[Section 54GA] : Exemption of Capital Gain on Transfer of Assets of Shifting of Industrial Undertaking from Urban Area to any Special Economic Zone (SEZ)

Exemption of Long-term Capital Gains Tax under Section 54GA

Section 54GA of the Income Tax Act provides an exemption on capital gains arising from the transfer of assets by an industrial undertaking or a ship or a hotel. This section aims to promote the growth of industries and encourage investment in the country.

The exemption is available to all categories of assessees in respect of capital gain arising on the transfer of fixed assets other than furniture and fittings of industrial undertaking effected in the course of shifting of such industrial undertaking to any Special Economic Zone.

The conditions for claiming exemptions are as under:

(i)         the transfer is effected in the course of or in consequence of shifting the undertaking from an urban area to any Special Economic Zone. The Special Economic Zone may be developed in any urban area or any other area.

1.   Any other area means an area not declared as an urban area.

2.   ‘Urban area’ means any such area within the limits of a municipal corporation or municipality, as the Central Government may, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, by general or special order, declare to be an urban area for the purposes of this sub-section;

3.   “Special Economic Zone” means each Special Economic Zone notified under the proviso to section 3(4) and section(1) of the Special Economic Zones Act, 2005 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone. [Section 2(za) of the Special Economic Zones Act, 2005].

(ii)        asset transferred is machinery, plant, building, land or any right in building or land used for the business of industrial undertaking in an urban area;

(iii)       the capital gain arising on the asset transferred may be short-term or long-term capital gain. Normally, it will be short-term capital gain because most of the assets of the industrial undertaking will be depreciable assets;

(iv)       the capital gain is utilised within 1 year before or 3 years after the date of transfer for the specified purpose.

Specified purpose includes the following:

(a)        for purchase of new machinery or plant for the purpose of business of the Industrial Undertaking in the Special Economic Zone to which the said undertaking is shifted;

(b)        acquisition of building or land or construction of building for the purposes of the assesse&s business in the Special Economic Zone;

(c)        expenses on shifting of the old undertaking and its establishment to the Special Economic Zone; and

(d)        incurring of expenditure on such other purposes as specified by the Central Government for this purpose.

Quantum of Deduction:

  1. If the capital gain, on transfer of the original asset, is equal to or less than the cost and expenses incurred for the above specified purposes, the entire capital gain shall be exempt.
  2. If the capital gain on transfer of the original asset is greater than the cost and expenses incurred for the specified purposes then the exemption shall be allowed to the extent of the cost and expenses incurred.

In other words, capital gain shall be exempt to the extent it is spent for the specified purpose.

Summary :

In this blog post, we will explore the details of this exemption and the conditions that need to be fulfilled to avail it.

Eligibility Criteria

To be eligible for the exemption under Section 54GA, the following conditions must be met:

  • The transfer of assets must be by an industrial undertaking, ship, or hotel
  • The transfer must be in the context of shifting the industrial undertaking or hotel from an urban area to any Special Economic Zone (SEZ)
  • The transfer must take place within a specified time frame

Time Frame

The transfer of assets must take place within 1 year before or 3 years after the date on which the industrial undertaking or hotel begins to operate in the SEZ. This time frame ensures that the exemption is only available for genuine cases where the intent is to shift the business to an SEZ and not for any other purpose.

Exemption Amount

The exemption under Section 54GA is equal to the amount of capital gains arising from the transfer of assets. This means that the entire capital gain can be exempted from tax, resulting in significant tax savings for the assessee.

Utilization of Exemption Amount

The amount of exemption can be utilized by the assessee for purchasing new assets for the industrial undertaking or hotel in the SEZ. The new assets must be acquired within 1 year from the date of transfer of the original assets. This provision ensures that the funds saved from the exemption are reinvested in the growth of the business.

Documentation Requirements

To claim the exemption under Section 54GA, the assessee must submit the necessary documents and proofs to the income tax department. These documents include:

  • Proof of transfer of assets
  • Proof of shifting the industrial undertaking or hotel to the SEZ
  • Proof of purchase of new assets in the SEZ
  • Any other documents as required by the income tax department

Conclusion

The exemption provided under Section 54GA of the Income Tax Act is a beneficial provision for industrial undertakings, ships, and hotels looking to relocate to a Special Economic Zone. By availing this exemption, businesses can save a significant amount of tax and reinvest the funds in their growth. However, it is important to fulfil all the eligibility criteria and comply with the documentation requirements to successfully claim the exemption.

Scheme of Deposit in Capital Gains Accounts Scheme, 1988:

The amount of capital gain which is not utilised by the assessee towards the cost and expenses specified, before the date of furnishing of the return of income, shall be deposited, before the due date of the furnishing of the return, in a capital gains account scheme. The proof of such deposit shall be attached with the return. In this case the amount already utilised by the assessee for the specified purpose, along with the amount so deposited shall he deemed to the cost/expenditure specified and shall be eligible for exemption.

Consequences where the amount deposited in the Capital Gains Accounts Scheme is not utilised for the specified purpose within the specified period:

The amount not so utilised shall be charged as capital gains, short-term or long-term depending upon the capital gain on the original transfer, of the previous year in which the period of 3 years from the date of transfer of the original asset expires. In this case, the assessee shall be eligible to withdraw the amount from the scheme.

Consequences where the new asset is transferred within a period of 3 years of its purchase or construction:

In this case, the capital gain, which was exempt earlier u/s 54G, shall be deducted from the cost of acquisition of the new asset for the purpose of computation of capital gain in respect of the transfer of the new asset.

See also  [Section 54GB]: Exemption of Long-Term Capital Gains Tax on Transfer of Residential Property if Invested in a New Manufacturing SME Company
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