2006 (12) TMI 108 - HC - Income Tax

Summary

Issues involved:
The judgment deals with the issue of whether capital gains arising from the acquisition of agricultural lands within municipal limits are taxable under the Income-tax Act, 1961.

Details of the Judgment:

The case involved the acquisition of land by the Government, which was sought to be taxed for capital gains. The Commissioner of Income-tax (Appeals) accepted the claim of the assessee that no cost of acquisition was incurred, a view upheld by the Tribunal based on the judgment in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294.

In B.C. Srinivasa Setty's case, the Supreme Court held that for tax under "Capital gains," the transaction must fall within the computation provisions of section 48 of the Act. The question in the present case was whether income from capital gains was not taxable based on the same principle.

Agricultural land is considered a capital asset under section 2(14) of the Act, and its acquisition is deemed a transfer of a capital asset, thus subject to tax.

The Supreme Court in A.R. Krishnamurthy v. CIT [1989] 176 ITR 417 distinguished the B.C. Srinivasa Setty case, emphasizing that the cost of acquisition of leasehold rights can be determined, unlike in the case of goodwill where no cost element can be identified.

The plea of the assessee in the present case was that the cost of acquisition of land was nil, not that it could not be computed. However, it was noted that the land was allotted before March 1, 1970, the date when agricultural land within municipal limits was declared a capital asset.

Considering a similar issue in a previous case, it was held that capital gain arising from land acquisition would be taxable under the Act, but the cost for calculating capital gain tax should be determined as of March 1, 1970.

The reference was disposed of accordingly.