Agricultural land exclusion fails where converted farm house land is treated as non-agricultural for capital gains purposes

Land converted into a farm house scheme was held to have lost its agricultural character because the permitted use after conversion was limited to low-coverage residential construction. The decisive test was the actual character and intended user of the land on the date of transfer, not its past agricultural description or revenue records. On those facts, the land was no longer agricultural land for the exclusion under section 2(14) of the Income-tax Act, so it formed part of a capital asset and the capital gains addition was sustained.

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Issues: Whether the land sold by the assessee, after conversion into a farm house scheme, retained the character of agricultural land so as to fall outside the definition of capital asset under section 2(14) of the Income-tax Act, 1961.

Analysis: The land had been converted for use as an environmentally friendly residence or farm house, and the permitted use after conversion was restricted to low-coverage residential construction. The decisive test was the actual character and intended user of the land on the date of transfer, not merely its past agricultural description or revenue records. Applying the settled factual tests governing agricultural land, the land was found to have changed from agricultural use to non-agricultural residential use on conversion, so it no longer answered the description of agricultural land for the purposes of the exclusion in section 2(14). The contrary view based on the earlier coordinate bench decision was distinguished on facts because there the land had continued as agricultural land.

Conclusion: The land was not agricultural land at the time of sale and therefore formed part of a capital asset. The addition on capital gains was sustained.

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