In the realm of capital gains taxation under the Income Tax Act, 1961, the timing of reinvestment plays a crucial role in determining whether an assessee can claim exemption. Normally, the Income Tax Act prescribes strict deadlines for reinvestment or deposit of capital gains under various sections like Section 54, 54B, 54D, 54EC, and 54F.
However, what happens when a property is compulsorily acquired by the government or a statutory authority, and the compensation is not received immediately? In such situations, Section 54H comes to the rescue of the taxpayer by extending the timeline for reinvestment or deposit from the date of actual receipt of compensation instead of the date of transfer.
This blog dives deep into the purpose, scope, conditions, benefits, practical examples, and legal framework of Section 54H.
What is Section 54H?
Section 54H of the Income Tax Act, 1961 provides relief to taxpayers whose capital assets are compulsorily acquired, and the compensation is delayed. In such cases, the section allows the investment window for claiming exemption under specified capital gain provisions to start from the date of receipt of compensation, rather than the date of transfer.
Objective of Section 54H
Capital gain exemptions under various sections require the assessee to invest the gains within a specified time. However, in compulsory acquisition cases, the transfer is effected by law, and compensation is often delayed. The law recognizes this hardship and allows the investment period to begin only from the date of receipt of such compensation, ensuring that taxpayers do not lose the exemption benefit due to circumstances beyond their control.
Conditions for Applicability of Section 54H
For a taxpayer to claim the benefit of extended time under Section 54H, the following conditions must be fulfilled:
- Transfer should be by way of compulsory acquisition under any law.
- The capital asset must be transferred involuntarily (e.g., land acquisition by the government).
- The compensation must be received after the date of transfer.
- The assessee should be eligible to claim exemption under Sections 54, 54B, 54D, 54EC or 54F.
- The investment or deposit must be made within the specified extended period, calculated from the date of receipt.
Sections Covered Under Section 54H
Section 54H applies only to capital gain exemptions claimed under the following provisions:
| Section | Applicable To | Investment Type |
| Section 54 | Long-term capital gains on sale of residential house | Purchase/construction of another residential house |
| Section 54B | Capital gains from sale of agricultural land used for 2 years | Purchase of another agricultural land |
| Section 54D | Compulsory acquisition of industrial land/building | Reinvestment in another industrial land/building |
| Section 54EC | Long-term capital gains from any asset | Investment in NHAI/REC bonds |
| Section 54F | Long-term capital gains from any asset (other than house) | Purchase/construction of one residential house |
Standard Time Limits vs Extended Time Limit under Section 54H
| Section | Normal Investment Period | Investment Period under Section 54H |
| Section 54 | Purchase within 1 year before or 2 years after, or construct within 3 years from transfer | Period starts from date of receipt of compensation |
| Section 54B | Purchase within 2 years from date of transfer | Period starts from receipt of compensation |
| Section 54D | Reinvest within 3 years | From date of compensation |
| Section 54EC | Invest in bonds within 6 months | 6 months counted from compensation date |
| Section 54F | Purchase within 1 year before or 2 years after, or construct within 3 years | Time calculated from compensation receipt |
Practical Illustration
Let’s understand Section 54H through an example:
Scenario:
- Mr. Ramesh owns a residential house.
- The house is compulsorily acquired by the National Highway Authority of India (NHAI) on 10-August-2023.
- The compensation is received on 15-March-2024.
- Mr. Ramesh wants to claim exemption under Section 54 by buying a new house.
Without Section 54H:
- He must invest in a new house by 10-August-2025 (2 years from date of transfer).
- However, he didn’t have funds till March 2024, making timely investment impossible.
With Section 54H:
- The 2-year time limit starts from 15-March-2024.
- He can now invest until 14-March-2026.
This ensures that he doesn’t lose exemption due to delay in receipt of compensation.
Judicial Pronouncements Supporting Section 54H
Several courts have supported the principles of Section 54H even before its enactment:
- CIT v. Chanchal Kumar Sanyal (1986) 161 ITR 370 (Cal)
Held that delay in receiving compensation in compulsory acquisition must be considered while allowing exemption. - K. Raveendranathan Nair v. CIT (2007) 295 ITR 228 (SC)
Supreme Court ruled that capital gains arise only on receipt of compensation, strengthening the need for Section 54H. - G.M. Omer Khan v. CIT (1992) 196 ITR 269 (AP)
Reinforced the idea that hardship due to delayed compensation should not defeat exemption.
CBDT Circular on Section 54H
CBDT Circular No. 495 dated 22nd September 1987 explains the intention behind inserting Section 54H. It clarifies that the provision was introduced to ensure equity and fairness in compulsory acquisition cases and to avoid undue hardship.
Documentation for Claiming 54H Benefit
To successfully claim exemption with Section 54H benefit:
- Keep a copy of the compulsory acquisition order.
- Retain proof of receipt of compensation (bank entries, receipts).
- Ensure timely investment/deposit within the extended timeline.
- Prepare a detailed capital gains computation with justification for exemption.
Conclusion
Section 54H serves as a relief provision that aligns legal timelines with real-life scenarios. In cases of compulsory acquisition, taxpayers often face delays in receiving compensation. By resetting the investment timeline from the date of actual receipt, Section 54H ensures that the benefit of capital gains exemptions is preserved and justice is served.
If you’re dealing with compulsory acquisition or planning to claim capital gain exemptions, it’s vital to understand your rights under Section 54H. Seek professional advice to structure your investments within the extended timeframe and file accurate tax returns.