Traceable acquisition compensation defeats unexplained investment addition and removes capital gains tax on compulsory acquisition proceeds

Funds used to purchase property were traced through bank records to compensation received on acquisition of an earlier property by BMRCL, and the compensation had been disclosed by the assessee. On those facts, the payment was not an unexplained investment, so the section 69 addition was deleted. The compensation received for the compulsory acquisition was also reflected in Form 26AS and supported by TDS credit, and, applying CBDT Circular No. 36/2016, it was treated as not taxable as capital gain under the Income-tax Act, 1961. Both additions were therefore set aside in favour of the assessee.

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Issues: (i) Whether the addition made under section 69 of the Income-tax Act, 1961 for purchase of property was sustainable when the payment was traced to compensation received on acquisition of another property; (ii) Whether compensation received from BMRCL for acquisition of the assessee's property was liable to capital gains tax.

Issue (i): Whether the addition made under section 69 of the Income-tax Act, 1961 for purchase of property was sustainable when the payment was traced to compensation received on acquisition of another property.

Analysis: The purchase consideration was paid through banking channels, and the funds were found to have come from compensation received on acquisition of the assessee's earlier property by BMRCL. The receipts and payments were reflected in the bank account and the compensation had been disclosed by the assessee. On these facts, the payment could not be treated as an unexplained investment.

Conclusion: The addition under section 69 was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether compensation received from BMRCL for acquisition of the assessee's property was liable to capital gains tax.

Analysis: The compensation received for acquisition of the property was shown in Form 26AS and accepted for TDS credit. The acquisition by BMRCL was treated as established on the record. In light of CBDT Circular No. 36/2016 dated 25.10.2016, compensation received for acquisition under the relevant land acquisition regime was not taxable under the Income-tax Act, 1961.

Conclusion: The compensation was held not taxable as capital gain and this issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded in full, with both the addition for unexplained investment and the capital gains addition set aside.

Ratio Decidendi: Where the source of investment is demonstrably traceable to compensation received on compulsory acquisition and the compensation itself falls within the exemption recognized by the applicable acquisition law and CBDT circular, the related additions cannot be sustained under the Income-tax Act, 1961.

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