Agricultural land lease rights excluded from capital asset treatment, so surplus was not taxable as capital gains.

A transfer of leasehold rights in agricultural land was held not to amount to a transfer of a capital asset for capital gains purposes under section 12B of the Indian Income-tax Act, 1922. The land produced only agricultural income, and land yielding agricultural income was excluded from the definition of "capital asset" under section 2(4A). Because the assessee transferred rights in agricultural land rather than a taxable capital asset, the surplus realised could not be assessed as capital gains. The reference was answered in favour of the assessee.

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Issues: Whether the transfer by the assessee of its interest under the lease of agricultural land constituted a transfer of a capital asset so as to attract capital gains tax under section 12B of the Indian Income-tax Act, 1922.

Analysis: The land in question was found to yield only agricultural income. Under section 2(4A) of the Indian Income-tax Act, 1922, land from which income derived is agricultural income is excluded from the definition of capital asset. The lease conferred enduring rights in the land, and the transfer by the assessee was of those rights in agricultural land, not of a taxable capital asset. As the subject-matter of transfer fell within the statutory exclusion, the surplus realised could not be brought to tax as capital gains under section 12B.

Conclusion: The transfer was not of a capital asset and the amounts realised were not assessable as capital gains under section 12B; the answer to the reference was in favour of the assessee.

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