Compulsory Acquisition of a Capital Asset by Government

Where a capital asset is acquired under any law by the government, or where the consideration for the transfer of a capital asset is to be determined or approved by the government or the Reserve Bank of India, the following points may be noted while computing capital gain:

Chargeability on receipt basis: Capital gain is chargeable to tax in the previous year in which such compensation/consideration or part thereof is first received. Thus, capital gain is not chargeable on accrual basis. It is taxable on receipt basis.

Cost of acquisition to be deducted only in first computation: Where such compensation is received in installments, the cost of acquisition or cost of improvement is allowed to be deducted in full in the year of first computation on receipt basis. It is not to be apportioned over different installments.

Realization expenses to be deducted in subsequent computation also: If the assesse incurs realization expenses or legal expenses, etc., in respect of subsequent installments, the deduction is allowed for such expenses in computing capital gain.

Nature of capital gain in subsequent computation: The nature of capital gain is determined with reference to first computation. Thus, if the capital gain under first computation was long-term, it will remain so in subsequent computation also.

Enhancement of compensation: Where compensation is enhanced or further enhanced by any court, or Tribunal or other authority, capital gain resulting from enhancement of compensation is also taxable on receipt basis. For computing capital gain from such enhancement, cost of acquisition/cost of improvement is taken at nil. Thus, only realization expenses may be claimed as deduction under Sec. 48 (i) in computing capital gain from enhancement of compensation.

Receipt of enhanced compensation by any other person: Where due to the death of the original transferor or for any other reason, any other person receives enhanced compensation; recipient of such compensation is taxable on such capital gain.

Interest on enhanced compensation: Where the assesse is following mercantile system of accounting, interest on enhanced compensation should be spread over on accrual basis and be taxed accordingly [Raina Bai v. CIT (1990)181 ITR 400(SC)].

Reduction in compensation: Where compensation is reduced subsequently by any Court or Tribunal or other authority, the assessed capital gain of that year is re-computed with reference to reduced compensation, taking it as the full of consideration.