Section 87 — Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area. Successor to s.54G of the 1961 Act.
Section 87 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) sets the conditions and the relief. Clause (a) requires capital gains from the transfer of machinery, plant, building, land or rights in building or land used for the business of an industrial undertaking situated in an urban area, effected in shifting that undertaking to an area other than an urban area. Clause (b) requires that, within one year before or three years after the transfer, the assessee purchased new machinery or plant for the business in the new area, acquired land or a building or constructed a building there, shifted the original asset and transferred the establishment, and incurred expenses on such other purpose as is specified in a scheme notified by the Central Government. Item (A) then charges under section 67 only the difference where the cost of the new asset is less than the capital gains, and charges nothing where it equals or exceeds them. Item (B) reduces the new asset's cost — to nil in the first case, and by the amount of the capital gain in the second — for computing gains on its transfer within three years of being purchased, acquired, constructed or transferred.
Sub-section (2) requires capital gains not used for the new asset within one year before the transfer or before filing the return under section 263 to be deposited in a specified bank or institution under a notified scheme, before the return is filed and not later than the due date under section 263(1), with proof submitted along with the return. Sub-section (3) deems the amount already used together with the deposit to be the cost of the new asset.
Sub-section (4) charges any deposit not utilised within the sub-section (1) period under section 67 as income of the tax year in which three years from the date of transfer expire, and allows the assessee to withdraw it under the scheme. Sub-section (5) defines "urban area" as an area within a municipal corporation or municipality declared as such by the Central Government, having regard to population, concentration of industries, and the need for proper planning and other relevant factors.
An undertaking moving out of a congested urban area has to sell its old premises and plant to fund the new site, and taxing that gain would take away the money needed for the move. The section defers the charge to the extent the proceeds go back into the new location, and uses a deposit account to hold the balance so the relief does not rest on an intention. The lock-in and the reclaim make sure the relief follows a real relocation.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Window for acquiring or constructing the new asset | Within one year before or three years after the date of transfer | Covers new plant or machinery, land or building, construction, shifting the original asset and the notified other purposes | Sub-section (1)(b) |
| Lock-in on the new asset | Three years | Transfer within three years of purchase, acquisition, construction or transfer makes the cost nil, or reduces it by the capital gain | Sub-section (1)(B) |
| Outer date for depositing unutilised capital gains | The due date under section 263(1) | The deposit must be made before filing the return and in any case not later than that date | Sub-section (2)(b) |
| Year in which an unutilised deposit is charged | The tax year in which three years from the date of transfer expire | Where the deposit is not wholly or partly utilised within the period specified in sub-section (1) | Sub-section (4)(a) |
The relief is measured by spending, not intention: a shortfall against the capital gain is charged under section 67, and a matching or larger spend leaves nothing charged. Money not yet spent must be parked in the notified deposit before the return is filed and no later than the section 263(1) due date, with proof attached — filing late does not buy more time. The deposit counts as cost under sub-section (3) only provisionally, because whatever remains unused when three years from the transfer expire is charged in that later year. Even then the exemption is not settled, since sub-section (1)(B) strips the new asset's cost if it is sold within three years.
A company sells the land and building of a factory inside a municipal corporation for a capital gain of Rs 5 crore and shifts the undertaking to a non-urban site. It spends Rs 3.5 crore there before filing its return and deposits the remaining Rs 1.5 crore by the section 263(1) due date, so nothing is charged that year. If only Rs 1 crore of the deposit is used within three years of the transfer, the unused Rs 50 lakh is charged under section 67 in the tax year those three years expire.
In the capital gains schedule of the return for the year of transfer, with proof of deposit submitted along with the return; and again, years later, in an assessment bringing the unutilised deposit to charge under sub-section (4).
such 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 under section 263(1)
See the full 1961 to 2025 concordance.
See the notifications index.
