Taxability of Compulsory Acquisition of Asset

Government is acquiring private asset of people for the benefit and development of society. People receives compensation against their asset acquired. Sometimes they are satisfied with the compensation received but sometimes not. None satisfied people can file suit regarding less compensation and might win getting enhanced compensation along with interest. However, in all this matter main question arises regarding the taxable treatments. So let’s discuss.

When the compensation is received towards the capital asset get acquired, it will lead to capital gain or capital loss in the hands of assesse. The same is being dealt under section 45(5) of the Income Tax Act, 1961, Compensation on Compulsory Acquisition under any law.

• 1. Compensation shall be determined or approved by Central Government or Reserve Bank of India and in case of any enhanced or further enhanced compensation, determined by court or Tribunal or any other authority.
• 2. The capital gain arising on compulsory acquisition of capital asset shall be taxable in the year in which compensation is received to assesse, if compensation is being received in installments, capital gain on whole or initial compensation shall be taxable in the year in which first installment is received.
• 3. Where the assesse is entitled to enhanced compensation, capital gain on same shall be taxable as and when received. If the enhanced compensation is received due to interim order of any court, then such compensation shall not be taxable in the year of receipt but shall be taxable in the year in which final order is passed by such court or other authority.
• 4. In order to calculate Long Term or Short Term Capital Gain on initial compensation, assesse’s cost of acquisition or indexed cost of acquisition along with cost of improvement or indexed cost of improvement needs to be reduced from fair value of compensation (initial compensation received). However, for Long Term or Short Term Capital Gain on enhanced compensation, only litigation expenses shall be reduced from fair value of compensation (enhanced compensation received).
• 5. Nature of capital gain on enhanced compensation shall be same as the nature of initial compensation.
• 6. If any interest is received on late compensation, it shall be taxable under the head other sources in the year of its receipt. 50% deduction shall be allowed on interest received on late compensation under section 57 of the Income Tax Act, 1961.
• 7. If any compensation is reduced by any court or authority, then the rectification has to be made giving effect to the same.

Taxability of capital gain on compulsory acquisition of agricultural land is debatable issue. Capital gain arising on compulsory acquisition of rural agricultural land is always exempted under section 10(37) of the Income Tax Act, 1961. However, in case of urban agricultural land, capital gain arising to individual or HUF on compulsory acquisition shall be exempted under section 10(37) provided such land has been used for agricultural purposes during the preceding 2years by the individual or his parents or by such HUF.

Further there is also debate regarding the taxability of interest received on compensation or enhanced compensation stating – “as per the settled position of law on the issue, the interest received on compensation or enhanced compensation is taxable as Income from Other Sources and is not exempt under section 10(37) of IT Act, 1961”. Many judgments have been passed in against the statement, however it’s still a litigated issue.

CorpoEdge has dealt with many such appeals. For further doubt, kindly contact CorpoEdge Team.