Agricultural land at the time of transfer remains outside capital gains, even if the buyer later converts it for non-agricultural use.

Land sold outside the municipal area retained its agricultural character at the time of transfer, so it did not fall within the definition of a capital asset under section 2(14)(iii) of the Income-tax Act. The sale deed's reference to industrial use and the purchaser's intended post-transfer conversion did not change the land's character in the seller's hands. As the decisive test is the nature of the land at the date of transfer, the addition treating the sale proceeds as taxable capital gains was unsustainable and the Revenue's challenge failed.

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Issues: Whether the land sold by the assessee retained its agricultural character so as to fall outside the definition of capital asset under section 2(14)(iii) of the Income-tax Act, 1961, despite the sale deed referring to industrial use and conversion under section 63(AA) of the Land Revenue Code.

Analysis: The land was found to be situated outside the municipal area and used for agricultural purposes at the time of sale. The conversion into non-agricultural land was to be undertaken by the purchaser after the transfer, and such post-sale conversion did not alter the character of the land in the hands of the seller. The reasoning followed the Tribunal's earlier view in the assessee's own case and the allied decision relied upon by the first appellate authority, holding that a conditional transfer for conversion purposes does not by itself make the seller's land a non-agricultural asset. On that basis, the addition made by treating the sale proceeds as taxable capital gains was unsustainable.

Conclusion: The land sold by the assessee was agricultural land at the time of transfer, the exemption under section 2(14)(iii) remained available, and the Revenue's challenge to deletion of the addition failed.

Final Conclusion: The Revenue's appeal was rejected, and the relief granted by the first appellate authority was sustained.

Ratio Decidendi: For capital gains purposes, land must be judged by its character at the time of transfer, and a subsequent conversion to non-agricultural use by the purchaser does not, by itself, convert agricultural land into a capital asset in the seller's hands.

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