Section 54D: Capital Gain Exemption on Compulsory Acquisition of Industrial Land & Building

The gains arising from the transfer of capital assets are known as capital gains. Such gains are taxed at special rates under the head “Capital Gains”. However, certain exemptions are available to help the taxpayer benefit from such gains and avoid paying more taxes. In some cases, the transfer of capital assets can be a compulsory acquisition by the government or an agency of the government. The exemption for such a scenario is covered under section 54D of the Income Tax Act 1961. 

This article will discuss section 54D and the conditions for claiming an exemption.

What is Section 54D?

Section 54D of the Income Tax Act 1961 outlines the provisions for an exemption in the case of compulsory acquisition of land and building of an industrial undertaking.   

In situations where a capital gain results from such compulsory acquisition, the provisions of section 54D apply to reduce such gains by making an alternative investment as prescribed. 

What are The Conditions Under Section 54D?

The following conditions must be fulfilled in order to claim an exemption under section 54D:

It is to be noted that the alternate investment made i.e., the new asset cannot be sold for a period of 3 years from the date of making such investment. 

Quantum of Exemption Available

However, the maximum exemption that an assessee can avail is restricted to the amount of capital gains or the amount of alternate investment made, whichever is lower. 

In simple terms, 

• If cost of new asset > Capital gains, then entire capital gains is exempt.
• If cost of new asset < Capital gains, then capital gains to the extent of cost of new asset is exempt. 

For Example, Mr. Anban is a sole proprietor conducting business on an industrial land in Bengaluru. The said land was acquired by the government through compulsory acquisition and Mr. Anban was compensated accordingly. The capital gains from such a transfer came to be Rs. 75 lakhs.

Case - 1: Mr. Anban purchased another industrial land for Rs. 90 lakhs

In this case, the maximum exemption available (assuming all the conditions are satisfied) will be Rs. 75 lakhs i.e., entire capital gains being exempt. As the cost of new asset is greater than the resulting capital gains.

Case - 2: Mr. Anban purchased another industrial land for Rs. 50 lakhs

In this case, the maximum exemption available (assuming all the conditions are satisfied) will be Rs. 50 lakhs only. As the cost of new asset is less than the capital gains amount. The balance Rs. 25 lakhs (75 lakhs - 50 lakhs) will be taxed in the hand of Mr. Anban as capital gains.

Note: This exemption will be available for both Long-term and Short-term capital gains provided all the conditions are satisfied. 

Consequences of Non-Compliance 

In case of failure to comply with the provisions of section 54D by the assessee, then the entire exemption availed will be reversed and taxed as capital gains in the hands of the assessee.

• If the new asset is sold within 3 years from the date of purchase, then the exemption availed will be reversed and taxed in the hands of the assessee.
• If the capital gains amount was transferred to CGAS and the amount was not utilised to make new investments for 3 years. Then the entire amount will be taxed at the end of the 3rd year. 

Conclusion

It is essential to comply with the provisions of section 54D accordingly in order to avoid any reversal of exemptions availed. This article will help you understand key provisions of section 54D, guiding you on how to properly claim exemptions and comply with the provisions. Through this article, you will be able to understand the provisions of the section to claim proper exemptions and get to know the treatment of such a transfer.