Compulsory acquisition, solatium and business compensation can all affect tax treatment through capital gains or revenue receipt rules.

Compulsory acquisition is treated as a transfer by operation of law for capital gains purposes because statutory vesting of ownership, title and interest in the State falls within the widest meaning of "transfer". Solatium paid on compulsory acquisition forms part of the compensation for the capital asset and is includible in computing capital gains as part of the consideration received. Compensation for loss of contracts and loss of profits retains the character of a revenue receipt where it is referable to business profits rather than sterilisation of a capital asset, and is taxable as income.

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Issues: (i) Whether compulsory acquisition of property amounts to a transfer within section 12B(1) of the Income-tax Act, 1922 so as to attract capital gains tax; (ii) whether solatium awarded under section 23(2) of the Land Acquisition Act, 1894 forms part of the consideration for computing capital gains; (iii) whether compensation for loss of contracts and loss of profits is a revenue receipt taxable as income.

Issue (i): Whether compulsory acquisition of property amounts to a transfer within section 12B(1) of the Income-tax Act, 1922 so as to attract capital gains tax.

Analysis: The expression "transfer" in section 12B(1) was held to be of the widest import and capable of including transfer by operation of law. Compulsory acquisition results in the vesting of the ownership, title and interest of the property in the State and is not excluded merely because it is involuntary. The statutory language did not confine transfer to acts of parties.

Conclusion: Compulsory acquisition amounts to a transfer within section 12B(1), and the resulting profits are taxable as capital gains.

Issue (ii): Whether solatium awarded under section 23(2) of the Land Acquisition Act, 1894 forms part of the consideration for computing capital gains.

Analysis: Solatium, though paid because the acquisition is compulsory, is an additional amount that augments the compensation for the property acquired. It is part of the consideration received for the capital asset and not a payment wholly independent of the acquisition price.

Conclusion: Solatium forms part of the consideration for the transfer and is includible in computing capital gains.

Issue (iii): Whether compensation for loss of contracts and loss of profits is a revenue receipt taxable as income.

Analysis: Compensation received for loss of profits retains the character of revenue receipt. The same principle applies to compensation for loss of contracts where the payment is referable to business profits and not to the sterilisation of a capital asset.

Conclusion: The sums received for loss of contracts and loss of profits are revenue receipts and are taxable as income.

Final Conclusion: The reference was answered mainly against the assessee, with the substantive tax issues decided in favour of the revenue, while the remaining questions were not pressed.

Ratio Decidendi: For capital gains purposes, compulsory acquisition is a transfer because the statutory vesting of ownership in the State includes transfer by operation of law; amounts paid as solatium or compensation for loss of profits remain part of the taxable consideration or revenue receipt where they are referable to the acquired business rights or profits.

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