A) ABSTRACT / HEADNOTE

The judgment examines the precise point of accrual of capital gains under Section 45 of the Income-tax Act, 1961 in cases of compulsory acquisition of land under the Land Acquisition Act, 1894. The dispute arose from the acquisition of land belonging to the assessee, which was already in possession of a college as a lessee whose lease had expired prior to acquisition. The controversy centered on whether capital gains accrued on the date of issuance of notification under Section 4 of the Land Acquisition Act, 1894 or on the date of passing of the award under Section 11.

The Supreme Court rejected the contention that issuance of notification or prior possession by the beneficiary institution resulted in vesting of land. It held that capital gains accrue only when the transfer of capital asset is complete, which in compulsory acquisition cases correlates with statutory vesting of land in the Government, and such vesting ordinarily occurs under Section 16 only after the award is made. The Court clarified that accrual of the right to receive compensation is conceptually distinct from accrual of capital gains.

The judgment authoritatively settles that in ordinary acquisitions under the 1894 Act, capital gains accrue on the date of award, unless urgency provisions under Section 17 are expressly invoked. The ruling reconciles conflicting strands of tax jurisprudence and affirms that income tax cannot be levied on a mere inchoate or contingent right.

Keywords: Capital gains, compulsory acquisition, vesting of land, Section 45 Income-tax Act, Land Acquisition Act 1894.

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The case arose from a long-drawn dispute concerning taxation of compensation received on compulsory acquisition of land. The assessee, a Hindu Undivided Family, owned land that had been leased to a college. After the lease expired, the beneficiary institution sought compulsory acquisition of the land. Although acquisition proceedings commenced in 1968, the award was passed only in 1970.

The Income-tax authorities differed on whether capital gains accrued on the date of notification or the date of award. The Assessing Officer initially excluded capital gains, while the appellate authorities later brought them to tax. Conflicting views were expressed by the ITAT in different assessment years.

The High Court held that capital gains accrued only on the date of award. The assessee challenged this conclusion, arguing that possession with the beneficiary amounted to vesting at the notification stage. The Supreme Court was thus required to determine the exact moment of transfer for the purposes of capital gains taxation under the Income-tax Act.

The background reflects persistent uncertainty in Indian tax jurisprudence regarding compulsory acquisition, particularly the conflation between possession, vesting, and accrual of income.

D) FACTS OF THE CASE

The subject land, measuring 41 kanals and 14 marlas, was allotted to the assessee as evacuee property. A substantial portion was leased to S.A. Jain College for 20 years, expiring on 31.08.1967. After expiry, the college remained in possession without renewal.

On 15.05.1968, the State issued a Section 4 notification under the Land Acquisition Act, 1894 for acquiring the land for a playground. A declaration under Section 6 followed on 13.08.1969. The Land Acquisition Collector passed the award on 29.09.1970.

Compensation and solatium were awarded to the landowners, and interest was granted from the date of notification. Subsequent litigation led to enhancement of compensation by the civil court and High Court.

During income-tax assessment for AY 1971-72, the question arose whether capital gains accrued in the year of notification or the year of award. Conflicting findings at different appellate levels ultimately culminated in the Supreme Court appeal.

E) LEGAL ISSUES RAISED

i. Whether capital gains under Section 45 of the Income-tax Act, 1961 accrued on the date of Section 4 notification or on the date of award under Section 11 of the Land Acquisition Act, 1894?
ii. Whether prior possession of land by the beneficiary institution amounted to vesting in the Government?
iii. Whether interest awarded from the date of notification altered the accrual of capital gains?

F) PETITIONER / APPELLANT’S ARGUMENTS

The counsels for the appellant submitted that the acquisition was effectively complete upon issuance of notification since the beneficiary already possessed the land. It was argued that possession constituted extinguishment of ownership rights within the meaning of Section 2(47) of the Income-tax Act.

Reliance was placed on cases concerning urgency acquisitions to argue that vesting need not await the award. It was further contended that interest awarded from the notification date implied earlier transfer. The appellant also argued parity with its own earlier assessment year where the ITAT had ruled in its favour.

G) RESPONDENT’S ARGUMENTS

The counsels for the respondent submitted that vesting under the Land Acquisition Act is purely statutory and occurs only as provided under Sections 16 or 17. Since urgency provisions were never invoked, vesting could occur only upon making of the award.

It was argued that possession by a lessee after expiry of lease was merely that of a tenant at sufferance and could not be equated with Government possession. The respondent emphasized that income tax is levied on accrued income, not on a speculative or contingent right.

H) RELATED LEGAL PROVISIONS

i. Section 45, Income-tax Act, 1961
ii. Sections 4, 6, 9, 11, 16, 17, 28, Land Acquisition Act, 1894

I) JUDGEMENT 

The Supreme Court affirmed the High Court’s view. It held that capital gains accrue only upon completion of transfer, which in compulsory acquisition occurs when land vests in the Government. Vesting under Section 16 follows the award, not the notification.

The Court drew a clear distinction between right to receive compensation and transfer of capital asset. It held that possession taken before statutory vesting does not complete transfer. Interest awarded under Section 28 was held irrelevant to accrual of capital gains.

The Court approved earlier High Court rulings holding that even where possession is taken earlier, vesting relates back to the award in ordinary acquisitions. It rejected the analogy with urgency acquisitions.

The appeal was dismissed.

a) RATIO DECIDENDI

Capital gains under Section 45 of the Income-tax Act, 1961 accrue only when the transfer of capital asset is statutorily complete. In cases of ordinary acquisition under the Land Acquisition Act, 1894, such transfer is complete only upon vesting of land under Section 16, which occurs after the award. Notification or prior possession does not trigger accrual.

b) OBITER DICTA

The Court observed that confusion between possession and vesting has led to inconsistent tax treatment. It cautioned against extending urgency acquisition principles to ordinary acquisitions without statutory basis.

c) GUIDELINES

i. Accrual of capital gains must align with statutory vesting.
ii. Interest payment dates do not determine transfer.
iii. Possession by a lessee does not amount to Government possession.

J) CONCLUSION & COMMENTS

The judgment brings doctrinal clarity by decisively separating income accrual from compensation entitlement. It reinforces statutory interpretation over equitable assumptions. The ruling has enduring significance for land acquisition taxation and prevents premature taxation on contingent gains.

K) REFERENCES

a) Important Cases Referred

i. Special Land Acquisition Officer v. Godrej & Boyce [1988] 1 SCR 590
ii. Fruit & Vegetable Merchants Union v. Delhi Improvement Trust [1957] SCR 1
iii. Lt. Governor of Himachal Pradesh v. Avinash Sharma [1971] 1 SCR 413
iv. S. Appala Narasamma v. CIT (1987) 168 ITR 17

b) Important Statutes Referred

i. Income-tax Act, 1961
ii. Land Acquisition Act, 1894