Section 45(5) – Compulsory Acquisition – Capital Gain

SECTION 45(5) – COMPULSORY ACQUISITION

Compulsory Acquisition by the Central Government is always be a concern for many people as how it should be tax. Hence today I am writing this article to cover various aspects of this section in question answer form.

1. Do consideration received from Government against compulsory acquisition attracts capital gain?

As per section 45(5), consideration received against Compulsory acquisition by the Central Government shall also attract Capital Gain.

[Jehangir P. Vazifdar V ITO (1992) 42 ITD 67 (Bom-Trib) – Received would mean when it has become finally receivable or the same is received unconditionally.]

2. What will be the treatment of consideration further enhanced or reduced?

Enhanced & further enhanced compensation will also be considered for the purpose of Capital gain in the below mentioned manner:

• Consideration determined / awarded / approved at first instance shall be chargeable in the P.Y. in which, wholly or partly, was first received.
• Enhanced & Further enhanced compensation shall be chargeable in the Year of receipt.
• In case the amount of compensation or enhanced compensation is subsequently reduced the capital gain shall be recalculated by the taking the compensation or enhanced compensation so reduced. (Refer Sec 155(16).

3. What will be the COA and COI while calculating the enhanced consideration?

COA & COI shall be taken to be nil while calculating CG from enhanced compensation or further compensation.

Some Practical Issues on Section 45(5) – Compulsory Acquisition – Capital Gain

Issue 1 – Enhanced Compensation 45(5)

Enhanced compensation received by assessee during pendency of dispute before Court cannot be deemed to be his income for purpose of computation of capital gain in year of receipt, in terms of provisions of sec. 45(5). [Hari Kishan v. Presiding Officer (2008) 172 Taxman 219 (P & H)]

Issue 2 – Taxability of interest on enhanced compensation

• Interest on enhanced compensation is taxable on accrual basis but only if it is undisputed. [ITO vs. Amarlal (2007) 14 SOT 239 (Del-Trib)]
• Interest received on delayed payment of compensation is determined and taxable under the head income from other sources on year to year basis. [CIT v Ghanshyam (HUF) (2009) 315 ITR 1 (SC)].
• Interest on enhanced compensation is not taxable on lumpsum basis under mercantile system, however spread over on annual basis over the period starting from the date of compulsory acquisition to the date on which court makes an order for enhanced compensation. [Rama Bai V CT (1990) 181 ITR 400 (SC), see also CIT vs Hardwari Lal, HUF [2009] 312 ITR 0151 (P&H)].
• Where assessee follows cash system of accounting, interest on enhanced compensation on acquisition of land shall be taxable in year of receipt. [CIT v Smt Burfi [201 1] 331 ITR 001 (P&H)]

Issue 3 – Date of transfer

• If property acquired under Requisitioning and Acquisition of Immovable Property Act, 1952 – Date of publication of the notification for acquisition would be the date of Transfer. [G.M. Omer Khan v CIT (1992) 196 ITR 269 (SC) see also Omar khan (G.M.) v Addl CIT (1992) 195 ITR 269 (SC)]
• If property acquired under Land Acquisition Act, 1894 (The Central Act) or any other state Act – Date of transfer would be the date of actual possession by declaring it to do so. [CIT v Shaggy Abdulla (Smt) (2000) 108 Taxman 249 (Ker)]
• In case of emergency acquisition, effective date of transfer is the date of taking possession under section 17 of the Land Acquisition Act, 1894 and not the date of award of compensation. [BC Gupta & Sons Ltd. v CIT (1996) 221 ITR 53 (Gau.) also see Alexander George V CIT (2003) 128 Taxman 851 (Ker)]

Issue 4 – Other related issues

• The Supreme Court in the case of CIT V Hindustan Housing and Land Development Trust (1986) 161 ITR 524 has held that :

• • Where additional compensation awarded to the assessee has been made subject matter of appeal by the Government then such amount shall be taxable as capital gain only.
  • In the year in which additional compensation is received.
  • In the year in which the dispute is finally settled. Whichever is later.

[New friends Co-operative House Building Society Ltd. v CIT (2010) 327 ITR 0039 (P&H) also see CIT vs. Ghanshyam (HUF) [2009] 315 ITR 0001 (SC), Chandi Ram v CIT [2009] 312 ITR 0139, Anil Kumar Forma (HUF) V. CIT [2007] 289 ITR 0245 (Mad), G.M. Omar Khan V. Addl CIT (1992) 196 ITR 269 (SC)].

• If any amount is received after stay of the award, in pursuance of any interim order, as a payment subject to the final result, it will not be an amount received as ‘enhanced compensation’ contemplated u/s 45(5)(b), but only an interim payment received subject to final decision. [CCIT & Anr v. Smt. Shantavva (2004) 267 ITR 67 (Karn).]
• Solatium awarded by competent authority constitutes part of consideration for compulsory acquisition. [CIT v. Smt. Subaida Beevi (1986) 160 ITR 557 (Ker) see also Vadilal Soda Ice Factory v CIT (1971) 80 ITR 711 (Guj), K.C. Mahajan (1998) 234 ITR 235 (P&H).
• Expenses for realization of enhanced consideration is allowable in terms of S. 48(1). [Chakiri Ashok Kumar v ITO (2002) 80 ITD 410 (Hyd).].
• The compensation due to injurious effect on the unacquired portion is also taken in to account, the amount awarded for such compensation shall also be a part of the full consideration price for computing the capital gain for the portion acquired. [P. Mahalakshmi and Others v CIT (2002) 255 ITR 647 (SC)].

(Source – Book on Practical Aspects of Tax Audit, TDS, HUF & Capital Gains  written by CA Agarwal Sanjay ‘Voice of CA’ & Team)

Republished with Amendments