Your Taxes

My land was acquired for a road project in 2008; I received ₹ 2.8 lakh as compensation in 2011. Now, an additional compensation of ₹ 2.5 lakh has been sanctioned with interest from 2008 and solatium of ₹0.75 lakh.

What’s the tax liability on the enhanced compensation, solatium and interest for 2008 to 2018. Please note that I received only 50 per cent of the award (due to a High Court stay) on 27.2.2018.

Can I take any deduction from the interest amount of previous years since I didn’t have taxable income from 2013 to 2017?

Joy NJ

As per the provisions of Section 45 of the Income Tax Act, capital gain arising from transfer of a capital asset (including land) by way of compulsory acquisition under any law, or a transfer, the consideration for which was determined or approved by the Centre or RBI, is taxable under the head Capital Gains in the year such compensation is first received (initial compensation).

In case the compensation or the consideration for such transfer is enhanced/ further enhanced (‘additional compensation’ or ‘enhanced compensation’) by any court/tribunal/other authority, such compensation is also taxed as capital gains in the year it is received.

In case the compensation (initial/ or enhanced compensation) is reduced subsequently by order of any court/ tribunal/ other authority, capital gain is recomputed by considering the reduced compensation.

Further, any amount of compensation received in pursuance of an interim order of a court/tribunal/ other authority shall be considered income chargeable under the head Capital Gains of the previous year in which the final such order is made.

In light of the above, below are my comments to your queries:

*Initial compensation of ₹2.8 lakh received in 2011 was chargeable under the head Capital Gains (after considering the cost of acquisition and cost of improvement of land as per the specified provisions) for the tax year in which it was received.

*Enhanced compensation (excluding interest) and solatium (being in the nature of compensation) shall also be taxable as Capital Gains in the respective tax years in which they were received. While calculating such capital gains, the cost of acquisition and cost of improvement shall be taken to be nil.

*Interest received on enhanced compensation shall be taxable as ‘income from other sources’ in the tax year in which it was received.

You may claim a deduction of any expenditure incurred wholly and exclusively for earning interest income.

It is also pertinent to note that capital gains on account of compensation received on compulsory acquisition of an agricultural land is exempt from tax under Section 10(37) of the I-T Act, subject to certain specified conditions.

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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