Agricultural land outside capital asset definition remains exempt from capital gains when revenue records and distance criteria are satisfied.

Agricultural land recorded in revenue records, assessed to land revenue, lying beyond the prescribed municipal distance and never converted to non-agricultural use is outside the definition of "capital asset" under section 2(14)(iii) of the Income-tax Act, 1961. The absence of agricultural income or proved agricultural operations for part of the holding period does not, by itself, change the character of the land where the statutory geographical exclusion is satisfied and surrounding circumstances support agricultural status. On these facts, the surplus on sale is not chargeable to capital gains tax.

---

---

Issues: Whether the land sold by the assessee was agricultural land falling outside the definition of "capital asset" under section 2(14)(iii) of the Income-tax Act, 1961, and therefore whether the surplus on its sale was chargeable to capital gains tax.

Analysis: The land stood classified as agricultural in the State revenue records, was assessed to land revenue, and there was no conversion for non-agricultural use at any stage. The material on record also showed that the land was situated beyond 8 kilometres from the municipal limits and the village population was below ten thousand, satisfying the statutory geographical exclusion. The absence of agricultural income for part of the holding period did not by itself alter the character of the land, particularly when no step had been taken to put it to non-agricultural use and the surrounding circumstances, including sale to an agriculturist, supported its agricultural character. On these facts, the Revenue's objection that actual agricultural operations were not proved was not sufficient to treat the land as a capital asset.

Conclusion: The land was not a capital asset within section 2(14)(iii) of the Income-tax Act, 1961, and the surplus on sale was not taxable as capital gains; the finding of the first appellate authority was upheld in favour of the assessee.

Ratio Decidendi: Land shown as agricultural in revenue records, lying beyond the prescribed municipal distance and never converted to non-agricultural use, remains excludible from the definition of capital asset even if agricultural operations are not shown for part of the holding period.

---