Compulsory acquisition is the power of government to acquire private rights in land without the willing consent of its owner or occupant in order to benefit society. Compensation against such acquisition is provided to the assessee by the government. On occurrence of such transactions capital gain is to be computed as per the provisions of Income Tax Act. Section 45 of the act deals with situations which are not actual transfer but are deemed to be transfer of capital asset.
Section 45(5) specifically deals with compulsory acquisition of capital assets. The conditions to be satisfied by any transaction to fall under this section are as follows: –
√ Compulsory acquisition has taken place
√ Compulsory acquired asset must be capital asset
√ Compensation thereof has been determined or approved by Central Government or the Reserve Bank of India
√ Any court, Tribunal or other authority has the right to enhance the compensation, if necessary.
As per section 2(14) “capital asset” means—
(a) property of any kind held by an assessee, whether or not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992,
but does not include—
(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ;
(ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes—
(b) archaeological collections;
(e) sculptures; or
(f) any work of art.
(iii) agricultural land in India,[Therefore Capital gains arising on compulsory acquisition of such agricultural land is exempt under section 10(37)]
(iv) 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;
(v) Special Bearer Bonds, 1991, issued by the Central Government ;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 8[or deposit certificates issued under the Gold Monetisation Scheme, 2015] notified by the Central Government.
There can be two phases of income being received in this case, and their treatment has been explained below.
Initial compensation is chargeable to tax in the previous year in which such compensation (or part thereof) is first received. Further, for computing capital gain, initial compensation is taken as full value of consideration. From the full value of consideration, amount applicable as per section 48 should be deducted to arrive at the value of capital gain.
In a case when full amount of compensation has been determined, but only partial amount thereof has been received, cost of acquisition should also be considered to that extent only.
Actual consideration of a land in 2001-02 is Rs. 76,000. The land was compulsorily acquired and the full value of consideration decided by Government was Rs. 15,00,000 in F.Y. 2019-20, but actual amount received in 2019-20 is only Rs. 7,15,000. In such case the capital gain will be calculated as follows: –
Full Value of Consideration 7,15,000
Less: Cost of Acquisition (W.N.1) (1,04,695)
Capital Gain/Loss 6,10,304
Working Note 1
76,000*289/100 = 2,19,640
Now, taking proportionate amount of indexed cost,
2,19,640 *7,15,000/15,00,000 = 1,04,695
Enhanced compensation shall also be taxable in the year of receipt. The cost of acquisition and the cost of improvement shall be taken as nil in such case. Litigation expenses for getting the compensation enhanced are deductible as expenses on transfer. If the enhanced compensation is received by any other person due to death of the transferor or any other reason, it would be taxable as income of the receipient.
In case of enhanced compensations received on compulsory acquisition of capital asset, interest is also paid to the assessee for delayed payment. Such interest would be taxable in the year of receipt as per section 145A. Interest income on enhanced compensation is taxable under section 56(2)(viii) but under virtue of section 57(iv), 50% of amount is allowed as deduction from such income.
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(Republished with Amendments by Team Taxguru)