Transfer includes compulsory acquisition of a property under any Law. In such cases, settlement of the amount of compensation usually takes a long time. The compensation is initially fixed by the Land Acquisition Officer and is subject to appeal and re-determination by courts. The compensation amount may vary as the case progresses from one authority to another. The transferor may get paid in installments as and when a higher authority awards further compensation.
In cases of compulsory acquisition of an asset, the Capital Gains is determined on the actual receipt of compensation and not on the accrual basis. The Capital Gains is computed by taking the compensation received in the first instance as the full value of consideration. As and when any further compensation is received, the same would be brought to tax as capital gains of the year in which such further compensation is received.
As the deductions in computing the capital gains are considered while computing the capital gains in the initial year, no further deductions are allowed in the subsequent calculations on account of cost of acquisition etc.
In case the compensation is reduced subsequently, the Capital Gains for the relevant year would be recomputed taking reduced compensation as the full value of consideration.
The time period for making investments in a house, in shares, etc. eligible for deduction from LTCG would be counted from the date of receipt of the compensation.
- 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 Government or RBI, it will be treated as transfer of previous year in which the consideration is determined but the capital gain will be taxable in the year in which it is received.
- Capital gain 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 compulsorily acquired.
- Capital gain shall be taxable even if the right to receive compensation is in dispute as the capital gain will be recomputed where the compensation received was subsequently reduced by the court.
- By this provision a basic departure has been made the assessment of capital gain resulting from compulsory acquisition. Before insertion of sub-S. (5), the year of transfer was the only point from which the proceedings were to be started. Whether full amount of consideration was received or had accrued, capital gain was to be computed in the year of transfer. This provision in S. 45(5) provides that where an award is made by the competent authority enhancing the compensation or the same is further enhanced thereafter by the court, the enhanced amount of compensation is to be taxed in the year of its receipt and the same is not to be related back to the year of transfer.
S. 45(5), 54EA & 54H of IT Act, 1961—Capital gain—The Court is essentially concerned with a situation where the assessee has claimed a benefit in terms of S. 54EA and for which purpose he is claiming the benefit of this provision in the background of the provisions of sub-s. (5) of S. 45 of the Act. Under sub-s.(5) of S. 45, the enhanced/additional compensation is brought to tax in the assessment year corresponding to the dates on which such enhanced compensation is received, that is, the assessment year relevant to the date of transfer but only the assessment year relevant to the date of receipt of additional or enhanced compensation. In the present case, enhanced compensation of land acquired in 1992 having been received by the assessee in 1997 and invested immediately in specified bonds for the purpose of S. 54EA, thus, he is entitled to claim exemption u/s 54EA of the Act notwithstanding the fact that S. 54H did not contain reference to the provisions of S. 54EA on the dates relevant for assessment years 1998-99—CIT vs. J. Palemar Krishna (2011) 244 CTR 618 (Delhi)
S. 45(5) (as it stood prior to 1.4.2004) of Income Tax Act, 1961—Capital Gain—The short question to be decided in this batch of civil appeals is : whether ITAT was right in ordering deletion of enhanced compensation and interest thereon from the total income of the assessee on the ground that the said two items, awarded by the Reference Court, was under dispute in First Appeal before the High Court.” While allowing the appeal, the Supreme Court held that:—”The following conditions need to be satisfied for taxing a transaction as capital gains, viz., the subject-matter must be a capital asset, the transaction must fall in the definition of “transfer”, there must be profit or loss called “Capital Gains” and that the taxpayer has claimed exemption in whole or in part by complying with legal provisions (Like S. 54F).” CIT, Faridabad vs. Ghanshyam (HUF)  12 ITCD 1 (SC)
S. 45(5)(b) of IT Act, 1961, r/w S. 34 of Land Acquisition Act, 1984—Income—The position with regard to the receipt of interest on account of delayed payment received u/s 34 of the Land Acquisition Act, 1894, would be different where the assessee is following the cash system of accountancy and the interest received on enhanced compensation has to taxed in the year of receipt—CIT vs. Smt. Burfi (2011) 331 ITR 1 (P&H)
S. 28(i) & 45(5) of IT Act, 1961—Capital gain—Excess of realization of investment consisting of purchase and resell, though profitable, is outside the domain of adventure in the nature of trade. A prudent person who wait for 10 or 20 year to dispose of the property and surplus resulting from sale would be held as profit arising from adventure or to be held as a capital gain—ITO vs. Baguio Investment Pvt. Ltd.  127 TTJ 423 (ITAT-Pune A)
S. 5, 45(5) & 155(16) of IT Act, 1961—Capital gain—The receipt of enhance compensation/consideration on compulsory acquisition of land u/s 28 of Land Acquisition Act, 1894 is to be taxed in the year of receipt subject to adjustment, if any, u/s 155(16) of the Act—ITO vs. Roop Singh  127 TTJ 377 (ITAT-Del F)
S. 2(14), 4 & 45(5) of IT Act, 1961—Capital gain—The compensation received for requisition cannot be taxed as an income of the assessee under the Act because the requisition of the land is only taking of possession of the land by the State Government for purposes specified in S. 3(1) of the Act, thereby the owners of the land are deprived from the use and enjoyment of the land. Even otherwise, when the compensation which is not against the transfer of the property (compulsory acquisition), then same cannot be included as consideration for computation of capital gain and same cannot be taxed as income of the assessee under any other head—DCIT vs. Udhava Das Fomra & Ors.  1 ITR (Trib) 443 (Chennai)
S. 5 & 45(5) of IT Act, 1961—Capital gain—The enhanced compensation along with interest thereupon is assessable in the year in which it is received—DCIT vs. Ajay Sharma (2011) 135 TTJ 222 (ITAT-Delhi)
S. 45(5)(B), 155(7A) of IT Act, 1961—Capital gain—The enhanced compensation is not exigible to tax either in the year of receipt or in the year of acquisition/transfer of capital asset—CIT vs. Smt. Parkash Kaur (2011) 330 ITR 332 (P&H)
S. 45(5)(b) of the IT Act, 1961—Capital gain—S. 45(5)(b) of the Act would be attracted only when the assessee receives the enhanced compensation in pursuance of a final award/order of a Court, Tribunal or other authority increasing the compensation. This provision is attracted only when the final decision is rendered by the appellate or other authority. The provision of clause (c) of S. 45(5) would apply only to future periods and not to any period prior to April 1, 2004, or any assessment year prior to the assessmen year 2004-05—Chandi Ram vs. CIT (2009) 312 ITR 319 (P&H)
S. 45(5)(b) of the IT Act, 1961—Income—In case the interest payable on enhanced compensation is pending in dispute before the court, the interest would not accrue and can be subject to tax only when the enhanced compensation is finally determined—CIT vs. Bhoop Ram Dagar, HUF (2009) 312 ITR 157 (P&H)
S. 45(5)(b) of the IT Act, 1961—Income—The interest on enhanced compensation would not accrue till the issue of enhanced compensation is finally decided and thereafter on attaining the finality of determination of enhanced compensation by the court, the interest accrued to the assesee has to be spread over on an annual basis right from the date of delivery of possession till the date of the order of the court of the time basis—CIT vs. Hardwari Lal, HUF (2009) 312 ITR 151 (P&H)
S. 45(5) of IT Act, 1961—Capital gain—Only after attaining the finality of compensation from the highest court, the amount received by the assessee is taxable—New Friends Co-Op. House Building Society Ltd. vs. CIT (2010) 327 ITR 39 (P&H)
S. 45(5)(d) of IT ACT, 1961—Loss—SMT. VIBHA GOEL v. JOINT COMMISSIONER OF INCOME-TAX  16 ITR (Trib) 418 (ITAT-CHANDIGARH)
As Per Section 45(5), of the Income Tax Act, 1961-
45(5). Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely :—
(a) the capital gain computed with reference to the compensation awarded in the first instance or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India shall be chargeable as [income under the head “Capital gains” of the previous year in which such compensation or part thereof, or such consideration or part thereof, was first received]; and
(b) the amount by which the compensation or consideration is enhanced or further enhanced by the court, Tribunal or other authority shall be deemed to be income chargeable under the head “Capital gains” of the previous year in which such amount is received by the assessee;
(c) where in the assessment for any year, the capital gain arising from the transfer of a capital asset is computed by taking the compensation or consideration referred to in clause (a) or, as the case may be, enhanced compensation or consideration referred to in clause (b), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the full value of the consideration.]
Explanation.—For the purposes of this sub-section,—
(i) in relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil;
(ii) the provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988;
(iii) where by reason of the death of the person who made the transfer, or for any other reason, the enhanced compensation or consideration is received by any other person, the amount referred to in clause (b) shall be deemed to be the income, chargeable to tax under the head “Capital gains”, of such other person.