Compulsory acquisition and capital gains: initial computation follows received compensation, with later enhancement handled by recomputation machinery

In compulsory acquisition, capital gains are computed on the compensation actually received when possession is taken, because the Land Acquisition Officer's award is only a provisional offer and the acquisition is not finally concluded until compensation is judicially determined. Later enhancement of compensation can be given effect through the statutory recomputation mechanism. Section 52(2) of the Income-tax Act does not apply to such transfers, since compulsory acquisition is not a case of declared understated consideration. A separate direction to adopt revised compensation was unnecessary because the statute itself provides the machinery for later adjustment.

---

---

Issues: (i) Whether, in a case of compulsory acquisition, capital gains were to be computed with reference to the compensation actually paid by the Land Acquisition Officer, subject to recomputation if the compensation was later enhanced by judicial determination. (ii) Whether section 52(2) of the Income-tax Act, 1961 applied to the transfer of land effected through land acquisition proceedings. (iii) Whether the Tribunal was right in refusing to direct the Income-tax Officer to adopt the revised compensation as and when finally determined.

Issue (i): Whether, in a case of compulsory acquisition, capital gains were to be computed with reference to the compensation actually paid by the Land Acquisition Officer, subject to recomputation if the compensation was later enhanced by judicial determination.

Analysis: In land acquisition cases, the amount awarded by the Land Acquisition Officer is only an offer and the acquisition is not finally concluded until compensation is judicially determined. The right to enhanced compensation arises only on final determination, and if the amount received is later increased, the statute permits recomputation of capital gains. The relevant charge of capital gains arises in the year in which possession is taken, and later enhancement does not alter the initial basis of computation, though it may require recomputation under the statutory rectification mechanism.

Conclusion: The capital gains were correctly determined with reference to the compensation paid by the Land Acquisition Officer, with liberty to recompute upon final enhancement of compensation. This is in favour of the assessee.

Issue (ii): Whether section 52(2) of the Income-tax Act, 1961 applied to the transfer of land effected through land acquisition proceedings.

Analysis: Section 52(2) proceeds on the footing that the assessee has declared consideration below fair market value in a transfer. In compulsory acquisition, the amount fixed by the Land Acquisition Officer is not an agreed consideration but a provisional offer, and the market value is yet to be determined in the statutory and judicial process under the Land Acquisition Act. The provision therefore has no proper application to such a transfer.

Conclusion: Section 52(2) did not apply to the transfer in question. This is in favour of the assessee.

Issue (iii): Whether the Tribunal was right in refusing to direct the Income-tax Officer to adopt the revised compensation as and when finally determined.

Analysis: A specific direction was unnecessary because the statute itself contains machinery for giving effect to later enhancement of compensation, and where assessment or recomputation is made in consequence of a finding or direction in judicial proceedings, the ordinary limitation bar does not operate in the same way. The Tribunal therefore was not required to issue the requested direction.

Conclusion: The refusal to give the direction was correct. This is in favour of the assessee.

Final Conclusion: The references were answered for the assessee on all questions, holding that land acquisition compensation is the basis of the initial capital-gains computation, later enhancement may be adjusted under the statutory recomputation mechanism, and section 52(2) has no application to compulsory acquisition.

Ratio Decidendi: In compulsory acquisition, the Land Acquisition Officer's award is only a provisional offer; capital gains are computed on the compensation received on possession being taken, section 52(2) is inapplicable to such acquisition, and later judicial enhancement of compensation is to be given effect through the statutory recomputation provisions.

---