1. ' The respondent-assessee are entitled to one-sixth share each in the Matruka lands of their father.
2. Part of the agricultural land was sold by them during the accounting year relevant to the assessm ent year 1981-82. In response to notices under section 143(2), they returned certain income, but claimed that no capital gains tax is leviable as the income is agricultural income. The Income- tax Officer did not accept the plea that the income is agricultural income within the meaning of the term as held by the Bombay High Court in Manubhai A. Sheth v. N.D. Nirgudkar, Second I.T.O. (1981)
3. 128 ITR 87 on the ground that the Department has not accepted the said judgment of the Bombay High Court and filed a special leave petition in the Supreme Court. On appeal, the Appellate Assistant Commissioner upheld the order of assessment passed by the Income-tax Officer. On further appeal to the Tribunal, it was held that the above question had to be considered in the light of the decision of the Bombay High Court cited supra (see (1981) 128 ITR 87) and for consideration of the issue whether the agricultural land sold came within the purview of the rationale of that decision, the matter was remitted to the Income-tax Officer. The Tribunal thus allowed the appeal and remitted the matter to the Income-tax Officer for fresh consideration.
4. ' At the instance of the Revenue, the following question of law is referred to this Court for its opinion: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in holding that capital gains tax was not leviable on the sale of agricultural lands used for agricultural purposes?"
5. ' The above said question is squarely covered by the decision of the Bombay High Court cited supra (see (1981) 128 ITR 87) as well as the judgment of our High Court in J. Raghottama Reddy v..
6. I.T.O. (1988) 169 ITR 174. But before answering this reference, it is necessary to notice the subsequent events. The Income-tax Act has been amended by Parliament and an Explanation is added to subsection (1-A) of section 2 by the Finance Act, 1989, with retrospective effect from April 1, 1970.
7. Admittedly, the amended definition of "agricultural income" was not before the Tribunal when it decided the appeals of the respondents-assessees on March 31, 1984. In these circumstances, should we answer the question of law in the light of the law as it existed when the Tribunal passed the order or in the light of the law as it is deemed to have existed in view of the amendment of the definition of "agricultural income" retrospectively?
8. ' In CIT (Addl.) v. M.J. Devda (1977) 109 ITR 484 (AP), the question that fell for consideration of our High Court was whether in directing reference under section 256(2) of the Income Tax Act, 1961, the High Court should take note of the amendment of law with retrospective effect. In that case, the Income-tax Officer imposed penalty under section 271(1)(a) of the Income-tax Act for delay in filing the return for the assessm ent year 1966-67. While computing the penalty, the tax paid under section 140-A on self-assesknent was not deducted by the Income-tax Officer. But the assessee got relief from the Appellate Assistant Commissioner and the Appellate Tribunal. The application of the Revenue for referring the question, as to whether the Tribunal was correct in computing the penalty with reference to net tax, to the High Court, was rejected in November, 1973. Thereafter, the Revenue filed an application under section 256(2) to the High Court for a direction to the Appellate Tribunal to refer the question of law to the High Court. That application was filed in July, 1974.
9. Section 271(1)(a) was amended on August 18, 1974, with retrospective effect from 1961. The effect of the amendment was that the self-assessment tax paid should not be deducted from the amount on which the penalty has to be reckoned. Our High Court upheld the contention of the assessee that the order of the Tribunal was in accordance with law. When it was passed and merely because the law was amended subsequently with retrospective effect, no question of law arose out of the order of the Tribunal. This Court took the view that "question of law" referred to in subsection (1) of section 256 of the Act is co-extensive with the expression used in subsection (2) of section 256 of the Act; for the purpose of issuing a direction under subsection (2) of section 256, the High Court should not be satisfied with the correctness of the decision of the Tribunal; as the effect of the subsequent amendment was not a question that arose out of the order of the Tribunal and as it was not before it at any time, the correctness or otherwise of the decision of the Tribunal would have to be decided only in the light of the law that was in force when the Tribunal rendered the decision. It was held that if the question had already been referred to the 'High Court under subsection (1) of section 256, at the time of answering the question, the High Court would be bound to apply the amended law because the Court has to decide how the questions referred should be answered. This judgment of our High Court was dissented from by the Bombay High Court in CIT v.
10. Mrs. Kamla S. Asrani (1991) 189 ITR 359. In that case, the Tribunal decided that the income derived by the assessee by way of capital gains from the sale of agricultural land would not be considered as income from agriculture and, therefore, not taxable as capital gains. In view of the law as it existed before the amendment, referred to above, the Tribunal declined to refer the question of law to the High Court. On an application under section 256(2) of the Act, the Bombay High Court had to consider whether in considering the question of law that arose from the order of the Tribunal in appeal, subsequent amendment of the relevant provisions with retrospective effect should be taken into consideration. It was observed that while considering an application under section 256(2), a retrospective amendment of law must be taken into consideration by the High Court; otherwise, it would amount to drawing an artificial distinction between section 256(1) and section 256(2). The advisory jurisdiction under section 256(2) should be exercised in the light of the law as it was deemed to stand on the date when the Tribunal decided the appeal. Even though the High Court upheld that the rejection of the application of the Department under section 256 was right on the basis of law existing at that time, it directed the Tribunal to refer the question whether capital gains arising on the transfer of agricultural land were agricultural income. In Sterling Foods v. CIT (1991) 190 ITR 275, the question before the Karnataka High Court was whether the assessee was entitled to special deduction under section 80-HH. After the question was referred to the High Court, the section was amended retrospectively. The Karnataka F' ;h. Curt held that when a question had been referred to the High Court arid, meanwhile, the law was amended with retrospective operation, it be the duty of the High Court to apply the law so amended if it appoint <i.> </i.> ' Now, it will be useful to read the relevant amendment of section 2(1-A) by the Finance Act, 1989, with retrospective effect. By the said amendment, an Explanation to the definition of "agricultural income" in clause (1-A) was inserted. The Explanation reads as follows: "For the removal of doubts, it is hereby declared that Revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of this section."
11. ' From a perusal of the Explanation extracted above, it is clear that the Explanation is in the nature of declaration. It declares that the revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of the section. By this Explanation, the effect of the judgment of the Bombay High Court cited supra (see (1981) 128 ITR 87) and the judgment of our High Court cited supra J. Raghottama Reddy v. I.T.O. (1988) 169 ITR 174 is nullified. Consequently, the income derived by the assessees from the sale of agricultural land could not be treated as agricultural income. In this view of the matter, the above said question is answered in the negative, i,e,, in favour of the Revenue and against the assessees.
12. ' The reference is answered accordingly.