Land acquisition compensation exemption and capital gains cost rules: statutory exemption was denied, and actual purchase cost remained the basis.

Compensation for compulsory acquisition under a State highways regime was held not to qualify for tax exemption because Section 96 of the 2013 land acquisition law applies only to awards or agreements made under that Act, and exemption cannot be implied without an express statutory grant. The purchaser could not substitute the seller's stamp valuation as the cost of acquisition, because the Section 50C deeming fiction is confined to the transferor's capital gains computation and does not replace actual purchase cost. The cost of improvement claim required fresh verification, as the supporting documents did not conclusively establish nexus with the subject land, so that issue was remanded for reassessment.

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Issues: (i) Whether compensation received on compulsory acquisition under the State highways acquisition regime before the notified commencement of the 2013 land acquisition law was exempt from tax; (ii) whether the assessee could substitute the actual cost of acquisition with the stamp valuation adopted for the seller for computing capital gains; (iii) whether the claim for cost of improvement was established, or required further verification.

Issue (i): Whether compensation received on compulsory acquisition under the State highways acquisition regime before the notified commencement of the 2013 land acquisition law was exempt from tax.

Analysis: The compensation and award were both shown to have arisen before 01.01.2014, when the 2013 land acquisition law was brought into force. The statutory exemption under Section 96 operates only in relation to awards or agreements made under that Act. The State amendment placing certain State enactments within the scheme of the 2013 law did not displace the fact that the award in question was made under the State highways enactment, and the later revival legislation did not establish any separate notification extending the exemption to such receipts. Exemption being a matter of express statutory grant, it could not be inferred merely from the general compensation framework.

Conclusion: The exemption claim was rejected and the issue was decided against the assessee.

Issue (ii): Whether the assessee could substitute the actual cost of acquisition with the stamp valuation adopted for the seller for computing capital gains.

Analysis: The deeming fiction in Section 50C is confined to the transferor for computation of capital gains and does not operate to replace the purchaser's actual cost of acquisition. The analogous provisions relied upon by the assessee in the context of transfer pricing of assets or share premium did not govern the computation of cost in the present case. The assessing authority therefore treated the actual purchase cost as the relevant base and rejected the enhanced valuation adopted by the assessee.

Conclusion: The assessee was not entitled to adopt the stamp valuation as cost of acquisition, and the issue was decided against the assessee.

Issue (iii): Whether the claim for cost of improvement was established, or required further verification.

Analysis: The assessee produced work order and bill evidence and asserted that substantial expenditure had been incurred on filling and levelling the land. At the same time, the supporting particulars did not conclusively establish that the expenditure related to the subject land with sufficient clarity. Since the payment trail and tax deduction at source were not by themselves conclusive of nexus, further substantiation was required.

Conclusion: The disallowance was set aside for fresh verification, and the issue was restored to the assessing authority.

Final Conclusion: The assessment was sustained on the exemption and cost of acquisition issues, while the claim for improvement expenditure was sent back for verification, resulting in only partial relief to the assessee.

Ratio Decidendi: A tax exemption connected with land acquisition compensation must rest on an express statutory grant applicable to the award in question, and a deeming provision for transferor-side computation cannot be used to substitute the purchaser's actual cost of acquisition.

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