Capital gains on compulsory acquisition were taxable when possession was delivered, not when compensation was later determined or paid.

Capital gains from compulsory acquisition were held taxable in the assessment year relevant to the previous year in which possession was delivered, because delivery of possession under the Punjab Development of Damaged Areas Act, 1951 effected the statutory transfer and absolute vesting of the property. The later determination or receipt of compensation did not govern the year of taxability under section 45 of the Income-tax Act, 1961. The question was answered in favour of the assessee and against the Revenue.

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Issues: Whether capital gains arising from compulsory acquisition were taxable in the assessment year of payment of compensation or in the assessment year relevant to the year in which possession of the property was delivered.

Analysis: Section 45 of the Income-tax Act, 1961 taxes profits or gains arising from the transfer of a capital asset in the previous year in which the transfer occurs. Under section 6(2) of the Punjab Development of Damaged Areas Act, 1951, on delivery of possession the acquired area vests absolutely in the Trust free from encumbrances, and compensation is payable only thereafter in due course. The statutory scheme therefore makes delivery of possession the decisive event for transfer, not the later determination or payment of compensation. The property in question vested in the Trust when possession was delivered on 21-4-1971.

Conclusion: Capital gains were taxable in the year relevant to the previous year in which possession was delivered, and not in the year in which compensation was determined or received. The question was answered against the Revenue and in favour of the assessee.

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