2007 (1) TMI 149 - MADRAS HIGH COURT

Character of the land - Agricultural land - capital gains - undivided shares - the lands are not agricultural lands and hence profit on sale of the lands is assessable as capital gains? - Addition to gross profits - Admitted fact that till the assessee sold the lands, agricultural operations, in fact, were carried out by the assessee. The assessing authority, in its order, in paragraph 11, states that the land was actually under cultivation till the date of sale.

A perusal of section 45 shows that the requirement as on the date of sale or transfer is that the asset must be a capital asset, considering the description under the Act. The charge ability to tax under section 45 arises only if on the date of sale, the land in question retained its character as a capital asset, which means, an asset which does not answer the definition of a capital asset and which is an agricultural land falling within the definition of section 2(14) would automatically be outside the scope of section 45.

Thus, we do not find any reason to accept the plea of the respondents/Revenue that the asset in question is a capital asset and it attracts levy of capital gains tax, it having shed its character as an agricultural land on the sale effected.

As admitted by the Revenue that as on the date of sale, the agricultural operations were in fact carried on in the lands, it is difficult to accept the view of the Tribunal, considering the law was to proceed from the point of how the purchaser had intended to use. It is not disputed by the Revenue that the land in question does not fall within the restricted clause to make it a capital asset for purposes of levy u/s 45.

Consequently, Appeal is partly allowed and the first question is in favour of the assessee and the second one is held against the assessee.