Compulsory acquisition is the power of government to acquire private rights in the land without the willing consent of its owner in order to benefit society, compensation against such acquisition is provided to the assessee by the government. On the occurrence of such transactions capital gain is to be computed as per the provisions of Income Tax Act, 1961.
A capital gain arises from the transfer of a capital asset, i.e. compulsory acquisition under any law, the compensation for which was determined or approved by Central Government or Reserve Bank of India, and the compensation for such transfer is enhanced or further enhanced by the court, Tribunal or other authorities, the capital gain Shall be dealt with in the following manner, namely
Initial Compensation: the capital gain in respect of compensation awarded for the first time by the Central Government or the Reserve Bank of India shall be chargeable as income under the head capital gain of the previous year in which such compensation or part thereof was first received.
Enhanced compensation: the amount by which the compensation is enhanced or further enhanced by the court or tribunal or other authorities, shall be deemed to be income chargeable under the head of capital of the previous year in which such amount is received by the assessee. Cost of acquisition, in this case, shall be taken to be nil as it has already been deducted at the time of computation of capital in case of an above
Section 45(5) specifically deals with the compulsory acquisition of capital assets.
The conditions to be satisfied by the transaction to fall under this section are as follows:
- The compulsory acquisition has taken place
- A compulsorily acquired asset must be capital Asset
- Compensation thereof has been determined or approved by the Central Government or the Reserve Bank of India
- Any court, tribunal or other authority has the right to enhance the compensation, if necessary.
Treatment of interest on compensation or enhanced compensation:
Year of chargeability: such interest shall be deemed to be the income of the year in which it is received
Income from other sources: Amount of interest referred to in section 145A(b) be chargeable to tax under the head income from other sources
Amount of Deduction: Amount equal to 50% of the amount of interest referred to in Section 56(2)(viii) shall be allowed as a deduction and no other deduction will be allowed in respect of such interest under any other provisions of this Act.
