s.2(14) — Meaning of capital asset, and rural agricultural land
Defines capital asset as property of any kind held by an assessee, and excludes stock in trade, personal effects and rural agricultural land lying beyond set population and distance limits from a municipality.
The aerial distance tiers in sub-clause (iii)(b) apply from assessment year 2014-15 under the Finance Act, 2013. The Board's Circular 17 of 2015, read as reproduced by the Ahmedabad Tribunal in Akash Deep Farms, accepts that for earlier years the distance is the shortest road distance. Before assessment year 2014-15 the eight kilometre limb also applied only to areas the Central Government had notified, read for this page only as the Commissioner (Appeals) quoted the old text in Akash Deep Farms. The counterpart in the Income-tax Act, 2025 is section 2(22).
Income-tax Act, 1961
s.2(14)
Income-tax Act, 2025
s.2(22)
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 2(14) of the Income-tax Act, 1961 defines capital asset as property of any kind held by an assessee, whether or not connected with his business or profession, with further limbs for securities held by a Foreign Institutional Investor and unit linked insurance policies, and excludes stock in trade, personal effects and specified bonds. Sub-clause (iii) excludes agricultural land in India unless it lies (a) within a municipality or cantonment board with a population of not less than ten thousand, or (b) within a distance, measured aerially from the local limits of such a municipality or board, of two kilometres where its population is more than ten thousand and not more than one lakh, six kilometres where it is more than one lakh and not more than ten lakh, and eight kilometres where it is more than ten lakh. Population is that of the last preceding census whose figures were published before the first day of the previous year, and the tiers key to the municipality's population, not the village's. Rural agricultural land given under a joint development agreement is therefore not a capital asset, and no capital gain arises on it. Character is judged on the date of transfer. The Supreme Court in Sarifabibi Mohmed Ibrahim (September 1993), a Surat case, held that whether land is agricultural "is essentially a question of fact" to be drawn "on a cumulative consideration of all the relevant facts", adopting the thirteen factors of the Gujarat High Court in Siddharth J. Desai (September 1981), which include whether permission for non-agricultural use was obtained, when and by whom. The Pune Tribunal in Popatrao Dashrathrao (January 2026) found "some force" in the owner's argument that agricultural land given under a registered agreement of 20 January 2011 was transferred in that year without any capital gain (paras 22 and 23) but did not decide it, held that the market value of the flats on the occupancy certificate was their cost on a later sale (para 28), and remanded the computation. Held is wider than owned: the Bombay High Court at Nagpur in Vidarbha Veneer Industries (April 2025, para 6), construing section 50C, said land can be held as owner, lessee, allottee, tenant or licensee. The counterpart in the Income-tax Act, 2025 is section 2(22), which keeps item (A) in the same words and sets the distance tiers in a Table under item (B), with population taken before the first day of the tax year.
What the provision does
Decides whether anything is a capital asset at all, and so whether a capital gain can arise. For land given for development it settles, by location and character on the date of transfer, whether rural agricultural land is outside the charge. It does not decide when the transfer takes place or whether land has ceased to be agricultural, which are questions of fact.
Threshold questions
- Is the land agricultural on the date of transfer, judged on its use, the revenue record, the price and any permission for non-agricultural use
- Does it lie within a municipality or cantonment board with a population of ten thousand or more
- If outside, how far is it from the local limits of such a municipality (measured aerially, from assessment year 2014-15), what was that municipality's population in the last published census, and for earlier years was the land in an area notified by the Central Government
- Was permission for non-agricultural use obtained by the owner before the transfer, or only by the developer or buyer afterwards
- Is the land held as stock in trade, which takes it out of the definition and into business income
- Is what is transferred land itself, or a right in land such as a lease, a development right or a right under an agreement
In practice
The recurring disputes.
When land given for development stops being agricultural
The owner's argument is that character is tested on the date of transfer, and that permission for non-agricultural use sought or paid for by the developer after the agreement does not change the owner's land; the Gujarat High Court in Siddharth J. Desai held land agricultural where the buyer obtained permission four days after the conveyance, and answered in the negative the question whether land ceased to be agricultural on an application for permission under section 63 of the Tenancy Act (an application the owner himself had made). The Revenue's argument is that where the owner obtains the permission before the agreement, or the agreement is priced by the square yard on a layout for housing, the land has lost its character; in Sarifabibi the Supreme Court found that the owners "had no intention to bring it under cultivation at any time after 1965-66" and that the agreement to sell for housing, the permission to sell for a non-agricultural purpose, the years without cultivation, the location and the price together outweighed the owners' case, "Though a formal permission" had not been obtained (para 20). No decision was found fixing whether character ends on the application, the Collector's order or the start of work, and the cumulative test governs.
The Gujarat tenancy bar and the year of transfer of agricultural land
Agricultural land in Gujarat cannot lawfully pass to a non-agriculturist developer without permission or conversion, and two Benches have reached opposite results. The Ahmedabad Tribunal in Jigneshbhai Shivabhai Patel (June 2022), on a Revenue appeal it also held defective, adopted the Commissioner (Appeals)'s reasoning and accepted a transfer in assessment year 2008-09, when the buyer-developer took possession and went on to obtain conversion and building permission, though the sale deed came in 2011. The Surat Tribunal in Bhanuben Ramanbhai Surati (May 2025), agreeing that a "non-agriculturist cannot buy agricultural land", held that the transfer took place only on the sale deed of 7 November 2012. The owner who wants an early year relies on Jigneshbhai, the Revenue on Bhanuben, and the positions reverse when the early year is time barred. Neither order engaged the other, and there is no High Court ruling.
Rural agricultural land under a joint development agreement: the cost of the flats
If the land was not a capital asset when it was given, no gain arises on it, but the flats received are capital assets that will be sold. The owner's argument is that the flats were acquired in exchange and their cost is their market value when received, as the Pune Tribunal took it in Popatrao Dashrathrao (para 28), though that order made no finding that the land was agricultural. The Revenue's argument is that an exchange value as cost presupposes that the exchange was taxed, and that where nothing was taxed on the land the flats can carry no more than the original cost of the land. The Pune order remanded the computation on the owner's footing; no Gujarat decision was traced.
Land held by a developer or dealer: capital asset or stock in trade
A person who deals in land may still hold particular land as an investment. The Chennai Tribunal in R.P. Darrmalingam (March 2015) agreed with the Commissioner (Appeals) that "the main factor/criteria is the 'dominant intention of the assessee' at the time of purchase of an asset" and that book entries are only one factor (para 13). In Santhosh Meenakshi Textiles (March 2021) it held that a company's rural agricultural land sold through a registered power of attorney to a buyer who plotted it was not an adventure in the nature of trade, because the "subsequent action of the purchaser is not relevant" (para 11). The Mumbai Tribunal in Kutch Development Organisation (May 2019) held that agricultural land beyond eight kilometres bought by an association with real estate objects was not a capital asset and that its object clause "is not determinative of the activity carried on". The Revenue's argument is that a dealer's land is presumed to be stock, which takes a rural agricultural plot out of the exclusion and into business income; Kutch Development Organisation answered that the character of agricultural land is the same either way (para 15). The question is one of intention and conduct.