Treatment of capital gains arising on compulsory acquisition of lands and buildings in Clause 84 of the Income Tax Bill, 2025 vs. Section 54D of the Income Tax Act, 1961

Clause 84 Capital gains on compulsory acquisition of lands and buildings not to be charged in certain cases.

Income Tax Bill, 2025

Introduction

Clause 84 of the Income Tax Bill, 2025 addresses the treatment of capital gains arising from the compulsory acquisition of lands and buildings. This provision aims to provide relief to taxpayers who reinvest their compensation in similar assets, particularly in the context of industrial undertakings. The clause mirrors the objectives of Section 54D of the Income-tax Act, 1961, but introduces certain modifications to adapt to contemporary economic and tax environments. Understanding the nuances of Clause 84 is crucial for stakeholders, including businesses and tax practitioners, as it impacts capital gains tax liability and investment strategies.

Objective and Purpose

The primary objective of Clause 84 is to offer tax relief to taxpayers who face compulsory acquisition of their lands or buildings. This relief is contingent upon the reinvestment of the compensation received into similar assets, thereby facilitating the continuity of industrial operations. The legislative intent is to encourage the reinvestment of capital gains in productive assets, supporting economic growth and industrial development. By deferring capital gains tax liability, the provision aims to mitigate the financial impact of compulsory acquisitions on businesses and promote the re-establishment or expansion of industrial undertakings.

Detailed Analysis

1. Conditions for Relief

Clause 84(1) outlines the conditions under which capital gains from compulsory acquisition are not charged to income tax. The provision applies when an assessee's capital asset, forming part of an industrial undertaking, is compulsorily acquired, and the assessee reinvests the compensation in another land or building within three years. The reinvestment must be for shifting, re-establishing, or setting up another industrial undertaking. This sub-section aligns with Section 54D of the Income-tax Act, 1961, but the language and structure have been modernized for clarity.

2. Treatment of Capital Gains

The tax treatment based on the relationship between capital gains and the cost of the new asset. If capital gains exceed the cost of the new asset, the excess is charged u/s 67, and the cost of the new asset for future capital gains computation is set to nil. Conversely, if capital gains are equal to or less than the cost, no capital gains are charged, and the cost is reduced by the amount of the capital gains for future computations. This mirrors the mechanism in Section 54D but updates references to sections relevant under the new Bill.

3. Utilization and Deposit of Capital Gains

Clause 84(2) addresses situations where capital gains are not immediately reinvested. It mandates the deposit of unutilized capital gains in a specified bank or institution by the due date for filing the return of income. This deposit must be utilized according to a scheme notified by the Central Government. This provision ensures that the tax deferral is contingent on the genuine intent to reinvest the capital gains, preventing misuse of the relief. The requirement for proof of deposit aligns with compliance and transparency objectives.

4. Deemed Cost of New Asset

Sub-section (3) clarifies that the cost of the new asset includes both the amount already utilized for its purchase or construction and the deposited amount under sub-section (2). This provision ensures that taxpayers benefit from the relief even if the reinvestment is staggered over time. The inclusion of deposited amounts in the cost basis aligns with the policy of encouraging reinvestment within a specified period.

5. Consequences of Non-utilization

Clause 84(4) outlines the consequences if the deposited amount is not fully utilized within the specified period. Unutilized amounts are charged u/s 67 as income of the tax year in which three years from the transfer date expires. Additionally, the assessee may withdraw the unused amount according to the notified scheme. This provision underscores the conditional nature of the relief, ensuring that tax deferral is only granted for genuine reinvestment efforts.

Practical Implications

Clause 84 has significant implications for businesses and individuals facing compulsory acquisition of industrial assets. The provision offers a mechanism to defer capital gains tax liability, thereby preserving capital for reinvestment. However, compliance with the conditions and timelines is crucial to benefit from the relief. Taxpayers must carefully plan their reinvestment strategies and maintain adequate documentation to substantiate their claims. Additionally, the requirement to deposit unutilized gains introduces procedural obligations that necessitate timely action and adherence to notified schemes.

Comparative Analysis with Section 54D of the Income-tax Act, 1961

Clause 84 of the Income Tax Bill, 2025, and Section 54D of the Income-tax Act, 1961, share similar objectives and mechanisms for deferring capital gains tax liability. Both provisions aim to facilitate the reinvestment of compensation from compulsory acquisitions into similar assets, promoting industrial continuity. However, Clause 84 introduces updated references and language to align with the new legislative framework. Additionally, the Bill's emphasis on compliance and transparency reflects contemporary tax policy priorities. While the core principles remain consistent, the procedural updates in Clause 84 enhance clarity and adaptability to current economic conditions.

Conclusion

Clause 84 of the Income Tax Bill, 2025, represents a continuation of the policy objectives embodied in Section 54D of the Income-tax Act, 1961. By providing tax relief for reinvestment of capital gains from compulsory acquisitions, the provision supports industrial growth and economic resilience. However, the effectiveness of this relief depends on taxpayers' adherence to the specified conditions and timelines. As the Bill progresses through the legislative process, stakeholders should monitor developments and prepare for potential compliance requirements. Future reforms may further refine the provision to address emerging challenges and opportunities in the tax landscape.

Section 54D of the Income-tax Act, 1961

Introduction

Section 54D of the Income-tax Act, 1961, provides a tax exemption for capital gains arising from the compulsory acquisition of lands and buildings used for industrial purposes. This statutory provision is designed to facilitate the reinvestment of compensation into similar assets, thereby supporting the continuity and growth of industrial undertakings. Understanding the intricacies of Section 54D is essential for taxpayers navigating compulsory acquisition scenarios and seeking to optimize their tax liabilities.

Objective and Purpose

The legislative intent behind Section 54D is to offer relief to taxpayers affected by compulsory acquisitions, enabling them to reinvest their compensation in similar assets without immediate tax liability. The provision aims to mitigate the financial impact of such acquisitions on businesses, encouraging the re-establishment or expansion of industrial operations. By deferring capital gains tax, Section 54D supports economic stability and industrial development, aligning with broader policy objectives of fostering growth and investment.

Detailed Analysis

1. Conditions for Exemption

Section 54D(1) sets forth the conditions under which capital gains from compulsory acquisition are exempt from tax. The provision applies when an assessee's capital asset, forming part of an industrial undertaking, is compulsorily acquired, and the assessee reinvests the compensation in another land or building within three years. The reinvestment must be for shifting, re-establishing, or setting up another industrial undertaking. This sub-section establishes the foundational criteria for claiming the exemption, emphasizing the continuity of industrial operations as a key consideration.

2. Treatment of Capital Gains

The tax treatment based on the relationship between capital gains and the cost of the new asset. If capital gains exceed the cost of the new asset, the excess is charged u/s 45, and the cost of the new asset for future capital gains computation is set to nil. Conversely, if capital gains are equal to or less than the cost, no capital gains are charged, and the cost is reduced by the amount of the capital gains for future computations. This mechanism incentivizes complete reinvestment of capital gains while ensuring that tax liability is proportionate to the extent of reinvestment.

3. Utilization and Deposit of Capital Gains

Section 54D(2) addresses situations where capital gains are not immediately reinvested. It mandates the deposit of unutilized capital gains in a specified bank or institution by the due date for filing the return of income. This deposit must be utilized according to a scheme notified by the Central Government. The provision ensures that the tax deferral is contingent on the genuine intent to reinvest the capital gains, preventing misuse of the exemption. The requirement for proof of deposit aligns with compliance and transparency objectives.

4. Consequences of Non-utilization

The provision includes a mechanism for dealing with unutilized deposited amounts. If the amount is not fully utilized within the specified period, it is charged u/s 45 as income of the previous year in which three years from the transfer date expires. Additionally, the assessee may withdraw the unused amount according to the notified scheme. This aspect underscores the conditional nature of the exemption, ensuring that tax relief is only granted for genuine reinvestment efforts.

Practical Implications

Section 54D has significant implications for businesses and individuals facing compulsory acquisition of industrial assets. The provision offers a mechanism to defer capital gains tax liability, thereby preserving capital for reinvestment. However, compliance with the conditions and timelines is crucial to benefit from the exemption. Taxpayers must carefully plan their reinvestment strategies and maintain adequate documentation to substantiate their claims. Additionally, the requirement to deposit unutilized gains introduces procedural obligations that necessitate timely action and adherence to notified schemes.

Comparative Analysis with Clause 84 of the Income Tax Bill, 2025

Section 54D of the Income-tax Act, 1961, and Clause 84 of the Income Tax Bill, 2025, share similar objectives and mechanisms for deferring capital gains tax liability. Both provisions aim to facilitate the reinvestment of compensation from compulsory acquisitions into similar assets, promoting industrial continuity. However, Clause 84 introduces updated references and language to align with the new legislative framework. Additionally, the Bill's emphasis on compliance and transparency reflects contemporary tax policy priorities. While the core principles remain consistent, the procedural updates in Clause 84 enhance clarity and adaptability to current economic conditions.

Conclusion

Section 54D of the Income-tax Act, 1961, provides a valuable tax exemption for capital gains arising from compulsory acquisitions, supporting industrial growth and economic resilience. However, the effectiveness of this relief depends on taxpayers' adherence to the specified conditions and timelines. As tax laws evolve, stakeholders should monitor developments and prepare for potential compliance requirements. Future reforms may further refine the provision to address emerging challenges and opportunities in the tax landscape.

 

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Full Text:

Clause 84 Capital gains on compulsory acquisition of lands and buildings not to be charged in certain cases.

 

Dated: 27-3-2025