Compulsory acquisition compensation relates back to the transfer year and is taxable as capital gains when transfer occurs.

On compulsory acquisition, enhanced compensation granted later is treated as an accretion to the original consideration and relates back to the date of transfer. The High Court held that, for section 45 of the Income-tax Act, the capital gains liability arises in the year of transfer on the acquisition notification date, not in the year when the enhanced amount is finally determined. The later judicial award does not create an independent receipt in a subsequent year. The statutory scheme, including the recomputation mechanism in section 155(7A), supports assessment in the transfer year, with reopening of that year's assessment if required within the prescribed time.

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Issues: Whether enhanced compensation awarded in appeal against compulsory acquisition is taxable as capital gains in the year of transfer or only in the year when the enhanced amount is finally determined.

Analysis: On compulsory acquisition, the transfer is taken to occur on the date of acquisition notification and the compensation awarded in the first instance is the consideration relevant to section 45 of the Income-tax Act, 1961. Any further compensation granted by a court or appellate authority is not an independent receipt accruing in the later year, but is an accretion to the original acquisition consideration and relates back to the transaction of transfer. The statutory scheme, including the deeming fiction in section 45 and the recomputation mechanism introduced by section 155(7A), shows that the timing of the later judicial determination does not alter the year in which the enhanced compensation is assessable. If necessary, the assessment for the year of transfer may be reopened within the prescribed time.

Conclusion: Enhanced compensation awarded subsequently on compulsory acquisition is assessable as capital gains in the year of transfer, not in the year of later judicial determination; the issue is answered in favour of the Revenue.

Ratio Decidendi: In cases of compulsory acquisition, enhanced compensation awarded later relates back to the original transfer and is taxable under section 45 of the Income-tax Act, 1961 in the year of transfer, irrespective of the date of the appellate award.

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