Section 54D – Capital Gain Exemption on Compulsory Acquisition of Lands and Buildings

When an industrial undertaking faces compulsory acquisition of land, buildings, or rights in such properties under any law, it may result in capital gains. However, under Section 54D of the Income Tax Act, 1961, an exemption is available if the assessee reinvests the proceeds in a new asset within the prescribed period. This provision ensures that businesses can relocate or re-establish their operations without facing an undue tax burden on the capital gains arising from such forced acquisitions.

Eligibility Criteria for Exemption Under Section 54D

To avail of the exemption under Section 54D, the following conditions must be satisfied:

1. Type of Asset: The capital asset transferred should be land, building, or rights in land/building forming part of an industrial undertaking owned by the assessee.

2. Usage Condition: The asset should have been used for business purposes for at least two years before the date of compulsory acquisition.

3. Reinvestment Timeline: The assessee must purchase another land, building, or rights or construct a new building within three years from the date of transfer.

Tax Treatment of Capital Gains Under Section 54D

Depending on the reinvestment of the capital gain, tax treatment differs as follows:

1. Full Reinvestment:

• If the entire capital gain is reinvested in purchasing or constructing a new asset, no capital gain tax is levied.

• However, if the new asset is sold within three years, the cost of acquisition is treated as nil while calculating future capital gains.

2. Partial Reinvestment:

• If only a part of the capital gain is reinvested, the remaining capital gain (i.e., excess over the cost of the new asset) is taxed under Section 45 as capital gains in the year of transfer.

• Similar to full reinvestment, if the new asset is sold within three years, the cost of acquisition is reduced by the capital gain amount.

Deposit Scheme for Unutilized Capital Gains

If the capital gain amount is not fully utilized before filing the return under Section 139, the unutilized amount must be deposited in a Capital Gains Account Scheme (CGAS) with a bank before the due date of filing the return. This amount is considered as invested for exemption purposes.

However, if the amount deposited is not utilized within three years, the unutilized portion is taxed as capital gains in the year in which the three-year period expires.

Key Takeaways

• Section 54D provides capital gains tax relief on compulsory acquisition of industrial land/buildings.

• The reinvestment window is three years from the date of transfer.

• If the reinvestment is not fully made before filing the return, depositing the amount in a Capital Gains Account Scheme is necessary.

• Selling the new asset within three years nullifies the benefit as the cost of acquisition is considered nil or reduced by capital gains.

Conclusion

Section 54D is a crucial provision for industrial undertakings affected by compulsory acquisition, helping them mitigate tax liabilities and ensure business continuity. Proper planning and adherence to timelines for reinvestment or deposit under CGAS can help businesses optimize tax benefits and comply with income tax rules efficiently.