[Section 54D] : Exemption of Capital Gain on Compulsory Acquisition of Land and Buildings forming part of an Industrial Undertak

As per Section 54D, the Capital Gain arising from the transfer, by way of compulsory acquisition under any law, of land or buildings forming part of an industrial undertaking belonging to the assessee are Exempt, if the following conditions are satisfied:

(i) the transfer is by way of compulsory acquisition of the asset;

(ii) the asset transferred is land or buildings forming part of an industrial undertaking belonging to the assessee;

(iii) such land or buildings were in use by the assessee for the purpose of the business of the industrial undertaking for at least 2 years immediately preceding the date of transfer;

(iv) capital gain on compulsory acquisition of land and buildings can be short-term or long-term. However, since building is being used for business, it is a depreciable asset and therefore, capital gain on transfer of such building, even if, it is held for more than 3 years, will be a short-term capital gain. Land is however, not a depreciable asset and as such the period of holding will be important for computing long-term/short-term capital gain;

(v) the assessee purchases/constructs other land and buildings within a period of 3 years after the date of transfer for the purpose of shifting or re-establishing the said industrial undertaking or setting up another industrial undertaking.

Quantum of deduction

If the amount of capital gain is equal to or less than the cost of the new asset, the entire capital gain shall be exempt.
If the amount of capital gain is greater than the cost of the new asset, the cost of the new asset shall be allowed as an exemption.

In other words, capital gain shall be exempt to the extent it is invested in the purchase/construction of new land/building for the industrial undertaking.

Scheme of Deposit in Capital Gains Accounts Scheme, 1988

The scheme of deposit is applicable, in this case also. In other words, the assessee should either purchase the agricultural land and/or deposit the amount under the Capital Gains Accounts Scheme on or before the due date of furnishing the return of income. The amount so spent/deposited, by the due date of furnishing the return, shall be treated as if it were used for the said purpose.

The proof of such a deposit shall be attached with the return. In this case, the amount already utilised by the assessee for the purchase of the agricultural land, along with the amount so deposited, shall be deemed to be the cost of the agricultural land and shall be eligible for exemption.

Consequences where the Amount Deposited in the Capital Gains Accounts Scheme is not utilized for the Purchase or the Construction of Land/Building for the Industrial Undertaking within the Specified Period:

The amount not so utilised shall be charged as capital gains of the previous year in which the period of 3 years from the date of transfer of the original asset expires and it will be short term or long-term capital gain, depending upon the fact whether the capital gain at the time of the original transfer was a short-term or long-term capital gain. In this case, the assessee shall be eligible to withdraw the amount from the scheme.

1. It may be observed that exemption u/s 54D is avaflable to all assessees including companies, which own industrial undertakings.

2. The unutilised deposit amount in the Capital Gains Accounts Scheme, 1988 in the case of an individual, who dies before the expiry of the two/three years stipulated period under sections 54, 54B, 54D, 54F and 54G, cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilized portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.

3. In the case of transfer by way of compulsory acquisition by the Government, the period of 3 years for acquiring the new asset shall commence from the date of receipt of the compensation and not from the date of acquisition. Similarly, deposit under the Capital Gains Accounts Scheme may be made in the previous year in which the compensation is received or till the due date of filing of the return of income of the previous year, in which the compensation is received.

Consequences where the New Asset is Transferred within a period of 3 years of its Purchase or Construction:

In this case, the capital gain which was exempt under this section earlier, shall be reduced from the cost of the new asset for the purpose of computation of capital gain in respect of the transfer of the new asset.

Tags: Capital Gains