Agricultural land classification under income tax law depends on records, local land law, and actual use, not commercial yield alone.

Land recorded in revenue records as agricultural, and supported by local land law and surrounding evidence of use, is not treated as a capital asset merely because cultivation is limited, non-commercial, or does not generate surplus income. The Bombay HC relied on ancestral ownership, agricultural entries, trees and horticultural use, personal consumption of produce, and the applicable definition under local land law to conclude that the Revenue had not displaced the assessees' case. It also rejected splitting the same land into agricultural and non-agricultural portions on the basis of an inspection report. The result was that the sale consideration was not chargeable to capital gains tax and the penalty could not stand.

---

---

Issues: Whether the land sold by the assessees was agricultural land falling outside the definition of capital asset under Section 2(14)(iii) of the Income-tax Act, 1961, so as to exempt the sale consideration from capital gains tax.

Analysis: The land was ancestral, recorded in the revenue records as agricultural, and supported by the local land law definition of agriculture under the Goa, Daman and Diu Land Revenue Code, 1968. The Court treated the statutory presumption attached to land records as relevant and held that the Revenue had not displaced the assessees' case with satisfactory material. It found that the presence of trees, horticultural use, personal consumption of produce, and the nature of the land were consistent with agricultural use, and that mere absence of regular commercial yield or labour records did not convert the land into a non-agricultural asset. The Court also rejected the approach of treating part of the land as agricultural and the balance as non-agricultural on the basis of the inspection report and held that the facts and local land law supported the assessees' claim.

Conclusion: The land was held to be agricultural land and not a capital asset; the assessees succeeded and the Revenue's tax demand and penalty could not stand.

Final Conclusion: The appeals were allowed and the assessees were held not liable to capital gains tax on the sale of the subject land.

Ratio Decidendi: Where land is recorded and shown by evidence to be agricultural in nature, its character must be determined in light of the applicable local land law and actual agricultural use, and it cannot be treated as a capital asset merely because agricultural operations are limited, non-commercial, or yield no surplus income.

---