Agricultural land under a Gram Panchayat stays outside capital asset status unless it falls within a specified municipal jurisdiction.

Agricultural land situated within a Gram Panchayat but outside a municipality, municipal corporation or cantonment board is not treated as a capital asset merely because the local population exceeds 10,000. Section 2(14)(iii)(a) applies only where the land is within the jurisdiction of the specified municipal or cantonment body, and the population requirement attaches to that body, not to a rural village area. A Gram Panchayat is a distinct rural local authority and is not equivalent to a municipality. On that reasoning, agricultural land under a Gram Panchayat remains outside the capital asset definition and capital gains tax is not chargeable.

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Issues: Whether agricultural land situated within a Gram Panchayat but outside the limits of a municipality, municipal corporation, or cantonment board can be treated as a capital asset under section 2(14)(iii)(a) of the Income-tax Act, 1961 merely because the population of the area exceeds 10,000.

Analysis: The exception in section 2(14)(iii)(a) applies only to agricultural land situated within the jurisdiction of a municipality, municipal corporation, notified area committee, town area committee, town committee, or cantonment board having the prescribed population. The population criterion attaches to the relevant municipal body and not to any rural area or village population by itself. A Gram Panchayat is a distinct rural local self-government unit and is not equivalent to a municipality. On that basis, land situated in a village or under a Gram Panchayat remains outside the definition of capital asset, even if the local population exceeds 10,000.

Conclusion: The land was not a capital asset under section 2(14)(iii)(a), and capital gains tax was not exigible. The issue was decided in favour of the assessee.

Ratio Decidendi: For agricultural land to fall within section 2(14)(iii)(a), it must be situated within the jurisdiction of the specified municipal or cantonment body, and the population requirement applies to that body and not to a Gram Panchayat or other rural area.

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