Income Tax 2025

Appearance

Capital gains on compulsory acquisition of lands and buildings not to be charged in certain cases ​

84(1) ​

Where an assessee has––

  • (a) capital gains arising from the transfer by way of compulsory acquisition under any law, of a capital asset being land or building or any right in land or building, forming part of an industrial undertaking belonging to him, which was being used by the assessee for the business of the said undertaking in the two years immediately preceding the date of transfer (original asset); and
  • (b) within three years after that date, purchased any other land or building or any right in any other land or building or constructed any other building for shifting or re-establishing the said undertaking or setting up another industrial undertaking (new asset), then, instead of the capital gain being charged to income-tax as income of the tax year in which the transfer took place, it shall be dealt with as follows:— (i) if the capital gains exceeds the cost of new asset, such excess shall be charged under section 67, and for computing any capital gains arising from the transfer of the new asset within three years of its purchase or construction, the cost shall be nil; or (ii) if the capital gains is equal to or less than the cost of new asset, no capital gains shall be charged under section 67 and for computing capital gains from the transfer of the new asset within three years of its purchase or construction, the cost shall be reduced by the amount of the capital gains.

84(2) ​

If the capital gains is not utilised by the assessee to purchase the new asset before filing the return of income under section 263, then––

  • (a) the unutilised amount shall be deposited not later than the due date for filing the return of income under sub-section (1) of the said section in a specified bank or institution and utilised as per the scheme notified by the Central Government;
  • (b) such deposit shall be made not later than the due date applicable in the case of the assessee for filing the return of income under the said sub-section; and
  • (c) the proof of deposit shall be submitted along with the return on or before the due date for filing the return.

84(3) ​

For the purposes of sub-section (1), the amount already utilised for purchasing or constructing the new asset together with the deposited amount under sub-section (2), shall be deemed to be the cost of the new asset.

84(4) ​

If the amount deposited under sub-section (2) is not fully utilised for the purchase or construction of the new asset within the period specified in sub-section (1), then,—

  • (a) the unutilised amount shall be charged under section 67 as the income of the tax year in which three years from the date of the transfer of the original asset expires; and
  • (b) the assessee shall be entitled to withdraw the unused amount according to the said scheme.
Explanation

Section Summary: ​

Section 84 of the new income tax law provides relief from capital gains tax when land or buildings (or rights in them) used for an industrial undertaking are compulsorily acquired by the government or under any law. The relief applies if the taxpayer reinvests the capital gains into purchasing or constructing new land or buildings for shifting, re-establishing, or setting up another industrial undertaking within three years. The section aims to encourage reinvestment in industrial activities by deferring or exempting capital gains tax under specific conditions.

Key Changes: ​

  1. Reinvestment Requirement: The taxpayer must reinvest the capital gains within three years from the date of compulsory acquisition into new land, buildings, or rights in land/buildings for industrial purposes.
  2. Tax Treatment of Unutilised Gains: If the capital gains are not fully reinvested, the unutilised amount must be deposited in a specified bank or institution as per a government-notified scheme. Failure to utilise the deposited amount within three years results in taxation of the unutilised portion.
  3. Cost Adjustment for New Asset: The cost of the new asset is adjusted based on the amount of capital gains reinvested or deposited, impacting future capital gains calculations if the new asset is sold within three years.

Practical Implications: ​

  1. For Taxpayers with Industrial Undertakings: Taxpayers whose land or buildings are compulsorily acquired can defer or avoid capital gains tax by reinvesting in new industrial assets. This provides financial relief and encourages continuity of industrial operations.
  2. Compliance Burden: Taxpayers must ensure timely reinvestment or deposit of unutilised capital gains. Failure to comply results in taxation of the unutilised amount.
  3. Impact on Future Sales: If the new asset is sold within three years, the cost basis for calculating capital gains is adjusted based on the reinvested or deposited amount, potentially increasing taxable gains.

Critical Concepts: ​

  1. Compulsory Acquisition: Transfer of land or buildings under a law (e.g., government acquisition for public purposes).
  2. Original Asset: The land, building, or rights in land/buildings used for an industrial undertaking that is compulsorily acquired.
  3. New Asset: The land, building, or rights in land/buildings purchased or constructed for shifting, re-establishing, or setting up another industrial undertaking.
  4. Cost Adjustment:
    • If capital gains exceed the cost of the new asset, the excess is taxed, and the cost of the new asset is treated as nil for future capital gains calculations.
    • If capital gains are equal to or less than the cost of the new asset, no tax is charged, and the cost of the new asset is reduced by the amount of capital gains.

Compliance Steps: ​

  1. Reinvestment: Purchase or construct new land or buildings within three years of the compulsory acquisition.
  2. Deposit Unutilised Gains: If capital gains are not fully reinvested, deposit the unutilised amount in a specified bank or institution before filing the income tax return.
  3. Documentation: Submit proof of reinvestment or deposit along with the income tax return.
  4. Utilisation of Deposited Amount: Ensure the deposited amount is utilised for the intended purpose within three years. If not, the unutilised amount will be taxed, and the balance can be withdrawn.

Examples: ​

  1. Full Reinvestment:

    • A taxpayer’s industrial land is compulsorily acquired, resulting in capital gains of ₹50 lakh. They reinvest ₹60 lakh in new land for their industrial undertaking within three years. No capital gains tax is charged, and the cost of the new land is reduced by ₹50 lakh for future capital gains calculations.

  2. Partial Reinvestment:

    • Capital gains from compulsory acquisition are ₹50 lakh. The taxpayer reinvests ₹30 lakh in new land and deposits ₹20 lakh in a specified bank. If the deposited ₹20 lakh is not utilised within three years, it will be taxed as income, and the taxpayer can withdraw the unused amount.

  3. Excess Capital Gains:

    • Capital gains are ₹50 lakh, and the taxpayer reinvests ₹40 lakh in new land. The excess ₹10 lakh is taxed, and the cost of the new land is treated as nil if sold within three years.