Amendment for May 2015 – Practical Aaspects – Capital Gains

The Central Government acquires a house property owned by Mr. Manish on October 17, 2005 fixing
compensation at Rs. 32,00,000. The indexed cost of acquisition of this house property is Rs. 28,00,000.

The Government paid Rs. 20,00,000 partly on May 13, 2010 and balance on March 11, 2012. Being aggrieved against the award, Mr. Manish filed an appeal. The Court, by an interim order dated July 19, 2014 ordered Central Government to pay Rs. 5,00,000 which was paid on 15th September,2014. However, Court passed final order dated 11th August, 2015 fixing enhanced compensation of Rs. 17,00,000. The Central Government paid 12,00,000 (Rs. 5,00,000 has already been paid) on 12th December, 2015. Legal expenses incurred by Mr. Manish were Rs.45,000. Compute the income of Mr. Manish under the head “Capital gains”.

Before, we go to the solution, let us take an overview of section 45(5).
When section 45(5) is applicable- In any of the following cases, section 45(5) is applicable —

1. When the transfer of a capital asset is by way of compulsory acquisition under any law.
2. When a capital asset is transferred (not by way of compulsory acquisition) and the consideration is
approved or determined by the Central Government (not by a State Government) or the Reserve Bank
of India.
Section 45(5)(a):- Tax Treatment of initial compensation–
Initial compensation is chargeable to tax in the previous year in which such compensation (or part thereof) is
first received.
Further, for computing capital gain, initial compensation shall be taken as full value of consideration.
Section 45(5)(b):-Tax Treatment of enhanced compensation – If any compensation is enhanced by a court,
tribunal or any authority, then tax treatment shall be as under—

1. It shall be taxable in the previous year in which enhanced compensation is received by the assessee.

2. In this case, the cost of acquisition and the cost of improvement shall be taken as nil.

3. Litigation expenses for getting the compensation enhanced are deductible as an expense in connection
with transfer.

4. Enhanced compensation can be short-term capital or long-term capital depending upon the nature of
original capital gain.
Proviso to Section 45(5)(b) :-Tax Treatment of compensation received under interim order of a court, tribunal
etc. [inserted by Finance Act, 2014 effective from A.Y. 2015-16]
This proviso states that any amount of compensation received in pursuance of an interim order of a court,
Tribunal or other authority shall be deemed to be income chargeable under the head “Capital gains” of the
previous year in which the final order of such court, Tribunal or other authority is made


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