Compulsory acquisition and enhanced compensation: capital gains and interest tax follow the transfer and accrual dates, not later quantification.

Capital gains were held not to arise in assessment year 1982-83 where agricultural land had been compulsorily acquired earlier and possession had already passed, because the transfer event had occurred before final quantification of compensation. Interest on enhanced compensation was treated as accruing from the date of dispossession from year to year, so it could not be taxed entirely in the year of receipt or final determination. The protective assessment in the hands of an Association of Persons also failed because the claimants were only joint claimants with determined partition shares, not an AOP for this purpose.

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Issues: (i) Whether capital gain arose in the assessment year 1982-83 on account of compulsory acquisition of agricultural land; (ii) Whether the amount of interest on enhanced compensation was taxable in the year of receipt or had to be spread over the years of accrual; (iii) Whether the protective assessment in the hands of an Association of Persons could stand.

Issue (i): Whether capital gain arose in the assessment year 1982-83 on account of compulsory acquisition of agricultural land.

Analysis: The land had been acquired by the Government long before the assessment year in question, possession had been delivered, and the owners were left only with the right to receive compensation or seek enhancement. The assessment year 1982-83 could not be treated as the year in which the transfer giving rise to capital gain occurred merely because the compensation was finally quantified later.

Conclusion: Capital gains were not taxable in the assessment year 1982-83; this issue was decided in favour of the assessee.

Issue (ii): Whether the amount of interest on enhanced compensation was taxable in the year of receipt or had to be spread over the years of accrual.

Analysis: The right to enhanced compensation and the consequential interest arose from the date possession of the acquired land was taken. The interest did not accrue only when the High Court finally quantified it; instead, it accrued from year to year from the date of dispossession. Therefore, taxation of the entire amount in the year of final determination or receipt was not correct.

Conclusion: The interest was not taxable as a whole in the assessment year 1982-83; this issue was decided in favour of the assessee.

Issue (iii): Whether the protective assessment in the hands of an Association of Persons could stand.

Analysis: The members claiming enhanced compensation were not shown to constitute an Association of Persons for the relevant purpose. They were only joint claimants asserting their respective rights in the compensation arising from the same acquisition, and their inter se shares had already been determined by partition.

Conclusion: The protective assessment in the hands of the Association of Persons was unsustainable; this issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on all substantial issues, and the departmental challenges to deletion of the additions failed.

Ratio Decidendi: In compulsory acquisition cases, capital gain depends on the transfer event and not on later enhancement of compensation, while interest on enhanced compensation accrues from the date possession is taken and is taxable only according to the year of accrual.

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