Compulsory Acquisition Taxability

By | October 21, 2016
(Last Updated On: October 21, 2016)

Compulsory Acquisition Taxability

Compulsory Acquisition Taxability

What is Compulsory acquisition

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.

The booklet How to compute capital gains published by Income-tax Department explains ‘compulsory acquisition of a capital asset under any law’ as under :

“Acquisition of immovable properties under the Land Acquisition Act, acquisition of industrial undertaking under the Industries (Development and Regulation) Act etc…, are some of the examples of compulsory acquisition of a capital asset.”

P.R. Aiyar’s Advanced Law Lexicon defines ‘compulsory acquisition’ citing Halsbury’s Laws of England as under:

“Where land or an interest in land is purchased or taken under statutory powers without the agreement of the owner, it is said to have been compulsorily acquired, but where there is a statutory power to take mere possession of land without the acquisition of any estate or interest in it apart from the possession, it is said to have been requisitioned.

Thus, there is a distinction between ‘compulsory acquisition’ and ‘requisition’. The definition of ‘transfer’ in section 2(47) specifically includes ‘compulsory acquisition’ but not ‘requisition’.

On 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.

Taxability of Compulsory acquisition

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—

(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art.

(iii) agricultural land in India,[ 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.

Exemption u/s 10(37) to Agriculture land

It may be noted that section 10(37) deals with compulsory acquisition of agricultural land which is exempt if the following conditions are satisfied.

(a)    The land must be situated in an area referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of section 2 (i.e. the agricultural land falls within the definition of capital asset).

(b)    The land was used for agricultural purposes by the HUF or individual or the parents of the assessee during the period of 2 years immediately preceding the date of transfer.

(c)    The transfer is by way of compulsory acquisition under any law or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India.

(d)    The compensation or consideration is received on or after 1-4-2004.

Situations of  Taxation of Income Received on Compulsory acquisition

1) CAPITAL GAIN ON CONSIDERATION RECEIVED ON FIRST INSTANCE

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.

Hence, if the acquisition of the asset was notified on 10-5-2005, the possession was taken on 16-8-2004, the award is made on 20-10-2007 and the compensation is first paid on 14-5-2008, the capital gain on the acquisition will first be brought to tax in the assessment year 2009-10 (i.e. based on actual receipt on 14-5-2008).

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.

For example:

Actual consideration of a land in 1985-86 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. 2014-15, but actual amount received in 2014-15 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)       (278,918)

Capital Gain/Loss                                 436,082

Working Note 1

76,000*1024/133 = 585,143

Now, taking proportionate amount of indexed cost,

5,85,143*7,15,000/15,00,000 = 278,918

2) CAPITAL GAIN WHEN ENHANCED COMPENSATION HAS BEEN RECEIVED

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.

The Finance (No. 2) Act, 2014 has inserted a proviso to clause (b) of sub-section (5) of the aforesaid section 45, so as to provide that any amount of compensation received in pursuance of an interim order of a court, Tribunal or other authority shall be deemed to be income chargeable under the head “Capital gains” of the previous year in which the final order of such court, Tribunal or other authority is made. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.

ILLUSTRATION : Sumit owned a plot of land which he purchased in 1974 for Rs. 1,40,000. The market value on 1-4-1981 was Rs. 2,00,000. On 17-8-2006 the land was requisitioned by the Government and Sumit was awarded compensation of Rs. 18,00,000. This sum was paid to Sumit on 14-4-2007. The relevant notification was published in the Official Gazette on 18-10-2006 and possession of the property was handed over on the same date. Sumit appealed against the award and he was granted additional compensation by the Court of Rs. 6,00,000 and the additional compensation was received by sumit on 10-4-2008 although the judgment of the Court was rendered on 15-3-2008.

In this case, since the compensation in the first instance was paid to Smit on 14-4-2007, the capital gains in the first instance of Rs. 6,98,000 [Rs. 18,00,000 – Rs. 11,02,000 (2,00,000 × 551 ÷ 100)] is liable to tax for the assessment year 2008-09.

The additional compensation is chargeable to tax in the assessment year 2009-10 because it is received in the previous year relevant to that assessment year even though the judgment of the Court was delivered in the previous year relevant to assessment year 2008-09. The entire amount of additional compensation is chargeable to tax in the assessment year 2009-10.

Interest on compensation/enhanced compensation taxable on receipt basis

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.

The Finance (No. 2) Act, 2009 has amended sections 56(2) and 145A with effect from assessment year 2010-11 to provide that interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it was received, irrespective of the method of accounting followed by the assessee. CBDT’s Circular No. 5/2010, dated 3-6-2010

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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Judgments on Compulsory acquisition

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