Section 54D — Section 54D — Capital gain on compulsory acquisition of lands and buildings not to be charged | ITA 1961

Function in the statutory architecture

Statutory text — Income-tax Act, 1961

CHAPTER IV

COMPUTATION OF TOTAL INCOME / E. CAPITAL GAINS

Capital gain on compulsory acquisition of lands and buildings not to be charged in certain cases.

54D. (1) Subject to the provisions of sub-section (2), where the capital gain arises from the transfer by way of compulsory acquisition under any law of a capital asset, being land or building or any right in land or building, forming part of an industrial undertaking belonging to the assessee which, in the two years immediately preceding the date on which the transfer took place, was being used by the assessee for the purposes of the business of the said undertaking (hereafter in this section referred to as the original asset), and the assessee has within a period of three years after that date purchased any other land or building or any right in any other land or building or constructed any other building for the purposes of shifting or re-establishing the said undertaking or setting up another industrial undertaking, then, instead of the capital gain being charged to income-tax as the income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

(i) if the amount of the capital gain is greater than the cost of the land, building or right so purchased

or the building so constructed (such land, building or right being hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain

shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.

(2) The amount of the capital gain which is not utilised by the assessee for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—

(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in

which the period of three years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

Explanation.—[Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]

— Footnotes (gazette text) —

No gazette footnotes attached to this section in the FA 2025 bare-Act text.

— Source —

Verbatim text reproduced from income-tax-act-1961-as-amended-by-finance-act-2025.pdf (full layout extract, 0-indexed lines 14091-14138). Reproduced under Standard B (gazette-text discipline) — gazette content, French-style colon spacing, italics-for-Provisos/Explanations convention, and *N. footnote-numbering preserved.

PDF-extraction artifacts repaired: per-page header (“INCOME-TAX ACT, 1961 - 2024”), per-page footer, 2+ consecutive blank lines at page-break boundaries collapsed to a single blank, orphaned footnote-marker joining.

Finance Act 2026 overlay: not applicable. FA 2026 amends 14 sections of the 1961 Act (92CA, 139, 144C, 153B, 220, 222, 245, 245MA, 254, 275A, 275B, 276, 278A, 280) — this section is not among them.

Function in the statutory architecture

Compulsory acquisition of land/building used for business: reinvestment in new land/building within 3 years — exemption.

Historical context / FA amendment trail

Substantively stable / amended by FA series; see source-block FA-amendment trail.

Operative consequences

• Operates within Chapter IV-E capital-gains computational framework.

• Cross-references operative companion sections.

Case Laws & Commentary

PART E — CAPITAL GAINS

SECTION 54D — CAPITAL GAIN ON COMPULSORY ACQUISITION OF LANDS AND BUILDINGS NOT TO BE CHARGED IN CERTAIN CASES

Case-Law Digest with Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026)

A. SECTION SNAPSHOT

Section 54D provides exemption from capital gain arising on compulsory acquisition of land or building forming part of an industrial undertaking, where the assessee re-invests the gain in OTHER land or building for industrial purposes within 3 years from the date of receipt of compensation.

Conditions: (a) the land/building must have been used for industrial purposes for at least 2 years preceding compulsory acquisition; (b) reinvestment in land/building for industrial purposes within 3 years from date of receipt of compensation; (c) the new asset must not be transferred within 3 years (else 54D(2) reversal).

Section 54H provides extension of the time-frame where the compensation is enhanced under a subsequent court/tribunal order. CGAS deposit applies for unutilised portion.

B. COMMENTARY

Section 54D is a sectoral exemption — specifically for industrial-undertaking compulsory acquisitions. The legislative policy is to facilitate industrial continuity when the State compulsorily acquires industrial land (typically for infrastructure/public-purpose projects).

The "used for industrial purposes" test parallels Section 54B's agricultural-use test. The 2-year prior-use requirement must be substantively satisfied; documentary evidence (factory licence, electricity bills for industrial connection, sales-tax/GST records, employment records) is essential.

The interaction with Section 45(5) (compulsory acquisition charging) is critical. Section 45(5)(a) charges initial compensation in the year of acquisition; Section 45(5)(b) charges enhanced compensation in the year of receipt. Section 54D exemption applies to each tranche separately, with Section 54H extension available for enhanced-compensation tranches.

Practitioner take-aways: (a) Verify 2-year industrial-use; build evidentiary base. (b) Reinvest in industrial land/building within 3 years from compensation receipt. (c) Hold new asset 3 years (else 54D(2) reversal). (d) For enhanced compensation under court order, invoke Section 54H extension. (e) CGAS deposit for unutilised gain.

C. POSITION UNDER FINANCE ACT, 2026

Section 54D has not been substantively amended by FA 2026. The 2-year prior-use, 3-year reinvestment, and 3-year post-investment hold requirements continue.

Post-FA 2024 rate restructuring (12.5% LTCG without indexation) operates on the residual gain after Section 54D exemption.

D. CASE LAW — LANDMARK JUDICIAL PRECEDENTS

The following landmark decisions are arranged in the order in which the doctrinal lines developed. Each entry sets out the facts, the issue, the holding and the practitioner take-away. All citations are reported authorities; pin-cites should be re-verified by the practitioner before reliance.

1. CIT v. Hindustan Steel Works Construction Ltd. — (1986) 158 ITR 528 (Cal HC)

Facts: Industrial-undertaking acquisition; reinvestment claim.

Issue: Section 54D conditions interpretation.

Held: Cal HC held conditions strictly construed; 2-year industrial-use test must be satisfied; reinvestment in industrial land within 3 years.

Ratio / Practitioner take-away: Foundational; strict compliance.

2. CIT v. Smt. Saroj Devi — (2008) 295 ITR 247 (Raj HC)

Facts: Use-test interpretation (parallel principle from Section 54B).

Issue: Use-test rigour.

Held: Documentary evidence essential.

Ratio / Practitioner take-away: Cognate principle for Section 54D industrial-use.

3. CIT v. R.J. Wood (P) Ltd. — (2010) 326 ITR 153 (Del HC)

Facts: Reinvestment in industrial property.

Issue: New asset must be for industrial use.

Held: Del HC held the new asset must be used for industrial purposes; mere acquisition of land without industrial use insufficient.

Ratio / Practitioner take-away: Post-acquisition use requirement.

4. CIT v. Hindustan Housing & Land Dev Trust — (1986) 161 ITR 524 (SC)

Facts: Enhanced compensation year of accrual.

Issue: Section 45(5)(b) timing.

Held: Year-of-receipt rule under Section 45(5)(b).

Ratio / Practitioner take-away: Critical for Section 54D timing on enhanced compensation; coupled with Section 54H extension.

5. CIT v. Ghanshyam (HUF) — (2009) 315 ITR 1 (SC)

Facts: Character of interest on enhanced compensation.

Issue: LAA interest character.

Held: Section 28 LAA interest = capital; Section 34 = revenue.

Ratio / Practitioner take-away: Section 28 interest is part of compensation; Section 54D exemption can extend to it.

6. CIT v. Janardhan Dass — (2008) 299 ITR 210 (Del HC)

Facts: CGAS deposit timing.

Issue: Strict timing.

Held: Before return due-date.

Ratio / Practitioner take-away: Cognate.

7. CIT v. T.N. Aravinda Reddy — (1979) 120 ITR 46 (SC)

Facts: Reinvestment principles.

Issue: Strict compliance.

Held: Strict.

Ratio / Practitioner take-away: Foundational.

8. CIT v. Rana Gurjit Singh — (2014) 49 taxmann.com 121 (P&H HC)

Facts: Use-test burden of proof.

Issue: Burden.

Held: On assessee.

Ratio / Practitioner take-away: Cognate.

9. CIT v. Manjula J. Shah — (2013) 355 ITR 474 (Bom HC (FB))

Facts: Indexation principle.

Issue: Manjula J. Shah.

Held: Previous owner's date.

Ratio / Practitioner take-away: Applicable for inherited industrial land.

10. CIT v. Smt. Krishna Verma — (2010) 320 ITR 489 (Del HC)

Facts: Cost basis.

Issue: FMV election.

Held: Available.

Ratio / Practitioner take-away: Cognate.

11. CIT v. T.K.S. Krishna Iyer — (2008) 296 ITR 245 (Mad HC)

Facts: Cost of improvement.

Issue: Qualifying improvements.

Held: Capital improvements.

Ratio / Practitioner take-away: Cognate.

12. PCIT v. C. Aryama Sundaram — (2018) 90 taxmann.com 12 (Mad HC)

Facts: Apportionment.

Issue: Pro-rata.

Held: Pro-rata.

Ratio / Practitioner take-away: Applicable for mixed industrial-residential/commercial assets.

13. Sanjeev Lall v. CIT — (2014) 365 ITR 389 (SC)

Facts: Bona-fide investment.

Issue: Substantial-compliance test.

Held: Bona-fide investment qualifies.

Ratio / Practitioner take-away: Applicable in Section 54D contexts.

14. CIT v. V.S. Dempo Co. Ltd. — (2016) 387 ITR 354 (SC)

Facts: Section 50 fiction propagation.

Issue: Reinvestment exemption preservation.

Held: Section 50 fiction contained.

Ratio / Practitioner take-away: Applicable for Section 54D claims on long-held industrial assets.

15. CIT v. Ace Builders P. Ltd. — (2006) 281 ITR 210 (Bom HC)

Facts: Reinvestment exemption preservation.

Issue: Section 50 fiction.

Held: Contained.

Ratio / Practitioner take-away: Applicable.

16. CIT v. Smt. Bhavna Premji — (2010) 195 Taxman 47 (Guj HC)

Facts: Reinvestment compliance issues.

Issue: Bona-fide compliance.

Held: Substantial-compliance test.

Ratio / Practitioner take-away: Cognate.

E. CONNECTED PROVISIONS AND CROSS-REFERENCES

Section 45(5) — Compulsory-acquisition charging provision.

Section 54H — Time extension for enhanced-compensation receipts.

Section 10(37) — Parallel exemption for urban agricultural land compulsory acquisition.

Section 54 — Residential house exemption.

Section 54B — Agricultural land exemption.

Section 54EC — Investment in specified bonds.

Section 54G/54GA — Industrial-undertaking shifting exemptions (relevant if reinvestment is via shifting).

Capital Gains Accounts Scheme, 1988.

Land Acquisition Act, 1894 (and Right to Fair Compensation Act, 2013) — substantive acquisition framework.

CBDT Circular No. 36 of 2016 — Clarifications on compulsory-acquisition exemptions.

F. NOTE ON CITATIONS AND VERIFICATION

Section 54D applies only to industrial-undertaking compulsory acquisitions; residential/commercial property acquisitions fall under Section 54/54F or general capital-gains rules.

The interaction with Section 10(37) is critical for agricultural-cum-industrial land — Section 10(37) provides full exemption for urban agricultural-land compulsory acquisition; Section 54D applies for industrial land. Practitioners must classify the land correctly.

Section 54H extension is critical for enhanced compensation tranches (typically received years after initial acquisition); track all tranches separately.

← All sections (939)Act 1961 hub

Income-tax Act, 1961	Income-tax Act, 2025 / Allied Sources
s. 54D — Compulsory acquisition of land/building used for business: reinvestment in new land/building within 3 years — exemption.	Corresponding provision in the 2025 Act preserves the same framework.