CAPITAL GAINS ON COMPULSORY ACQUISTION OF AN ASSET [SECTION 45(5)]

Where a capital asset other than urban agricultural land has been compulsorily acquired under any law, it will be treated as transfer of previous year in which the asset is compulsorily acquired or if an asset is not compulsorily acquired but the consideration is determined or approved by the Central Govt. or RBI, it will be treated as transfer of previous year in which the consideration is determined but the capital gains will be taxable in the year in which it is received.

Taxability of capital gains

Capital gains will be taxable in the year in which the compensation is received and Indexation will be done till the previous year in which the asset is compulsory acquired.

Computation of Capital Gains

Initial consideration: It will be the sale consideration of the asset. Capital gains will be chargeable to tax for that previous year in which the whole or part of the consideration is actually received and not the year of compulsory acquisition or determination of consideration by Central govt. or RBI.

Particulars	Amount
Full value of consideration (Initial compensation)	XXX
Less: Expenses of transfer	XXX
Cost of acquisition /indexed cost of acquisition	XXX
Cost of improvement/indexed cost of improvement	XXX
Capital gains chargeable to tax	XXX

Enhanced Compensation: This is fully taxable in the year in which it is received. The cost of acquisition and cost of improvement will be taken as NIL since it already been deducted at the time of computation of capital gains for initial compensation. There will be long term or short term capital gain, it will depend upon the original capital gain. In case person dies before getting enhanced compensation it will be taxable in the hands of legal heirs.

Particulars	Amount
Full value of consideration (Enhanced compensation)	XXX
Less: Expenses of transfer	XXX
Cost of acquisition /indexed cost of acquisition	NIL
Cost of improvement/indexed cost of improvement	NIL
Capital gains chargeable to tax	XXX

Where right to receive compensation is in dispute

Capital gains shall be taxable even if the right to receive compensation is in dispute as the capital gains will be recomputed where the compensation received was subsequently reduced by the court.

This Article has been Shared by Student of ICAI Palak Aggarwal. She can be reached at aggarwal.palak2809@gmail.com