Statutory requisition compensation is not capital gains or income, and mixed litigation s must be allowed proportionately.

Compensation for statutory requisition of land and building was held not taxable as capital gains or as income because requisition under the West Bengal Land (Requisition and Acquisition) Act, 1948 only placed the property under State control and did not amount to a transfer of ownership or rights in property. The payment was confined to loss of use and enjoyment, so it fell outside section 45(5) and outside the charging provisions generally. Litigation s relating to enhanced compensation were allowed only on a proportionate basis where the proceedings covered both taxable acquisition compensation and non-taxable requisition compensation, with expenditure linked to the non-taxable component excluded.

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Issues: (i) Whether compensation received for requisition of land and building under the West Bengal Land (Requisition and Acquisition) Act, 1948 was taxable as capital gains or as income under the Income-tax Act, 1961. (ii) Whether the expenses incurred during litigation for enhanced compensation were allowable in full or had to be restricted proportionately.

Issue (i): Whether compensation received for requisition of land and building under the West Bengal Land (Requisition and Acquisition) Act, 1948 was taxable as capital gains or as income under the Income-tax Act, 1961.

Analysis: Requisition under section 3(1) of the West Bengal Land (Requisition and Acquisition) Act, 1948 only placed the property under State control for a statutory purpose; ownership remained with the assessee until acquisition, and the requisition could end by release under section 6(1) or by acquisition under section 4(2). The compensation paid for requisition was only for deprivation of use and enjoyment, not for a voluntary transfer of property or of rights in property. It therefore did not fall within the concept of consideration for transfer, could not be brought to tax as capital gains under section 45(5), and also did not constitute income under any other head.

Conclusion: The requisition compensation was not taxable as capital gains or as income and was not includible in the assessee's taxable income.

Issue (ii): Whether the expenses incurred during litigation for enhanced compensation were allowable in full or had to be restricted proportionately.

Analysis: The litigation expenses related to both requisition compensation and acquisition compensation. Since the requisition compensation was held to be non-taxable, the expenditure relatable to that component could not be allowed against taxable income. At the same time, the expenses could not be disallowed wholesale merely for want of complete substantiation where part of the litigation related to taxable acquisition compensation. The proper course was to allow the expenditure in proportion to the income that was brought to tax, while maintaining the restriction applied to non-legal expenses on a proportionate basis.

Conclusion: The disallowance was modified and the Assessing Officer was directed to allow proportionate expenses.

Final Conclusion: The first issue was decided in favour of the assessees, while the second issue was adjusted by permitting only proportionate deduction of expenses, resulting in partial relief to the Revenue.

Ratio Decidendi: Compensation paid for statutory requisition that does not amount to a transfer of property is not taxable as capital gains or as income, and litigation incurred for mixed taxable and non-taxable receipts must be allowed only on a proportionate basis.

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