Section 88 Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone.

Income-tax Act, 2025

At a Glance

This document is the Old Version of Clause 88 of the Income Tax Bill, 2025, titled "Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone." It matters because it prescribes conditions under which capital gains arising from transfers related to relocation of industrial undertakings to SEZs are exempted or deferred. The provision affects taxpayers operating industrial undertakings in urban areas contemplating relocation to Special Economic Zones, and the revenue authorities administering capital gains taxation. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 88 of the Income Tax Bill, 2025 and section 87 (referred to as containing a meaning for "urban area" and as a potential conflicting provision). The clause addresses capital gains arising from transfer of capital assets (machinery, plant, building, land, or rights therein) used in the business of an industrial undertaking situated in an urban area, where the transfer is effected in the course of or in consequence of shifting that undertaking to any Special Economic Zone. Definitions or explanatory notes: the clause states "In this section 'urban area' shall have the meaning assigned to it in section 87." No further definitions are provided in the text.

Statutory Provision Mode

Text & Scope

Clause 88 applies when an assessee has capital gains arising from the transfer of a capital asset (machinery, plant, building, land or rights therein) used in the business of an industrial undertaking situated in an urban area, and the transfer is effected in the course of or in consequence of shifting that undertaking to any Special Economic Zone. The provision covers cases where, within one year before or three years after the date of transfer, the assessee has (i) purchased machinery or plant for the business in the SEZ; (ii) acquired land or constructed or acquired building for the business in the SEZ; (iii) shifted the original asset and transferred the establishment to the SEZ; or (iv) incurred expenses for other purposes specified by a scheme notified by the Central Government. The capital gain is to be dealt with under the special rules outlined rather than being charged as income of the tax year in which the transfer occurred.

Interpretation

Legislative intent suggested by the text: to encourage relocation of industrial undertakings from urban areas to SEZs by providing exemption/deferral of capital gains when gains are reinvested in specified assets or used as per a notified scheme. The clause implements a rollover or reinvestment relief mechanism: if reinvestment equals or exceeds the capital gain, no capital gain tax is charged; if reinvestment is less, the difference is charged as income. The provision indicates that the cost basis for any later transfer of the new asset within three years is adjusted to reflect the relief (nil cost or reduced by the exempted/reinvested amount), thereby preventing immediate disposal to realise exempted gains without tax consequences.

Exceptions/Provisos

Carve-outs and conditions: the relief is conditional on utilisation of the capital gain for the specified "new asset" purposes within the one year before or three years after transfer window. If the amount is not utilised within the pre-filing or deposit timeline, the assessee must deposit the unutilised amount in a specified bank or institution and utilise it as per a Central Government notified scheme. If the deposited amount is not utilised within the three-year period, the unutilised portion is charged as income in the tax year in which that three-year period expires. The provision also includes forfeiture/withdrawal mechanics via the scheme. Specific thresholds, percentages, or exemptions beyond these conditions: Not stated in the document.

Illustrations

• Example 1: An urban industrial unit sells machinery and realises capital gains of INR X, and within the prescribed period purchases new machinery in an SEZ costing INR Y. If Y >= X, no capital gain is charged; if Y < X, the excess X-Y is charged as income u/s 67. (Amounts and dates: Not stated in the document.)

• Example 2: An assessee realises capital gain but does not immediately reinvest; the assessee deposits the unutilised amount in the specified bank before the return filing due date and later utilises the deposit for acquiring building in the SEZ. The deposited plus utilised amounts are deemed to be the cost of the new asset. (Specific bank/institution and scheme details: Not stated in the document.)

Interplay

Interactions mentioned: reference to section 87 for meaning of "urban area"; reference to section 67 for charging unexempted amounts as income; procedural deposit and utilization subject to a scheme notified by the Central Government. References to "the said section" or "the said sub-section" in relation to filing due dates suggest interplay with return filing provisions in section 263(1) (Bill uses "sub-section (1) of the said section" in places). Other Rules/Notifications/Circulars: Not stated in the document beyond mention of a Central Government notified scheme and a specified bank or institution.

Differences between (Document 1) Section 88 of the Income-tax Act, 2025 and (Document 2) Clause 88 of the Income Tax Bill, 2025 (Old Version)

• Scope of destination area:

  Difference: Document 1 (Section 88 of the Act) specifies that the industrial undertaking is shifted "to any Special Economic Zone in any urban or any other area." Document 2 (Bill) states the undertaking is shifted "to any Special Economic Zone in any area."

  Practical impact: The Act language explicitly clarifies that the SEZ may itself be located in an "urban or any other area," possibly to avoid ambiguity about whether SEZ location affects eligibility. The Bill's phrase "in any area" is effectively similar but marginally less explicit; the Act wording reduces potential interpretive disputes about SEZ located status. For taxpayers, the Act wording offers clearer assurance that SEZ location (urban or non-urban) does not affect the exemption.

• Cross-reference to charging provision:

  Difference: Document 1 refers to charging under "section 67," while Document 2 refers to charging under "section 67" as well but uses slightly different clause references (e.g., earlier/later references to clause (a) vs. clause (A)(I)/(II)). Substance is largely the same, but Document 1 uses sub-clause lettering (A)(I)/(II) and cross-references consistently.

  Practical impact: No substantive tax outcome change; differences are stylistic and organizational. Both draft and enacted text charge unexempted amounts under the same provision (section 67).

• Temporal formulation for deposit if not utilised:

  Difference: Document 1 prescribes deposit "shall be made 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); and the proof of deposit shall be submitted along with such return." Document 2 states deposit "shall be made not later than the due date for filing the return of income under sub-section (1) of the said section ... and the proof of deposit shall be submitted along with the return on or before the due date for filing the return." The Bill uses a slightly different cross-reference style and repeats "not later than the due date" twice.

  Practical impact: Both require deposit by the due date for filing the return; the Act's wording "before the filing of the return and not later than the due date applicable ... u/s 263(1)" may be marginally clearer about timing relative to filing obligations under that specific section. Practically, timing obligations for deposit remain the same.

• Drafting clarity in computing cost for subsequent transfer:

  Difference: Document 1 states: "for computing any capital gain arising from transfer of the new asset within three years of its being purchased, acquired, constructed or transferred, the cost shall be nil in case of sub-clause (A)(II), or shall be reduced by the amount of the capital gain in case of sub-clause (A)(I)." Document 2 uses: "the cost shall be nil in case of clause (a), or shall be reduced by the amount of the capital gain in case of clause (b)."

  Practical impact: The Act's reference to sub-clause labels (A)(I)/(II) ties back explicitly to the earlier bifurcation between "is less than" and "is equal to or more than" the capital gains. The Bill's cross-reference to "clause (a)"/"clause (b)" may be less precise; the Act improves internal consistency and clarity for calculation of cost for later disposals.

• Terminology for withdrawal of unutilised amount:

  Difference: Document 1 states "the assessee shall be entitled to withdraw such unutilised amount in accordance with the scheme referred to in sub-section (2)." Document 2 says "the assessee shall be entitled to withdraw the unused amount according to the said scheme."

  Practical impact: Substantively equivalent; the Act's phraseology is slightly more formal and references the specific sub-section, improving cross-referential clarity. No substantive change to taxpayer rights.

• General drafting and cross-reference polish:

  Difference: Document 1 generally employs more explicit sub-clause lettering and cross-references (e.g., explicit mention of "sub-clauses (i) to (iv) referred to as 'new asset'") and adds some minor clarifications (e.g., deems combined utilised amount and deposited amount to be cost). Document 2 conveys the same scheme but with small differences in labelling and repetition.

  Practical impact: Changes are largely drafting refinements aimed at clarity and internal consistency; they are unlikely to change substantive tax outcomes but reduce room for legal interpretation disputes.

Practical Implications

• Compliance and risk areas: Taxpayers must track timing windows (one year before to three years after transfer) for reinvestment, ensure timely deposit of unutilised amounts with specified institutions before the return filing due date, and maintain proof of deposit to be submitted with the return. Failure to comply can trigger immediate taxation of previously exempted gain u/s 67 at the end of the three-year period or earlier non-qualification for relief if deposit/timelines are missed.
• Record-keeping/evidence: Taxpayers should retain evidence of transfer dates, purchase/construction/acquisition invoices for new assets, proofs of shifting and transfer of establishment, deposit receipts from specified banks/institutions, and any utilisation records under the notified scheme. The provision explicitly requires submission of proof of deposit with the return.

Key Takeaways

• Clause 88 provides reinvestment relief for capital gains arising from asset transfers made in consequence of shifting industrial undertakings from urban areas to SEZs.
• Relief applies where reinvestment in specified new assets occurs within one year before or three years after the transfer; reinvestment equal to or exceeding the gain results in no chargeable capital gain.
• If reinvestment is partial, the unreinvested portion is taxed as income u/s 67; if not reinvested within timelines, deposit into a specified bank/institution and compliance with a notified scheme is required.
• Cost basis for subsequent transfer of the new asset within three years is adjusted (nil or reduced), preventing immediate tax-free realisation.
• Provision cross-references section 87 for "urban area" and requires adherence to a Central Government notified scheme; details of the scheme and specified institutions are not provided in the clause.

Full Text:

Section 88 Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone.