Capital gains on compulsory acquisition and taxable interest on delayed compensation upheld under the income-tax framework.

Parliament was held competent to include certain agricultural land within the definition of a capital asset for capital gains purposes, as the constitutional concept of agricultural income is read in line with income-tax law and any overlap with the State field is incidental. Compensation received on compulsory acquisition of agricultural land falling within the statutory exceptions was treated as a capital receipt chargeable to capital gains tax, not agricultural income. Interest paid on delayed compensation was treated as a separate revenue receipt, taxable under the Income-tax Act, and subject to tax deduction at source under section 194A, subject to the statutory exception where the payee furnishes the required affidavit or statement.

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Issues: (i) Whether Parliament had legislative competence to enact the provision bringing certain agricultural land within the definition of capital asset for capital gains taxation; (ii) whether compensation received on compulsory acquisition of agricultural land was chargeable to income-tax as capital gains or exempt as agricultural income; and (iii) whether interest paid on compensation for compulsory acquisition of land was income taxable under the Income-tax Act and liable to deduction at source under section 194A.

Issue (i): Whether Parliament had legislative competence to enact the provision bringing certain agricultural land within the definition of capital asset for capital gains taxation.

Analysis: Agricultural income for constitutional purposes is to be understood in the sense given by the income-tax law. The entries in the Seventh Schedule must receive a wide and liberal construction. On that approach, tax on capital gains arising from land that has ceased to retain the characteristics of agricultural land remains a tax on income other than agricultural income. The definition of agricultural income and the scope of capital asset could validly be adjusted by Parliament within its field, and any overlap with the State field was incidental.

Conclusion: Parliament was competent to enact section 2(14)(iii) of the Income-tax Act, 1961.

Issue (ii): Whether compensation received on compulsory acquisition of agricultural land was chargeable to income-tax as capital gains or exempt as agricultural income.

Analysis: Compulsory acquisition is a transfer of a capital asset. Agricultural land is excluded only if it continues to answer that description at the time of transfer and is not covered by the statutory exceptions. The compensation received on acquisition represents the market value of the land and is a capital receipt, not revenue derived from land. The statutory Explanation to section 2(1A) makes it clear that income arising from transfer of the specified land is not agricultural income.

Conclusion: Compensation for compulsory acquisition of agricultural land falling within section 2(14)(iii) is not agricultural income and is exigible to capital gains tax.

Issue (iii): Whether interest paid on compensation for compulsory acquisition of land was income taxable under the Income-tax Act and liable to deduction at source under section 194A.

Analysis: Interest on delayed payment of compensation is distinct from the compensation itself. It is paid for deprivation of the use of money representing the compensation and is a revenue receipt. It does not fall within agricultural income and is therefore taxable. Once it is income by way of interest, the payer is obliged to deduct tax at source under section 194A, subject to the statutory exception where the payee furnishes the required affidavit or statement.

Conclusion: Interest on compensation for compulsory acquisition is taxable income and tax is deductible at source under section 194A.

Final Conclusion: The challenge to the notices failed because the receipt of interest on compensation arising from compulsory acquisition was held taxable, while the statutory deduction mechanism was held applicable, and the petitions were dismissed.

Ratio Decidendi: Compensation for compulsory acquisition of agricultural land is a capital receipt governed by the capital gains provisions if the land falls within the statutory exceptions to agricultural land, and interest on delayed payment of such compensation is a separate taxable revenue receipt on which tax may be deducted at source.

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