Section 54d

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

06 February 2012 Need help on a tax query. A portion of my industrial land has been taken over by govt. through forceful acquisition. I would like to use Section 54D to invest the proceeds from the acquisition for some construction activity in the remaining land. The land was acquired in 2011 but before that, it was occupied by a tenant who vacated through court order after a long legal battle. As per 54D, I should have operated some industrial activity in that said property but since it was occupied in a court battle, I could not do that. Can someone please advise me if I can still go ahead with Section 54D, and will my valid justification that the property was not available due to legal battle prior to acquisition for my industrial activity be considered by the IT authorities?Kindly advise.

CA. Hari Kishan

CA. Hari Kishan (Expert)
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07 February 2012 It is a very difficult proposition and not a very strong point of arguments.. however for sure a matter of litigation.. must try it..

Querist : Anonymous

Querist : Anonymous (Querist)

07 February 2012 Thanks...Since there was no way we could have used that land 2 years prior to the acquisition as it was entangled in court case, we want to see how we can get some tax relief on this forceful acquisition. The other option is to go with 54f but that is to purchase a residential property which we don't need now, and we want to use this money for reconstruction in our existing land.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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23 July 2025 You're referring to **Section 54D** of the Income Tax Act, 1961, which offers **capital gains exemption** on **compulsory acquisition of land or building** used for **industrial purposes**. However, as you rightly pointed out, there are certain **strict conditions**, and your specific case presents a gray area.

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## 📘 **Section 54D – At a Glance**

This section applies **only if**:

1. The capital gain arises from **compulsory acquisition** of land/building.
2. The asset was used by the assessee **for industrial purpose** **in the two years immediately preceding** the date of acquisition.
3. The assessee **purchases or constructs another land/building** for **industrial use** within **3 years** from the date of acquisition.
4. The new asset should not be transferred for **3 years**.

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## 🔍 **Your Case Summary**

* The land was industrial and taken by the government **under compulsory acquisition** ✅
* You want to reinvest the proceeds into **reconstruction on the remaining industrial land** ✅
* However, the land was **under tenant occupation** and you **could not use it for industrial purpose** in the **2 years before acquisition** ❌

* The tenant vacated **only after a long legal battle**.

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## 🧾 **Legal Interpretation & Position**

Section 54D requires **actual industrial use** in the **two years prior to acquisition**. If **no industrial activity was carried out**, technically, you do **not fulfill the basic condition**. Courts and tax authorities **strictly interpret** this clause.

> ⚖️ However, **some relief may be sought on equitable grounds**:

* You can **argue impossibility of use** due to **legal encumbrance** (tenant dispute).
* Show **intent and efforts to use the land industrially** (e.g., legal notices, court documents).
* You can also cite **absence of your control over the property** during that period, which was **legally documented**.

Yet, **this is not a guaranteed exemption**. The **tax officer may deny the benefit**, and you may have to pursue it through **appeal or litigation**.

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## ✅ **Alternative: Section 54F**

As you mentioned, **Section 54F** is for capital gains on sale of assets other than residential property and allows reinvestment into **residential property**.

But this won’t suit your purpose, since:

* You don’t want a residential property.
* Section 54F doesn’t allow industrial reinvestment.

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## 🧠 **Practical Advice**

1. **File for exemption under Section 54D** with **full disclosure** of the legal situation and supporting documents (tenant dispute, court orders, etc.).
2. Be prepared for **scrutiny or rejection** by the AO.
3. If rejected, consider approaching **CIT(A)** or **ITAT**, where equitable arguments might be considered more favorably.
4. As a fallback, calculate your **capital gains liability** and plan for investment under **Sections 54EC** (NHAI/REC bonds) if eligible — to save at least part of the tax.

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## 💬 Conclusion

Your eligibility under Section 54D is **debatable**, and success depends on how convincingly you can prove the **legal impossibility** of industrial use in the two years before acquisition. Though not a strong legal ground, you **can claim** and **fight it** if disallowed.

Let me know if you’d like help drafting a **justification note** or representation letter to submit along with your return.

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