Compulsory Acquisition of Assets - Capital Gains Taxability

• Section 45(5) of the Income Tax Act, 1961 talks about compulsory acquisition of assets by the government.

• As per the definition of transfer given in section 2(47) of the Act, transfer includes compulsory acquisition of assets.

• As per section 45(1), profit or gain arising from transfer of a capital asset is taxable in the previous year in which transfer took place.

• Contrary to what is contained in section 45(1), this section provides for chargeability of capital gains on compulsory acquisition of assets in the previous year in which compensation or part thereof is first received by the assessee.

• So, if transfer took place in PY 2017-18 (when asset was compulsorily acquired) and compensation or part thereof was first received in PY 2018-19, capital gains liability would arise in PY 2018-19.

• If assessee in future receives any enhanced compensation, then that enhanced compensation will be taxable in the year in which it is received.

• If any interim order of any Court, Tribunal or other authority provides compensation to the assessee, such compensation will be taxable in the previous year in which final order of such court, Tribunal or other authority is passed.

• For the purpose of calculating capital gains in case of enhanced compensation, cost of acquisition (COA) and cost of improvement (COI) shall be taken as Nil.

• If initial compensation is received in instalments, then complete amount of initial compensation is taxable in the year in which first instalment is received.