Capital gains arising on the compulsory acquisition of any land or building forming a part of an industrial undertaking are exempt subject to the following requirements:
- Such land or building was used by the assessee for the purpose of industrial undertaking for two years preceding the date of compulsory acquisition,
- The assessee has purchased any land or building or constructed a building within 3 years from the date of the receipt of the compensation, and
- Newly acquired land or building should be used for the purpose of shifting or re-establishing the said undertaking or setting up another industrial undertaking.
Where the capital gain arises from the transfer by way of compulsory acquisition under any law, if a capital asset being land or building or any right in land or building forming part of an industrial undertaking, which was being used by assessee for two years preceding the previous year in which the asset was acquired for his own business and the assessee reinvests the capital gains from such a transfer in purchase of another land or building or right in land or building or constructs another building within 3 years after the transfer, the capital gain so invested is exempted from tax. if the amount invested is less than the capital gain earned, the balance shall be taxable. The new asset so purchased cannot be sold or transferred within a period of 3 years from the date of transfer. If sold or transferred earlier, old exempted gain along with new capital gain will be taxable in the previous year in which new asset is transferred.
It can be summarized as follows:
| Section | Asset | Assessee | Holding Period of Original Assets | Whether Reinvestment Necessary —Time Limit | Other Conditions/Incidents | Quantum |
| 54D | Industrial Land or Building or any right therein. | Any Assessee | Use for 2 years | Yes — In Industrial Land, Building, or any right therein within 3 years after the date of transfer. | Must have been compulsorily acquired. | The amount of gains, or the cost of new asset, whichever is lower. |
Reference:
As Per Section 54D, of the Income Tax Act, 1961-
Capital gain on compulsory acquisition of lands and buildings not to be charged in certain cases.
54D. (1)Subject to the provisions of sub-section (2), where the capital gain arises from the transfer by way of compulsory acquisition under any law of a capital asset, being land or building or any right in land or building, forming part of an industrial undertaking belonging to the assessee which, in the two years immediately preceding the date on which the transfer took place, was being used by the assessee for the purposes of the business of the said undertaking[(hereafter in this section referred to as the original asset)], and the assessee has within a period of three years after that date purchased any other land or building or any right in any other land or building or constructed any other building for the purposes of shifting or re-establishing the said undertaking or setting up another industrial undertaking, then, instead of the capital gain being charged to income-tax as the income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost of the land, building or right so purchased or the building so constructed (such land, building or right being hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or
(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.]
(2) The amount of the capital gain which is not utilised by the assessee for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—
(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.