Mere inclusion of the lands in a draft town planning scheme or their potential future non-agricultural use did not change their agricultural character at the time of sale.

**Key Takeaways:** - The court emphasized the importance of determining the actual character and use of the land at the time of sale, rather than its potential future use. - Strong presumptions arise from the actual agricultural use of the land and entries in revenue records, which must be effectively rebutted by the revenue authorities. - Mere inclusion in a draft town planning scheme or the possibility of future non-agricultural use does not change the agricultural character of the land. - The court criticized the Tribunal for entertaining new arguments from the revenue department at the appellate stage, which were not raised earlier. **Issue:** Whether the lands sold by the assessee, Chandulal Lallubhai (HUF), during the assessment year 1969-70 were agricultural lands, and if so, whether the profits arising from their sale were liable to be taxed as capital gains under Sections 45 and 2(14) of the Income Tax Act, 1961. **Facts:** - The assessee had purchased three parcels of land (Survey Nos. 71, 72/2/2, and 191) in Ahmedabad city in 1943, which were agricultural lands at the time of purchase. - In 1959 and 1960, the State of Gujarat initiated land acquisition proceedings for Survey Nos. 71 and 191 for the Gujarat Housing Board. - After a legal dispute and compromise, portions of Survey Nos. 71 and 191 remained with the assessee. - In 1968, the assessee sold 6,200 sq. yds. of land from these three survey numbers to a housing society for Rs. 2,17,000. - The Income Tax Officer (ITO) sought to tax the surplus from the sale as capital gains, but the assessee claimed the lands were agricultural. - The Appellate Assistant Commissioner (AAC) allowed the assessee's claim, but the Tribunal held that the agricultural operations were an "eye-wash" to avoid tax. **Arguments:** - The assessee argued that the lands were agricultural at the time of sale, as evidenced by the revenue records, cultivation of crops, and payment of land revenue. The assessee obtained permission under Section 63 of the Tenancy Act to sell the agricultural lands. - The revenue department contended that the lands were earmarked for residential construction, and the agricultural operations were a device to avoid tax. The Tribunal accepted this argument, stating that the cultivation was an "eye-wash" close to the time of sale. **Key Legal Precedents:** - **State of Maharashtra vs. Dnyaneshwar Laxman Rao Wankhede:** Emphasized the importance of establishing demand, acceptance, and recovery for an offense under the Prevention of Corruption Act. - **CIT v. Vajulal Chuntilal (HUF):** The presumptions arising from actual agricultural use and revenue records were not rebutted, and the Tribunal erred in disregarding these presumptions. - **CIT v. Manilal Somnath:** The character of the land at the time of sale is crucial, not its potential future use. Inclusion in a draft town planning scheme does not rebut the presumption of agricultural land. - **CWT v. Officer-in-Charge (Court of Wards), Paigah:** Entries in revenue records raise a rebuttable presumption about the character of the land. **Judgement:** The Gujarat High Court allowed the assessee's appeal and ruled in their favor. The key findings were: 1. The Tribunal's observation that the agricultural operations were an "eye-wash" was unjustified and not permissible, as the revenue department did not raise this contention earlier. 2. Strong presumptions arose from the actual agricultural use of the lands, entries in revenue records showing cultivation, and payment of land revenue as agricultural lands. 3. These presumptions were not effectively rebutted by the revenue department. 4. The mere inclusion of the lands in a draft town planning scheme or their potential future non-agricultural use did not change their agricultural character at the time of sale. 5. The assessee had obtained permission under Section 63 of the Tenancy Act to sell the lands for non-agricultural purposes, indicating their agricultural nature. 6. The lands were sold as agricultural lands, and the profits arising from the sale could not be taxed as capital gains under Sections 45 and 2(14) of the Income Tax Act, 1961. **FAQs:** Q1. What was the significance of the assessee obtaining permission under Section 63 of the Tenancy Act? A1. The fact that the assessee sought permission under Section 63 of the Tenancy Act to sell the lands for non-agricultural purposes indicated that the lands were agricultural in nature. Otherwise, such permission would not have been required or granted under this section. Q2. Why did the court criticize the Tribunal's observation that the agricultural operations were an "eye-wash"? A2. The court criticized the Tribunal for entertaining this new argument from the revenue department at the appellate stage, when it was not raised earlier before the lower authorities. The court held that the Tribunal should not have allowed such a new contention. Q3. What was the significance of the entries in the revenue records? A3. The entries in the revenue records, showing the lands as agricultural and the cultivation of crops, raised a strong presumption in favor of the assessee regarding the agricultural character of the lands. The court held that such presumptions must be effectively rebutted by the revenue authorities. Q4. Can the potential future non-agricultural use of land change its character at the time of sale? A4. No, the court emphasized that the potential future non-agricultural use or the possibility of such use by a future owner does not change the actual character of the land at the time of sale. The court focused on the actual condition and intended use of the land at the relevant time.