Section 88: capital gains exemption on shifting an industrial undertaking into a Special Economic Zone

Introduction

For an industrial undertaking shifting to a Special Economic Zone, Section 88 offers a rollover of gain on specified business assets transferred in that move. It applies whether the SEZ lies in an urban area or elsewhere.

Key takeaways

What Section 88 says

Irrespective of Section 87, where the assessee has capital gains from transferring machinery, plant, building, land, or rights in building or land, used for the business of an industrial undertaking situated in an urban area, in the course of shifting that undertaking to any Special Economic Zone (in an urban or any other area), and within one year before or three years after the transfer the assessee purchases new machinery or plant, acquires or constructs building or land, shifts the original asset and transfers the establishment, or incurs expenses on other notified purposes (together the "new asset") in that SEZ, then instead of the gains being taxed as income of the transfer year: if the cost of the new asset is less than the capital gains, only the difference is charged to tax under Section 67; if the cost of the new asset equals or exceeds the gains, no capital gains are charged to tax.

If the new asset is itself transferred within three years of being purchased, acquired, constructed or transferred, its cost for computing any capital gain on that later transfer is treated as nil (where no gains were originally charged) or reduced by the amount of the earlier gains (where some gains were charged).

Depositing unutilised money before the return due date

If the capital gains are not used for the new asset within one year before the transfer, or before filing the return of income under Section 263, the unutilised amount must be deposited in a specified bank or institution under a Central Government-notified scheme, before filing the return and no later than its due date, with proof of deposit submitted along with the return. The amount already spent, plus the deposited amount, is together treated as the cost of the new asset.

If the deposited amount is not fully used within the time limit, the unutilised amount is charged to tax as income of the tax year in which three years from the date of transfer expires, though the taxpayer may withdraw the unutilised amount under the notified scheme.

How this differs from Section 87

Section 88 applies specifically to relocation into a Special Economic Zone, and can apply even where Section 87 also could - the section overrides Section 87 for SEZ relocations. The "urban area" definition used in Section 88 is the same one used in Section 87.

Step-by-step flow for applying Section 88

1. 1

   Was a capital asset of an urban industrial undertaking transferred because the undertaking was shifted to a Special Economic Zone?

   The asset must be machinery, plant, building, land or rights in building or land used for the undertaking's business. The SEZ may be in an urban or any other area. "Urban area" has the Section 87 meaning.

   • No (shifted to a non-SEZ area): Check Section 87 instead.
   • Yes: Section 88 applies, irrespective of Section 87.
2. 2

   Within one year before or three years after the transfer, was money spent in the SEZ?

   Machinery or plant, land or building acquired or constructed, shifting of the original asset and the establishment, and other purposes in the notified scheme make up the "new asset".

3. 3

   Is any gain unutilised before filing the return under Section 263?

   • Yes: Deposit it in a specified bank or institution by the Section 263(1) due date and attach proof to the return. Amount utilised plus deposit is deemed the cost of the new asset.
   • No: Go to the next step.
4. 4

   Compare the cost of the new asset with the capital gain

   • Equal or more: No capital gain is charged under Section 67.
   • Less: The difference is charged under Section 67.
5. 5

   Watch the three-year period

   Deposit left unused when three years from the transfer expire is charged under Section 67 in that tax year (Section 88(4)). A new asset transferred within three years takes a nil or reduced cost under Section 88(1)(B).

Practical checklist

Glossary

Special Economic Zone

The statutory destination for the industrial shift under Section 88.

Original asset

Specified plant, machinery, land, building or rights used in the original urban industrial undertaking.

Frequently asked questions