Real character of land controls capital gains exemption where surrounding facts show non-agricultural use despite revenue entries.

For capital gains purposes, the character of land must be determined by its real nature on the date of sale, assessed on the totality of circumstances rather than revenue entries alone. The Gujarat HC noted that urban location, proximity to development, sale to a non-agriculturist for a housing project on a per square yard basis, long absence of substantial cultivation, prior conversion of part of the holding, and permission for sale to a housing society pointed to non-agricultural use. Revenue records, lack of formal conversion, and earlier agricultural use were insufficient to displace those stronger indicators. The land was therefore not agricultural land within section 2(14), and the capital gains on sale were taxable.

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Issues: Whether the land in question was agricultural land within the meaning of section 2(14) of the Income-tax Act, 1961, and therefore exempt from capital gains tax on its sale.

Analysis: The decisive enquiry is the real character of the land at the date of sale, to be judged on the totality of circumstances and not merely by revenue entries or past user. Relevant factors include the location of the land in an urban area, its proximity to development, the fact that it was sold to a non-agriculturist for a housing project on a per square yard basis, the absence of substantial agricultural operations for years, the prior conversion of part of the same holding to non-agricultural use, and the obtaining of permission for sale to a housing society shortly before the transaction. The Court treated the commonly relied upon circumstances, such as entry in revenue records, absence of conversion, and earlier agricultural use, as insufficient to outweigh the more substantial indicators of non-agricultural character. It reiterated that a rebuttable presumption arising from revenue records can be displaced by surrounding facts and that the proper test is whether a sensible agriculturist would buy the land for genuine agricultural operations at the price actually fetched.

Conclusion: The land was not agricultural land within section 2(14) of the Income-tax Act, 1961, and the capital gains arising from its sale were leviable.

Final Conclusion: The references were answered against the assessee and in favour of the Revenue, affirming the taxability of the gain arising from the sale of the land.

Ratio Decidendi: The character of land for capital gains purposes must be determined by a practical assessment of the totality of circumstances at the date of sale, and not by revenue entries alone; where the land, viewed realistically, is not one that a bona fide agriculturist would purchase for agricultural use at the prevailing price, it is not agricultural land.

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