Agricultural land remains outside capital gains where constructive possession and agricultural use continue despite temporary loss of physical control.

The expression "held by an assessee" in section 2(4A) of the Indian Income-tax Act, 1922 is broad enough to include physical, constructive and symbolic possession, not merely actual possession. Land used for agricultural purposes retained its agricultural character despite temporary loss of physical possession through requisition, where agricultural use and agricultural income continued. As land from which agricultural income is derived is excluded from the category of capital asset, compensation received on its acquisition was outside capital gains tax.

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Issues: (i) Whether the words "held by an assessee" in section 2(4A) of the Indian Income-tax Act, 1922 include only physical possession or also constructive and symbolic possession. (ii) Whether compensation received for acquisition of land used for agricultural purposes was chargeable as capital gains.

Issue (i): Whether the words "held by an assessee" in section 2(4A) of the Indian Income-tax Act, 1922 include only physical possession or also constructive and symbolic possession.

Analysis: The expression "held" was construed in the context of agricultural land and capital asset. The Court reasoned that limiting the word to actual physical possession would create anomalies, especially where ownership and beneficial interest remain despite loss of physical possession. It held that the concept of holding in section 2(4A) is wide enough to include physical, actual, constructive and symbolic possession.

Conclusion: The expression "held by an assessee" includes constructive and symbolic possession as well as physical possession.

Issue (ii): Whether compensation received for acquisition of land used for agricultural purposes was chargeable as capital gains.

Analysis: The decisive factor was the character of the land at the material time. The land had been used for agricultural purposes and income had been derived from it. Its temporary loss of physical possession due to requisition did not alter its agricultural character, particularly when it continued to be used for agriculture by others and agricultural income was in fact derived from it. Since land from which agricultural income is derived is excluded from the category of capital asset, the compensation for its acquisition was not taxable as capital gains.

Conclusion: The compensation was not chargeable as capital gains and the receipt was exempt from tax.

Final Conclusion: The reference was answered in favour of the assessee by holding that the lands remained agricultural lands at all material times and the acquisition compensation was outside the ambit of capital gains.

Ratio Decidendi: For capital gains purposes, land used for agricultural purposes and yielding agricultural income does not become a capital asset merely because the assessee loses physical possession temporarily; "held" in the statutory definition covers constructive as well as symbolic possession.

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