Agricultural land beyond municipal limits is outside capital asset treatment; shortest road distance rule applies prospectively before AY 2014-15.

Agricultural land falls outside the definition of capital asset under section 2(14)(iii) if, for periods before assessment year 2014-15, it is situated beyond the prescribed municipal limit measured by the shortest road distance, not aerially. The Finance Act, 2013 distance amendment applies prospectively, and the relevant municipal limits are governed by the applicable Central Government notification. On the facts recorded, the land was treated as agricultural land and a village revenue certificate was accepted as competent evidence of location, so the transfer did not give rise to taxable capital gains.

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Issues: Whether the land sold by the assessee was agricultural land situated beyond the prescribed municipal limit so as to fall outside the definition of capital asset and whether the gain on its transfer was taxable.

Analysis: The relevant test under section 2(14)(iii) of the Income-tax Act, 1961 is whether agricultural land is situated beyond the specified distance from the local limits of a municipality. For the period prior to assessment year 2014-15, the distance is to be measured by the shortest road distance and not aerially, and the amendment introduced by the Finance Act, 2013 operates prospectively. The Central Government notification of 6-1-1994 governs the municipal limits relevant for this purpose. The assessee's land was treated on record as agricultural land, and the certificate from the village revenue official was accepted as competent evidence of location. The mere fact that the assessee had earlier shown capital gain in the return did not preclude the correct taxability being examined on merits.

Conclusion: The land was not a capital asset within the meaning of section 2(14), and the capital gain arising from its transfer was not taxable in the hands of the assessee.

Final Conclusion: The assessee succeeded on the core issue of taxability of the land sale, and the appeal was allowed only to the extent of deleting the capital gains addition, with consequential interest rendered academic.

Ratio Decidendi: For assessment years prior to 2014-15, agricultural land must be tested under the pre-amendment distance rule by measuring the shortest road distance from the municipal limits fixed by the applicable Central Government notification, and land situated beyond the prescribed limit is outside the scope of capital asset.

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