Income Tax 2025

Appearance

Capital gains on transfer of certain capital assets not to be charged in case of investment in residential house. ​

87(1) ​

  • (a) capital gains arising from the transfer of capital asset, being machinery or plant or building or land or any rights in building or land used for the business of an industrial undertaking situated in an urban area, effected in the case of shifting of an industrial undertaking situated in an urban area (original asset) to any non-urban area (new area); and
  • (b) within one year before or three years after the date of such transfer,— (i) purchased new machinery or plant for business of the industrial undertaking in the new area;(ii) acquired building or land or constructed building for his business in the said area; (iii) shifted the original asset and transferred its establishment to such area; and (iv) incurred expenses on such other purpose as specified in a scheme notified by the Central Government for this section, then, instead of the capital gains being charged to income tax as income of the tax year in which the transfer took place, it shall be dealt with as follows:— (A) if the cost and expenses incurred in on all or any of the purposes mentioned in clauses (i) to (iv) (new asset),–– (I) is less than the capital gains, the difference shall be charged under section 67 as the income of the tax year; or (II) is equal to or more than the capital gain, no capital gain shall be charged under section 67; (B) 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 clause (a) or shall be reduced by the amount of the capital gain in case of clause (b).

87(2) ​

If the capital gain is not used by the assessee for the new asset within one year before the transfer of the original asset, or before filing the return of income under section 263, then––

  • (a) the unutilised amount shall be deposited in a specified bank or institution and utilised as per the scheme notified by the Central Government;
  • (b) such deposit shall 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
  • (c) the proof of deposit shall be submitted along with the return on or before the due date for filing the return.

87(3) ​

For the purposes of sub-section (1), the amount already utilised for purchasing or constructing the new asset together with the deposited amount under sub-section (2) shall be deemed to be the cost of the new asset.

87 (4) ​

If the amount deposited under sub-section (2) is not wholly or partly utilised for the new asset within the period specified in sub-section (1), then,—

  • (a) the unutilised amount shall be charged under section 67 as the income of the tax year in which the period of three years from the date of the transfer of the original asset expires; and
  • (b) the assessee shall be entitled to withdraw the unused amount according to the said scheme.

87(5) ​

In this section, the expression “urban area” means any area within the limits of a municipal corporation or municipality, declared to be an urban area by the Central Government for the purposes of this section, having regard to––

  • (a) the population;
  • (b) concentration of industries; and
  • (c) need for proper planning of the area and other relevant factors
Explanation

Section Summary: ​

This section provides a tax exemption on capital gains arising from the transfer of certain capital assets (like machinery, plant, building, or land) used for an industrial undertaking in an urban area, provided the industrial undertaking is shifted to a non-urban area. The exemption applies if the taxpayer reinvests the capital gains into new machinery, plant, building, or land in the new area within a specified timeframe. The goal is to encourage the relocation of industries from urban to non-urban areas, promoting balanced regional development.

Key Changes: ​

  1. Expanded Scope of Assets: The section now explicitly includes machinery, plant, building, land, and rights in building or land used for industrial undertakings in urban areas.
  2. Reinvestment Window: Taxpayers have a window of one year before or three years after the transfer to reinvest the capital gains into qualifying assets in the new area.
  3. Deposit Mechanism: If the capital gains are not immediately reinvested, they must be deposited in a specified bank or institution as per a government-notified scheme.
  4. Cost Adjustment for New Assets: If the new asset is sold within three years, the cost of acquisition is adjusted to account for the earlier exemption.

Practical Implications: ​

  1. For Industrial Undertakings: Businesses relocating from urban to non-urban areas can defer or avoid capital gains tax by reinvesting in new assets in the new location.
  2. Timing of Reinvestment: Taxpayers must carefully plan the timing of reinvestment to ensure compliance with the one-year-before or three-year-after window.
  3. Deposit Requirement: If reinvestment is delayed, the unutilised capital gains must be deposited in a specified bank or institution to retain the tax benefit.
  4. Compliance Burden: Taxpayers must maintain detailed records of reinvestment and deposits to substantiate their claims during tax assessments.

Critical Concepts: ​

  1. Urban vs. Non-Urban Areas: Urban areas are defined as those within municipal corporation or municipality limits, declared by the Central Government based on population, industrial concentration, and planning needs. Non-urban areas are outside these limits.
  2. Cost Adjustment for New Assets: If the new asset is sold within three years, the cost of acquisition is reduced by the amount of capital gains exempted earlier. This ensures that the tax benefit is not misused.
  3. Government-Notified Scheme: The Central Government will specify the scheme for depositing unutilised capital gains, including the list of approved banks or institutions.

Compliance Steps: ​

  1. Identify Eligible Assets: Determine if the transferred assets (machinery, plant, building, or land) qualify under this section.
  2. Plan Reinvestment: Ensure reinvestment in new machinery, plant, building, or land in the new area within one year before or three years after the transfer.
  3. Deposit Unutilised Gains: If reinvestment is delayed, deposit the unutilised capital gains in a specified bank or institution before filing the income tax return.
  4. Maintain Documentation: Keep records of the transfer, reinvestment, and deposits, including proof of deposit and details of the new assets.
  5. File Returns: Submit proof of deposit and reinvestment along with the income tax return.

Examples: ​

  1. Scenario 1: A manufacturing company in Mumbai (urban area) sells its factory building for ₹5 crore, resulting in a capital gain of ₹2 crore. The company relocates to a non-urban area and invests ₹2.5 crore in a new factory building within two years. Since the reinvestment exceeds the capital gains, no tax is charged on the ₹2 crore gain.

  2. Scenario 2: Another company sells its machinery in Delhi (urban area) for ₹3 crore, with a capital gain of ₹1 crore. It relocates to a non-urban area but only invests ₹50 lakh in new machinery within three years. The remaining ₹50 lakh is deposited in a specified bank. If the deposit is not utilised within three years, the unutilised ₹50 lakh will be taxed as income in the year the three-year period expires.

This section incentivises industrial relocation while ensuring compliance through strict reinvestment and deposit requirements.