Law:

Section:

Section 45 read with section 2(1)(a ) of the income-tax act, 1961-Capital gains-Chargeable as-Assessee-company brought certain agricultural land for developing it into residential colony-But government acquired it before it was divided into plots and developed-Whether compensation awarded to assessee as a result of acquisition constituted its agricultural income exempt from tax even though land was not used for agricultural purposes-Held, yes-Whether as a result of acquisition notification, land being stock-in-trade stood sterilized and converted into capital asset-Held, no Facts The assessee-company had bought some agricultural land for developing it into a residential colony. However, before it was divided into plots or developed, the Government acquired it. The assessee-company claimed that the amount of compensation received by it for the land was its agricultural income within the meaning of section 2(1)( a) and, hence, exempt from income-tax. The ITO, however, held that the land which was acquired was not being used for agricultural purposes by the assessee, and that, therefore, the compensation received on acquisition thereof was assessable to tax as business income. The Tribunal also upheld the ITO's orders. On reference: Held The issuance of acquisition notification under section 4 of the Land Acquisition Act, 1894, did not change the position of lands. If they were the stock-in-trade of the assessee-company, they would continue to be so: their nature was not converted by reason of the notification. So the nature of the receipt following actual acquisition would depend on the nature of the land. No doubt, compensation has been paid for the land in question on the ground that it was agricultural land. The very mention of the type of land in the awards was based on the agricultural quality of the land and compensation had been awarded not on the basis of the land being a developed colony, but on the basis that it was agricultural land. It would make no difference even if the owner happened to be a person who had bought the agricultural land with the object of converting it into urban plots. Before such plots were carved out and steps taken for developing…

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