True character of restricted land governs capital gains treatment, and book entries do not control asset classification.

Land restricted by a defence notification was treated as a capital asset despite being shown in the books as stock-in-trade, because tax character depends on the true nature of the asset and the surrounding legal restrictions, not on accounting entries alone. The inability to carry out any development activity supported the view that the land was never practically available for trading use. The original acquisition date remained relevant for the holding period, so the transfer was accepted as giving rise to long-term capital gain or loss.

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Issues: Whether the land, though shown in the books as stock-in-trade, had in truth acquired the character of a capital asset so that its transfer gave rise to long-term capital gain or loss computed from the original date of acquisition.

Analysis: The land was purchased in 2006-2008, but a defence notification prohibited construction within the specified distance from the ammunition dump, and the assessee was consequently unable to undertake any development activity on the land. The conduct of the parties and the surrounding circumstances showed that the land could not realistically be exploited as trading stock. The mere accounting entry treating it as stock-in-trade was held not to be conclusive, because taxability depends on the true nature of the transaction and not on book classification. The Court also accepted that the first acquisition date remained the relevant date for testing the period of holding, and that the restriction from the outset supported the conclusion that the land retained the character of a capital asset.

Conclusion: The land was held to be a capital asset and not stock-in-trade for the purpose of the transfer in question, and the assessee's claim of long-term capital gain or loss was accepted.

Ratio Decidendi: For capital gains purposes, the true character of the asset must be determined from the surrounding facts and legal restrictions, and book entries are not decisive where the asset was never practically available for trading use.

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