Capital gains on acquired agricultural land and section 54E relief from compensation date in compulsory acquisition cases.

Agricultural land compulsorily acquired was held to be a capital asset where it fell within the statutory urban limits, so capital gains tax applied under the amended definition. The exclusion for agricultural land did not protect land situated within those specified limits. On exemption, section 54E was construed beneficially in compulsory acquisition cases: where compensation was received later than transfer, the six-month investment period was reckoned from receipt of compensation, not from the date of transfer. Investment in specified assets within that period qualified for exemption to that extent.

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Issues: (i) whether agricultural land acquired compulsorily was a capital asset so as to attract capital gains tax under the amended definition; (ii) whether exemption under section 54E was available when investment in specified assets was made within six months from receipt of compensation and not from the date of transfer.

Issue (i): whether agricultural land acquired compulsorily was a capital asset so as to attract capital gains tax under the amended definition.

Analysis: The definition of "capital asset" in section 2(14)(iii) of the Income-tax Act, 1961 excludes agricultural land, but includes agricultural land situated within the specified urban limits. The retrospective Explanation inserted by the Finance Act, 1989 to section 2(1A) and the amendment to section 2(14)(iii) made by the Finance Act, 1970 were treated as governing the case. On the facts, the land fell within the urban-agricultural exclusion from the capital asset carve-out, and the earlier view treating the land as outside capital gains charge was not accepted.

Conclusion: The land was liable to be treated as a capital asset and capital gains tax was attracted; this issue was decided against the assessee and in favour of the Revenue.

Issue (ii): whether exemption under section 54E was available when investment in specified assets was made within six months from receipt of compensation and not from the date of transfer.

Analysis: Section 54E(1), read with the second proviso inserted by the Taxation Laws (Amendment) Act, 1984, was interpreted in a beneficial manner in compulsory acquisition cases where compensation was not received on the date of transfer. The proviso was treated as clarificatory, and the period of six months was reckoned from the date of receipt of compensation. Investment in the specified bank deposit within that period satisfied the statutory requirement.

Conclusion: The assessee was entitled to exemption under section 54E to the extent of the investment made within six months from receipt of compensation; this issue was decided in favour of the assessee.

Final Conclusion: The determination on the taxability of the land was adverse to the assessee, but the alternative relief under section 54E was granted, so the common order resulted in mixed success for both sides.

Ratio Decidendi: In cases of compulsory acquisition, the period for investment-based exemption under section 54E is to be computed from receipt of compensation where the statutory proviso is clarificatory, while agricultural land falling within the statutory urban limits is not excluded from capital asset treatment.

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