Taxability of agricultural land gains within municipal limits confirmed under the capital asset exception and agricultural income rules.

Agricultural land in India is excluded from the definition of capital asset, except where it falls within the statutory exception in section 2(14)(iii). Where agricultural land is situated within municipal limits and covered by that exception, its transfer gives rise to taxable capital gains under the Income-tax Act, 1961. The inserted Explanation to section 2(1A) confirms that income from transfer of such land is not agricultural income. Accordingly, gains from transfer of agricultural land within municipal limits are chargeable to income-tax and do not enjoy the agricultural income exemption.

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Issues: Whether capital gains arising from transfer of agricultural land situated within municipal limits is chargeable to tax under the Income-tax Act, 1961.

Analysis: The statutory definition of "capital asset" excludes agricultural land in India except the lands specifically covered by section 2(14)(iii). The Court applied the earlier binding view that, after the relevant statutory amendment, agricultural land situated within municipal limits and falling within the specified category ceases to enjoy exemption and the gain from its transfer is taxable. The Explanation inserted in section 2(1A) was treated as confirming that income arising from transfer of such land is not agricultural income.

Conclusion: The capital gains arising from transfer of agricultural land situated within municipal limits are chargeable to income-tax, and the answer is in favour of the Revenue.

Ratio Decidendi: Agricultural land situated within municipal limits, when covered by the statutory exception in section 2(14)(iii), is a capital asset and the gains from its transfer are taxable capital gains rather than exempt agricultural income.

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