Compulsory acquisition of property by the government has raised the hackles of its victims in the recent past with many of them having no option but to capitulate before the might of the government and almost all of them feeling short-changed. It is no use comforting them saying that the compensation paid was the market rate but later events, especially the fact of a sprawling industry coming up, has pushed up the rates manifold. If that were the case, there should be a mechanism to compensate the early birds who ironically get the rawest deal with enhanced compensation determined in hindsight. The Income-tax Act, 1961 lays its hands off rural agricultural lands and to this extent the compensation received remains immune from capital gains tax. But lands in urban areas as well as rural non-agricultural lands come for some very harsh treatment in the hands of the taxman. While it is no small mercy that the I-T Act waits till the compensation or enhanced compensation is actually received whereas the norm for taxing capital gains is accrual, two aspects of it are bound to rankle the victims of compulsory acquisitions.Short-term or long-term? Capital assets — other than shares and a few specified paper assets — make the grade as long-term capital assets only if they were held for more than 36 months before their transfer, including compulsory acquisition. In all fairness, a victim of compulsory acquisition should be deemed to have fulfilled this criterion even if he had held the property for a lesser period because it was not out his volition that he sold his property to the government or governmental agency. On the contrary, he had to sell under duress. It would be a fair presumption that he would not have sold had the force of law not been brought to bear upon him. Denial of the hallowed status of long-term capital asset to the property compulsorily bought by the government amounts to denial of the various tax shelters available to earners of long-term capital gains besides subjecting the involuntary premature sales to a stiff tax which short-term capital gains attracts — 30 per cent if one is already having income of Rs 5 lakh or more. Long-term capital gains can be insulated from tax by investing in National Highway Authority of India (NHAI) bonds or Rural Electrification Corporation (REC) bonds although there is a cap of Rs 50 lakh per person per year. In addition one can also buy or construct a house within the prescribed time. It would be unjust to deprive the victims of compulsory acquisition of these tax shelters on the ground that they cashed in before three years — the truth is they cashed in prematurely because of governmental pressure. To be sure, some of them may not have the capacity to block their money in the prescribed bonds for three years or lock their money in a house. Such people should not be taxed for short-term capital gains, the rate of which is the normal slab rates once again because they did not cash in out of choice. Besides, the cost of short-term assets cannot be indexed so as to get the benefit of a heightened cost which has the effect of considerably reducing the capital gains liable to tax. Deduction of tax at sourceSection 194LA calls upon the governmental agency acquiring an immovable property compulsorily to deduct tax at the rate of 10 per cent of the amount paid if it is in excess of Rs 1,000. Besides being a butt of joke by prescribing a ludicrous limit of Rs 1,000, the provision makes life difficult for those who have bided their time and are willing to take advantage of tax shelters. It is indeed presumptuous of the government to assume that those entitled to tax shelters would not take advantage of the tax shelters. It is even more cruel to expect those who have taken advantage of the tax shelters to cringe and crave before the tax officialdom for refund of the tax thus unnecessarily deducted at source. Merely because a government agency is making the payment, TDS should not be imposed when thousands of transactions where the buyer happens to be a private property go scot-free. The government should, therefore, do the following two things:Deem all compulsory acquisitions as giving rise to long-term capital gains; and Spare compensation paid on compulsory acquisition from the clutches of TDS.The victims of compulsory acquisition, unlike the shareholders of a company taken over, are always a traumatised lot. Let the taxman not add salt to their injuries.
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