Compensation received for the requisition and acquisition of agricultural lands is not taxable as capital gains if the lands were used for agricultural purposes and the compensation was derived from lands used for agricultural purposes.

( 1 ) THIS reference under Section 66 (2) of the Indian I. T. Act, 1922, relates to the assessment year 1960-61, the relevant previous year ending on 31st December, 1959.

( 2 ) WE will briefly state the relevant facts stated and/or found by the Tribunal. The assessee was the owner of about 5,374 bighas of land in Assam and used them for agricultural purposes and derived agricultural income therefrom. In 1949, 'those lands were requisitioned by the Assam Government under the Assam Land (Requisition and Acquisition) Act, 1948, and the assessee was paid compensation for such requisition. Those lands were allotted to the landless people in 1949 and since then those people used those lands for agricultural purposes and derived agricultural income from those lands. In 1959, the assessee was paid compensation for the acquisition of those lands by the Assam Government under the aforesaid Act.

( 3 ) IN Income-tax Reference No. 109 of 1969 [cit v. All India Tea and Trading Co. Ltd. it has been held by this court that the compensation for the aforesaid requisition received by the assessee was agricultural income and was not includible in the computation of its total income.

( 4 ) WE are now concerned with the question as to whether Rs. 1,39,208. 41, being the compensation paid to the assessee for the acquisition of those lands minus Rs. 4,749, being the cost of those lands, is assessable in the hands of the assessee as capital gains under Section 12b of the Indian I. T. Act, 1922, read with Section 2 (4a) of that Act.

( 5 ) THE ITO assessed the aforesaid sum of Rs. 1,34,459 under the head "capital gains". The assessee appealed. The AAC found that the lands were agricultural lands and the income derived therefrom was agricultural income. He accordingly held that those lands were not capital assets and excluded Rs. 1,34,459 from the assessment. The department appealed. In view of the aforesaid facts found by the Tribunal, it agreed with the AAC and sustained the deletion.

( 6 ) THE Commissioner then raised the following question in his application under Section 66 (1) of the Act:"whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,34,459 was derived from land used for agricultural purposes and accordingly exempt from tax?"

( 7 ) AS the Tribunal rejected the aforesaid application, a Division Bench of this court acting under Section 66 (2) of the Act and at the instance of the Commissioner reframed the question as follows: "whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,34,459 was exempt from tax?"

( 8 ) HENCE, this reference is now before us and Mr. Ajit Sengupta, learned counsel for the revenue, argues as follows: (i) The word "held" in Section 2 (4a) of the Indian I. T. Act, 1922, connotes the idea of physical or actual possession and does not include constructive or symbolic possession; (ii) The assessee was not in physical or actual possession of those lands and, therefore, those lands were not held by the assessee as agricultural lands at the time of acquisition in view of the said requisition in 1949 and, accordingly, the aforesaid receipt is liable to be taxed under Section 12b of the Act; (iii) Under section 12b of the Act tax is payable under the head "capital gains" in respect of profits and gains from sale, exchange, etc. , of a capital asset. The assessee was the owner of those lands and such ownership was a capital asset held by the assessee and, therefore, by its acquisition, profits and gains accrued to the assessee, and, accordingly, the aforesaid amount is liable to be taxed under the head "capital gains" ; (iv) Only those lands from which the income derived is agricultural income are excluded from the definition of the term "capital asset". Therefore, agricultural income must be derived by the assessee in the previous year from those lands and not by any other person, because th