TRANSFER OF CAPITAL ASSET BY WAY OF COMPULSORY ACQUSITION
TRANSFER OF CAPITAL ASSET BY WAY OF COMPULSORY ACQUSITION
Applicability of Sec 45(5)
Section 45(5) applies in the following two situations:
• Capital asset has been compulsorily acquired by the Government or any other similar agency under any law; OR
• Transfer of capital asset has taken place and consideration for such transfer is to be determined or approved by the Central Government or RBI.
Full Value of Consideration (+)
• ORIGINAL COMPENSATION:
Capital gains shall be computed in the year in which the transfer has taken place but the entire capital gains shall be taxable in the year in which the first installment of
• As per Section 45(1) of the Income Tax Act, 1961, capital gains are chargeable to tax in the year in which transfer :- takes place except in certain cases.
The definition of 'transfer' includes any arrangement or transaction where any rights are handed over in execution of part performance of contract, even though the legal title has not been transferred. In such a scenario, execution of Joint Development Agreement between the owner of immovable property and the developer triggers capital gains tax liability in the hands of the owner in the year in which the possession of immovable property is handed over to the developer for development of a project.
• With a view to minimise the genuine hardship which the owner of land may face in paying capital gains tax in the year of transfer, Section 45(5A) has been newly introduced so as to provide that in case of an assessee being individual or HUF, who enters into a specified agreement for development of a project, the capital gains shall be taxable in the previous year' in which the certificate of completion for the whole or part of the project is issued" by the competent authority.
Illustration on Section 45(5A):
Mr X purchased a plot of land in Cochin during PY 2006-07 for Rs 50 lakhs. He entered into a 'specified agreement' with A Ltd (a developer) on 20th April 2015 allowing A Ltd the right to develop a project on such vacant land. Both the parties have*agreed that ownership of 60% of the constructed area would belong to Mr X and 40% of the constructed area would be retained by A Ltd for further sale to various buyers. Upon the signing of this agreement, A Ltd handed over a cash payment of Rs 10 lakhs to Mr X immediately.
The project got completed on 15th July 2017 and the necessary completion-certificate was issued by the appropriate authority on 25th July 2017. The SDV of 60% of the developed area given to Mr X as on 25th July 2017 was Rs 60 lakhs. Compute capital gains in the hands of Mr X for different years.
• Capital gains shall be computed in the year in which a specified agreement is entered into between the owne r of immovable property and the developer wherein the possession of the immovable property is handed over to the developer for development of a project. However, the capital gains so computed shall be taxable in the previous year in which the certificate of completion is issued by the competent authority.
• In the present case, capital gains shall be computed in PY 2015-16 (ie the year in which possession of the immovable property is handed over to the developer for development of a project). The cost of acquisition of 40% portion shall come out to Rs 20 lakhs (ie, 40% of Rs 50 lakhs). As a consideration for handing over 40% portion of the land, Mr X has received cash of Rs 10 lakhs and 60% share in the developed project having 5DV of Rs 60 lakhs. Therefore, full value of consideration shall be Rs 70 lakhs.
• Computation of Capital Gains (During PY 2015-16h
Full Value of Consideration (As Explained Above)
Less: Indexed Cost of Acquisition (Rs 20 lakhs x 254/122)
Long-Term Capital Gains
LTCG of Rs 28,36,065.57 so computed shall be considered as an income of PY 2018-19 (ie the year in which completion certificate has been issued by the competent authority).
the original compensation is received by the assessee. Cost of acquisition and cost of improvement shall be allowed to be deducted in the normal manner.
• ENHANCED COMPENSATION:
❑ If the assessee is not satisfied with the amount of compensation, he can file a case for receiving enhanced compensation. Such enhanced compensation is taxable in the year in which it is received by the assessee. The nature of capital gains (LT/ST) would be same as in case of original compensation.
❑ Where enhanced compensation has been received on the basis of an interim order of the Court, the amount of enhanced compensation shall be taxable only when the final order has been passed by the Court.
❑ While computing capital gains on enhanced compensation, the .assessee will be allowed to deduct legal expenses incurred to earn the enhanced compensation. Cost of acquisition and cost of improvement shall be taken as Nil.
❑ If the original assessee has died at the time of receipt of enhanced compensation, such enhanced compensation shall be taxable in the hands of the legal heir.
❑ Interest received on original/enhanced compensation is taxable u/h 'income from other sources' in the year of receipt irrespective of the year to which it pertains (Section 145A). 50% of such interest is allowed as deduction u/s 57.
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