Compulsory acquisition of identifiable business assets triggers balancing charge and capital gains when compensation is asset-specific.

Compulsory acquisition of a transport undertaking under the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act was treated as a transfer of identifiable capital assets, not a mere contractual sale. Because the statutory vesting operated by force of law and the compensation was shown to be attributable to specific assets, including buses, land, buildings, permits and spares, the transaction was not characterised as an unallocable slump sale. The excess over written down value was therefore held taxable as balancing charge under section 41(2), and any further surplus was liable to capital gains tax under section 45.

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Issues: (i) Whether the taking over of the assessee's transport undertaking under the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, 1971 amounted to compulsory acquisition so as to attract section 41(2) and section 45 of the Income-tax Act, 1961; (ii) Whether the compensation received on acquisition could be treated as attributable to the individual assets acquired, and not as consideration for a slump transaction; (iii) Whether the surplus arising on the acquisition was liable to balancing charge under section 41(2) and capital gains under section 45.

Issue (i): Whether the taking over of the assessee's transport undertaking under the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, 1971 amounted to compulsory acquisition so as to attract section 41(2) and section 45 of the Income-tax Act, 1961.

Analysis: The statutory scheme provided for vesting of the stage carriages and connected assets in the Government free from encumbrances upon notification. The Act was enacted for acquisition of passenger transport divisions in public interest and operated by force of law. On that basis, the taking over was not a mere contractual sale but a compulsory acquisition of capital assets, and the vesting was sufficient to constitute a "sale" and a "transfer" for the purposes of the income-tax provisions invoked.

Conclusion: The issue was answered in the affirmative and against the assessee.

Issue (ii): Whether the compensation received on acquisition could be treated as attributable to the individual assets acquired, and not as consideration for a slump transaction.

Analysis: The compensation was determined under the acquisition statute on the basis of agreement and market value principles, and the record showed item-wise valuation of buses, land, buildings, permits, spares and other assets. The assessee accepted the compensation without resorting to arbitration and also apportioned the amount among the assets in its return. Applying the test that even in a going-concern transfer the consideration is taxable where a portion of the price is attributable to specific assets, the compensation was held traceable to the individual assets acquired.

Conclusion: The issue was answered in the affirmative and against the assessee.

Issue (iii): Whether the surplus arising on the acquisition was liable to balancing charge under section 41(2) and capital gains under section 45.

Analysis: Once the compensation was held attributable to the specific assets, the excess over the written down value was taxable as balancing charge. Any surplus beyond the amount chargeable under section 41(2) was liable to be assessed as capital gains under section 45. The reasoning applied the principle that the tax consequences follow the identifiable allocation of consideration to depreciable assets acquired.

Conclusion: The issue was answered in the affirmative and against the assessee.

Final Conclusion: The acquisition was treated as compulsory acquisition of identifiable assets, not an unallocable slump sale, and the compensation was held taxable under the balancing charge and capital gains provisions.

Ratio Decidendi: Where a business undertaking is compulsorily acquired and the compensation can be fairly attributed to identifiable assets, the transaction attracts balancing charge under section 41(2), and any further surplus is chargeable as capital gains under section 45.

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