Capital gains on compulsory acquisition turn on possession and vesting, while the relevant year's notification controls land status.

Compulsory acquisition constituted a transfer for capital gains purposes when possession and statutory vesting occurred, not merely when the award was later passed, so the acquisition was taxable in assessment year 1986-87. Agricultural land in Thrikkakara Panchayat also remained a capital asset because the notification in force for the relevant year included that area; the later 1994 exclusion could not alter a completed assessment. Taxability was therefore determined by the law and notification applicable in the relevant assessment year, and the Revenue's position was upheld on both issues.

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Issues: (i) Whether the transfer of the acquired land was assessable to capital gains in the assessment year 1986-87; (ii) Whether the land in Thrikkakara Panchayat continued to qualify as a capital asset despite the later notification of 1994.

Issue (i): Whether the transfer of the acquired land was assessable to capital gains in the assessment year 1986-87.

Analysis: For compulsory acquisition, transfer within the meaning of section 2(47) of the Income-tax Act, 1961 includes acquisition under law. In urgent acquisition, possession may be taken before an award, and vesting follows possession. The Court held that the relevant date for taxability depended on when possession and vesting occurred in the acquisition process, not merely on the later passing of the award. On the facts, the acquisition fell within the year ending 31 March 1986.

Conclusion: The capital gains were rightly brought to tax in assessment year 1986-87, against the assessee.

Issue (ii): Whether the land in Thrikkakara Panchayat continued to qualify as a capital asset despite the later notification of 1994.

Analysis: Under section 2(14) of the Income-tax Act, 1961, agricultural land situated within the notified urban area was a capital asset. The notification in force during the relevant assessment year specifically included Thrikkakara Panchayat. The later notification of 1994, which excluded Thrikkakara, could not govern a completed assessment for the earlier year because the applicable law is the law in force in the assessment year unless a contrary intention is shown.

Conclusion: The land was a capital asset for the relevant assessment year, against the assessee.

Final Conclusion: The reference was answered in favour of the Revenue on both questions, and the assessee failed on the merits of the taxability issue.

Ratio Decidendi: Tax liability must be determined by the law and notification in force in the relevant assessment year, and in compulsory acquisition the point of taxability is governed by the statutory vesting arising on possession under the acquisition law.

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