Distance for capital asset test must be measured by road, not straight line, in agricultural land classification dispute.

For section 2(14)(iii)(b) of the Income-tax Act, distance from municipal limits for determining whether agricultural land is a capital asset is to be measured by road and not by straight-line or crow's flight distance. The Tribunal accepted this legal principle and rejected the Assessing Officer's reliance on map-based straight-line measurement. As the land's distance had not been verified on the correct basis, the matter was remanded for fresh determination of the distance by road. This approach aligns the capital asset test with the statutory distance criterion applicable to land near municipal limits.

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Issues: Whether agricultural land sold by the assessees fell within the definition of capital asset under section 2(14)(iii)(b) of the Income-tax Act, 1961 by reason of its distance from the municipal limits of Pondicherry, and whether such distance had to be measured by road or by straight line on horizontal plane.

Analysis: The Assessing Officer had relied on a map to treat the land as situated within 8 kms. of the municipal limits, while the assessees contended that the relevant distance had to be measured by the approach road. The Tribunal accepted the legal principle that for the purpose of section 2(14)(iii)(b), distance is to be reckoned by road and not by straight line distance or crow's flight, and relied on the cited precedent and the notification framework that takes into account urbanisation and related considerations. Since the factual distance of the land from the municipal limits had not been determined on that basis, the matter required fresh verification.

Conclusion: The issue was decided in favour of the assessees on the method of measurement, and the matter was remanded to the Assessing Officer to determine the distance by road.

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