Overriding title over acquisition compensation: capital gains taxed only on amount retained, and sale agreement was not frustrated.

A bona fide sale agreement, read with a later enforceable understanding, gave the purchaser a legally overriding right to part of the acquisition compensation, so capital gains were computed only on the amount actually retained by the assessee and not on the full award. The payment to the purchaser was treated as diversion of income by overriding title, because the right attached to the compensation before it became the assessee's income, rather than as a mere application of income after receipt. The agreement was not frustrated by acquisition, since that contingency was within the parties' contemplation and did not discharge the contract.

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Issues: (i) Whether capital gains were to be computed on the full compensation of Rs. 2,20,220 or only on Rs. 1,20,000 said to have been actually received by the assessee; (ii) whether the amount paid to the purchaser under the arrangement after the legal notice was a diversion of income by overriding title or a mere application of income; (iii) whether the agreement of sale became frustrated on acquisition of the land.

Issue (i): Whether capital gains were to be computed on the full compensation of Rs. 2,20,220 or only on Rs. 1,20,000 said to have been actually received by the assessee.

Analysis: The Tribunal's factual findings were that the original sale agreement was bona fide, that a subsequent understanding was arrived at between the parties after the legal notice, and that Rs. 1,05,220 was in fact paid to the purchaser out of the compensation. On those findings, the amount assessable in the assessee's hands was only what remained after giving effect to the purchaser's enforceable right in the compensation relating to the acquired land. The computation had to proceed on the real amount received by the assessee and not on the entire award amount.

Conclusion: The capital gains were rightly computed only with reference to Rs. 1,20,000, in favour of the assessee.

Issue (ii): Whether the amount paid to the purchaser under the arrangement after the legal notice was a diversion of income by overriding title or a mere application of income.

Analysis: The agreement of sale, as found to be genuine, together with the later understanding, conferred on the purchaser a legal right to the portion of compensation exceeding the agreed sale consideration. That right attached to the compensation itself and operated before the amount could be treated as the assessee's income in full. The payment was therefore not a voluntary post-receipt application of income but a case where the income was diverted at source by an overriding obligation in favour of the purchaser.

Conclusion: The payment was a diversion of income by overriding title, in favour of the assessee.

Issue (iii): Whether the agreement of sale became frustrated on acquisition of the land.

Analysis: The doctrine of frustration applies to contracts for sale of land, but only where the supervening event was outside the parties' contemplation and the contract does not otherwise provide for it. On the facts found, acquisition was within the contemplation of the parties, and the agreement was entered into in the background of the very acquisition proceedings that followed. The supervening acquisition did not, therefore, render the contract impossible of performance or discharge it by frustration.

Conclusion: The agreement did not become frustrated, in favour of the assessee.

Final Conclusion: The questions referred were answered against the Revenue, the assessee's computation of capital gains based on the amount actually retained was accepted, and the acquisition did not destroy the contractual arrangement governing the compensation.

Ratio Decidendi: Where a bona fide sale agreement, together with a subsequent enforceable understanding, gives the purchaser a legally overriding right to a defined portion of acquisition compensation, that portion is diverted before it becomes the vendor's income; and acquisition will not frustrate the contract if the contingency of acquisition was within the parties' contemplation.

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