Actual agricultural use up to transfer controls capital asset status; future potential and sale price are secondary indicators.

Land actually and consistently used for agriculture up to the date of transfer ordinarily retains its agricultural character for income-tax purposes, and that actual user is the primary test for deciding whether it is a capital asset. Surrounding development, municipal limits, town planning, sale price, and future non-agricultural potential are secondary indicators, relevant mainly where the land is idle or the agricultural use is only temporary. On the stated facts, continuous agricultural operations continued until sale and nothing showed that the character had changed before transfer. The land was therefore agricultural land on the date of sale and outside the definition of capital asset.

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Issues: Whether the land sold by the assessee retained the character of agricultural land on the date of sale so as to fall outside the definition of capital asset under the Income-tax Act.

Analysis: The decisive test was the character of the land at the date of sale. Where land is actually being used for agriculture, that user ordinarily furnishes a prima facie indication of its agricultural character. The wider tests relating to surrounding development, municipal limits, town planning, sale price, and potential for non-agricultural use are relevant mainly where the land is lying idle or where the actual agricultural user is merely a stop-gap or temporary arrangement. On the facts, the assessee had consistently carried on agricultural operations on the land up to the date of sale, and nothing showed that the agricultural character had been displaced before that date. The permission under the tenancy law and the high price obtained only indicated intended post-sale use and potential value, not the character of the land on the relevant date.

Conclusion: The land was agricultural land on the date of sale and was not a capital asset; the reference was answered in favour of the assessee and against the revenue.

Ratio Decidendi: Where land is actually and consistently used for agriculture up to the date of transfer, that actual user ordinarily controls the inquiry and displaces other indicators unless the facts show that the agricultural user was only temporary or the agricultural character had otherwise ceased.

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