Balasubrahmanyan, J.:— The assessee in this case owned agricultural lands. They are situate within the limits of Cuddalore Municipality. The assessee sold the lands to an urban co-operative building society at a profit of Rs. 1,14,000. The sale took place on March 4, 1970. The assessee claimed that this profit was not liable to capital gains tax. The claim was made in connection with his income-tax assessment for the assessment year 1970-71. The ITO rejected the assessee's claim for exemption, and brought the amount to tax under the head “Capital gains”. The Income-tax Appellate Tribunal confirmed 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 asset” in s. 2(14) of the I.T Act and the place of agricultural lands in that definition. Section 2(14), subject to exceptions, broadly defines a “capital asset” as property of any kind held by an assessee.
3. The exceptions are set out in s. 2(14), cls. (i) to (iv). Clause (iii) 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 provision, however, agricultural lands situate in certain urban areas were to be distinguished from agricultural lands situate elsewhere. The latter alone were to be treated as “non-capital assets”. The urban areas referred to in s. 2(14)(iii), as amended, cover agricultural lands within the limits of municipalities and other local authorities with a population of ten thousand people and more and also such peripheral belts as might be notified by the Central Govt. in that behalf.
4. In this case the agricultural lands sold by the assessee 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 the previous year ended March 31, 1970. The tax treatment of the assessee's transaction, therefore, fell to be considered in the light of the amended 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's case and brought to tax the capital gains of Rs. 1,14,000. The Tribunal upheld the assessment, basically, on the same considerations.
5. Before us, the assessee's learned counsel does not take up the stand that the assessee's agricultural lands 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 assets. Learned counsel urged that tax under the head “Capital gains” cannot be charged on the profits accruing from the sale or transfer of an item of property merely because such property answers the definition of a “capital asset” at the time of sale. According to learned counsel, there is a further implied requirement under the statute 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.
6. 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 the owner, but yields a profit when he disposes of it and realizes the proceeds. The unearned increment, as it is called, is realized at the time of sale or disposal. In order to fix the quantum of capital gains, therefore, it becomes necessary to reckon not only the amount of realisation at the point of sale, but also the cost of 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.
7. Learned counsel's argument before us might, to some extent, accord with these basic principles. But, on the terms of the statutory provisions, we cannot accede to the argument, that liability for capital gains tax cannot be fastened unless the property is a “capital asset” not only at the time of sale, but also answers the same description at the time of its acquisition. Section 45 of the I.T Act enacts that tax under the head “Capital gains” shall be payable on any profit or gain arising from the transfer of a capital asset. 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 the time of the transfer the subject of 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 the 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 must also have been a non-capital asset at the time of its acquisition or at any other 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.
8. This position is not bereft of authority. The Tribunal, in their order, had referred to a decision of the Gujarat High Court on the subject in Ranchhodbhai Bhaijibhai Patel v. CIT, [1971] 81 ITR 446. This decision takes the same view of the effect of the relevant statutory provisions with particular reference 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 housebuilding society at a profit. The profit was brought to charge as capital gains. The learned judges upheld the assessment. They rejected the contention that since the lands were non-capital assets at the time of their acquisition, no tax can be levied on the gains arising from their sale after they became capital assets. The learned judges observed that where the property transferred was not a capital asset on the date of its acquisition but became one subsequently, its character alone changes but the property remains the same. They added that to have regard for the previous different character of what is indubitably a capital asset at the time of the transfer, would be contrary to the terms of s. 45 and other related provisions of the Act.
9. We agree entirely with this view of the nature of the charge to capital gains under the I.T Act. The only distinction between the Gujarat case and the present case is that non-capital assets became converted into capital assets by an overt act of the assessee in the one case and by Act of Parliament in the other. But this difference does not affect the principle.
10. The question before us in this reference is:
“Whether, on the 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 considerations we have stated above, our answer to the question is in the affirmative and in favour of the Revenue. The assessee will pay the costs of the Department. Counsel's fee Rs. 500.