Tax Court: Circular Determines Cost of Acquisition for Converted Agricultural Land

The High Court of Gujarat held that Circular No. 88, dated August 1, 1969, issued by the Central Board of Direct Taxes was applicable for determining the cost of acquisition of agricultural land converted into non-agricultural land. The court emphasized that the circular was binding on subordinate authorities and applicable to the assessment year in question. It was clarified that agricultural land becomes a capital asset only upon conversion, with the cost of acquisition based on the market price at the time of conversion. The court upheld the Tribunal's decision, ruling in favor of the assessee and disposing of the reference with no costs.

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Issues:
1. Applicability of Circular No. 88, dated August 1, 1969, for determining the cost of acquisition of agricultural land converted into non-agricultural land for computing capital gains.

Analysis:
The judgment of the High Court of Gujarat dealt with the issue of whether Circular No. 88, dated August 1, 1969, issued by the Central Board of Direct Taxes was applicable for determining the cost of acquisition of agricultural land converted into non-agricultural land. The matter pertained to the assessment year 1971-72, where the assessee contended that the land became a capital asset on the date of conversion into non-agricultural land, and the cost of acquisition should be based on the value at that time. The Income-tax Officer disagreed and computed the cost based on the value at the time of the gift. The Tribunal held that the circular was applicable to the case, even though it was later withdrawn on September 23, 1971. The court analyzed the circular's content, which clarified that agricultural land becomes a capital asset only upon conversion into non-agricultural land, and the cost of acquisition should be determined based on the market price at the time of conversion. The court emphasized that the circular was binding on the subordinate authorities and was applicable to the assessment year in question.

The court further noted that the circular's withdrawal did not affect its operation, as it was in force at the relevant time. The instructions provided in the circular were issued under section 119 of the Income-tax Act and were binding on the subordinate revenue authorities. The court upheld the Tribunal's decision, stating that since the definition of "capital asset" did not include agricultural land, it only became a capital asset upon conversion into non-agricultural land. Therefore, the cost of acquisition had to be determined based on the value at the time of conversion. The court answered the referred question in favor of the assessee, emphasizing the applicability of the circular in determining the cost of acquisition for computing capital gains. The reference was disposed of accordingly, with no order as to costs.

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