Section 87 Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area.

Income-tax Act, 2025

At a Glance

Clause 87 of the Income Tax Bill, 2025 (Old Version) provides for exemption of capital gains arising on transfer of assets in the context of shifting an industrial undertaking from an urban area to a non-urban area. It sets out the conditions under which capital gains may be not charged or deferred, the treatment where the gains are reinvested in "new assets", and the time limits and deposit mechanism for unutilised gains. The provision principally affects taxpayers operating industrial undertakings, and the Revenue in administering exemptions. Effective date or enactment date: Not stated in the document.

Background & Scope

Statutory hook: Clause 87, Income Tax Bill, 2025 (Old Version). Context: a targeted capital gains exemption aimed at encouraging shifting of industrial undertakings from urban to non-urban areas by providing tax relief where capital gains are reinvested in specified assets related to the relocated undertaking. Coverage: capital gains on transfer of capital asset being machinery, plant, building, land, or rights in building or land used for business of an industrial undertaking situated in an urban area, where the transfer is effected in the case of shifting to a non-urban area. Definitions or explanatory material: the clause defines "urban area" for the purposes of the section by reference to limits of municipal corporation or municipality and declaration by the Central Government with regard to population, concentration of industries and need for proper planning. No other definitions are provided in the text.

Statutory Provision Mode

Text & Scope

The clause applies where an assessee has capital gains arising from transfer of a capital asset (machinery, plant, building, land or rights therein) used for the business of an industrial undertaking situated in an urban area, and the transfer is effected as part of shifting that undertaking to a non-urban area. The core scope elements are:

• Nature of asset: machinery, plant, building, land or rights in building/land used in the business of the industrial undertaking.
• Triggering event: transfer effected in connection with shifting the undertaking from an urban area to a non-urban area.
• Temporal window for reinvestment: within one year before or three years after the date of such transfer the assessee must have undertaken specified actions.
• Specified actions (new asset uses):
  • (i) purchased new machinery or plant for the industrial undertaking in the new area;
  • (ii) acquired building or land or constructed building for business in the new area;
  • (iii) shifted the original asset and transferred its establishment to the new area;
  • (iv) incurred expenses on other purposes as specified in a Central Government notified scheme for this section.

Interpretation

Legislative intent as indicated by the text: to incentivise relocation of industrial activity from urban to non-urban areas by deferring or exempting capital gains tax where gains are applied to capital expenditure in the relocated undertaking. The clause uses reinvestment and deposit mechanisms to tie tax relief to actual deployment of gains into productive assets for the relocated operation. The text contemplates both prior purchases (one year before) and post-transfer reinvestments (three years after), signalling flexibility in timing provided the specified actions occur within that window.

Exceptions/Provisos

The clause contains procedural and consequential rules rather than carve-out exceptions. Key provisions:

• Where the cost and expenses incurred on new assets is equal to or exceeds the capital gain, no capital gain shall be charged u/s 67.
• Where such cost/expenses are less than the capital gains, the difference shall be charged as income u/s 67 for the tax year.
• For any capital gain arising from transfer of the "new asset" within three years of its being acquired/constructed/transferred, the cost of the new asset shall be nil if the gain was fully absorbed (i.e., cost >= capital gain), or shall be reduced by the amount of capital gain where only part of the gain was absorbed.
• If capital gains are not used for the new asset within the stated period, the unutilised amount must be deposited in a specified bank/institution and utilised as per a notified scheme; timelines and proof obligations apply.
• Unutilised deposited amounts not applied within the three-year period will be charged as income u/s 67 in the tax year in which the three-year period expires, though withdrawal in accordance with the notified scheme is permitted.

Illustrations

• Example 1: An assessee sells machinery (original asset) in an urban area realising capital gains of Rs. 100 lakh. Within the three-year window the assessee purchases new machinery in the non-urban new area costing Rs. 120 lakh. Result under Clause 87(1)(A)(II): no capital gain charged u/s 67; for subsequent disposal of new machinery within three years, its cost shall be nil.
• Example 2: Same facts but new machinery purchase costs Rs. 70 lakh. Result under Clause 87(1)(A)(I): Rs. 30 lakh (100-70) will be charged as income u/s 67 in the tax year of transfer; cost of the new asset for computing later capital gains will be reduced by Rs. 30 lakh.
• Example 3: Assessee fails to apply the capital gain proceeds to any qualifying new asset within the relevant window but deposits the unutilised amount in the specified institution as required. If not applied within three years, the unutilised amount will be charged as income u/s 67 in the tax year when the three-year period expires.

Interplay

The clause cross-references section 67 (for charging the unabsorbed portion as income) and relies on a Central Government notified scheme for specifying permissible other expenditures and the mechanics of deposits and withdrawals. No other statutes, rules, notifications or circulars are named in the clause text. The clause operates as a self-contained relief subject to compliance with the notified scheme and procedural deposit requirements.

Differences Between Clause 87 of the Income Tax Bill, 2025 (Old Version) and Section 87 of the Income-tax Act, 2025

Comparison summary based strictly on the two documents provided:

• Destination terminology: Document 1 (Section 87 Act, 2025) speaks of shifting to "any area [other than an urban area (new area)]"; Document 2 (Clause 87 Bill, Old Version) uses "non-urban area (new area)".
  • Practical impact: wording change is semantic; both identify relocation to areas outside urban areas as qualifying. No substantive difference in scope is apparent from the texts.
• Drafting and cross-reference differences: Document 1 expressly refers to filing the return under "section 263" in certain subsections; Document 2 refers to "the said section" or "sub-section (1) of the said section" when setting the due date for deposits.
  • Practical impact: these are drafting variations in cross-referencing the return-filing due date; effect on interpretation depends on which section is intended, but the Bill text as provided does not clarify any substantive change in timing beyond referencing the due date for filing the return. (If further clarity is required on the intended section reference, the documents do not state one unequivocally.)
• Minor phrasing and typographical differences: Document 2 contains phrases such as "cost and expenses incurred in on all or any" and refers to "clause (a)" and "clause (b)" in sub-clause (B) whereas Document 1 uses sub-clause lettering (A)(I)/(II).
  • Practical impact: primarily drafting clarity and possible ambiguity in cross-references; operationally the economic outcomes as to taxability and basis adjustments appear consistent.
• Deposit and proof timing wording: Document 1 requires deposit "before the filing of the return and not later than the due date applicable in the case of the assessee for filing the return of income u/s 263(1)"; Document 2 states deposit is to be made "not later than the due date applicable in the case of the assessee for filing the return of income under sub-section (1) of the said section" and that proof is to be submitted "on or before the due date for filing the return."
  • Practical impact: slight differences in description of timing and where proof is submitted; substantively both require deposit by the due date for filing the return and proof to accompany the return. The documents do not state any change to the operative deadline beyond these phrasings.
• Definition of "urban area": both texts define it as any area within limits of municipal corporation/municipality declared urban by the Central Government having regard to population, concentration of industries and planning needs.
  • Practical impact: consistent definition across both texts.

Practical Implications

• Compliance and risk areas grounded in the text: taxpayers must evidentially demonstrate that capital gains were utilised for qualifying new assets within the one-year-before or three-years-after window. Failure to do so triggers deposit obligations and ultimately chargeability as income u/s 67.

• Record-keeping/evidence points suggested by the text: contemporaneous purchase deeds, invoices for machinery/plant, building acquisition/ construction contracts, evidence of transfer and shifting of establishment, bank deposit evidence where required by sub-section (2), and documentation conforming to the Central Government's notified scheme. The clause requires proof of deposit to be submitted with the return.

Key Takeaways

• Clause 87 provides a reinvestment-linked exemption for capital gains arising from transfers connected with shifting industrial undertakings from urban to non-urban areas.
• The exemption is conditional on purchase/acquisition/construction/transfer or specified expenses within one year before or three years after the transfer date.
• If reinvestment is equal to or exceeds the capital gain, no gain is charged; if less, the shortfall is charged as income u/s 67.
• Capital gains reinvested under the clause affect the cost basis of the new asset for subsequent disposals within three years: either nil cost where fully absorbed, or cost reduced by the amount of the exempted gain.
• Unutilised gains must be deposited in specified banks/institutions under a notified scheme and proof of deposit furnished with the return; failure to apply deposited funds within three years results in chargeability as income u/s 67.
• "Urban area" is defined narrowly for the clause's purposes by reference to municipal limits and Central Government declaration considering population, industry concentration and planning needs.
• Operational and evidentiary compliance with the notified scheme (including deposit and withdrawal mechanics) is essential; non-compliance results in tax consequences.

Full Text:

Section 87 Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area.