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Quick Snapshot: Understand This in 2 Minutes
Imagine a highway or metro project is being built. The government acquires your factory land. You did not choose to sell. The state forced the transaction. You get compensation. That compensation minus the cost of the asset is a capital gain. And the taxman wants his share.
Section 84 steps in here. It says: if you take that compensation and put it back into a new industrial land or building within 3 years, there is no tax. You were displaced. The law makes it easier to restart.
| Parameter | Details |
| Who can claim | Any person (individual, HUF, company, firm, etc.) |
| Asset sold | Industrial land or building compulsorily acquired under any law |
| Usage condition | Asset must have been used in the business of the industrial undertaking for 2 years before acquisition |
| Type of gain covered | Both short-term and long-term capital gains |
| Reinvest in | New land, building, or rights therein for re-establishing or setting up a new industrial undertaking |
| Time limit | Within 3 years after the date of compulsory acquisition |
| Cap | No cap. Lower of: capital gain or reinvestment amount |
| Old section | Section 54D of the Income Tax Act 1961 |
Key Conditions to Satisfy
There are three conditions you must meet before claiming Section 84.
1. The Transfer Must Be by Compulsory Acquisition
The asset must have been acquired under any law. A voluntary sale does not qualify. The government (or any authority acting under a law) must have compelled the transfer.
2. The Asset Must Have Been Used in Business for 2 Years
The land or building must have been used in the business of the industrial undertaking for the 2 years immediately before the date of compulsory acquisition. Unused land or a building that was merely owned does not qualify.
3. Reinvestment Must Be in a New Industrial Setup
Within 3 years, you must purchase or construct new land, building, or rights therein for:
- Shifting the existing industrial undertaking to a new location.
- Re-establishing the industrial undertaking.
- Setting up another industrial undertaking.
How Much Exemption Do You Get?
The exemption is the lower of:
(a) the capital gain, or
(b) the amount invested in the new asset.
Example 1: Full Exemption
ABC Ltd’s factory building is compulsorily acquired. Capital gain = Rs. 60 lakh. The company builds a new factory within 3 years at a cost of Rs. 75 lakh. Since Rs. 75 lakh exceeds Rs. 60 lakh, the entire Rs. 60 lakh is exempt.
Example 2: Partial Exemption
XYZ & Co’s industrial land is acquired by the state. Capital gain = Rs. 80 lakh. They reinvest Rs. 55 lakh in a new plot. Exemption = Rs. 55 lakh. Taxable capital gain = Rs. 25 lakh.
What If Compensation Is Delayed? Section 89 Applies
In many compulsory acquisition cases, the government pays compensation months or years after the actual acquisition. Section 89 provides that all time limits under Section 84 are counted from the date of actual receipt of compensation, not from the date of acquisition. This is a significant relief.
Lock-in and Withdrawal
If you sell the new land or building within 3 years of purchase or construction, the exempted capital gain is deducted from the cost of acquisition of the new asset. This increases the gain on the new asset’s sale.
CGAS for Section 84
If you have not reinvested by the ITR filing date, deposit the unused capital gain in a CGAS account. The deposit is treated as the cost of the new asset. You have 3 years from the acquisition date to complete reinvestment.
Practical Compliance Checklist
- Received a compulsory acquisition notice? Start documenting now. Collect the acquisition order, compensation award letter, and date of payment.
- Confirm the 2-year business usage of the acquired asset. Check balance sheets, insurance records, or property tax receipts for proof.
- If compensation payment is delayed, note that time limits run from the date of actual receipt (Section 89).
- Plan reinvestment in a new industrial land or building within 3 years. Do not let the time limit lapse.
- Deposit unused amounts in CGAS before filing your ITR if reinvestment is incomplete.
- Avoid selling the new asset within 3 years of purchase. The exemption will be reversed if you do.
Section 84 recognises that compulsory acquisition is not the assessee’s choice. The law does not punish you for being displaced. It gives you 3 years to rebuild and rewards you with a full capital gains exemption if you do. Whether you are a sole trader or a large company, the exemption is available. Just meet the conditions, document everything, and stay within the timelines.
