Surrender of water-drawing right received without cost was held outside capital gains computation under the tax provisions.

A payment received for surrendering a separately granted right to draw water from a well was held outside capital gains tax because the right had been obtained without any cost of acquisition. The receipt was not treated as enhanced compensation for the earlier land acquisition, as the land and well had already been acquired and the original compensation had become final. Since no computable cost of acquisition existed, sections 45(1) and 48(1) could not operate, and section 55(2) supported exclusion from tax. The addition was therefore deleted.

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Issues: Whether the amount of Rs. 15 lakhs received by the assessee for surrendering the right to draw water from the well was taxable as capital gains, either as enhanced compensation or as consideration for transfer of a capital asset.

Analysis: The agricultural land and well had already been acquired under the land acquisition proceedings and the original compensation had attained finality. The later right to lift water from the well was granted separately by the State Government on a nominal rent, without any cost of acquisition to the assessee. The subsequent payment was made not as enhancement of the original land acquisition compensation, but in settlement of the assessee's independent right to draw water. Since that right was acquired without cost and was not a capital asset for which cost could be ascertained under the relevant computation provisions, sections 45(1) and 48(1) did not apply. The exclusion in section 55(2) also supported the conclusion that no taxable capital gains could be computed on this receipt.

Conclusion: The receipt of Rs. 15 lakhs was not taxable as capital gains and the addition was deleted.

Ratio Decidendi: A receipt for surrender of a right acquired without cost, and not by way of enhanced compensation for an earlier acquisition, cannot be brought to capital gains tax where no computable cost of acquisition exists.

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