Agricultural land treatment under income tax law excluded capital gains and supported deduction for reinvestment in farm land.

Land recorded in revenue records as agricultural, actually used for agriculture up to the date of transfer, and not converted for non-agricultural use was treated as agricultural land outside the definition of a capital asset under section 2(14). The village population remaining below the statutory threshold and supporting evidence such as standing crops and a bore well reinforced that character, so the section 50C addition could not survive. On the related claim, investment of the sale proceeds in another agricultural land, supported by agreements, confirmations and affidavits, satisfied section 54B despite the absence of a registered sale deed, and the deduction was allowed.

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Issues: (i) Whether the land sold by the assessee was agricultural land not forming part of a capital asset under section 2(14) of the Income-tax Act, 1961, and therefore outside the charge of capital gains; (ii) Whether the assessee was entitled to deduction under section 54B of the Income-tax Act, 1961 in respect of investment in another agricultural land.

Issue (i): Whether the land sold by the assessee was agricultural land not forming part of a capital asset under section 2(14) of the Income-tax Act, 1961, and therefore outside the charge of capital gains.

Analysis: The land was recorded as agricultural in revenue records and was used for agricultural purposes up to the date of sale. The assessee had not obtained permission for non-agricultural use, and the surrounding circumstances, including the certificate of the competent authority, showed standing crops, bore well and agricultural use on the land. The village population was below the statutory threshold, so one of the conditions for treating the land as a capital asset failed. The treatment of the same land in the case of the co-owner also supported the same factual character.

Conclusion: The land was held to be agricultural land and not a capital asset; the addition made by invoking section 50C could not survive.

Issue (ii): Whether the assessee was entitled to deduction under section 54B of the Income-tax Act, 1961 in respect of investment in another agricultural land.

Analysis: The assessee had invested the sale proceeds in purchase of agricultural land and had produced agreements, confirmations, affidavits and other supporting material. The absence of a registered sale deed by itself did not defeat the claim where the investment and possession were otherwise established on the record. Since the underlying asset sold was agricultural land and the investment was for agricultural land, the statutory conditions for relief were satisfied.

Conclusion: The assessee was entitled to deduction under section 54B.

Final Conclusion: The additions and disallowance were set aside and the assessee succeeded on both substantive issues, with consequential relief following on the treatment of the land as agricultural land and the allowance of the related deduction.

Ratio Decidendi: Land remains agricultural land, and is excluded from the definition of capital asset, where it is shown in revenue records, actually used for agriculture up to the date of transfer, and not converted for non-agricultural use; once so held, relief for reinvestment in agricultural land follows if the statutory conditions are otherwise met.

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