Agricultural land beyond municipal limits may escape capital gains where its character remains unchanged and no effective conversion is proved.

Agricultural land situated beyond the prescribed municipal distance was treated as outside the definition of a capital asset under section 2(14)(iii) because its agricultural character was not shown to have been lost and no effective conversion of land use was established. The text also notes that possession was handed over under the sale arrangement, engaging transfer by part performance under section 2(47)(v) read with section 53A of the Transfer of Property Act, but the absence of any effective conversion meant section 45 did not apply. On these facts, the capital gains addition was unsustainable.

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Issues: Whether the land sold by the assessee retained its character as agricultural land and, if so, whether the transaction gave rise to taxable capital gains; and whether the relevant date of transfer was the date of agreement or the date of registration of the sale deeds.

Analysis: The land was found to be agricultural in nature and situated beyond 8 kilometres from the municipal limits, bringing it within the exclusion from "capital asset" under section 2(14)(iii) of the Income-tax Act, 1961. The record also showed that the agreement for sale was acted upon on 02.04.2007 and possession was handed over then, attracting the concept of transfer by part performance under section 2(47)(v) of the Income-tax Act, 1961 read with section 53A of the Transfer of Property Act, 1882. The orders of the land authority further showed that there was no effective conversion of the land from agricultural use, and the Revenue did not rebut this position. On these facts, section 45 of the Income-tax Act, 1961 was held not to apply.

Conclusion: The land continued to be agricultural land outside the definition of capital asset, and the capital gains addition was unsustainable.

Ratio Decidendi: Where agricultural land situated beyond the prescribed municipal distance is not shown to have lost its agricultural character, and possession is transferred under a contract without any effective conversion of land use, the consideration on such transfer does not attract capital gains tax.

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