Agricultural land acquisition compensation is not business income or capital gains when the land remains agricultural.

Compensation on compulsory acquisition of agricultural land was analysed by reference to the land's true character at the time of acquisition. Because the land remained agricultural and no development steps had been taken before acquisition, the compensation was not treated as business income. It was also not taxable as capital gains, as agricultural land is excluded from the definition of a capital asset. A section 4 notification under the Land Acquisition Act merely indicated an intention to acquire and did not, by itself, sterilise the land or convert stock-in-trade into a capital asset.

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Issues: (i) Whether compensation received on acquisition of agricultural land was assessable as business profits; (ii) Whether such compensation constituted agricultural income or taxable income in the nature of capital gains; (iii) Whether issuance of a notification under section 4 of the Land Acquisition Act, 1894, sterilised the land and converted stock-in-trade into a capital asset.

Issue (i): Whether compensation received on acquisition of agricultural land was assessable as business profits.

Analysis: The land retained its agricultural character until acquisition. Mere intention to develop it later into plots did not by itself make it a trading asset or a venture in the nature of trade, especially when no development steps had been taken before acquisition. The compensation, being attributable to agricultural land, was not treated as business income.

Conclusion: The issue was answered in the negative and in favour of the assessee.

Issue (ii): Whether such compensation constituted agricultural income or taxable income in the nature of capital gains.

Analysis: The receipt was not regarded as agricultural income in the statutory sense, but it was also not taxable as capital gains because agricultural land is excluded from the definition of capital asset. Since the land continued to be agricultural land, the excess compensation on acquisition did not attract capital gains tax.

Conclusion: The issue was answered in favour of the assessee to the extent that the receipt was held not taxable.

Issue (iii): Whether issuance of a notification under section 4 of the Land Acquisition Act, 1894, sterilised the land and converted stock-in-trade into a capital asset.

Analysis: A section 4 notification only indicated an intention to acquire the land. It did not alter the inherent nature of the land or convert stock-in-trade into a capital asset. The character of the receipt depended on the true nature of the land at the time of acquisition.

Conclusion: The issue was answered in the negative and against the assessee.

Final Conclusion: The compensation arising from compulsory acquisition of the land was held not to be taxable as business profit or capital gains, and the reference was resolved substantially in favour of the assessee.

Ratio Decidendi: Agricultural land does not lose its character merely because it was intended to be developed later, and a section 4 acquisition notice does not by itself convert the land into a trading or capital asset for income-tax purposes.

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