T.N.C. Rangarajan, Judicial Member
1. This appeal relates to the assessment of capital gains.
2. The assessee is a HUF. In the previous year ended 12-4-1983, corresponding to the assessment year 1983-84, the assessee sold 5.34 acres of land in Arapalayam village for a consideration of Rs. 10,05,200. The assessee reinvested this amount in the purchase of agricultural land. Therefore, the assessee claimed that the lands sold were agricultural lands and the consideration having been reinvested in agricultural lands, the assessee was entitled to relief Under Section 54B of the IT Act. The ITO was of the view that the lands sold were not agricultural lands, and, therefore, he brought to tax the capital gains arising from the transfer of the lands and did not consider the claim for exemption. On appeal, the CIT (A) confirmed the assessment.
3. In the further appeal before us, it was contended on behalf of the assessee that the lands were agricultural lands as registered in the revenue records, though remaining fallow due to drought situation. It was further submitted that since the proceeds have been reinvested, the assessee was entitled to relief Under Section 54B. On the other hand, it was contended on behalf of the revenue, relying on the decision of the Gujarat High Court in the case of Arundhati Balkrishna v. CIT  138 ITR 245, that the very fact that the assessee had been able to sell the property for a high price and that it had been described as Tarisu land showed that the property had ceased to be agricultural land and, therefore, the capital gains arising from the transfer of the lands was not only liable to tax but cannot also be eligible for relief Under Section 54B. In the alternative, it was contended that even if the lands were agricultural in nature, the assessee would not be entitled to the relief Under Section 54B unless it was shown that it was actually put to use within a period of two years prior to the sale.
4. On a consideration of the rival submissions, we are of the opinion that the assessee is entitled to succeed. The leading case on the question whether a land is to be taken as agricultural or not is that of the Supreme Court in the case of CWT v. Officer-in-Charge (Court of Wards)  105 ITR 133, wherein it was held:
The determination of the character of the land, according to the purpose for which it is meant or set apart and can be used, is a matter which ought to be determined on the facts of each particular case. What is really required to be shown is the connection with an agricultural purpose and user and not the mere possibility of user of land, by some possible future owner or possessor, for an agricultural purpose. It is not the mere potentiality, which will only affect its valuation as part of ‘assets’, but its actual condition and intended user which has to be seen for purposes of exemption from wealth-tax. One of the objects of the exemption is to encourage cultivation or actual utilisation of land for agricultural purposes. If there is neither anything in its condition, nor anything in the evidence to indicate the intention of its owners or possessors so as to connect it with an agricultural purpose, the land eould not be ‘agricultural land’ for the purposes of earning an exemption under the Act. Entries in revenue records are, however, good prima facie evidence.
Though the observations of the Supreme Court is with reference to the Wealth-tax Act, where agricultural land is not defined, it equally applies to Income-tax Act, where also agricultural land has not been denned. We must, therefore, determine the character of the land in question applying the tests given by the Supreme Court. The evidence available in the present case is that the land was entered in the revenue records as agricultural land. In the wealth-tax assessment the land has been exempted Under Section 5(1)(iv)(a), as agricultural land for the assessment year 1982-83 by the appellate order dated 25-6-1986. The nature of the land has been described by the CIT(A) by his order dated 4-1-1988 in the case of A.M.M. Arunachalam, who owned the adjacent land. It is stated that the land was always treated as agricultural land and that only limited cultivation was possible on account of scarcity. He has specifically observed:
During my camp at Madurai, the said land was inspected by me on 14-7-1987. Out of the plots sold, some have remained in their original condition. This indicates that the plots were not converted into house sites before sale. The land is low lying. In the adjoining locality some cultivation is still being carried out but evidently the shortage of water has affected the nature and extent of cultivation.
No doubt, the land has been sold for a high price and the purchaser has converted it into house sites. But we find on the facts on record that until the decision to sell the lands was taken by the assessee, the actual condition of the land was agricultural land intended to be used as agricultural land as it was used earlier. There is no evidence to show that the assessee by himself had decided to abandon the intention to cultivate the land even though the actual cultivation was not possible due to lack of water. That might have been the reason for selling the lands and might have fetched a higher price because of the intended user of the purchaser ; but, in our opinion, it does not in any way rebut the initial presumption that the property, classified as agricultural land in revenue records and accepted as agricultural land in the wealth-tax assessments, ceased to be such agricultural land before the transfer of such lands.
5. Section 2(14), which defines capital asset, was amended toy the Finance Act, 1970 to include agricultural land situated within the limits of any municipality. It is not in dispute that these lands were situated within Madurai Municipal Corporation and, therefore, the capital gains arising from the transfer of these lands would become assessable because the lands in question must be regarded as capital asset within the meaning of Section 2(14). However, the Finance Act, 1970 also introduced Section 54B granting exemption in case the proceeds of sale of agricultural lands are reinvested in the purchase of other agricultural lands. The Finance Bill did not contain this section and, therefore, we do not have any Notes on Clauses in respect of this section. However, after the Finance Act introduced this section, the CBDT has explained its meaning by Circular No. 45, dated 2-9-1970. It states:
The effect of the amendments to Section 2(14) and Section 47, as stated above, will be that capital gains arising from transfer of agricultural lands situated in the municipal and other urban areas on or after 1-3-1970, will become liable to taxation even where such land was held for bona fide agricultural purposes, often as the main source of livelihood. With a view to relieving the burden of taxation on the capital gains in such cases, a provision has been made, in a new Section 54B, for exempting from tax the capital gain arising from the transfer of agricultural land in certain circumstances. Under the new Section 54B, where the capital gain arises from transfer of land which in the two years immediately preceding the date of transfer was being used by the assessee or a parent of his for agricultural purposes, and the assessee has, within a period of two years after that date, purchased any other land (whether in the same area or elsewhere) for being used for agricultural purposes, then the capital gain will not be charged to tax to the extent that it has been utilised for acquiring the fresh land. Where the amount of the capital gain exceeds the cost of acquisition of the fresh land, only the excess will toe chargeable to tax. The concession will, however, be fortified if the assessee transfers the fresh land acquired by him within a period of three years from the date of its purchase.
It was argued on behalf of the revenue that this section imposed a further condition that the land should toe used by the assessee for agricultural purposes within a period of two years prior to the sale and it would not be sufficient that if the lands are found to be agricultural lands, though remaining fallow. We do not think that Parliament could have intended to impose such a restriction on the relief Under Section 54B. As pointed out by the Supreme Court, one of the objects of the exemption is to encourage cultivation. Therefore, it stands to reason that an assessee, who is unable to cultivate the land in his possession, should be encouraged to replace it with land which he can cultivate. That is why the Finance Act, 1970, while bringing to tax agricultural lands within the limits of a municipality, simultaneously granted relief Under Section 54B for reinvestment of the proceeds. The expression “used for agricultural purposes” in this section could only be the description of the agricultural land which is the subject of the transfer and not a condition precedent for granting the relief Under Section 54B. Even if we take it to be so, on the facts of the present case, we find that the assessee had in fact cultivated a part of its lands according to the Adangal Register and no further cultivation was possible because of lack of water. The use referred to in the section can only be regarded as such use as the lands are capable of with the aid of facilities available and the assessee cannot be denied the relief because he was actually unable to put the land to use due to vagaries of nature and non-availability of resources. It can hardly be the fault of the assessee if rained lands are not actually put to use during the drought. We are, therefore, convinced that the assessee was entitled to relief Under Section 54B.
6. The assessee has also raised an alternative ground that the capital gains arising from the transfer of agricultural lands within the limits of a municipality would still be agricultural income and not liable to tax under the Income-tax Act. This contention is supported by the decision of the Bombay High Court in the case of Manubhai A. Seth v. N.D. Nirgudkar, Second ITO  128 ITR 87. Hence, in any view of the matter, the tax imposed on the capital gains arising from the transfer of the lands in Arapalayam village has to be deleted. We direct accordingly.
7. In the result, the appeal is allowed.