## Compulsory Acquisition of a Capital Asset [Section 45(5)]
When a capital asset is compulsorily acquired by the Government (e.g., for highway, metro, public utility) under any law, the resulting capital gain is taxed under Section 45(5) with special timing rules.
### Normal Compensation (Initial Award)
| Element | Rule |
|---|---|
| Sale Consideration | Normal compensation amount |
| Year of Transfer | Year of compulsory acquisition |
| Year of Taxability | Year in which compensation is first received (even part) |
### Enhanced Compensation (on Appeal)
If the assessee disputes the compensation and a court orders enhancement:
| Element | Rule |
|---|---|
| Sale Consideration | Enhanced compensation amount |
| Cost of Acquisition | Litigation expenses only (no original COA — that was already used) |
| Cost of Improvement | Nil |
| Year of Taxability | Year of receipt of enhanced compensation |
| Nature (STCG/LTCG) | Same as normal compensation |
| Conditional Taxability | Taxable only if received pursuant to final order of court — NOT on interim order |
### Interest on Compensation / Enhanced Compensation
Taxable under Income from Other Sources (IFOS) — not under capital gains. A 50% deduction is allowed (Section 57).
### Section 10(37) — Exemption for Urban Agricultural Land
For Individual / HUF: Capital gain on compulsory acquisition of urban agricultural land is fully exempt if:
- The land was used for agricultural purposes for at least 2 years immediately preceding the date of compulsory acquisition.
- (Used by the assessee, parents, or HUF as the case may be.)