Agricultural land outside capital asset definition keeps sale surplus out of long-term capital gains tax

Land situated in village Juchandra, beyond 8 km from the notified municipal limits and outside the jurisdiction of the proposed municipal corporation on the relevant dates, was treated as agricultural land and therefore not a capital asset under section 2(14). The land's separate rural status during the year of sale, the later effective date of the final urban notification, and supporting revenue records and surrounding agricultural character showed that the surplus on sale was not chargeable as long-term capital gains. The addition treating the sale proceeds as taxable capital gains was accordingly found unjustified to that extent.

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Issues: Whether the land sold by the assessee was agricultural land outside the scope of capital asset so that the surplus on sale was not chargeable as long-term capital gains.

Analysis: The land was found to be situated in village Juchandra, beyond 8 km from the notified municipal limits and, on the relevant dates, outside the jurisdiction of the proposed municipal corporation. The record showed that the village retained a separate rural status during the year of sale, and the later final notification bringing it within the urban area took effect only subsequently. On these facts, the land could not be treated as a capital asset; the surrounding agricultural character and revenue records also supported that conclusion.

Conclusion: The land sold was agricultural land and not a capital asset under section 2(14); the addition treating the sale proceeds as taxable long-term capital gains was not justified, to that extent in favour of the assessee.

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