A Matter Of Political Expediency?

Replying to a question in a press conference recently in Delhi, the finance minister said that agricultural income could not be taxed under the Income Tax Act as it requires a Constitutional amendment. It is typical of the government to produce such evasive replies every time a question is raised on taxing rich and prosperous agriculturists.

It is sad to find that constitutional experts prefer to keep quiet on this issue, excusing the governments political unwillingness to tax affluent sections in the farm sector. The problem is compounded by the fact that since farmers are not subject to income or wealth tax, others can, with impunity, use them to launder their black income/wealth through hawala transactions.

 

In the discussion to follow, I put forward my interpretation of the constitutional and IT Law provisions in the context of taxation of agricultural incomes. The subject, Taxes on agricultural income, occurs in Section 46 of List II (State list) in the Seventh Schedule of the Constitution. However, entries in three lists in the Seventh Schedule entail no powers of legislation; they are merely fields of legislation, of an enabling character. These are designed to define and delimit the respective areas of legislative competence of union and state legislatures. They neither impose any implied restrictions on the legislative power conferred by the Articles of the Constitution, nor prescribe any duty to exercise that legislative power in any particular manner.

According to Article 366(1) of the Constitution, agricultural income is included as defined for the purpose of enactments relating to Indian Income Tax. Thus the power of states to legislate is limited to those areas that come within the purview of the definition of agricultural income as given in the IT Act, 1961. If certain categories of income are excluded from this definition, then states lose the power to legislate in regard to those categories and hence the union governments power to legislate on these can be exercised in terms of Residuary Entry 97 in List I.

The view in regard to law mentioned earlier is fortified by the decision of the Supreme Court in Karimtharuvi Tea Estates Ltd vs State of Kerala (1963) 48 ITR 83 (SC) where the Court observed:

Article 46, List II of the Seventh Schedule to the Constitution relates to taxes on agricultural income. In view of Clause (3) of Article 246, the State Legislature can enact laws about these taxes. Article 366 provides that unless the context otherwise requires, the expression agricultural income in the Constitution means agricultural income as defined for the purpose of enactments relating to the Indian Income Tax. Therefore, the agriculture income about which a State Legislature may enact under entry 46 of List II would be such income as defined in the Indian Income Tax Act. A similar view was taken by the Kerala High Court in K C Thomas vs Agri ITO (1973) 91 ITR 438 (Ker).

This view found support again recently in an MP high court decision in Singhai Rakesh Kumar vs Union of India & ORS (1996) 134 CTR (MP) 280. Here, the validity 2(14) (iii) (treating surplus arising from the sale of agricultural land in the indicated situation as income) was challenged. The Bombay HC had earlier, in its decision in Manu Bhai, A Sheth vs N D Nirgudkar, Second ITO (1981) 22 CTR (Bom) 41; (1981) 128 ITR 87 (Bom) held that agricultural lands, though situated within municipal limits, were not required to pay capital gains tax.

To counter this decision, the IT Act was amended by inserting an explanation to sub section (1A) of Section 2, redefining agricultural income to allow for the levy of tax on capital gains arising from the transfer of agricultural land. This amendment was, however, challenged on the grounds that it was beyond the competence of Parliament.

The court did not agree with this view. Referring to the definition of agricultural income under Article 366 (1), the court said the Constitution has adopted the definition given in the IT Act. Therefore, the amendment was very much within the jurisdiction of the Parliament. It is recognised that whatever definition is given in the Act is deemed to have been adopted under the Constitution also. The IT Act definition includes only income derived from agricultural operations or rent or revenue from the land; it does not include income from the sale of land. Therefore, it was deemed that the Parliament is competent under Entry 82, in the list of the Seventh Schedule, to legislate any amendment to the IT Act.

This decision further makes it clear that by amending the definition of agricultural income (for which an amendment can be moved in Parliament with the assent of the President and without amending the Constitution), those who earn income growing rubber, coconuts, coffee, spices and other such commercial crops do not fall under the broad rubric of agricultural income. There is absolutely no justification fiscal, ethical or cultural to exempt such persons from the tax net.

Further, the constitutional validity of the Wealth Tax Act regarding levy of tax on agricultural lands has been upheld by the Supreme Court in the case of UOI vs Harbhajan Singh Dhillon (1973) 83 ITR 582(SC).

The government could have asked the Expert Group constituted by it recently to examine the taxability of such incomes by making a special mention about it in its terms of reference. Instead, the Expert Group shied away from giving any recommendation on this matter, using the plea of a constitutional bar which, prima facie, does not exist. It is high time it is realised that the principle of taxation requires that tax be levied on the basis of the capacity to pay, and this is being grossly violated by excluding keeping such persons outside the tax net. The IT Act definition includes only income derived from agricultural operations or rent or revenue from the land; it does not include income from the sale of land.