Land held by an assessee for agricultural purposes and from which agricultural income is derived is exempt from capital gains tax under S. 12-B of the Indian Income-tax Act.

RAJAGOPALAN, J. :- The assessee was a dealer in cotton goods, sarangs and kailees, with his place of business at Melapalayam. Between August 1940 and December 1944 he purchased some plots of lands in T. S. No. 3140 in Melapalayam, which together totalled 2.54 acres. They were cultivable lands and were registered in revenue records as dry lands assessed to land revenue. The price paid by the assessee for these lands totalled Rs. 3,400. Even by April 1944, the assessee entered into an agreement with the Muslim Educational Society, Melapalayam, to construct buildings on the land for use as a school. Construction commenced in 1944 and was completed in 1946 at a cost of Rs. 33,167. The Committee occupied the buildings even before they were completed and paid rent which was eventually raised to Rs. 100 a month. The Committee decided to buy the property, and after some negotiations the assessee sold the land with the buildings thereon to the Committee for Rs. 80,000 on 5-6-1946.

2. The Departmental authorities treated Rs. 43,433, the difference between the sale-price and what the assessee had expended, as a capital gain. The market value of the land alone was estimated at Rs. 9,000, and so Rs. 5,600 was treated as the capital gain made by the assessee which could be allocated to the sale of the land apart from the building. Out of this, again 1/5th was excluded, as 1/5th of the area of the land was found to be in use, even after the Committee had acquired the property, for agricultural purposes. The school authorities used a fifth of the compound as an experimental farm attached to the school. The rest of the land, apart from the extent on which the building stood, was apparently in use as a play ground. Four-fifths of Rs. 5,600, Rs. 4,480, was treated by the Department as the capital gain assessable to tax under S. 12-B of the Indian Income-tax Act, i.e., with reference to the sale of the lands. As there was not much dispute as regards the capital gain from the sale of the house the amount chargeable to tax at Rs. 42,313 (sic). The Tribunal agreed with the Assistant Commissioner on this point.

3. The questions referred to this Court under S. 66(1) of the Act were :

1. Whether the provisions of S. 12-B of the Indian Income-tax Act imposing a tax on capital gains are ultra vires the Indian Legislature?

2. Whether the assessment of the capital gains at Rs. 4,480 on four-fifths of the land is valid?

4. The first question is no longer res integra. It is concluded by the decision of the Supreme Court in Navinchandra Mafatlal v. Commissioner of Income-tax, (1955) 26 ITR 758 : ((S) AIR 1955 SC 58) (A), where the validity of S. 12-B was upheld.

5. What is taxable under S. 12-B of the Act is "profits or gains arising from the sale......of a capital asset." "Capital asset" has been defined in S. 2(4-A). "Capital asset means property of any kind held by an assessee, whether or not connected with his business, profession or vocation, but does not include ........(iii) any land from which the income derived is agricultural income". "Agricultural income" has been defined in S. 2(1) of the Act.

6. The contention of the assessee was that all the land, except that actually occupied by the building in use as a school house, was held by him as agricultural land, and that any profit made by the sale of such agricultural land was excluded from the operation of S. 12-B; agricultural land was not a capital asset as defined by S. 2(4-A). 7. The questions that arise are :

(i) Was the land in question, T. S. No. 3140 land from which the assessee derived agricultural income? (ii) Did he derive income from the land? (iii) Was that income agricultural income as defined by S. 2(1) of the Act?

The assessee relied on entries in the Adangal registers to show that all through, upto at least the end of June 1945, the lands were used for agricultural operations and crops were raised thereon. He relied on entries in his accounts to show that he derived agricultural inco