The main legal point established in the judgment is the interpretation of 'agriculture' and 'agricultural purpose' to determine the classification of land as agricultural and the income derived as agricultural income, influencing the tax treatment of the property.

1. The assessee's father, Kolappa Pillai, purchased from the Maharaja of Travancore on 18th August 1956 a landed property known as Singarathope having an extent of a little over 9 acres situated within the municipal limits of Trivandrum town for Rs. 34,5i,0/- including registration expenses. The property was a garden land and had two wells and a tank: it had also facilities of electricity and tap water. The property had over 300 coconut trees, a few jack trees and other fruit-bearing trees thereon: it had also some sandalwood trees and flowering plants like jasmin. The Maharaja used to drive to the Singarathope during the evenings and spend some time there On 23rd January 1957, Kolappa Pillai made a settlement of the property on the assessee and his younger brother, the former getting 2 out of 3 shares and the latter getting the remaining third share.

2. The same year the Government of Kerala initiated proceedings for acquiring the property for providing house sites for Harijans. In the acquisition the assessee and his brother got Rs. 2,90,653/- as compensation, the matter, ultimately, having been disposed of by the High Court in February 1961. The assessee claimed that he expended Rs. 5,000/- on the property subsequent to the settlement. However, the Department allowed the claim only to the extent of Rs. 3,400/- so that the total cost of the asset (the property) came to Rs. 37,900/-. Deducting this amount from the amount received as compensation, the balance came to Rs. 2,52,753/-, out of which the share of the assessee came to Rs. 1,68,500/-. This was sought to be assessed under the head "capital gains"; and the assessee raised objection that the property was agricultural land and as such was not a capital asset. The Income-tax Officer and the Appellate Assistant Commissioner overruled this objection and treated the amount as capital gains. On appeal, the Income-tax Appellate Tribunal held that the property was agricultural land (in other words, the income derived from the property was agricultural income) and therefore, it was not a capital asset. Thereafter, at the instance of the Revenue, the following questions have been referred to this Court:

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in not treating the land in question as a capital asset;

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the income derived by the sale of land in question was not assessable as capital gains."

Capital gains are assessable under S.12B of the Indian Income-tax Act of 1922 (this is the Act that applies to the case, since the assessment relates to the assessment year 1958-59), if the profits or gains arise from the sale, exchange, relinquishment or transfer of a capital asset effected after 31st March 1956. And "capital asset" is defined under S.2 (4A) to mean property of any kind held by an assessee, whether or not connected with his business, profession or vocation, but does not include, inter alia, "any land from which the income derived is agricultural income". "Agricultural income" is again defined under S.2(1) to mean, inter alia, any income derived by agriculture from land which is used for agricultural purposes and is either assessed to land revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government as such.

3. The reasoning of the Department for holding that the property was a capital asset was that the property was in an important locality in the town having facilities of electricity and tap water and was capable of being used as house sites. The Department also relied upon the decision of a Division Bench of this Court in Krishna Iyer v. Addl. Income-tax Officer, Ernakulam (59 ITR.145). The reasoning of the Tribunal, on the other hand, was that the fruit-bearing trees like coconut trees, jack trees, etc. could not have been of spontaneou