1. The assessee in this case owned agricultural lands. They are situate within the limits of Cuddalore Municpality. The assessee should the lands to an urban co-o0operative building society at a profits of Rs. 1,14,000. the sale took place on March 4,1970. The assessee claimed that this profits was not liable to capital gains tax. The claim was made i connection with his income-tax assessment for the assessment year 1970-71. The ITo rejected the assessee claim for exemption. and bright the amount to tax under the head 'Capital gains'. The Income-tax Appellate Tribunal conferred the assessment, in appeal.
2. In this reference, the assessee contends that the assessment is bad in law. The contention bears examination by reference to the definition of 'capital assets' in s. 2(14) of the I. T. Act and the place of agricultural lands in at definition. Section 2(14), subject to exceptions, broadly defines a 'capital asset' as property of any kind held by an assessee. The exceptions are set out in s. 2(14), cls. (i) to (iv). Clause (ii) refers to agricultural lands. This clause was the subject of an amendment by Parliament in 1970 under the Finance Act of that year. before the amendment, all agricultural lands, wherever situate, were excluded from the definition of 'capital asset'. It may be said that all agricultural lands were non-capital assets. Under the amended provisos, however, agricultural lands situated in certain urban areas were to be distinguished from agricultural lands situate else where. The latter alone were to be treated as :'non-capital assets'. The urban areas referred tin s. 2(14)(iii), as amended, cover agricultural lands with in the lifts of municipalities and other local authorities with a population of ten thousand people and more and also such peripheral belts as might be noticed by e Central Govt., in that behalf.
3. In this case e agricultural lands sold by the assess are situate in Cuddalore Town, which is a populous municipality of more than ten thousand residents. The sale of these agricultural lands by the assessee took place in e previous year ended March 31, 1970. The tax treatment of the assessee transaction, therefore, feel to be considered in the light of the amendment provision in s. 2(14)(iii) since that was the law in force during the relevant assessment year 1970-71, the amendment having come into force on April 1, 1970. these considerations prevailed with the ITO when he applied the amended definition under s. 2(14)(iii) to the assessee case and brought to tax the capital gains of Rs. 1,14,000. /The Tribunal upheld the assessment, basically, on the same consideration.
4. Before us, the assessee learned counsel does not take to the stand that the assessee agricultural klands can be regarded as 'non-capital assets' at the time of their sale. what is urged by him, however, is that at the time of their acquisition, those lands, were non-capital sets, Learned counsel urged that tax under the head 'Capital gains : cannot be charged on e profits accruing from the sale or transfer of an item of property merely because such property answer the denudation of a 'capital assets; at the time of sale. According to learned counsel,, that is a further implied requirement under the statue that the property in question must also answer the description of a capital asset at the time of its acquisition or at any other relevant point of time which is material for the purpose of ascertaining its cost.
5. The argument is attractive up to a point, The basic conception of 'Capital gains, ' is that property, which involves a certain cost of acquisition to the owner, gains an increment in its value over a period of time during which it is being retained by e owner, but yields a profits when he disposes of its and realizes the proceeds. The unearned increment, as is it called, is realised at the item of sale or disposal, In order to fix the quantum of capital gains, therefore, e it becomes necessary to reckon not only the amount of realization at e point of sale, but also the cost o the property at the time of its acquisition or at any other point of time taken as the standard for measuring the increment in value.
6. Learned counsel argument before us might, to some extent accord with these basic principles. But, on the terms of e statutory provision, we cannot accede to the argument that liability for capital gains tax cannot be fastened3 unless the property is a 'capital asset :' not only at the time of sale, but also answer the same description at e item of its acquisition. Section 45 of the I. T. Act enacts that tax under the head 'Capital gains' shall be payable on any profits or gains arising from the transfer of a capital assets. under this charging section, the crucial requirements are that there must be a transfer and the transfer must be of a capital asset. the implication is that at e time of the transfer the subject o the transfer must be a capital asset. There is no further implication. The section does not say that the subject of the transfer must have been a capital asset at any other point of time. Conversely, the charge under s. 45 does not become exigible where e subject of transfer is a non-capital asset. It is not a further requirement for immunity from taxation that the non-capital asset in question just also have been a non-capital asset at the item of its acquisition or at any other material time. In other words, taxation, or exemption form taxation material time, In other words, taxation or exemption from taxation depends upon the subject of transfer answering or not answering the definition of capital asset at the time of transfer and at no other point of time.
7. This position is not bereft of authority. The Tribunal, in their order, bad referred to a decision of the Gujart High Court on the subject in Ranchhodbhai Bhaijibhai patel, v. CIT : 81ITR446(Guj) . This decision taken s the same view of the effect of the relevant statutory provisions with particular references to s. 2(14)(iii). the assessee in that case acquired certain agricultural lands and was using them as such. Subsequently the assessee ceased cultivation in order to render the lands fit for use as house sites. The assessee then sold the lands to a house-buildings society at a profits. The profits was brought to charge as capital gains. The learned judge upheld that assessment. They rejects the contention that since the lands were non-capital assets at the time of their acquisitions, no tax cane be levied on the grains arising from their sale after they became capital assets. The learned judges observed that where the property transferred was no a capital asset on e date of its acquisition but because one subsequently, its character alone changes but the property remains the same. They added that to have regard for the previous different character o what is indubitably a capital asset at the time of the transfer, would be contrary to the terms of s. 45 and other related provision of the ACt.
8. We agree entirely with their view of the nature of the charge to capital gains under the I. T. Act. The only distinction between the Gujart case and the present case is that non-capital assets became converted into capital assets by an overt act of the assessee in e one case and by Act of Parliament in the other. But this difference does not affect the principle.
9. The question before us in this reference is :
'Whether, on e facts and in the circumstances of the case, the sum of Rs. 1,14,000 is liable to be taxed as capital gains ' Having regard to the consideration we have stated above, our answer to the question is in e affirmative and in over of the REvenue. The assessee will pay the costs of the Department. counsel's fee Rs. 500.