Agricultural land character on sale determined by actual use; capital gains tax not chargeable where cultivation records showed farm use.

Agricultural land was excluded from the definition of capital asset under section 2(14) of the Income-tax Act as it then stood, so capital gains under section 45 arose only if the land transferred was in fact non-agricultural. The record-of-rights entry created only a rebuttable presumption; the real character of the land had to be determined from its actual or intended use and surrounding circumstances on the date of sale. Long-standing cultivation, agricultural income, assessment records, and use of cultivation equipment showed agricultural character, and municipal location or proposed industrial use did not by itself alter that character. Capital gains tax was therefore not chargeable on the transfer.

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Issues: Whether the lands sold by the assessee were agricultural lands on the date of transfer and, therefore, outside the definition of capital asset so that capital gains tax was not chargeable.

Analysis: For the relevant period, capital gains under section 45 of the Income-tax Act, 1961 arose only on transfer of a capital asset, and agricultural land was excluded from the definition of capital asset under section 2(14) as it then stood. The entry in the record of rights created only a rebuttable presumption under section 103-B(3) of the Bihar Tenancy Act. The decisive test was the real character of the land on the date of sale, which had to be gathered from its actual or intended user and surrounding circumstances. The materials relied upon by the Tribunal showed long-standing agricultural use, cultivation records, agricultural income in the accounts, agricultural assessment orders, and maintenance of cultivation equipment. The fact that the land stood within municipal limits, was near industrial development, or was sold for industrial purposes did not by itself change its agricultural character.

Conclusion: The land was agricultural land on the date of sale, and capital gains tax was not chargeable on the transfer. The answer was against the Department and in favour of the assessee.

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