Exemption from Capital Gains for all assesses

In the intricate landscape of tax regulations, Sections 54EC, 54G, 54GA, and 54D of the Income Tax Act emerge as crucial instruments guiding taxpayers toward strategic decisions. Each section, from facilitating tax-deferred investments to promoting industrial relocations and providing clarity on compulsory acquisitions, plays a pivotal role in shaping tax-efficient practices.

In a previous article related to exemption from capital gains, we discussed exemptions available to only Individuals and HUFs. In this article we are going to discuss further sections which provide exemptions from tax on capital gains to all the assessee irrespective of their status.

Section 54D:

Conditions for Exemption:

Capital gain (whether long term or short term) arising from the compulsory acquisition of a capital asset, being land or building or both (hereafter referred to as the original asset) forming part of an industrial undertaking, is eligible for exemption under Section 54D. The original asset must have been used for the business of the industrial undertaking in the two years preceding the transfer.

Within three years after the transfer, the assessee must purchase new land, building, or construct a building for the purpose of shifting or re-establishing the industrial undertaking.

Exemption Calculation

Exemption shall be lower of following:

• Cost of New Asset or

• Capital Gain

Although if new asset is transferred within 3 years of date of purchase or construction then, cost of acquisition shall be reduced by exempted capital gain. For example, if assessee claims exemption under this section, by purchasing a new land within specified period, and then transfer such property within 3 years of date of acquisition, so while computing capital gain at the time of transfer, cost of acquisition shall be considered as nil.

Deposit Requirement:

To claim exemption under this section, assessee is required to deposit such amount made in a specified bank or institution under a government-approved scheme before due date of filing of return.

The deposited amount should be utilized for the purchase of or construction of new land or building within the specified time frame. Failure to do so results in the unutilized amount being treated as income in the year when the two/three year period from the original asset`s sale expires.

Section 54EC:

Conditions for Exemption:

Long Term Capital Gain arising from sale of land or building or both is eligible for exemption under section 54EC. Exemption can be availed by making investment in specified bonds within six months of the transfer.

Specified Bonds are bonds redeemable after 5 years issued by

• The National Highways Authority of India

• The Rural Electrification Corporation Limited

• Power Finance Corporation Ltd.

• Indian Railway Finance Corporation

Investment made in specified assets during a financial year must not exceed fifty lakh rupees. If the specified asset is transferred within five years, the exempted capital gain is treated as income in the year of transfer.

It is noteworthy that if assessee takes any loan or advance on bonds, he shall be deemed to have converted into money on the date on which such loan or advance was taken capital gain exempted earlier shall become taxable again.

Further it is also noteworthy that in the case of Hindustan Unilever Limited vs Deputy Commissioner (2010) [2010] 121 TAXLOK.COM (IT) 010 (BOMBAY) Bombay High court held that if assessee has made the payment for purchase of the bond within 6 months from the date of transfer, exemption u/s 54EC cannot be denied merely on basis that bonds were issued after expiry of 6 months.

Section 54G:

Conditions for Exemption:

The exemption is applicable to the transfer of capital assets (whether short term or long term) being machinery, plant, building, land, or any rights in building or land. These assets should be used for the business of an industrial undertaking in an urban area.

Other Conditions to be satisfied:

• The industrial undertaking must be shifted to an area other than an urban area.

• The transfer should occur in the course of or as a consequence of the shifting.

The assessee shall within a period of one year before or three years after the date on which the transfer took place:

• Purchased new machinery or plant for the purposes of business of the industrial undertaking in the area to which the said undertaking is shifted;

• Acquired building or land or constructed building for the purposes of his business in the said area;

• Shifted the original asset and transferred the establishment of such undertaking to such area; and

• Incurred expenses on such other purpose as may be specified in a scheme framed by the Central Government for the purposes of this section

Tax Treatment of Capital Gains:

Amount of Exemption shall be lower of:

• Cost of New Asset or,

• Capital Gain Amount

Although if new asset is transferred within 3 years of date of purchase or construction then, cost of acquisition shall be reduced by exempted capital gain.

Section 54GA:

Conditions for Exemption:

The exemption is applicable to the transfer of capital assets (whether short term or long term) being machinery, plant, building, land, or any rights in building or land. These assets should be used for the business of an industrial undertaking in an urban area.

Other Conditions to be satisfied:

• The industrial undertaking must be shifted to Special Economic Zone (SEZ).

• The transfer should occur in the course of or as a consequence of the shifting.

The assessee shall within a period of one year before or three years after the date on which the transfer took place:

• Purchased new machinery or plant for the purposes of business of the industrial undertaking in the SEZ to which the said undertaking is shifted;

• Acquired building or land or constructed building for the purposes of his business in the SEZ;

• Shifted the original asset and transferred the establishment of such undertaking to such SEZ; and

• Incurred expenses on such other purpose as may be specified in a scheme framed by the Central Government for the purposes of this section

Tax Treatment of Capital Gains:

Amount of Exemption shall be lower of:

• Cost of New Asset or,

• Capital Gain Amount

Although if new asset is transferred within 3 years of date of purchase or construction then, cost of acquisition shall be reduced by exempted capital gain.

Conclusion:

In conclusion, the strategic provisions of Sections 54EC, 54G, 54GA, and 54D within the Income Tax Act offer taxpayers avenues for minimizing tax liabilities on capital gains. Section 54EC facilitates tax-efficient investments in specified bonds, Section 54G encourages industrial relocation by providing exemptions in the transition process, Section 54GA supports businesses in reorganizing by exempting capital gains from asset transfers, and Section 54D provides clarity on tax treatment in cases of compulsory acquisition. Together, these sections contribute to a comprehensive framework that aligns with economic objectives, encourages prudent financial decisions, and promotes both industrial growth and business adaptability.