Urban land within notified municipal limits can be a capital asset despite claimed agricultural character under tax law.

Land situated in an extensively urbanised area near Panchkula, abutting National Highway 73 and close to developed sectors and civic infrastructure, was treated as falling within the municipal or notified urban zone for section 2(14)(iii) of the Income-tax Act, 1961. The Court read "municipality" broadly to include an area with the trappings of a local authority or an urban area developed by the Haryana Urban Development Authority, and held that agricultural character is not decisive where the land is otherwise within the relevant urban limits. The land was therefore regarded as a capital asset.

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Issues: Whether the acquired land was agricultural land excluded from the definition of capital asset under section 2(14) of the Income-tax Act, 1961, or whether it was land falling within the urban and municipal ambit and therefore taxable as a capital asset.

Analysis: The land was situated in an extensively urban area near Panchkula, abutting National Highway 73 and lying close to developed sectors, public institutions and civic infrastructure. The Court treated the expression "municipality" in section 2(14)(iii) broadly, holding that it is not confined to a formally constituted municipality under municipal law alone, but includes an area having the trappings of a local authority or an urban area developed by the Haryana Urban Development Authority. The Court relied on the statutory scheme of section 2(14), the Central Government notification fixing the relevant distance from municipal limits, the constitutional concept of municipality, and the status and functions of the Haryana Urban Development Authority as a local authority. It also held that the agricultural character of land is not decisive where the land falls within the municipal or notified urban zone.

Conclusion: The land was held to be a capital asset within section 2(14)(iii) of the Income-tax Act, 1961, and the question of law was answered in favour of the Revenue and against the assessee.

Ratio Decidendi: For the purpose of section 2(14)(iii) of the Income-tax Act, 1961, land situated within the relevant municipal or notified urban area is a capital asset notwithstanding its claimed agricultural character.

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