Tenant compensation on compulsory acquisition is deductible in capital gains only to the extent of reasonable compensable interest.

Compensation paid to a tenant on compulsory acquisition was deductible in computing capital gains where the tenant was a person interested in the acquired property and the payment represented reasonable compensation for that interest. The amount was not treated as a mere voluntary diversion of funds, but only the portion attributable to the tenant's compensable interest was allowed. The claimed deduction was found excessive, so deduction was restricted to the reasonable amount, and capital gains were computed on the net compensation after reducing that sum.

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Issues: Whether the amount paid by the assessee to the tenant on acquisition of the property was deductible in computing capital gains.

Analysis: The assessee's alternative claim under the exemption provision was not pressed and was therefore confirmed against it. On the remaining issue, the tenant in the acquired premises was treated as a person interested in the property and as entitled to compensation on acquisition. The amount paid to the tenant pursuant to the understanding between the parties was not regarded as a mere voluntary diversion of funds, but as a payment referable to the tenant's compensable interest in the acquired property. The claim of Rs. 1 lakh was found to be somewhat excessive, and the deductible amount was restricted to the reasonable compensation attributable to the tenant's interest.

Conclusion: The assessee was entitled to a deduction only to the extent of Rs. 75,000, and the capital gains were to be computed after reducing that amount.

Ratio Decidendi: In computing capital gains from compulsory acquisition, compensation payable to a tenant who is a person interested in the acquired property is deductible to the extent it represents reasonable compensation for that interest, so that only the net compensation received remains assessable.

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