Overriding title and 01.04.1981 valuation govern capital gains treatment on transferred land proceeds and cost basis.

Where transfer consideration is diverted at source by an overriding title before it accrues to the assessee, no taxable capital gain arises in the assessee's hands, but the factual sequence must be verified to determine whether the proceeds ever reached the assessee. For a capital asset acquired before 01.04.1981, the assessee may adopt the fair market value as on that date as the cost of acquisition under section 55(2)(b), and the original purchase price need not be used. The discussion notes partial relief on capital gains computation, with one issue depending on factual verification and the other resolved in the assessee's favour.

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Issues: (i) Whether capital gains on the Beraberi land were taxable in the assessee's hands when the sale proceeds were alleged to have been diverted at source towards the third party's bank liability under an overriding title; (ii) whether, for the VIP Road land, the cost of acquisition had to be taken at the fair market value as on 01.04.1981 under section 55(2)(b) instead of the historical purchase price.

Issue (i): Whether capital gains on the Beraberi land were taxable in the assessee's hands when the sale proceeds were alleged to have been diverted at source towards the third party's bank liability under an overriding title.

Analysis: The dispute turned on whether the consideration ever reached the assessee or stood diverted before accrual. The controlling distinction was between diversion of income by an overriding title and mere application of income after receipt. The record showed that the property was mortgaged as collateral for a third party loan and was later sold, but the factual route of the sale consideration was not clearly established. If the sale was conducted by the bank and the proceeds were appropriated directly towards the loan, the assessee's case would fall within diversion at source. If, on the other hand, the assessee arranged the sale and the money passed through the assessee's hands before being applied to the debt, taxability would remain.

Conclusion: The issue was remanded for verification of the correct factual sequence, with deletion of the addition to follow if the facts show diversion at source.

Issue (ii): Whether, for the VIP Road land, the cost of acquisition had to be taken at the fair market value as on 01.04.1981 under section 55(2)(b) instead of the historical purchase price.

Analysis: The evidence showed that the assessee had acquired the property in 1976, i.e. before 01.04.1981, so the assessee was entitled to substitute the fair market value as on 01.04.1981 for the original cost. The lower authorities erred in treating the property as if it had been purchased in 2000 and in ignoring the statutory option available for pre-1981 acquisitions. The valuation report on record supported the assessee's claimed value as on 01.04.1981.

Conclusion: The assessee's claim on cost of acquisition was accepted and the fair market value of Rs. 8,30,000 was directed to be adopted.

Final Conclusion: The matter resulted in partial relief to the assessee, with one issue sent back for factual verification and the other decided in the assessee's favour on the merits of the capital gains computation.

Ratio Decidendi: Where transfer consideration is diverted at source by an overriding title before it accrues to the assessee, no taxable capital gain arises in the assessee's hands; and for a capital asset acquired before 01.04.1981, the assessee may adopt the fair market value as on that date as the cost of acquisition under the statute.

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