Capital gains on compulsory acquisition arise on delivery of possession, not on award or payment of compensation.

For capital gains purposes under the Punjab Development of Damaged Areas Act, 1951, the decisive transfer event is the delivery of possession under the acquisition scheme, not the later award or payment of compensation. The statutory process contemplated publication of the scheme, objections, government sanction, immediate possession and vesting of the land in the Trust free from encumbrances, showing that compensation was consequential rather than constitutive of transfer. As compulsory acquisition required no conveyance, capital gains under section 45 of the Income-tax Act, 1961 arose in the previous year in which possession was taken. The transfer was held to have occurred on 21-4-1971.

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Issues: Whether, for capital gains purposes, the transfer of land under the Punjab Development of Damaged Areas Act, 1951 took place on the date of the Collector's order for delivery of possession or only on the date of award/payment of compensation.

Analysis: Under the Punjab Act, the scheme contemplated publication, consideration of objections, sanction by the State Government, an application by the Improvement Trust for immediate possession, and vesting of the area absolutely in the Trust on delivery of possession free from encumbrances. The statutory framework also fixed the market value with reference to the time of publication of the scheme, showing that compensation proceedings were consequential and not the event determining transfer. Since the acquisition was compulsory and no conveyance was required, the decisive event for transfer was the taking of possession under section 6(2), not the later award or payment of compensation. For purposes of section 45 of the Income-tax Act, 1961, the capital gain arose in the previous year in which that transfer occurred.

Conclusion: The transfer took place on the date of delivery of possession, namely 21-4-1971, and not on the date of award or payment; the addition of Rs. 82,310 as capital gains for assessment year 1980-81 was therefore unsustainable and was deleted.

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