Agricultural land character on sale date prevented capital gains taxation under the Income-tax Act.

Land sold under a deed describing it as agricultural land retained that character on the date of transfer, so it did not constitute a capital asset under section 2(14)(iii) of the Income-tax Act, 1961. Section 63AA of the Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997 permits sale of agricultural land for bona fide industrial use to a non-agriculturist, but does not itself convert the land into non-agricultural land at the point of sale. Section 65B of the Bombay Land Revenue Code, 1879 contemplates post-commencement notice and certification, and the purchaser's later notice and the Collector's certificate showed conversion in user occurred after transfer. The capital gain addition was therefore unsustainable.

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Issues: Whether the land sold by the assessee retained its character as agricultural land and therefore did not constitute a capital asset under section 2(14)(iii) of the Income-tax Act, 1961, so that the resultant capital gain was not taxable.

Analysis: The sale deeds consistently described the subject land as agricultural land. The statutory scheme under section 63AA of the Gujarat Tenancy and Agricultural Lands Laws (Amendment) Act, 1997 permits sale of agricultural land for bona fide industrial purpose to a non-agriculturist, but does not by itself convert the land into non-agricultural land at the stage of sale. Under section 65B of the Bombay Land Revenue Code, 1879, the land may be used for bona fide industrial purpose without prior permission where the statutory conditions are met, and the purchaser is required to notify the Collector and obtain certification after commencement of such use. On the facts, the purchaser's subsequent notice and the Collector's later certificate showed that conversion in user occurred after the sale, not before it. The Revenue authorities, therefore, misread the land laws in treating the land as non-agricultural on the date of transfer.

Conclusion: The land was agricultural land on the date of sale and did not qualify as a capital asset under section 2(14)(iii) of the Income-tax Act, 1961; the capital gain addition was unsustainable and the issue is decided in favour of the assessee.

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