Capital gains on compulsory acquisition arise at possession, while enhanced compensation is taxable only when the right becomes final.

In compulsory acquisition, capital gains arise in the year possession is taken and the property vests in the Government, because transfer is complete at that point under the Income-tax Act read with the Land Acquisition Act; the subsequent determination or appeal on compensation does not postpone taxability. Enhanced compensation granted by the reference court does not accrue for tax while the State's appeal remains pending, because the assessee has no final and enforceable right to receive it until the amount becomes settled and payable. The issue on transfer was decided for the Revenue, while the accrual of enhanced compensation was decided for the assessee.

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Issues: (i) whether capital gains arising from compulsory acquisition became taxable in the year when possession was taken under the Land Acquisition Act, 1894, and not when compensation was finally determined in appeal; (ii) whether enhanced compensation granted by the reference court, while the State's appeal against enhancement was still pending, could be included in the computation of capital gains.

Issue (i): whether capital gains arising from compulsory acquisition became taxable in the year when possession was taken under the Land Acquisition Act, 1894, and not when compensation was finally determined in appeal

Analysis: The charge under section 45 of the Income-tax Act, 1961 fastens on the year in which the transfer of the capital asset takes place. In compulsory acquisition, transfer is complete when possession is taken and the property vests absolutely in the Government under section 16 of the Land Acquisition Act, 1894. The Collector's award is only an offer of compensation and the right to seek enhancement under section 18 does not postpone the occurrence of transfer. Once possession is taken, the assessee has a taxable transfer in that previous year, even though the compensation may be revised later.

Conclusion: Yes. Capital gains were assessable in the year of transfer when possession was taken. This issue was answered against the assessee and in favour of the Revenue.

Issue (ii): whether enhanced compensation granted by the reference court, while the State's appeal against enhancement was still pending, could be included in the computation of capital gains

Analysis: Income accrues only when the assessee acquires a vested and enforceable right to receive it, creating a debt in praesenti. Where enhanced compensation is under challenge in appeal, the right to receive the enhanced amount remains unsettled and contingent, because the amount may be reduced or disallowed in further proceedings. In that situation, the enhanced sum is not yet determinate and payable, and it does not accrue merely because it has been allowed by the reference court or withdrawn on security.

Conclusion: No. The enhanced compensation could not be included until it became final and payable. This issue was answered in favour of the assessee and against the Revenue.

Final Conclusion: The transfer on compulsory acquisition attracted capital gains in the year of possession, but the enhanced compensation awarded during the pendency of further appeals did not accrue for taxation until final determination.

Ratio Decidendi: In compulsory acquisition cases, capital gains arise on the vesting of the property by taking possession, but any enhanced compensation becomes taxable only when the assessee acquires a final and enforceable right to receive it.

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