1. These appeals by the assessee are directed against the orders of the A AC dated 28-12-1981 and consolidated order dated 4-1-1982, respectively, for the assessment years 1977-78, 1973-74 and 1974-75.
Since the issue involved is common these have been heard together and are disposed of by a consolidated order for the sake of convenience.
The AAC has made impugned order for the assessment year 1977-78 and has followed it in other assessment years.
2. The issue before us is whether on the facts and in the circumstances of the case, the capital gains arising from the sale of land of the assessee situated in Lehal, Patiala, is liable to tax under the Income-tax Act, 1961 ('the Act'). The facts which are relevant for determination of this issue lie in a narrow compass. The assessee had agricultural lands on which factually agricultural operations were carried on. During the accounting period ending 31-3-1977, relevant to the assessment year 1977-78, the assessee sold 2,133 sq. yards of the said land for Rs. 70,000. During the course of the assessment proceedings, the ITO went into the question of capital gains arising out of this transaction and their taxability. He worked out the capital gains by taking the cost of the acquisition of this capital asset sold by the assessee at Rs. 5 per sq. yard as on 1-1-1954 as against Rs. 20 per sq. yard claimed by the assessee. The capital gains so determined were taken as a part of the total income of the assessee and taxed vide order dated 25-2-1980.
3. Similarly, for the assessment year 1973-74, the ITO determined the capital gains arising out of the sale proceeds of 19 Biswas of land in Lehal, Patiala. For the assessment year 1974-75 also, capital gains were determined on . the sale proceeds of 1,060 sq. yards of land sold.These assessments were challenged in appeal before the AAC and he vide his impugned order dated 28-12-1981 dismissed the appeal for the assessment year 1977-78. This decision was followed for the assessment years 1973-74 and 1974-75, as mentioned above.
4. We have heard the parties. The issue for determination that has been projected above by us is contained in ground No. 3 in each of the assessment years under appeal. In the alternative, however, the assessee has also raised another ground, being No. 2, in each year where it has been claimed that the AAC erred in not taking the value of the agricultural lands for capital gains as on 28-2-1970. Placing reliance upon the judgment of the Bombay High Court in the case of Manubhai A. Sheth v. N.D. Nirgudkar, Second ITO  128 ITR 87, it was contended on behalf of the assessee that capital gains arising out of the sale of land actually put to agricultural use, wherever located, is not liable to tax. The learned counsel for the assessee also relied on the judgment of the Tribunal, in IT Appeal No. 250 of 1981, dated 18-11-1982 for the proposition that if in the alternative it were to be held that capital gains were chargeable on the sale of agricultural lands mentioned above, then for determining the chargeable capital gains the assessee should be given the benefit of substitution of cost as on 28-2-1970 with effect from which date agricultural lands became the capital asset due to amendment in law. He also relied on the ratio decidendi of the Supreme Court judgment in the case of CIT v.Groz-Beckert Saboo Ltd.  116 ITR 125 to support his submissions.
5. The revenue, on the other hand, relied on the Gujarat High Court judgment in the case of Ranchhodbhai Bhaijibhai Patel v. CIT  81 ITR 446 and justified the dismissal of the appeals by the learned AAC.6. We have given due consideration to the rival submissions and we are of the opinion that the assessee is entitled to succeed. Section 2 of the Act deals with definitions. Section 2(14) defines capital assets.
Before the substitution of Sub-clause (iii) of Clause (14) by the Finance Act, 1970 with effect from 1-4-1970 'capital assets' did not include 'agricultural lands in India'. However, the definition of capital asset underwent a change by Section 3 of the Finance Act, 1970 with the substitution of Clause (iii) which is as under : (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 ; or (b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may. having regard to the extent of and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette ; This sub-clause came up for consideration before the Hon'ble Bombay High Court in the case of Manubhai A. Sheth (supra) and the Court has held that Sub-clause (iii) of Clause (14) of Section 2 with other relevant sections of the Act does not operate to levy capital gains tax on profits or gains arising from the transfer of land which is used for agricultural purposes. The Hon'ble Court has observed that this must be read down so as to exclude from the operation of the said sub-clause, land which is used for agricultural purposes even though it may be situated in any of the areas mentioned in items (a) and (b) of Sub-clause (iii) or, in other words, Sub-clause (iii) of Section 2(14) should be read as if the brackets and words 'other than land which is used for agricultural purposes' occurred in the sub-clause after the words 'not being land'. Thus it is clear that even if the land which is used by the assess ee for agricultural purposes was located within the municipal limits of the city of Patiala, capital gains arising therefrom would not be liable to tax in view of the ratio of this judgment. The authorities below, therefore, erred in bringing to tax capital gains arising from the sale of the said land because admittedly the land before sale, in whatever manner it was disposed of, was in fact used for agricultural purposes.
7. This aspect of the matter has been emphasised by the Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel (supra). In this judgment, the Hon'ble Court after laying down certain guidelines for determining the nature of the land observed that, 'if it is being used for agricultural purposes or even if the agricultural use has ceased but it is apparent that the land is meant to be used for agricultural purposes, it would be agricultural i.u.d'. This nature of land is to be determined just prior to the point of time when it was sold. In the Gujarat High Court case, the land had in fact been converted into land meant for non-agricultural use due to requirements of land for its disposal. But that is not the case before us, and, therefore, the revenue cannot derive benefit from the judgment of the said Court cited by it. In view of what is stated above, the alternative contention of the assessee becomes in a way infructuous. However, if we were to consider whether, when capital gains arising from the sale of said land is taxable, the assessee will be entitled to substitute the cost thereof from the date from which such land became asset within the meaning of the Act, the position is as under : It is now well settled by the decisions of the Supreme Court in the case of CIT v. Bai Shirinbai K. Kooka  46 ITR 86 and in the case of CIT v. Hantapara Tea Co. Ltd.  89 ITR 258 that where the assessee converts his capital assets into stock-in-trade and starts dealing in them the taxable profit on the sale must be determined by deducting from the sale proceeds the market value at the date of their conversion into stock-in-trade and not the original cost of the assessee. This proposition is very clearly reiterated by the Hon'ble Supreme Court in the case of Groz-Beckert Saboo Ltd. (supra). In our considered opinion, the ratio decidendi of the judgment of the Supreme Court in this case supports the proposition that in case capital gains arising from the sale of agricultural land is to be brought to tax, the assessee should have an option to substitute its cost on the date from which agricultural land due to amendment in law referred to above became an asset. This view we have already taken in the case of Amber Industries (P.) Ltd. [IT Appeal No. 250 of 1981, dated 18-11-1982] which has been referred to above. But since we have held that the capital gains arising from the sale of land wherever located are not liable to tax in case the land was actually used for agricultural purposes, this issue actually does not survive for our consideration. Therefore, we are not issuing any directions to ITO to work out the capital gains by taking the cost of the asset as on 28-2-1970 or 1-4-1970 for this purpose.