Agricultural land retains tax exemption absent clear conversion; potential for housing use alone does not create capital gains liability.

Agricultural land is excluded from capital asset treatment under the Indian Income-tax Act, 1922, and capital gains arise only on transfer of a capital asset. In determining whether land retains agricultural character, the relevant factors are its nature, prior use, basic agricultural operations, and surrounding circumstances. Here, the presence of coconut and fruit-bearing trees, wells and a tank, land revenue assessment, and prior treatment as agricultural land supported that character. No definite act of conversion into non-agricultural land was shown. Mere suitability for house sites or an intention to develop the property did not change its character, so the sale proceeds were not assessable as capital gains.

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Issues: Whether the land in question was a capital asset liable to capital gains tax, or agricultural land excluded from capital asset treatment.

Analysis: Capital gains under section 12B of the Indian Income-tax Act, 1922 arise only from transfer of a capital asset, and section 2(4A) excludes land from which the income derived is agricultural income. Since the expressions "agriculture" and "agricultural purpose" are not defined, their meaning is to be gathered from common parlance and applied with reference to the nature and character of the land, its prior use, the existence of basic agricultural operations, and surrounding circumstances. The property had coconut and other fruit-bearing trees, wells and a tank, was assessed to land revenue, and had been treated as agricultural land in the hands of the previous owner. No definite act was shown by the assessee converting it into non-agricultural land. Mere capability of being used as house sites or the assessee's intention to develop it did not by itself alter its agricultural character.

Conclusion: The land was not a capital asset and the sale proceeds were not assessable as capital gains.

Ratio Decidendi: Land continues to be agricultural land for income-tax purposes unless the evidence shows that its character has been changed by definite non-agricultural user or conversion; mere potential for building use or surrounding urban development is insufficient.

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