Agricultural land character and capital gains cost of acquisition depend on actual user, intention, and the property's acquisition cost.

Agricultural land must be determined by its ordinary character, actual user, surrounding circumstances and the owner's intention. Applying those factors, land whose agricultural use had ceased after non-agricultural permission was obtained and which was intended for residential construction was treated as non-agricultural and therefore a capital asset under section 2(14). For capital gains, the cost of acquisition under sections 48 and 55 refers to the cost of the property transferred, and does not require the asset to have been a capital asset when first acquired. Where the land was acquired before 1 January 1954, the fair market value on that date could be adopted.

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Issues: (i) Whether the lands sold by the assessee were agricultural lands within the meaning of section 2(14) of the Income-tax Act, 1961; (ii) if not, whether in computing capital gains the assessee was entitled to deduct the market value of the lands as on 1 January 1954 or as on 23 January 1963.

Issue (i): Whether the lands sold by the assessee were agricultural lands within the meaning of section 2(14) of the Income-tax Act, 1961.

Analysis: The expression "agricultural land" is not defined in the Act and must be understood in its ordinary sense, with primary regard to the actual use of the land and its general nature and character. Relevant considerations include the use to which the land is put, the intention of the owner as gathered from surrounding circumstances, the situation and surroundings of the land, and other objective indicators. Here, agricultural use had ceased after permission for non-agricultural use was obtained, the land was intended to be used for residential construction, the sale was effected after the change in user, and the land was dealt with as non-agricultural property.

Conclusion: The lands were not agricultural lands at the dates of sale and were capital assets within section 2(14) of the Income-tax Act, 1961. This issue was decided against the assessee.

Issue (ii): If the lands were not agricultural lands, whether in computing capital gains the assessee was entitled to deduct the market value of the lands as on 1 January 1954 or as on 23 January 1963.

Analysis: For capital gains, section 45 charges the transfer of a capital asset, while section 48 requires deduction of the cost of acquisition of the capital asset. The expression "cost of acquisition of the capital asset" refers to the cost of acquiring the property transferred and does not require that the property must have been a capital asset on the date of acquisition. Section 55(2)(i) permits, where the asset was acquired before 1 January 1954, substitution of fair market value on that date. The statutory scheme does not warrant a fresh notional acquisition when land later changes from agricultural to non-agricultural.

Conclusion: The assessee was entitled to deduct the fair market value of the land as on 1 January 1954. This issue was decided in favour of the assessee.

Final Conclusion: The reference was answered partly against the assessee on the character of the land, but in his favour on the basis to be adopted for computing capital gains.

Ratio Decidendi: For capital gains, the taxable transfer depends on the asset being a capital asset at the date of transfer, and the cost of acquisition under sections 48 and 55 is the cost of the property transferred, even if it became a capital asset only later by change of user.

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