Capital Gain in case of Compulsory Acquisition of an Asset

Income tax on capital gain is one of the hot topic, that everyone wants to discuss including non-residents. Capital gain is a wide chapter that has been dealing in detail about the capital assets and tax treatment on that capital assets. A capital asset is defined under section 2(14) of the income tax act 1961. Capital asset means

  1. a property held by the taxpayer whether or not connected with his business or profession.
  2. any securities held by a Foreign Institutional Investor (FII)
  3. any unit-linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof (w.e.f 01.04.2021)

But the capital asset does not include:

  1. Stock-in-trade
  2. personal effects, that is to say, movable property held for personal use. However, capital asset includes:
    • jewellery;
    • archaeological collections;
    • drawings;
    • paintings;
    • sculptures; or
    • any work of art.
  3. agricultural land in India (with certain conditions)
  4. 6 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980,
  5. Special Bearer Bonds, 1991,
  6. Gold Deposit Bonds

Section 45(5) of the income tax act is applicable to the taxpayers:

  • When capital asset is transferred by compulsory acquisition under any law or;
  • When capital asset is transferred for a consideration which was determined or approved by the Central Government or the Reserve Bank of India and
  • the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority

Tax Treatment when Initial compensation is received on compulsory acquisition

In case of the acquisition of property, the liability of income tax is not postponed merely because there is a possibility of compensation being increased or reduce in later years. The Initial compensation on compulsory acquisition of capital assets is taxable in the previous year in which compensation is first received company registration in gurgoan. It is important to note that capital gain is not chargeable to income tax in the year of transfer of capital asset. However, the amount of consideration in pursuance of interim order of any court, tribunal or other authority is chargeable to tax in the year in which final order of any court, tribunal or other authority is passed ca in gurgaon.

Tax Treatment when Enhanced compensation is received

The enhanced compensation is received from the order of the court, tribunal or other authority is chargeable to tax in the year in which enhanced compensation is received. The cost of acquisition in relation to enhanced compensation will be taken as NIL. It is important to note that the enhanced compensation received by the other person will be chargeable to tax in that person only income tax consultant in gurgaon. This happens due to the death of a person who had to receive the enhanced compensation, but his legal heir let’s say family members receive such consideration company formation in gurgaon.

It is important to note that section 45(5) only changes the year of taxability, if any property is not a capital asset, the transaction does not become chargeable to tax simply because the property was compulsorily acquired or compensation enhanced (Dhaiya vs Assistant commissioner of income tax 269 ITR 542)

It should also be noted that once compensation is reduced, the capital gain is also reduced. The additional compensation is treated as deemed income in the hands of recipient even if he happens to be different for the original transferor.

Tax Treatment when compensation is paid but amount is subject matter of dispute

The enhanced compensation is taxable in the year in which compensation is received when the compensation is paid by the order of the government, and it is still the subject matter of dispute. If any such compensation is subsequently reduced, then the re-computation shall be made under section 155 as provided in the income tax act gst consultant in gurgaon. The assessing officer has the power to recompute the capital gain within 4 years from the end of the previous year in which the order of the court, tribunal or other authority is passed.

Taxability of interest received on compensation

Taxability of interest was considered in detail by the supreme court in the case of Commissioner of income tax vs Ghanshyam 315 ITR 1. Supreme court held that interest awarded under section 28 of the Land acquisition act, 1894 represents ‘’compensation’’ because it is an accretion to the value of land, while interest under section 34 represents compensation for delayed payment. So what does the supreme court judgement means in this case? This means that interest under section 28 is chargeable to income tax in the year in which interest is received (Commissioner of income tax vs Govindbhai mamaiya 367 ITR 498), however interest under section 34 is taxable is not the year of receipt only if the assessee follows the cash system of accounting, else income tax will be payable in the year of accrual. (CIT vs Parkash Kaur 330 ITR 332)

Conclusion: Nowadays income tax department has started sending income tax notices to the person whose property has been acquired by the government and not filing the income tax return. Practically these persons are farmers and agriculturists and have no knowledge about income tax and income tax returns. So the income tax department sends notices because they have received information from the annual information system ca in gurgaon. It is advisable to file the reply to such notices very carefully because the amount of compensation is in lakhs or sometime in crores hence any omission or mistake may create huge demand of income tax liability.

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