1978-VIL-05-ITAT-

Equivalent Citation: ITD 002, 371, TTJ 007, 194,

Income Tax Appellate Tribunal MADRAS

Date: 17.10.1978

K. PARAMESWARAN.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : GEORGE CHERIYAN., T. LAKSHMANA PERUMAL.

JUDGMENT

Per Shri George Cheriyan, Accountant Member --- This appeal by the assessee relates to the assessment year 1973-74. The assessee, a HUF, was the owner of certain agricultural lands situated in Musiri which is a place near Karur in Trichy district. The land sold was 7.83 acres in extent and was entirely wet land. The sale consideration was Rs. 1,02,650.

2. According to the assessee, no capital gains tax was leviable. It was the contention of the assessee that Musiri was only a town panchayat and was not a municipality within the meaning of the term in section 2(14)(iii)(a) of the Income-tax Act, 1961 ('the Act'). The assessee did not dispute that the population of Musiri exceeded 10,000.

3. The ITO, however, considered that the provisions of section 2(14)(iii)(a) gave the term 'municipality' an extended meaning and the term 'municipality' as used in that section would include also town panchayats. He, therefore, denied exemption to the assessee and brought to tax, the capital gains of Rs. 79,160.

4. The assessee appealed to the AAC and contended that Musiri was a place governed by the Madras Panchayats Act, 1958 and not by the Madras District Municipalities Act, 1920 and, therefore, the agricultural lands sold, situated in Musiri, were not capital assets within the meaning of section 2(14).

5. The AAC referring to the provisions of section 2(14)(iii)(a), stated that the provisions referred to the terms municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name, or a cantonment board and, therefore, 'all self-governing localities' known by any local name would be included in the term 'municipality'. The AAC had referred to the dictionary meaning of 'municipality' as a town or district having local self-government and according to her, the emphasis was on local self-government and not on the difference in names or the structure or the composition of the units. The AAC was of the view that the population criterion of 10,000 incorporated in the provision was for judging the extent of urbanisation and since Musiri was a town panchayat with a population exceeding 10,000, the AAC was of the view that the assessee could not claim the exemption under section 2(14)(iii)(a) in respect of the agricultural land situated in Musiri.

6. The assessee is in appeal before us and has relied again on the provisions of the Madras Panchayats Act in support of the stand that Musiri would not fall within the term 'municipality'. According to the learned departmental representative, Musiri was a taluk headquarters and was clearly a town and, therefore, town panchayat was clearly a municipality 'by any other name'.

7. Since the issue before us is of general applicability, we consider it necessary to go into the matter in some depth.

8. Section 2(14) while defining 'capital asset' excludes certain items from the definition. One such item excluded is 'agricultural land in India' under section 2(14)(iii). To quote from the provision :

"(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---

(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 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 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 extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette ;"

The question boils down to whether the term 'municipality' as amplified in section 2(14)(iii)(a) would include a town. While the assessee is convinced that a town panchayat could never be a municipality within the meaning of the provisions of the Act referred to, the department was more than convinced that such town panchayats did fall within the term 'municipality'. According to the learned departmental representative, musiri was a taluk headquarters and was clearly a town and, therefore, town panchayat was clearly a 'municipality' by any other name. If a town panchayat is included in the said term, the assessment is in order. Otherwise not. For deciding on this issue, it would be necessary to spell out with reference to the factual position what are municipalities, municipal corporations, notified area committees, town area committees, town committees as also cantonment boards vis-a-vis the institution of Panchayat in India.

9. The powers and functions of local bodies in India following the English practice have been determined by the method of specific grant. By such grant there are obligatory functions as well as permissive functions and such functions are exercised by all local bodies, i.e., whether rural or urban.

In the book Essays in Urban Government by Mohit Bhattacharya (1970 edition), there are certain statistics at page 2 which gives as its source 'A.H. Marshall, Local Government, Finance, International Union of Local Authorities, the Hague 1969'. This is as under:

Urban Local Bodies in India:

Types Number

a. Municipal Corporations 29

b. Municipal Councils 1483

c. Cantonment Boards 62

d. Notified Area Committees 164

e. Town Area Committees 327

10. The author states that the aforesaid are the five types of Urban Local Bodies in India. It would be noticed that section 2(14)(iii)(a) refers to all these bodies. According to the author, though all the aforesaid are urban local bodies, the first two alone can be considered as full-fledged representative urban local government. The notified area committee exists in eight States and one Union territory, and the author states that these committees represent stop-gap arrangement for areas which are fast developing as urban areas but which are not yet ripe for municipalisation. The members of these committees are all nominated by the State Governments which vests these committees with specific powers in accordance with the provisions of the prevailing municipal acts. The author proceeds to state that there are town area committees in six States and one Union territory. The members of these committees are usually nominated or partly nominated, or partly elected. Generally such committees are set up, according to the author, for small towns and entrusted with limited local functions.

11. The municipal corporations and municipal councils, the author says, have their basic structures laid down in the 19th century and remain essentially the same today. The corporation form is found in the principal cities and the corporations enjoy wider powers and more autonomy than other municipal councils. A distinctive feature of the corporation system is the statutory distribution of powers among three co-ordinate authorities, i.e., the corporation, the Commissioner and the standing committees. The municipal councils, on the other hand, have integrated system and the chairman of the same is the head of the deliberative wing as also the chief executive.

12. The cantonments are governed by the Cantonments Act, 1924 constituting Boards. They are sub-divided into the following categories :

Class I : Population of 10,000 and above

Class II(a) : Population of 7,500 to 10,000

Class II(b) : Population of 5,000 to 7,500

Class II(c) : Population of 2,500 to 5,000

Class III : Population below 2,500

13. Regarding Panchayat system, we came across a book 'Madras Panchayat System', Volume II, by Dharampal, 1972 edn. It is stated therein that this system was inaugurated in the later half of the 19th century. The author then states :

"Scholars in India held conflicting opinions about the connotation and origin of the term 'Panchayat'. According to some of them the term has historically implied more or less self-governing village bodies looking after the manifold civic, administrative and political needs of the citizens of the area. A number of such scholars go so far as to equate the term 'panchayat' with what has been rather dramatically called the village republic by some of the early British district administrators including the more well known Metcalfe. The majority of scholars in India on the other hand believe that the term Panchayat never conveyed any sub-meaning and the function of panchayat was merely to act as judicial bodies in civil or criminal cases at the villages or other levels and to settle religious and ritual problems of various kinds."

As far as Madras is concerned, there was originally, the Madras Village Panchayat Act which was replaced by the Madras Panchayat Act, 1958. When the Bill in this regard was introduced, it was stated that the proposed Bill was intended to provide the statutory basis for reorganising the local administration in the rural areas of the State. The most important change proposed was abolition of District Boards at district levels of development blocks. The preamble to the Panchayat Act, 1958 which received the assent of the President on 22-1-1958 and came into effect from 2-10-1961, reads as under :

"An Act to make better provision for the organisation of village and town panchayats and for the constitution of Panchayat Union Councils.

WHEREAS it is necessary in the national interest that the production of food should be increased progressively from year to year so as to keep pace with the growth of population and that the growth of population should be brought under control;

WHEREAS the measures designed to secure these two national purposes depend for their successful implementation on their being undertaken as part of a comprehensive programme of measures designed to promote rural employment, to improve rural living conditions, to provide cultural and recreational facilities in rural areas, and thus raise the standard of living of the rural people ; WHEREAS a stage has been reached when statutory provision has to be made for the setting up of local administrative organisations in rural areas so as to be capable of undertaking and discharging the responsibility for efficient maintenance and further progressive development of the services, works and other facilities aforesaid ;

AND WHEREAS it is a Directive Principle of State Policy embodied in the Constitution that the State should take steps to organise village panchayats and endow them with such powers and authority as may be necessary to enable them to function as units of self-government;

Be it enacted in the Ninth Year of the Republic of India as follows:"

Section 1 of the Act states that the Act extends to the whole of the State of Madras except the city of Madras, and the municipalities governed by the Madras District Municipalities Act as well as the townships specified, namely Mettur, Courtallam and Bhavanisagar which were constituted under the separate Acts. There are then the following definitions contained in section 2:

"(20) 'panchayat' means the body constituted for the local administration of a village or town under this Act."

"(22) 'panchayat town' means any local area over which a panchayat which is classified as a town panchayat under this Act has jurisdiction."

"(23) 'panchayat union' means any local area which is declared to be a panchayat union under this Act."

"(32) 'town' means any local area which is declared to be a panchayat town under section 3, sub-section (1)."

"(33) 'town panchayat' means panchayat classified as a town panchayat under this Act."

"(35) 'village' means any local area which is declared to be a panchayat village under section 3, sub-section (1) and 'revenue village' means any local area which is recognised as a village in the revenue accounts of Government after excluding therefrom the area, if any, included in---

(a) the city of Madras including Fort St. George with the glacis;

(b) municipalities constituted under the Madras District Municipalities Act, 1920 ;

(c) cantonments constituted under the Cantonment Act, 1924 (Central Act II of 1924) ; and

(d) the townships constituted under the Mettur Township Act, 1940 (Madras Act XI of 1940), the Courtallam Township Act, 1954 (Madras Act XVI of 1954) and the Bhavanisagar Township Act, 1954 (Madras Act XXV of 1954)."

In terms of section 3, every local area comprising a revenue village or any portion of a revenue village having a population estimated at not less than 5,000 and an annual income estimated at not less than ten thousand rupees is to be declared a 'Panchayat town'. Every other local area comprised in the aforesaid villages with a population estimated at not less than 500 would be known as a 'Panchayat village'. The classifications are to be made by notification by the Inspector who in section 2(15) means an officer appointed by the Government to exercise the powers or duties of an Inspector under the Act. The Inspector has powers to cancel or modify the notifications. Under section 40 of the aforesaid Act, the Government may, if a specific motion is passed to that effect by both Houses of the Legislature, declare any village or town or any specified part thereof to be a township if it is an industrial, labour or institutional colony or a health resort and in regard to an area declared to be a township, the Government has to constitute a township committee. On constitution of such a committee by notification, the Government may direct that the functions vested in the Panchayat shall be transferred to the township committee. The book by Dharampal to which we have already referred, shows that in 1965, Madras consisted of 12,895 panchayats. The biggest Panchayat union was of 1,818 sq. miles in Coimbatore East and the smallest 16.48 sq. miles in Coimbatore West. 15 Panchayat unions covered population of over one lakh, and 4 less than 30,000. A significant fact brought out was that out of 374 union headquarters, less than half had a railway station and telegraph office which can be considered to be a starting point of urbanisation. Subsequent to the establishment of Panchayat unions, and up to 1965, the State Government notified under section 4, 11 townships. These are : 1. Aruvankadu 2. Modukuarai 3. Annamalai University Campus 4. Bankaranagar 5. Harveypatti 6. Manimuthar 1963 7. Valparai 1963 8. Highways (Madurai)---1964 9. Mahabalipuram 10. Ambattur 11. Kanyakumari 1965.

Many of the Town Panchayats were also declared municipalities and during 1965 there were five such declarations.

14. As far as municipalities are concerned, they are governed by the Madras District Municipalities Act, 1920.

15. In all the States in India, there are similar legislations for municipalities and Panchayats. It is clear from what we have set out that the concept of municipalities relate to urban local self-government and the concept of Panchayat to rural self-government. Both these concepts which are mutually exclusive were well known and well established by the time the amendment to section 2(14)(iii) was made with effect from 1-4-1970. Since the concepts were well known, it would follow that if the intention of Parliament was to include Panchayats also in the term 'municipality' it would have been so mentioned in the statute along with such terms as notified area committee, town area committee and town committee. This has not been done. Apart from this there is also the well known canon of construction to quote from CIT v. Gaekwar Foam & Rubber Co. Ltd. [1959] 35 ITR 662 (Bom.) where it is stated :

"It is well established that the words which express a legal conception must have attributed to them their legal meaning. Technical words, where we find them, must have their technical sense ascribed to them and not their popular sense---uti loquitor vulgus. The principle is of cogency when the words in question represent legal conceptions...."

From what we have set out earlier, it is clear that the terms 'municipality', 'notified area committee', 'town area committee' and 'town committee' have legal conceptions and the terms must be given their legal meaning. If given their legal meaning, the terms 'municipality', 'notified area committee', 'town area committee' and 'town committee' are entirely different concepts from the term 'panchayat', be it a village panchayat or a town panchayat.

16. The department seeks to include panchayat in the term 'municipality' by placing reliance on the ejusdem generis rule of interpretation. The Supreme Court in Mangalore Electric Supply Co. Ltd. v. CIT [1978] 113 ITR 655 (speaking through Chandrachud, CJ.) had this to say about the use of the rule as an aid to interpretation :

"The argument that the word 'transfer' must be construed ejusdem generis with the words, sale, exchange or relinquishment, has to be rejected because as stated in Craies on Statute Law (7th edition, page 181) :

'The ejusdem generis rule is one to be applied with caution and not pushed too far, as in the case of many decisions, which treat it as automatically applicable, and not as being, what it is, a mere presumption, in the absence of other indications of the intention of the Legislature.

The modern tendency of the law, it was said, is 'to attenuate the application of the rule of ejusdem generis'. To invoke the application of the ejusdem generis rule there must be a distinct genus or category. The specific words must apply not to different objects of a widely differing character but to something which can be called a class or kind of objects. Where this is lacking, the rule cannot apply.'

Thus unless you find a category there is no room for the application of the ejusdem generis doctrine and where the words are clearly wide in their meaning they ought not to be qualified on the ground of their association with other words. [See Corporation of Glasgow v. Glasgow Tramway & Omnibus Co. Ltd. [1898] AC 631, 634 (HL)]. In Nation Association of Local Government Officers v. Bolton Corporatian [1943] AC 166 (HL), it was held that 'the ejusdem generis rule is often useful or convenient, but it is merely a rule of construction, not a rule of law'. In the instant case, in the absence of a distinct genus or category, no presumption can arise that the word 'transfer' must be construed in the sense of a voluntary act of transfer since 'sale', 'exchange' or 'relinquishment' are in the normal acceptation of those terms of voluntary acts. The words (a) sale, (b) exchange, (c) relinquishment, and (d) transfer must accordingly be given their plain and natural meaning and there is no justification for restricting the wide comprehension of the last of the four words to voluntary transfers by the application of the ejusdem generis rule."

17. Looking to the aforesaid, we cannot ignore the indications of the intention of the Legislature. The intention always was to exclude transactions in agricultural land from capital gains but where urbanisation was advanced there was very little difference in the value of the land irrespective of the use to which it was put. Government accordingly decided that transactions in agricultural lands situated in sufficiently developed urban areas should be brought to tax. This is amply clear, if further authority is required from the provisions of section 2(14)(iii)(b) which states that areas may be notified within 8 kilometres of municipalities or cantonment boards having regard to the extent of, and scope for, urbanisation of that area'. Such extension has to be done by notification. The category of words used, i.e., 'municipality', 'municipal corporation', 'notified area committee', 'town area committee' and 'town committee' all refer to urban local self-government institutions. Panchayats are rural self-government institutions whether they be town Panchayats or village Panchayats. We have to emphasise that under the Panchayats Act, 1958, every village with a population of not less than 50,000 is to be declared a 'Town Panchayat' but thereafter it is only on both Houses of the Legislature making a motion that Government can specify any village or town to be a township and exclude it from the Panchayat area. Thus even a Town Panchayat is essentially a rural self-government institution. Thus there is no room for the application of ejusdem generis doctrine in including panchayats which are a distinct genus or category in the term 'any other name' and to classify the same as a municipality with its different variations as spelt out in section 2(14)(iii)(a). In the light of the aforesaid, we have no hesitation in coming to the conclusion that Musiri which is a Town Panchayat, is not a 'municipality' within the meaning of section 2(14)(iii)(a) and, therefore, transactions of land situated in Musiri as long as it is agricultural land cannot be subject to levy of capital gains tax. We would accordingly delete from the assessment as made the sum assessed as capital gains before allowance of deduction at Rs. 79,160.

18. The appeal is, accordingly, allowed.

 

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