Capital gains on compulsory acquisition accrue when possession is taken and land vests, not when acquisition notifications issue.

Capital gains on compulsory acquisition under the urgency provisions of the Land Acquisition Act, 1894 accrue when the land is actually transferred, not when sections 4 and 6 notifications are issued. Preliminary acquisition notifications do not by themselves divest title; where section 17(1) is invoked, vesting occurs only when possession is taken and the land passes absolutely to the Government free from encumbrances. For section 45 of the Income-tax Act, 1961, the taxable previous year is therefore the year in which possession is taken and transfer is effected. On these facts, the capital gains arose in assessment year 1972-73.

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Issues: Whether capital gains arising from compulsory acquisition under the urgency provisions of the Land Acquisition Act, 1894 accrued in the assessment year in which the acquisition notifications were issued or in the year in which possession was actually taken and compensation paid.

Analysis: Under the scheme of the Land Acquisition Act, 1894, the preliminary notifications under sections 4 and 6 do not by themselves transfer title. Where urgency is invoked under section 17(1), the Government may take possession after the statutory period, and only on taking possession does the land vest absolutely in the Government free from encumbrances. For income-tax purposes, section 45 of the Income-tax Act, 1961 taxes capital gains in the previous year in which the transfer of the capital asset is effected. Since possession in the present case was taken only in September 1971, the transfer occurred in that previous year and not on the earlier publication of the notifications.

Conclusion: Capital gains arose in the assessment year 1972-73 and not in assessment year 1971-72; the answer is in favour of the Revenue and against the assessee.

Ratio Decidendi: For capital gains taxation on compulsory acquisition, the decisive event is the actual transfer of the capital asset, which in an urgency acquisition occurs when possession is taken and the property vests in the Government, not when the preliminary acquisition notifications are issued.

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