Cost of acquisition in land compensation matters must be ascertained fully before capital gains can be computed.

Capital gains on compulsory acquisition of agricultural land should be computed only on a proper ascertainable cost basis. Where land is settled by allotment of developed leasehold plots and the amount payable includes fair market value, solatium and interest, the tentative compensation award alone cannot be treated as the full cost component if the composite acquisition amount is not finally determined. On that footing, the cost of acquisition was not capable of being fixed on the incomplete basis adopted below, and recomputation was required by reference to the price a comparable allottee would have paid for the plots on the relevant date.

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Issues: Whether, on the facts of the case, the cost of acquisition of the plots allotted in exchange for acquired land could be determined for purposes of capital gains, and whether the Assessing Officer was justified in computing capital gain by treating the compensation amount awarded by the Land Acquisition Officer as the cost component.

Analysis: The agricultural land had been acquired and the compensation originally quantified by the Land Acquisition Officer had not been finally accepted or paid in that form; instead, the matter was settled by allotment of developed leasehold plots against adjustment of the amount payable for acquisition and payment of development cost. The amount payable for the acquired land was therefore not confined to the tentative award alone, but also included the elements ordinarily embedded in acquisition compensation, namely fair market value, solatium and interest. Since that composite amount had not been finally determined, one essential component of the acquisition cost remained indeterminate. In such a situation, the principle that capital gains provisions do not operate where the cost of acquisition cannot be ascertained applied. The approach of equating the acquisition cost with only the tentative compensation award was therefore incorrect.

Conclusion: The cost of acquisition could not be computed on the basis adopted by the lower authorities, and the matter was required to be recomputed by taking the price that any other allottee would have paid for the plots on the relevant date. The assessee obtained substantial relief on the capital gains issue.

Final Conclusion: The assessment on the capital gains question was set aside and the Assessing Officer was directed to recompute the matter in accordance with the proper cost basis.

Ratio Decidendi: Where an essential component of the cost of acquisition is not capable of being ascertained, capital gains cannot be computed on an artificial or incomplete basis.

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