Agricultural land character for capital gains depends on transfer-date facts, not mere conversion permission or future non-agricultural use.

The character of land for capital gains purposes must be determined on the date of transfer from contemporaneous revenue records, cultivation evidence and surrounding facts. Where RTC extracts and village records showed agricultural use, and conversion permission was subject to lapse if the converted purpose was not implemented, the land retained its agricultural character and fell outside the definition of capital asset, except for the limited portion already treated otherwise in one appeal. A separate addition for lease rentals was sustained because the lease agreement stood unrebutted and no material was produced to show that the amount was not receivable.

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Issues: (i) Whether the lands sold by the assessees retained the character of agricultural land on the dates of transfer and were, therefore, outside the definition of capital asset under the Income-tax Act. (ii) Whether the addition of lease rentals was sustainable.

Issue (i): Whether the lands sold by the assessees retained the character of agricultural land on the dates of transfer and were, therefore, outside the definition of capital asset under the Income-tax Act.

Analysis: The decisive inquiry was the character of the land on the date of sale, assessed on the totality of surrounding facts. The record showed that the lands continued to stand in the revenue records as agricultural lands, RTC extracts and village accountant certificates indicated cultivation, and the assessee had produced material showing agricultural activity. The conversion orders were subject to a condition that the land had to be used for the converted purpose within two years, failing which the conversion would lapse. On the facts, there was no convincing evidence that the converted purpose had actually been implemented by the assessees before sale. The later use by the purchaser and the location or potential non-agricultural value of the land were not treated as conclusive. The Tribunal also distinguished the revenue's authorities on facts and accepted the presumption arising from the revenue records and contemporaneous cultivation material, except to the limited extent already upheld by the first appellate authority in one item of land.

Conclusion: The lands sold by the assessees were agricultural lands on the dates of transfer and did not constitute capital assets, except for the limited portion already treated as capital asset by the first appellate authority in one appeal.

Issue (ii): Whether the addition of lease rentals was sustainable.

Analysis: The addition was based on the lease agreement, while the assessee did not produce evidence to show that the agreement was not acted upon or that the amount was not receivable. The finding of the first appellate authority was not displaced by any rebuttal material before the Tribunal.

Conclusion: The addition of lease rentals was sustained against the assessee.

Final Conclusion: The assessees succeeded on the principal question of capital gains taxability on sale of land, while the separate addition relating to lease rentals survived; the revenue's appeals substantially failed, save for the limited capital-asset finding already affirmed in one case.

Ratio Decidendi: The character of land for capital gains purposes must be determined on the date of transfer from the actual user, contemporaneous revenue records, and the surrounding circumstances, and a mere conversion permission or potential non-agricultural use does not by itself destroy the agricultural character where the converted purpose has not been implemented.

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