Rural agricultural land on transfer date stayed outside capital asset treatment; later urban notification could not trigger capital gains.

Land sold in Village Chhawla was held to be agricultural land situated in a rural area on the date of transfer. A later notification treating the village as urban could not operate retrospectively to alter its character for the relevant assessment year. As the land fell outside the definition of "capital asset" under Section 2(14)(iii) of the Income-tax Act, no charge to capital gains arose under Section 45. The long-term capital gain addition was therefore unsustainable and was deleted, with the assessee succeeding on merits.

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Issues: Whether the land sold by the assessee in Village Chhawla was agricultural land situated in a rural area so as to fall outside the definition of capital asset and the charge to capital gains tax.

Analysis: The only substantive dispute was the character of the land on the date of sale. The later notification treating Village Chhawla as urban could not retrospectively convert the land into urban land for the relevant assessment year. Section 507(a) of the Delhi Municipal Corporation Act, 1957 contemplates a formal notification by which rural areas cease to be included in the rural area and become part of the urban area. On the material available, the land was rural on the date of transfer. Consequently, it did not answer the definition of capital asset under Section 2(14)(iii) of the Income-tax Act, 1961, and no capital gains charge could arise under Section 45 of the Income-tax Act, 1961.

Conclusion: The land was agricultural land in a rural area, the capital gains addition was unsustainable, and the assessee succeeded on merits.

Final Conclusion: The assessment addition on account of long-term capital gain was deleted, and the appeal was allowed.

Ratio Decidendi: Land remains outside the capital asset definition under Section 2(14)(iii) where, on the date of transfer, it is situated in a rural area, and a later urban notification does not operate retrospectively to attract capital gains tax under Section 45.

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