Capital gains on compulsory acquisition arise on vesting at possession, and statutory interest accrues year by year for tax purposes.

In compulsory acquisition, capital gains are taxable in the year of transfer when possession is taken under urgency provisions and the land vests in the Government free from encumbrances; a later compromise on enhanced compensation does not alter that tax year, so the gains were not assessable in assessment year 1973-74. Statutory interest under section 34 of the Land Acquisition Act accrues from year to year for the period between possession and payment and must be assessed accordingly; as no part related to the relevant year, it was not taxable in assessment year 1973-74. Both issues were answered in favour of the assessee.

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Issues: (i) whether capital gains arising from compulsory acquisition of land were assessable in the assessment year 1973-74 or in the year in which possession was taken and the lands vested in the Government; (ii) whether interest payable under section 34 of the Land Acquisition Act was taxable in the assessment year 1973-74 or had to be assessed on accrual from year to year.

Issue (i): whether capital gains arising from compulsory acquisition of land were assessable in the assessment year 1973-74 or in the year in which possession was taken and the lands vested in the Government.

Analysis: Section 45 of the Income-tax Act fastens liability to capital gains tax on the year in which the transfer takes place. In the case of compulsory acquisition, the relevant transfer occurs when possession is taken under the urgency provisions and the land vests in the Government free from encumbrances. The later compromise regarding enhanced compensation does not shift the year of transfer for tax purposes.

Conclusion: The capital gains were not assessable in the assessment year 1973-74 and the issue was decided in favour of the assessee.

Issue (ii): whether interest payable under section 34 of the Land Acquisition Act was taxable in the assessment year 1973-74 or had to be assessed on accrual from year to year.

Analysis: Interest under section 34 is statutory and not discretionary. The right to receive such interest accrues from year to year for the period between possession and payment, so the income must be assessed year-wise according to the period to which it relates. If no part of the interest related to the relevant assessment year, it could not be brought to tax in that year.

Conclusion: The interest was not taxable in the assessment year 1973-74 and the issue was decided in favour of the assessee.

Final Conclusion: The reference was answered entirely in favour of the assessee, with both questions on capital gains and interest answered against the Revenue.

Ratio Decidendi: In compulsory acquisition cases, capital gains are taxable in the year of transfer marked by vesting on taking possession, and statutory interest under section 34 of the Land Acquisition Act accrues from year to year and is assessable accordingly.

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