons equally circumstanced have been treated unequally and vice versa.

Mr. Nanavati for some of the petitioners has relied very strongly on the decision of the Supreme Court in K. T. Moopil Nair v. State of Kerala AIR 1961 SC 552. Sinha C.J., delivering the judgment of the majority of the learned judges who decided the matter, has observed in paragraph 7 at page 557 of the report :

" if the legislature has classified persons or properties into different categories, which are subjected to different rates of taxation with reference to income or property, such a classification would not be open to the attack of inequality on the ground that the total burden resulting from such a classification is unequal. Similarly, different kinds of property may be subjected to different rates of taxation, but so long as there is a rational basis for the classification, article 14 will not be in the way of such a classification resulting in unequal burdens on different classes of properties. But if the same class of property similarly situated is subjected to an incidence of taxation, which results in inequality, the law may be struck down as creating an inequality amongst holders of the same kind of property."

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 cases, what is sought to be done by section 2(14)(iii) which is the impugned piece of legislations 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 provision to a limit up to eight kilometres of 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 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’s case (supra) , 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.

We may point out that in K. C. Thomas v. Agricultural Income-tax Officer [1973] 91 ITR 438 (Ker.) questions similar td the question before us came up for consideration before the Kerala High Court and there the learned single judge of the Kerala High Court has come to the same conclusions as we have done regarding article 366(1) and the entries in List II of the Seventh Schedule and also article 274(1) of the Constitution. The conclusions reached by the learned single judge regarding the scope of article 366(1) and entries in List II in the Seventh Schedule and article 274(1) are similar to the conclusions reached by us.

The result, therefore is that the two challenges, one on the ground of legislative competency of Parliament and the other on the ground of violation of article 14 of the Constitution must fail. These special civil applications, therefore, fail and each of the special civil applications is, therefore, dismissed and the rule in each matter is discharged with costs.

On behalf of each of the petitioners in these special civil applications, application is made under article 132 and article 133 for certificate for appeal to the Supreme Court. As regards certificate under article 132(1), since our decision involves a substantial question of law as to the interpretation of the provisions of the different articles of the Constitution and entries in Lists I and II of the Seventh Schedule of the Constitution, a certificate under article 132 is granted. As regards certificate under article 133, though there is a substantial question of law of general public importance which has been decided by us in this case, the said question is not required to be decided by the Supreme Court in view of the fact that our conclusions herein are based on one or the other decision of the Supreme Court. We, therefore, decline to grant the certificate under article 133 of the Constitution.

The different petitioners herein have through their respective advocates undertaken to apply for urgent certified copies of the judgment herein in the course of tomorrow and they have applied for stay of the operations of the different proceedings pending before the authorities concerned regarding their liability to pay tax on capital gains arising under the circumstances set out hare in above. In order to enable the parties concerned to appeal to the Supreme Court and to obtain stay from the Supreme Court, the proceedings before the different authorities in connection with the liabilities of these different assessees to capital gains tax are hereby stayed for a period of four weeks from the date on which certified copies of the judgment are ready for delivery to the applicants for such certified copies. The office to supply such certified copies even though the formal orders in connection with these different matters are not drawn up.