Capital gains on compulsory acquisition turn on transfer year, exclusion of severance damages, and fair market value valuation.

Capital gains from compulsory acquisition are analysed by linking section 45 to the year of transfer, so later enhancement of compensation does not shift taxability away from that year; only amounts actually awarded can be brought into computation, not mere appellate claims. Damages for severance of the unacquired land are treated as compensation for injury to the remaining property, not as part of the transfer consideration under section 48. For valuation as on 1-1-1954, comparable evidence and local development may justify a figure above the revenue estimate but below the assessee's claim, with the severance element reflected in the overall valuation.

---

---

Issues: (i) Whether the enhanced compensation awarded by the Civil Judge and the pending appellate claims could be included in the capital gains of the year of transfer; (ii) whether damages awarded for severance and injury to the unacquired land formed part of the full value of the consideration under section 48; (iii) what was the fair market value of the acquired land as on 1-1-1954 for computing capital gains.

Issue (i): Whether the enhanced compensation awarded by the Civil Judge and the pending appellate claims could be included in the capital gains of the year of transfer.

Analysis: The transfer of the capital asset had taken place in the previous year relevant to the assessment year in question. Section 45 deems profits or gains arising from such transfer to be income of the year in which the transfer took place. The fact that the final compensation was determined later, or that appeals were pending, did not prevent the capital gain from being assessed in the year of transfer. Claims not yet awarded by the Civil Judge could not be brought to tax merely because they were sought in appeal, but any amount ultimately awarded in appeal would be relevant when and if received or awarded.

Conclusion: The capital gains arising from the transfer were assessable in the year of transfer, and the amounts actually awarded by the Civil Judge could be taken into account, while mere claims pending before the High Court could not be included.

Issue (ii): Whether damages awarded for severance and injury to the unacquired land formed part of the full value of the consideration under section 48.

Analysis: The phrase in section 48 refers to the full value of the consideration received or accruing as a result of the transfer of the capital asset. The majority held that the damages awarded for severance of the unacquired land were not consideration for the transfer of the acquired land, but were compensation for injury caused to the remaining property as a consequence of the acquisition. In a situation where two views were possible, the view favourable to the assessee was adopted, and the later Kerala High Court view was preferred over the contrary Karnataka view.

Conclusion: The damages awarded for severance of the unacquired land were excluded from the full value of consideration and the issue was decided in favour of the assessee.

Issue (iii): What was the fair market value of the acquired land as on 1-1-1954 for computing capital gains.

Analysis: The evidence showed that the estimate of Re. 1 per sq. ft. adopted by the authorities was too low, while the assessee's claim of Rs. 2.50 per sq. ft. was not fully established. Taking into account comparable material, development around the locality, and the evidence of rising land values, the land was valued at a figure higher than that adopted by the revenue but below the assessee's claim. The damages element was also reflected in the manner of valuation of the acquired land.

Conclusion: The fair market value was fixed at Rs. 1.50 per sq. ft., with appropriate adjustment for the severance element, in favour of the assessee in part.

Final Conclusion: The assessee's capital gains were to be recomputed on the basis of the revised land value, while excluding damages for severance from the consideration; the departmental challenge to the deletion of claims not actually awarded failed.

---