Compensation on compulsory acquisition [Section 45(5)]

Event:
Transfer of a Capital Asset by way of Compulsory Acquisition, under any law or 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.

Year of Chargeability:
In the previous year in which compensation is received (Full/Part).

Consideration:
 Compensation Received.

Indexation
 available only up to the year of transfer.


NOTE-

- If the Compensation is received by the legal representative of the deceased person from whom the Asset was acquired, the recipient shall be chargeable to tax.

-Enhanced compensation/consideration: Sometimes, the assessee is not satisfied with the compensation determined and may go in for an appeal against the amount determined. If on appeal the compensation is enhanced, the additional compensation is called enhanced compensation.

• Such enhanced compensation shall be fully taxable as capital gain in the year in which it is received. 
• The cost of acquisition and improvement thereto will be taken as nil, since it has already been deducted at the time of computation of capital gain for initial compensation. 

-Capital gains originally computed in respect of the compensation or the enhanced compensation received shall be revised if such compensation or enhanced compensation is reduced by any court etc.

-Interest on enhanced compensation is chargeable under Income from other sources.

• Interest on enhanced compensation cannot be taxed all in lump sum. The interest has to be spread over on an annual basis till the date of the order of the Court on a time basis-K.S.Krishna Rao v. CIT [1990].

-Expenses incurred for getting the enhanced compensation is allowable as expenditure.


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