Agricultural land outside the capital asset definition remains exempt from capital gains tax on transfer.

Agricultural land that retains its agricultural character and falls outside the statutory definition of a capital asset is not subject to capital gains tax on transfer. The land here was recorded as Ghasni land in Himachal Pradesh, used for grazing and pasture, and supported by trees; revenue records and local land law confirmed its agricultural nature. No contrary evidence showed that it had lost that character, and the purchaser's later request for change of land use did not alter the nature of the land in the assessee's hands at the time of transfer. As section 45 applies only to transfers of capital assets, the addition for long-term capital gain was deleted.

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Issues: Whether the land sold by the assessee was agricultural land excluded from the definition of capital asset, so that no capital gains tax was chargeable on its transfer.

Analysis: The land was situated in Himachal Pradesh and was found, on the basis of revenue records and surrounding circumstances, to be Ghasni land used for grazing and pasture. The land was also supported by trees and was treated under the local land law as agricultural land. The assessment record did not establish any contrary evidence that the land had lost its agricultural character. The applicability of the municipal-distance test was not accepted as a basis to bring the land within the capital-asset definition for the relevant year, and the fact that the purchaser sought change of land use did not alter the nature of the land in the assessee's hands at the time of transfer. Since section 45 applies only to transfer of a capital asset, a transfer of agricultural land outside section 2(14) does not give rise to taxable capital gains.

Conclusion: The land was not a capital asset and the addition on account of long-term capital gain was rightly deleted.

Final Conclusion: The Department failed to show any error in the appellate finding that the transfer was of agricultural land outside the capital-gains provision, so the disallowance of the addition stood.

Ratio Decidendi: Agricultural land that retains its agricultural character and falls outside the statutory definition of capital asset is not chargeable to capital gains tax on transfer.

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