Agricultural land sold in parcels remained non-business stock, but capital gains tax applied because it fell within notified urban limits.

Land recorded in revenue records and used for agriculture retained its agricultural character, and sale in smaller parcels without development activity did not amount to an adventure in the nature of trade. The proceeds were therefore not assessable as business income. However, because the land fell within the relevant notified area and prescribed proximity to municipal limits, it remained a capital asset for tax purposes. The transfer was accordingly chargeable to long-term capital gains and not exempt from tax.

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Issues: (i) Whether the land sold by the assessees was agricultural land and whether its transfer constituted an adventure in the nature of trade assessable as business income; (ii) whether the gain arising from the transfer of such land was exempt from tax or chargeable as long-term capital gains.

Issue (i): Whether the land sold by the assessees was agricultural land and whether its transfer constituted an adventure in the nature of trade assessable as business income.

Analysis: The land was reflected in the revenue records and girdawari as agricultural land, and the material on record showed agricultural use prior to the notified urban usage. The mere fact that the land was later sold in smaller parcels to different purchasers did not, by itself, change its character or establish a trading venture. No material showed that the assessees had converted the land into plots or undertaken development activity so as to make the transactions a business operation.

Conclusion: The land retained its character as agricultural land and the sale proceeds could not be assessed as business income.

Issue (ii): Whether the gain arising from the transfer of such land was exempt from tax or chargeable as long-term capital gains.

Analysis: Agricultural land is excluded from the definition of capital asset only if it falls outside the specified municipal or notified limits. On the facts found, the land fell within the relevant notified area and within the prescribed proximity to the municipal limits. Therefore, although the land was agricultural in character, it remained a capital asset for tax purposes and the transfer attracted the charging provision for capital gains.

Conclusion: The gain was chargeable as long-term capital gains and was not exempt from tax.

Final Conclusion: The Revenue's challenge to the agricultural character of the land failed, but the assessees' claim of complete exemption also failed; the transfer was held to give rise to taxable long-term capital gains.

Ratio Decidendi: Agricultural land recorded and used as such does not become business stock merely because it is sold in parcels, but it remains a capital asset chargeable to capital gains tax if it falls within the statutory urban proximity limits.

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