Capital gain Tax Relief in relocation of industrial undertakings from urban areas to non-urban in Clause 87 of Income Tax Bill, 2025 vs. Section 54G of Income Tax Act, 1961

Clause 87 Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area.

Income Tax Bill, 2025

Introduction

Clause 87 of the Income Tax Bill, 2025, introduces provisions for the exemption of capital gains arising from the transfer of assets in cases of shifting industrial undertakings from urban areas to non-urban areas. This clause is designed to incentivize the relocation of industrial units to less congested areas, thereby promoting balanced regional development and decongesting urban centers. It echoes the existing Section 54G of the Income-tax Act, 1961, which provides similar relief but under different terms and conditions. The analysis herein will explore the legislative intent, key provisions, and practical implications of Clause 87, and compare it with the existing framework u/s 54G.

Objective and Purpose

The primary objective of Clause 87 is to facilitate the relocation of industrial undertakings from urban areas to non-urban areas by providing tax exemptions on capital gains. This move aligns with broader policy goals of reducing urban congestion, promoting regional development, and encouraging industrial growth in less developed areas. The provision aims to alleviate the tax burden on industries that undertake such relocations, thereby making the process economically viable and attractive. Section 54G of the Income-tax Act, 1961, was introduced with similar objectives. It seeks to provide tax relief to industries shifting from urban to non-urban areas, thus contributing to de-urbanization and balanced development. Both provisions reflect a policy initiative to encourage the redistribution of industrial activities for more equitable regional development.

Detailed Analysis

Clause 87 of the Income Tax Bill, 2025

Clause 87 outlines the conditions under which capital gains arising from the transfer of assets due to the shifting of industrial undertakings are exempt from taxation.

The key elements include:

1. Eligible Assets and Timing:

The assets eligible for exemption include machinery, plant, buildings, land, or rights in buildings or land used for business. The exemption applies if the transfer occurs in the context of shifting the undertaking from an urban area to a non-urban area. The new assets must be acquired within one year before or three years after the transfer.

2. Expenditure Conditions:

The exemption is contingent upon the assessee incurring expenses on new machinery, plant, buildings, or land in the new area. Additionally, expenses must be incurred on purposes specified in a government-notified scheme.

3. Capital Gain Computation:

If the cost of new assets is less than the capital gains, the difference is charged as income. If the cost equals or exceeds the capital gain, no tax is levied. For new assets transferred within three years, the cost is adjusted by the capital gain amount.

4. Deposit Requirement:

Unutilized capital gains must be deposited in a specified bank or institution before filing the income return, with proof submitted alongside the return. Unused deposits after three years are taxed as income.

5. Definition of Urban Area:

The term "urban area" is defined as areas within municipal limits declared by the central government, considering population, industrial concentration, and planning needs.

Section 54G of the Income-tax Act, 1961

Section 54G mirrors Clause 87 in many respects but includes some differences:

1. Eligible Assets and Timing:

Similar to Clause 87, Section 54G applies to machinery, plant, buildings, land, or rights used for business in urban areas. The timeline for acquiring new assets is identical.

2. Expenditure Conditions:

The section requires expenses on new machinery, plant, buildings, or land and other purposes specified in a government scheme.

3. Capital Gain Computation:

The computation mechanism is akin to Clause 87, with the difference between capital gain and new asset cost taxed if the latter is less.

4. Deposit Requirement:

Unutilized capital gains must be deposited before filing the income return, similar to Clause 87, with taxation on unutilized amounts after three years.

5. Definition of Urban Area:

The definition aligns with Clause 87, focusing on municipal limits and government declarations.

Practical Implications

The practical implications of Clause 87 and Section 54G are significant for businesses considering relocation:

1. Incentives for Relocation: - Both provisions offer substantial tax relief for industries shifting to non-urban areas, making relocation financially attractive.

2. Compliance Requirements: - Businesses must adhere to strict timelines for asset acquisition and capital gain utilization, necessitating careful planning and financial management.

3. Impact on Urban and Non-Urban Areas: - The provisions aim to reduce urban congestion and stimulate economic activity in non-urban regions, contributing to regional development.

4. Banking and Institutional Roles: - The requirement to deposit unutilized capital gains in specified banks or institutions underscores the role of financial entities in facilitating compliance.

Comparative Analysis

While Clause 87 and Section 54G share core objectives and mechanisms, some distinctions merit attention:

1. Legislative Context: - Clause 87 is part of a broader legislative reform in the Income Tax Bill, 2025, potentially reflecting updated policy priorities. Section 54G, rooted in the 1961 Act, may not fully align with contemporary economic conditions.

2. Scheme Specifications: - The schemes specified for eligible expenses may differ, affecting the applicability and benefits under each provision.

3. Legal Interpretation and Ambiguities: - Both provisions may present interpretative challenges, particularly regarding the definition of "urban area" and eligible expenses, necessitating judicial clarification.

Conclusion

Clause 87 of the Income Tax Bill, 2025, and Section 54G of the Income-tax Act, 1961, represent significant legislative efforts to promote industrial relocation from urban to non-urban areas. While they share common goals and frameworks, differences in legislative context and specific provisions may influence their application and impact. As regional development and urban decongestion remain policy priorities, these provisions will likely continue to evolve, necessitating ongoing analysis and potential reform.

 

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Full Text:

Clause 87 Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area.

 

Dated: 27-3-2025