Section 45(5) - Capital Gains on Transfer by way of Compulsory Acquisition of an Asset - Income Tax - Ready Reckoner - Income Tax

Section 45(5) :- Capital Gains on Transfer by way of Compulsory Acquisition of an Asset Transfer of capital asset by way of compulsory acquisition under any law or the transfer is the one for which the consideration is determined or approved by the Central Government or the RBI. when the central government pays this above compensation, capital gains may arise. Such Capital Gains are chargeable as income of the previous year in which such compensation or part thereof, was first received. The capital gains arising from the transfer of the capital asset shall be dealt with as under: In respect of: Original Compensation Taxable in the year in which it is first received by the assessee. (even part thereof) Period of holding shall be taken up to the date when asset was compulsorily acquired. Enhanced Compensation Taxable in the year in which it is received by the assessee. Nature of capital gain shall be same as the nature of capital gain with reference to original compensation Cost of acquisition shall be taken to be NIL If any enhanced compensation is received in pursuance of an interim order of court, Tribunal or other authority, then such enhanced compensation received shall be taxable in the previous year in which the final order is passed by the court, tribunal or other authority. Compensation reduced by any court or Authority Rectification is to be made to give effect to the reduced compensation. Death of the transferor It is possible that the transferor may die before he receives the enhanced compensation. In that case, the enhanced compensation or consideration will be chargeable to tax in the hands of the person who receives the same Notes: Litigation expenses incurred to obtain the enhanced compensation are deductible from enhanced compensation. Interest on compensation/ Enhanced Compensation shall be taxable in the year of receipt under the head Income from other sources . 50% of such interest shall be allowed as deduction under section 57 , from such interest. Where additional compensation awarded to the assessee has been made subject matter of appeal by the Government then such amount shall be taxable as capital gain only, in the year in which additional compensation is received or in the year in which the dispute is finally settled, whichever is later. If due to the death of transferor, the enhanced compensation is received by any other person. In that case, the enhanced compensation will be taxable under Capital Gain of such other person. Any Central Government arising to an Individual or HUF on compulsory acquisition of urban agricultural shall be exempt from tax provided such land has been used for agricultural purpose during the proceeding 2 years by the Individual or his parents or by such HUF. [ Section 10(37) ]