Rural agricultural land treatment under section 56(2)(vii)(b) clarified; exclusion from capital asset leads to deletion of addition.

Application of the gifttax provision was tested against the statutory definition of capital asset; because the land lay beyond municipal limits and the town population was below the census threshold, the land qualified as agricultural and therefore fell outside the definition of capital asset. Consequently, the provision targeting receipt of property without adequate consideration did not apply to the transaction and the addition under that provision was deleted. The taxpayer's contention about reference to a valuation officer for fair market value was considered subordinate to the determinative exclusion of the land from capital asset status.

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Issues: (i) Whether section 56(2)(vii)(b) of the Income-tax Act, 1961 is applicable to the assessee's acquisition of agricultural land which is excluded from the definition of 'capital asset' under section 2(14) of the Income-tax Act, 1961.

Analysis: The statutory text of section 2(14) excludes specified agricultural land from the definition of 'capital asset' where the land is situated beyond the prescribed municipal/population/distance thresholds. Explanation (d) to section 56(2)(vii)(b) lists 'immovable property being land or building or both' among items captured by the deeming provision, but does not itself carve out the agricultural-land exclusion contained in section 2(14). The material facts establish that the land is agricultural in revenue records, is located more than six kilometres from the local limits of the relevant municipality, and the municipal population falls below the threshold; these facts are supported by a Tehsildar certificate and census data. On applying the statutory exclusion in section 2(14) to the facts, the asset does not qualify as a 'capital asset' for purposes of the deeming provision in section 56(2)(vii)(b).

Conclusion: Section 56(2)(vii)(b) is not applicable to the impugned transaction; the addition of Rs. 59,32,667 under section 56(2)(vii)(b) is deleted and the appeal is allowed in favour of the assessee.

Ratio Decidendi: Agricultural land that falls within the exclusion in section 2(14) of the Income-tax Act, 1961 (on the basis of municipal limits, distance and population tests) is not a 'capital asset' and therefore the deeming provisions of section 56(2)(vii)(b) do not apply to such land.

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