Capital gains on compulsory acquisition depend on vesting date, not actual compensation receipt, with municipal-limit land still taxable.

Section 256 reference jurisdiction is conditional: a party that did not first seek a reference under section 256(1) cannot invoke section 256(2) to add a new question before the High Court. The article also explains that land may be agricultural in fact yet still fall within the capital asset definition if it lies within municipal limits under section 2(14)(iii)(a). For compulsory acquisition, capital gains arise on the date the property vests in the Government on publication of the acquisition notice, and actual receipt of compensation is not required for chargeability. A mere claim for enhanced compensation cannot be included in the computation base unless compensation is determined or accrued.

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Issues: (i) whether an assessee who had not moved the Tribunal under section 256(1) of the Income-tax Act, 1961, could invoke section 256(2) and raise an additional question before the High Court; (ii) whether the acquired lands were agricultural lands falling outside the definition of "capital asset" under section 2(14)(iii)(a) of the Income-tax Act, 1961; (iii) whether capital gains arose on the date when the requisitioned property vested absolutely in the Central Government and whether actual receipt of compensation was necessary for chargeability; and (iv) whether the assessee's mere claim for additional compensation could be taken into account for computing capital gains.

Issue (i): whether an assessee who had not moved the Tribunal under section 256(1) of the Income-tax Act, 1961, could invoke section 256(2) and raise an additional question before the High Court.

Analysis: The statutory scheme of section 256 makes the High Court's jurisdiction purely advisory and conditional upon prior compliance with section 256(1). Section 256(2) can be invoked only where the Tribunal has rejected a proper application under section 256(1). The High Court cannot treat the reference procedure as analogous to cross-objections under the Civil Procedure Code or enlarge the reference by permitting a party to raise questions not previously brought before the Tribunal in the manner required by the Act.

Conclusion: The additional question was not entertainable and the assessee's motion was rejected.

Issue (ii): whether the acquired lands were agricultural lands falling outside the definition of "capital asset" under section 2(14)(iii)(a) of the Income-tax Act, 1961.

Analysis: The evidence showed that the lands were in fact used for cultivation and were agricultural in nature. However, for exclusion under section 2(14)(iii)(a), the controlling factor is whether the land is situate within the jurisdiction of a municipality or municipal corporation having the requisite population, not whether a constituent village or locality within those limits separately has a population below the threshold. Since the lands were within the municipal limits of Hyderabad, they answered the statutory description of capital asset notwithstanding the agricultural character of the land.

Conclusion: The lands were agricultural in character, but they did not cease to be capital assets by reason of being within municipal limits; the issue was decided against the assessee on the statutory definition point.

Issue (iii): whether capital gains arose on the date when the requisitioned property vested absolutely in the Central Government and whether actual receipt of compensation was necessary for chargeability.

Analysis: For capital gains under section 45, the relevant point is the date of effective transfer when title vests in the transferee. Under section 7(2) of the Requisitioning and Acquisition of Immovable Property Act, 1952, the requisitioned property vests absolutely in the Central Government from the beginning of the day on which the acquisition notice is published in the Official Gazette. The property therefore transferred on the date of publication of the notification, and not earlier. Actual receipt of compensation is not the test; what matters is whether gains arose in the previous year from the transfer of the capital asset.

Conclusion: The transfer took place when the notification was published and the gains were chargeable in that year; actual receipt of compensation was not necessary, and the issue was decided in favour of the revenue.

Issue (iv): whether the assessee's mere claim for additional compensation could be taken into account for computing capital gains.

Analysis: A mere claim made by the assessee does not amount to compensation received or accrued. Until compensation is determined by the competent authority, the claimed amount cannot be treated as the basis for computation of capital gains. The amount actually awarded is the relevant figure for section 45 read with section 48.

Conclusion: The claim amount could not be taken into account for computing capital gains, and the issue was decided in favour of the assessee.

Final Conclusion: The reference was answered by holding that the lands were agricultural in fact but fell within the capital-gains net because they were within municipal limits, that the relevant transfer occurred on the date of vesting under the acquisition notice, that chargeability did not depend on actual receipt of compensation, and that a mere claim for enhanced compensation was not part of the computation base.

Ratio Decidendi: For capital gains, the decisive event is the effective transfer of title, and in compulsory acquisition the land is transferred when the statute causes vesting in the acquiring authority; agricultural land within municipal limits remains a capital asset for purposes of the statutory exclusion, and only compensation actually determined or accrued can be used in computing gains.

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