Compulsory acquisition and capital gains: possession before compensation is fixed did not trigger tax in that year.

Where land is compulsorily acquired and possession is taken under section 17 of the Land Acquisition Act, 1894 before the award and before compensation is determined, capital gains could not be fastened on the assessee in the assessment year of possession under the pre-amendment law. Although compulsory acquisition is a transfer under section 2(47) of the Income-tax Act, 1961, the court noted that requiring computation before the compensation amount is known is impracticable, and the later insertion of section 54H confirmed that the earlier statutory position did not adequately address such cases. The department's attempt to tax the gain in assessment year 1984-85 was therefore rejected.

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Issues: Whether, on compulsory acquisition of land under section 17 of the Land Acquisition Act, 1894, capital gain was exigible to tax in assessment year 1984-85 on the date possession was taken.

Analysis: Under section 2(47) of the Income-tax Act, 1961, transfer includes compulsory acquisition, and ordinarily the date of transfer governs the assessment year for capital gains. However, where section 17 of the Land Acquisition Act, 1894 is invoked, possession may be taken before any award is made and before compensation is known or received. The Court held that the department's approach would require the assessee to disclose and compute capital gains without knowledge of the compensation amount, which is impracticable. The insertion of section 54H by the Finance (No. 2) Act, 1991 further showed that earlier law did not adequately cater to such cases, and the pre-amendment position could not be applied to deprive the assessee of statutory reliefs.

Conclusion: Capital gain was not exigible to tax in assessment year 1984-85 on the facts of the case, and the department's application was rightly rejected.

Ratio Decidendi: In cases of compulsory acquisition where possession is taken under section 17 of the Land Acquisition Act, 1894 before the award and before compensation is determined, capital gains cannot be fastened on the assessee in the assessment year of possession on the pre-amendment law.

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