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. Successor to s.54GA of the 1961 Act.
Section 88 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) applies irrespective of section 87. Where the assessee has 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, the transfer being effected in the course of or in consequence of shifting that undertaking to a Special Economic Zone in any urban or other area, and has within one year before or three years after the date of the transfer purchased machinery or plant for the business in that Zone, acquired land or building or constructed a building for his business there, shifted the original asset and transferred the establishment of the undertaking there, and incurred expenses on such other purposes as a scheme notified by the Central Government specifies, then instead of charging the gain in the year of transfer: if the cost and expenses on those purposes, called the new asset, are less than the capital gains, the difference is charged under section 67 as income of the tax year; if they equal or exceed the capital gains, no capital gain is charged under section 67. Clause (B) adds the lock-in: for computing a capital gain on the transfer of the new asset within three years of its being purchased, acquired, constructed or transferred, the cost is nil where the gain was fully covered, or is reduced by the amount of the capital gain where it was only partly covered.
Sub-section (2) is the deposit route. Where the capital gain is not utilised for the new asset within one year before the transfer of the original asset, or before filing the return of income under section 263, the unutilised amount is to be deposited in a specified bank or institution and utilised as per a scheme notified by the Central Government; the deposit must be made before the filing of the return and not later than the due date applicable to the assessee under section 263(1); and proof of deposit must be submitted along with the return. Sub-section (3) treats the amount already utilised for purchasing or constructing the new asset, together with the deposited amount, as the cost of the new asset.
Sub-section (4) deals with a deposit that is not used. Any part of it not utilised for the new asset within the period specified in sub-section (1) is charged under section 67 as income of the tax year in which the period of three years from the date of transfer of the original asset expires, and the assessee may withdraw that unutilised amount in accordance with the scheme. Sub-section (5) takes the meaning of "urban area" from section 87.
An undertaking that sells its urban plant and land only in order to move into a Special Economic Zone has realised a gain on paper while the money goes straight back into the same business elsewhere. The section defers the charge to the extent the proceeds are actually reinvested in the Zone, charges the shortfall, and — through the deposit machinery and the three-year lock-in — makes sure the deferral is paid for by real reinvestment rather than an intention stated on a return.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Window for acquiring or shifting to the new asset | One year before or three years after the date of transfer | Applies to purchase of machinery or plant, acquisition of land or building or construction of a building, shifting of the original asset and transfer of the establishment, and expenses on purposes specified in a notified scheme | Sub-section (1)(b) |
| Lock-in on the new asset | Three years of its being purchased, acquired, constructed or transferred | A transfer of the new asset within this period makes its cost nil where the whole gain was covered, or reduces it by the amount of the capital gain where only part was | Sub-section (1)(B) |
| Outer date for depositing the unutilised gain | The due date for filing the return under section 263(1) | The deposit must also be made before the return is actually filed, and proof of deposit must accompany the return | Sub-section (2)(b) and (c) |
| Year in which an unutilised deposit is charged | The tax year in which three years from the date of transfer of the original asset expire | Applies to so much of the deposit as is not wholly or partly utilised for the new asset within the sub-section (1) period; the assessee may then withdraw that amount under the scheme | Sub-section (4)(a) |
This is a rollover, not an exemption: what is put into the Zone escapes the charge and what is not is charged under section 67 as income of the tax year. The deposit route has two independent limits, and satisfying one does not save you — sub-section (2)(b) requires the deposit before the return is filed and in any case not later than the section 263(1) due date, and sub-section (2)(c) requires proof of the deposit with the return, so filing first and depositing afterwards fails even inside the due date. The relief is then held on trust for three years: transferring the new asset within three years brings the deferred gain back through the cost rule in sub-section (1)(B), and an unused deposit is charged in the year the three years from the original transfer expire. Finally, this section is only for a shift into a Special Economic Zone — section 87 is the parallel provision for a shift to a non-urban area, and sub-section (5) borrows the meaning of "urban area" from it.
An industrial undertaking in an urban area sells its plant and building in the course of shifting to a Special Economic Zone and makes a capital gain of 3 crore rupees. Within three years it spends 2.2 crore on machinery, land and building in the Zone. Under sub-section (1)(A)(I) the shortfall of 80 lakh rupees is charged under section 67 as income of the tax year. Whatever part of the 3 crore had not been spent by the time the return was filed had to be deposited under sub-section (2) before filing and not later than the section 263(1) due date, with proof attached to the return. If the new machinery is then sold two years after purchase, sub-section (1)(B) reduces its cost by the amount of the capital gain when the gain on that later sale is computed.
In the capital gains computation and the return for the year of the original transfer, where proof of deposit is filed under sub-section (2)(c); and in an assessment three years later, where the Assessing Officer charges an unutilised deposit under section 67.
has within one year before or three years after the date of such transfer
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)
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
See the full 1961 to 2025 concordance.