Agricultural lands do not come within the definition of capital asset under Section 2(14)(iii) of the Income-tax Act, 1961, and therefore, no capital gains tax is leviable on the compensation received by the assessee for the acquisition of his agricultural lands.

A.R. Tiwari, J.

1. At the instance of the Revenue, the Income-tax Appellate Tribunal, Indore, referred the underrated question of law under Section 256(1) of the Income-tax Act, 1961 (for short "the Act"), arising out of I.T.A. No. 1096/Ind of 1983 decided by the Tribunal on August 28, 1985 :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in holding that land used for agricultural purposes does not come within the definition of capital asset under Section 2(14)(iii) of the Income-tax Act, 1961 ?"

Briefly stated the facts of the case are that the assessee owned lands situated in village Bhamori, Tehsil Indore, admeasuring 23.12 acres. The Indore City Improvement Trust, vide notification under Section 68 of the Madhya Pradesh Town Improvement Trusts Act, 1961, proposed to acquire the aforesaid lands. The lands were acquired with effect from November 9, 1973. The possession of the lands was taken over on March 25, 1975. Later, on January 14, 1976, the trust informed the assessee that it was prepared to pay the assessee the sum of Rs. 1,61,840 as compensation for the acquisition. The assessee termed the compensation as inadequate and suggested the reference of the dispute to the Tribunal under Section 73 of the Trusts Act. The matter was then referred to the Land Acquisition Tribunal. The compensation was determined by order dated April 29, 1977. The order was confirmed by the High Court on January 18, 1982. Initially, in the income-tax proceedings there was a dispute on the assessment year for which the capital gain arising on the aforesaid acquisition was taxable. The Tribunal held that it was taxable for the assessment year 1974-75. It then restored the issue of quantum of capital gain to be assessed for disposal by the appellate authority. The order of the Tribunal was upheld by the High Court in Miscellaneous Civil Case No. 134 of 1980 on July 8, 1982. The matter thus went back to the first appellate authority. The Commissioner of Income-tax (Appeals) took up the matter for disposal. The appeal was dismissed. The Tribunal set aside the assessment directing the Income-tax Officer to allow the assessee a reasonable opportunity for producing evidence and to make enquiry whether the lands in question were used for agricultural purposes. It was directed by the Tribunal that if the Income-tax Officer found after such an enquiry that the lands were used for agricultural purposes, then in the light of the case of Manubhai A. Sheth v. N.D. Nirgudkar, 2nd ITO [1981] 128 ITR 87 (Bom), no capital gains tax was leviable. The Revenue felt dissatisfied by the order of the Tribunal and accordingly filed the application seeking statement of the case and reference of the question of law. The Tribunal then stated the case and referred the question of law as noted above.

2. We have heard Shri D.D. Vyas, learned counsel for the applicant. The non-applicant has died during the pendency of the appeal. Shri P.M. Choudhary, learned counsel, however, on instructions from one of the legal representatives of the deceased/non-applicant/assessee appeared only to inform that pursuant to the order of remand by the Tribunal, the final order is passed by the appropriate authority and after enquiry the lands in question have been held to be agricultural lands. It is noticed that the Revenue took no steps to bring the legal representatives of the non-applicant on record.

3. Section 2(14)(iii) of the Act provides as under :

"(iii) agricultural land in India, not being land situate-

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; o