Agricultural land outside capital gains net where records, cultivation evidence and location beyond municipal limits support its character.

Agricultural land shown as such in revenue records, supported by cultivation evidence and accepted agricultural income, is treated as outside the definition of capital asset under section 2(14)(iii) when it lies beyond the prescribed municipal limits and has not been converted to non-agricultural use. A later municipal notification or reorganisation does not change the land's character for the relevant year. The text further notes that a profitable sale of such land, without plotting, development, or other indicators of commercial dealing, does not by itself amount to an adventure in the nature of trade or generate business income; the surplus is then not assessable as business income.

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Issues: (i) Whether the land sold by the assessees was agricultural land falling outside the definition of capital asset under section 2(14)(iii), and therefore not chargeable to capital gains tax. (ii) Whether the sale of the land constituted an adventure in the nature of trade and the resultant surplus was taxable as business income.

Issue (i): Whether the land sold by the assessees was agricultural land falling outside the definition of capital asset under section 2(14)(iii), and therefore not chargeable to capital gains tax.

Analysis: The land continued to be described as agricultural in the revenue records and pahanis, and the assessees had shown agricultural income from the land, which had been accepted in regular assessment. Government certificates and allied records supported cultivation of crops on the land. The sale took place before the municipality-related notification relied upon by the Assessing Officer, and the subsequent municipal reorganisation did not alter the character of the land for the relevant year. On the evidence, the land was situated beyond the prescribed municipal limit and was not converted into non-agricultural land.

Conclusion: The land was agricultural land and did not constitute a capital asset under section 2(14)(iii); the issue is decided in favour of the assessee.

Issue (ii): Whether the sale of the land constituted an adventure in the nature of trade and the resultant surplus was taxable as business income.

Analysis: The land was held for more than two years, remained agricultural throughout, was not plotted or developed, and no material showed any change of user or conversion into non-agricultural land. The mere fact that the land was sold to a developer or that profit was realised did not establish trading intent. The surrounding circumstances did not disclose the attributes of a commercial venture in land dealing, and the transaction was a disposal of agricultural land as it stood.

Conclusion: The transaction was not an adventure in the nature of trade and the surplus could not be assessed as business income; the issue is decided in favour of the assessee.

Final Conclusion: The departmental appeals fail because the land retained its agricultural character and the sale did not amount to a trading transaction, so the addition made on the sale consideration was rightly deleted.

Ratio Decidendi: Agricultural land shown as such in revenue records and used for cultivation, when neither converted nor brought within the notified municipal limits, remains outside the definition of capital asset, and a mere profitable sale of such land does not by itself establish an adventure in the nature of trade.

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