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Issues Involved:
1. Whether the land sold by the assessee was agricultural land and thus the surplus realized on the sale was not liable to be assessed to capital gains. 2. Whether the land ceased to be agricultural land upon the application for permission under section 63 of the Bombay Tenancy and Agricultural Lands Act, 1948. Issue-wise Detailed Analysis: Issue 1: Whether the land sold by the assessee was agricultural land and thus the surplus realized on the sale was not liable to be assessed to capital gains. The primary question was whether the land sold by the assessee was "agricultural land" and thus exempt from capital gains tax. The land in question was purchased by the assessee along with another person and was located in village Billimora, outside the municipal limits. The land was used for agricultural purposes for three years, growing pulse (tuver) and green grass, although the yield was low and there was no sale of produce. The land continued to be listed in the revenue records as agricultural and was assessed to land revenue. The assessee applied for permission under section 63 of the Bombay Tenancy and Agricultural Lands Act, 1948, to sell the land to a cooperative housing society. The permission was granted with conditions for residential use, and the conveyance was executed shortly afterward. The assessee received a sum of Rs. 67,928 as his one-third share of the consideration and claimed that the surplus was not taxable as capital gains since the land was agricultural. The Income Tax Officer (ITO) disagreed, stating that since no agricultural operations were carried out immediately before the sale, the land could not be treated as agricultural. However, the Appellate Assistant Commissioner (AAC) and the Appellate Tribunal reversed this decision, holding that the land was agricultural and thus the surplus was not taxable. The High Court affirmed the Tribunal's decision, noting several factors: - The land was classified as agricultural in revenue records and assessed to land revenue. - Agricultural activities were carried out for three years, indicating its use and physical characteristics were agricultural. - There was no evidence of conversion to non-agricultural use before the sale. - The permission for non-agricultural use was obtained by the vendee after the sale. - The land was located in a rural area, not within municipal limits. - There was no evidence that the price paid was solely due to its potential for non-agricultural use. The Court concluded that the land was indeed agricultural at the time of sale, and the surplus realized was not liable to be assessed as capital gains. Issue 2: Whether the land ceased to be agricultural land upon the application for permission under section 63 of the Bombay Tenancy and Agricultural Lands Act, 1948. The second question was whether the land ceased to be agricultural upon the application for permission under section 63 of the Bombay Tenancy and Agricultural Lands Act, 1948. The permission was necessary because the land was agricultural, and the sale was to a non-agriculturist. The permission was granted with conditions for residential use, but the land was sold before any conversion to non-agricultural use. The Court noted that obtaining permission under section 63 did not change the land's classification or its actual use. The permission was a legal requirement for selling agricultural land to a non-agriculturist. The land's character as agricultural was not altered by the mere act of obtaining permission, especially since the actual conversion to non-agricultural use occurred after the sale. The Court emphasized that the land continued to be listed as agricultural in revenue records and was not reclassified or physically altered before the sale. Therefore, the land did not cease to be agricultural upon the application for permission. Conclusion: The High Court answered both questions in favor of the assessee: - The land was agricultural, and the surplus realized on its sale was not liable to be assessed as capital gains. - The land did not cease to be agricultural upon the application for permission under section 63 of the Bombay Tenancy and Agricultural Lands Act, 1948. The Commissioner was directed to pay the costs of the reference to the assessee.
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