Compulsory acquisition of agricultural land: compensation was not taxable as capital gains because the land was not a capital asset on transfer date.

Compensation received on compulsory acquisition of agricultural land was treated as outside capital gains because the land was not a capital asset on the relevant transfer date. The analysis applied the statutory definition of capital asset together with the deeming rule for compulsory acquisition, and held that the operative date was the date linked to the acquisition process, not the later date of enhanced compensation. A subsequent notification bringing Kalol within a specified urban area could not change the land's character retrospectively. The compensation and solatium were therefore not taxable as capital gains, and the addition was deleted.

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Issues: Whether the compensation arising from compulsory acquisition of agricultural land was taxable as capital gains, and whether the land had become a capital asset on the relevant date of transfer.

Analysis: The dispute turned on the combined operation of the definition of "capital asset" and the deeming provision treating compulsory acquisition as a transfer. The land was acquired under the Land Acquisition Act, but the relevant date for capital gains was held to be the date of transfer linked to the acquisition process, not the later date on which enhanced compensation was determined by the civil court. On the dates material to the acquisition and award, the land had not yet fallen within the notified area so as to be treated as a capital asset under the statutory definition. The later notification including Kalol within the specified urban area became effective only from 6th Jan., 1994 and could not alter the character of the land on the earlier transfer date.

Conclusion: The land was not a capital asset on the relevant date, so the compensation and solatium from its acquisition were not taxable as capital gains; the deletion of the addition was upheld.

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