Non-agricultural land test: actual use and real agricultural connection prevail over revenue records for capital gains treatment.

Land situated in an industrial zone was treated as non-agricultural where there was no established agricultural user or real connection with agricultural purposes, even though revenue records still described it as agricultural and formal non-agricultural conversion occurred later. The conversion of the land into stock-in-trade was supported by a board resolution and disclosure in the accounts and return, so it was valid and the asset remained a capital asset on the date of conversion. On that basis, section 45(2) applied to the gains. Section 50C could not be applied to the year of conversion because it was operative only from a later assessment year.

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Issues: Whether land situated in an industrial zone, though not formally converted into non-agricultural land until later, was non-agricultural on the date of conversion into stock-in-trade so as to attract section 45(2), and whether section 50C could be applied to compute the capital gains.

Analysis: The land was acquired for industrial use, was situated in an industrial zone, and there was no established agricultural user or connection with agricultural purposes. The mere fact that revenue records continued to describe the land as agricultural, or that formal conversion to non-agricultural use occurred later, was not conclusive. Since the land lacked the essential character of agricultural land, it was a capital asset on the date of conversion into stock-in-trade. The conversion was supported by the Board resolution and disclosed in the accounts and return, and there was nothing illegal in such conversion. For the same reason, the gains had to be computed under section 45(2). Section 50C, being applicable from a later assessment year, could not be applied to the year of conversion.

Conclusion: The land was rightly treated as a non-agricultural capital asset on the date of conversion, section 45(2) applied, and section 50C did not apply to the capital-gains computation. The Revenue's challenge failed.

Ratio Decidendi: For determining whether land is agricultural, the decisive test is its real connection with agricultural purpose and actual user, not merely its description in revenue records or the fact that formal non-agricultural conversion occurred later.

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