Void transfer of agricultural land cannot give rise to taxable capital gains; share loss needs an actual transfer.

Capital gains were not taxable where the sale of agricultural land was void ab initio under the Gujarat Tenancy & Agricultural Land Act, 1948, because there was no legally effective transfer and the cancellation deed, refund of consideration, and return of title documents showed the transaction never had legal existence. Applying the real income principle, the addition was deleted. A claimed long-term capital loss on shares was disallowed because no transfer occurred during the year; mere diminution in value or book entries does not create a deductible capital loss under the Income-tax Act, 1961. The assessee succeeded only on the capital gains issue.

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Issues: (i) Whether long-term capital gains were taxable where the sale of agricultural land was subsequently cancelled and the transaction was held to be void ab initio under the applicable law. (ii) Whether a long-term capital loss on decline in value of shares was allowable in the absence of any transfer during the previous year.

Issue (i): Whether long-term capital gains were taxable where the sale of agricultural land was subsequently cancelled and the transaction was held to be void ab initio under the applicable law.

Analysis: Capital gains are chargeable in the year in which a transfer takes place, but that principle applies only where there is a legally effective transfer. The land in question was agricultural land in Gujarat, and the statutory bar under the Gujarat Tenancy & Agricultural Land Act, 1948 rendered the transfer to a non-agriculturist invalid. The cancellation deed, refund of consideration, and return of title documents showed that the original transaction was a nullity in law from inception. In such circumstances, no real income accrued and tax cannot be levied on a transfer that never had legal existence. The principle of real income and the constitutional mandate that tax can be collected only by authority of law also supported this view.

Conclusion: The addition of long-term capital gains was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether a long-term capital loss on decline in value of shares was allowable in the absence of any transfer during the previous year.

Analysis: Loss or gain under section 45 of the Income-tax Act, 1961 arises only on transfer of a capital asset. The assessee had not effected any transfer of the shares during the relevant year. A diminution in value reflected in the books or required by accounting standards does not, by itself, create a tax-deductible capital loss. Taxability and deductibility must be determined under the Income-tax Act and not merely from book entries.

Conclusion: The claim for long-term capital loss was rightly rejected and the disallowance was upheld against the assessee.

Final Conclusion: The appeal succeeded only on the capital gains issue, while the disallowance of the claimed share loss was sustained, leaving the assessee partly successful overall.

Ratio Decidendi: Capital gains can be taxed only when there is a legally effective transfer of a capital asset, and a transaction that is void ab initio in law does not give rise to taxable capital gain; conversely, a capital loss is allowable only when it results from an actual transfer under the statute.

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