Agricultural land character depends on intended use and surrounding facts, not completed cultivation at sale.

Land is treated as agricultural where it has been set apart or earmarked for agricultural use, even if actual cultivation was not completed before sale. The decisive factor is the surrounding facts, including the lease purpose, progressive development into plantation, and clear intention to use the estate for agriculture. Inability to fully develop the reserve land because of financial constraints did not change its character. Accordingly, the land fell outside the definition of capital asset under the Income-tax Act, and the revenue's appeals failed.

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Issues: Whether the forest land sold by the assessee was agricultural land so as to fall outside the definition of capital asset under the Income-tax Act, 1961.

Analysis: The relevant test was whether the land had been set apart or earmarked for agricultural use, not merely whether actual agricultural operations had been completed at the time of sale. The lease was taken for plantation purposes, the estate had been progressively developed into rubber plantation over the years, and the remaining reserve land was part of the same intended agricultural development. The inability to fully develop the land before sale because of lack of finance did not alter the character of the land where the intention and surrounding facts showed that it had been reserved for agriculture.

Conclusion: The land was agricultural land and was not a capital asset; the revenue's appeals failed.

Ratio Decidendi: Land is agricultural if it is set apart or earmarked for agricultural use, and actual cultivation is not indispensable where the surrounding facts show a clear agricultural intention and development of the land for that purpose.

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