[Section 45(1A)] Insurance claim received on damage or destruction of capital assets
Where any person receive any money or other assets under any insurance from an insurer on account of;
(a) Damage or destruction of capital assets,
(b) Flood, typhoon, hurricane, cyclone, earthquake or other natural calamities,
(c) Riot or civil disturbances,
(d) accidental fire or explosion,
(e) Action by an enemy and an action taken in fighting an enemy (with or without declaration of war).
is treated as transfer. Such transfer are liable to capital gain in the year of receipt of compensation.
If compensation received in cash
- Compensation so received
If compensation received in kind
- Fair Market Value of asset (as on date of receipt)
NOTES:
If compensation received for any other damage to capital assets shall not be taxable as it is a capital receipt, hence not treated as transfer.
Compensation received for any damages to non-capital assets is a revenue receipt chargeable under section 28 or 56.
[Section 45(2)] Conversion of Capital Asset into Stock-in-Trade
From Assessment Year 1985-86 onwards, conversion of capital asset into stock in trade shall be treated as transfer under section 2(47).
NOTES:
Sale Consideration will be Fair Market Value on date of conversion of capital assets.
Taxable in the year in which stock is actually sold.
Actual Sale Value XXX
Less: Fair Market Value XXX
Less: Expenses on transfer XXX
shall be treated as business income.
[Section 45(2A)] Transfer of Security by Depository
Transfer of securities held in dematerialized form shall be treated as transfer.
NOTES:
Cost of Acquisition and period of holding determined on basis FIFO method (First-in-First Out).
In case an assessee has securities in physical form and dematerialized form, physical form securities are remain in the possession of investor and FIFO method applied on dematerialized securities.
An assessee has more than one account in case of depository system, FIFO technique shall applied for each account separately.
[Section 45(3)] Transfer of capital assets by a partner of FIRM/ AOP/ BOI as capital contribution
Where a partner/member transfer any of its capital assets to firm/ AOP/ BOI of which he is a member by way of capital contribution, treated as transfer.
Sale Consideration will be amount recorded in books of accounts of firm/ AOP/ BOI as value of such assets.
Fair Market Value of such asset is irrelevant to decide sale consideration.
[Section 45(4)] Transfer of capital assets by a firm/ AOP/ BOI to partner/ member by way of distribution on its dissolution
On dissolution of a firm/ AOP/ BOI, distribution of its capital assets among partners/ members shall be treated as transfer.
Sale consideration will be Fair Market Value as on date of transfer.
Agreed Value of such asset is irrelevant to decide sale consideration.
Cost of Acquisition of such assets in hands of partner or member shall be taken as agreed value as on date of transfer.
Profit or loss arising on distribution of Stock-in-trade on dissolution shall be taxable under the head "Profit and Gain from Business or Profession".
[Section 45(5)] Transfer by way of compulsory acquisition
Section 45(5) is applicable on following cases:
When transfer of a capital asset by way of compulsory acquisition under any law; or
When a capital assets is transferred and consideration of transfer is to be determined or approved by Central Government or RBI.
[Section 45(5)(a)] Tax treatment of Initial Compensation received
Sale Consideration will be total compensation/ consideration received or receivables.
Taxable in the year, when such compensation or consideration is first received.
Legal expenditure incurred to recover claim shall be allowed as deduction.
[Section 45(5)(b)] Tax treatment of Enhanced Compensation
Where assessee has received enhanced compensation, then such enhanced compensation shall be taxable under this section.
Sale Consideration will be total enhanced compensation or consideration received.
Litigation expenses for getting such enhanced compensation are deductible.
Taxable in the year when such enhanced compensation is received.
Interest on enhanced compensation is taxable under "Income from other sources".
[Section 45(5)(c)] Tax treatment of reduced compensation
Where in any assessment year, such compensation or consideration is reduced by any court tribunal or other authority, then capital gain of that year shall be recomputed considering compensation or consideration so reduced by such court or other authority.
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