Capital Gains on transfer by way of compulsory acquisition of land and building [Section 54D] under Exemption of capital gains :

Eligible assessee – Any assessee

Conditions to be fulfilled

•  There must be compulsory acquisition of land and building forming part of an industrial undertaking.
•  The land and building should have been used by the assessee for purposes of the business of the industrial undertaking in the 2 years immediately preceding the date of transfer.
•  The assessee must purchase any other land or building or construct any building (for shifting or re-establishing the existing undertaking or setting up a new industrial undertaking) within 3 years from the date of transfer.

Quantum of exemption

•  If cost of new asset ≥ Capital gains, entire capital gains (short-term or long-term) is exempt.
•  If cost of new asset < Capital gains, capital gains (short-term or long-term) to the extent of cost of new asset is exempt.

Consequences of transfer of new asset before 3 years

•  If the new asset is transferred before 3 years from the date of its acquisition, then cost of the asset will be reduced by capital gains exempted earlier for computing short-term capital gains.

Illustration 17
PQR Ltd., purchased a land for industrial undertaking in May 2003, at a cost of Rs 4,00,000. The above property was compulsorily acquired by the State Government at a compensation of Rs 12,00,000 in the month of January, 2016. The compensation was received in March, 2016. The company purchased another land for its industrial undertaking at a cost of Rs 2,00,000 in the month of March, 2016. What is the amount of the capital gains chargeable to tax in the hands of the company for the A.Y. 2016-17?

Financial year	Cost Inflation Index
2003-04	463
2015-16	1081

Solution
Computation of capital gains in the hands of PQR Ltd. for the A.Y.2016-17

Particulars	Rs
Sale proceeds (Compensation received)	12,00,000
Less : Indexed cost of acquisition [Rs 4,00,000 × 1081/463]	9,33,909
	2,66,091
Less: Exemption under section 54D (Cost of acquisition of new undertaking)	2,00,000
Taxable long term capital gain	66,091