Section 88 — Industrial Shift Urban to SEZ | ITA 2025

Section 88 — - CG ON SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREA TO SEZ

Section 88 is the substantive equivalent of 1961 s. 54GA -- the SEZ-DESTINATION VARIANT of the urban-shift CG roll-over exemption. Where industrial undertaking shifts from urban area TO ANY SPECIAL ECONOMIC ZONE (SEZ) -- whether the SEZ is itself in URBAN OR ANY OTHER AREA -- the relief applies. CRITICAL DISTINCTION FROM s. 87: destination is SEZ-specific (not non-urban-generally); SEZ may itself be in urban area (most operating SEZs are in urban / peri-urban locations -- Mahindra World City near Chennai, ICC Bombay SEZ etc.). The provision opens with 'IRRESPECTIVE OF anything contained in section 87' -- making s. 88 a SUBSTITUTE pathway specifically for SEZ-bound shifts. SEZ Act 2005 governs SEZ designation and operations. SEZs offer additional tax incentives under s. 144 (SEZ unit tax holiday on profits and gains, equivalent of 1961 s. 10AA, currently sunset 31-Mar-2026 for new units). Section 88 facilitates the SHIFT itself; s. 144 governs the post-shift operational tax position.

Statutory text — Income-tax Act, 2025

Marginal note -- Capital gain on transfer of assets in case of shifting of industrial undertaking from urban area to any Special Economic Zone

(1) Irrespective of anything contained in section 87, if the assessee has—

(a) capital gains arising from the transfer of a capital asset, being machin- ery or plant or building or land or any rights in building or land used for the business of an industrial undertaking situated in an urban area, effected in the course of or in consequence of shifting of such industrial undertaking (original asset) to any Special Economic Zone in any urban or any other area; and

(b) has within one year before or three years after the date of such transfer,—

(i) purchased machinery or plant for the business of the industrial undertaking in such Special Economic Zone;

(ii) acquired building or land or constructed building for his business in such Special Economic Zone;

(iii) shifted the original asset and transferred the establishment of such undertaking to such Special Economic Zone; and

(iv) incurred expenses on such other purposes specified by a scheme notified by the Central Government in this behalf, then, instead of capital gain being charged to income-tax as income of the tax year in which the transfer took place, it shall be dealt with as follows:—

(A) if the cost and expenses incurred in on all or any of the purposes men- tioned sub-clauses (i) to (iv) referred to as “new asset”,—

(I) is less than the capital gains, the difference shall be charged under section 67 as the income of the tax year; or

(II) is equal to or more than the capital gains, no capital gain shall be charged under section 67;

(B) for computing any capital gain arising from transfer of the new asset within three years of its being purchased, acquired, constructed or transferred, the cost shall be nil in case of sub-clause (A)(II), or shall be reduced by the amount of the capital gain in case of sub-clause (A)(I).

(2) If the capital gain referred to in sub-section (1) is not utilised by the assessee for the new asset within one year before the transfer of the original asset, or before filing the return of income under section 263, then,—

(a) the unutilised amount shall be deposited in a specified bank or institution and utilised as per the scheme notified by the Central Government;

(b) 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); and

(c) the proof of deposit shall be submitted along with such return.

(3) For the purposes of sub-section (1), the amount already utilised for purchasing or constructing the new asset together with the deposited amount under sub-section

(2) shall be deemed to be the cost of the new asset.

(4) If the amount deposited under sub-section (2) is not wholly or partly utilised for the new asset within the period specified in sub-section (1), then,—

(a) 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; and

(b) the assessee shall be entitled to withdraw such unutilised amount in accordance with the scheme referred to in sub-section (2).

(5) For the purpose of this section, the expression “urban area” shall have the mean- ing assigned to it in section 87.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 -- s. 88	INCOME-TAX ACT, 1961 -- s. 54GA
Sub-s. (1)(a) -- CG on industrial-undertaking shift from urban area to SEZ	1961 s. 54GA(1)
Sub-s. (1)(b)(i) -- new machinery / plant in SEZ	1961 s. 54GA(1)(b)(i)
Sub-s. (1)(b)(ii) -- building / land in SEZ	1961 s. 54GA(1)(b)(ii)
Sub-s. (1)(b)(iii) -- shift original asset / transfer establishment to SEZ	1961 s. 54GA(1)(b)(iii)
Sub-s. (1)(b)(iv) -- CG-notified scheme expenses	1961 s. 54GA(1)(b)(iv)
Sub-s. (1)(A)/(B) -- cost-vs-CG mechanics + 3-year claw-back	1961 s. 54GA(1) Proviso
Sub-s. (2) -- CGAS deposit before s. 263 due date	1961 s. 54GA(2)
Sub-s. (3) -- utilised + deposited = deemed cost	1961 s. 54GA(2) Proviso
Sub-s. (4) -- unutilised at 3-year expiry charged	1961 s. 54GA(2) Proviso
Sub-s. (5) -- 'urban area' = s. 87 definition	1961 s. 54GA(2) Explanation

STATUTORY ARCHITECTURE

ELIGIBILITY (sub-s. 1): (a) ASSESSEE: ANY assessee (individual / HUF / firm / LLP / company) operating industrial undertaking in URBAN AREA. Same scope as s. 87. (b) ORIGINAL ASSET: machinery / plant / building / land OR rights in building / land used for the business of urban industrial undertaking. (c) SHIFT REQUIREMENT: in COURSE OF or in CONSEQUENCE of shifting industrial undertaking to ANY SEZ -- in urban or any other area. The 'in or other area' phrasing accommodates SEZs located within urban municipal limits (most operational SEZs). (d) WINDOW (sub-s. 1(b)): 1 YEAR BEFORE OR 3 YEARS AFTER date of original transfer. Same as s. 87. (e) FOUR EXPENDITURE HEADS (sub-s. 1(b)(i)-(iv)): (i) PURCHASED MACHINERY / PLANT for the business of industrial undertaking in SEZ; (ii) ACQUIRED BUILDING / LAND OR CONSTRUCTED BUILDING for business in SEZ; (iii) SHIFTED ORIGINAL ASSET and TRANSFERRED ESTABLISHMENT to SEZ; (iv) Incurred expenses on CG-NOTIFIED scheme purposes. Aggregate of (i)-(iv) = 'new asset' for s. 88 mechanics. MECHANICS (sub-s. 1(A)/(B)): (I) IF cost-and-expenses (heads (i)-(iv)) IS LESS THAN CG -- DIFFERENCE chargeable u/s 67; (II) IF cost-and-expenses >= CG -- NO CG charged. 3-YEAR CLAW-BACK (sub-s. 1(B)): if new asset transferred within 3 years of being purchased / acquired / constructed / transferred -- new asset cost set to NIL (Case (II)) or reduced by CG amount (Case (I)) for subsequent CG computation. Same s. 87 / s. 82 architecture. CGAS DEPOSIT (sub-s. 2): if reinvestment incomplete before s. 263 due date, deposit unutilised CG amount in CGAS-style scheme; submit proof with return; utilise within window. DEEMED COST (sub-s. 3): utilised + deposited = deemed cost of new asset. UTILISATION FAILURE (sub-s. 4): unutilised at 3-year-expiry chargeable in expiry year + withdrawal entitlement.

S. 87 vs S. 88 -- DESTINATION DISTINCTION

S. 87 (1961 s. 54G) covers urban-to-NON-URBAN shifts -- general decongestion / decentralisation policy intent. S. 88 (1961 s. 54GA) covers urban-to-SEZ shifts -- SEZ-specific incentive policy. Where industrial undertaking shifts from urban area to SEZ within urban or peri-urban location, S. 88 applies (notwithstanding s. 87 destination test). The opening 'IRRESPECTIVE OF S. 87' resolves the overlap -- s. 88 takes precedence for SEZ-destination shifts. Practitioner: SEZ destination triggers s. 88 even if SEZ is itself in urban area; s. 87's non-urban requirement is overridden. The choice between s. 87 and s. 88 for SEZ-bound shifts is settled in favour of s. 88. Combined with SEZ tax holiday under s. 144 (1961 s. 10AA equivalent) -- Stage 1 (CG roll-over via s. 88) + Stage 2 (15-year tax holiday on operating profits via s. 144) -- the shift can be highly tax-efficient. However, FA 2024 is sun-setting fresh-unit-eligibility for s. 144 by 31-Mar-2026; pipeline timing critical.

SEZ DESIGNATION AND ELIGIBILITY

SEZ ACT 2005 framework: Special Economic Zones designated by Ministry of Commerce after Board of Approval (BoA) clearance. Two categories: (a) SEZ DEVELOPER: entity developing the zone infrastructure; (b) SEZ UNIT: entity operating manufacturing / services within zone. S. 88 applies to UNITS shifting INTO SEZ (operational unit destination); not to developer infrastructure. Verify: (i) Ministry of Commerce notification of SEZ; (ii) BoA approval letter for unit operations; (iii) Operating SEZ (some SEZs de-notified post 2017-2020 sunset; check current status); (iv) Lease deed / unit allotment with SEZ developer. Practitioner: post-FA 2017 sunset of SEZ unit tax holiday for new units (effectively phased to 31-Mar-2026 for s. 144 / 10AA), SEZ economic attractiveness has reduced; s. 88 still operational for shifts but combined incentive less compelling than pre-2017.

CASE LAW

(i) ITAT decisions on s. 54GA application: shift-of-establishment requirement strictly construed; partial relocation does not qualify. (ii) Industrial relocation cases: pollution-clearance-driven shifts to SEZ qualify. (iii) FA 2017 / FA 2020 SEZ amendments: limit on new-unit eligibility; existing units pre-cutoff continue. (iv) MoC notifications de-notifying defunct SEZs -- units must verify operational status. (v) ITAT Mumbai / Chennai cases on Mahindra City / SriCity SEZ unit shifts under s. 54GA.

PLANNING NOTES

(i) SEZ STATUS VERIFICATION -- Ministry of Commerce notification + BoA approval letter; verify operational status. (ii) FA 2024 / S. 144 SUNSET TIMELINE -- 31-Mar-2026 cutoff for new-unit eligibility for SEZ tax holiday; align relocation timeline. (iii) SHIFT-OF-ESTABLISHMENT DOCUMENTATION -- board resolution / state government NOC / pollution clearance / new-area land allotment / EPF transfer / employee relocation. (iv) WIDER WINDOW -- 1y before / 3y after; document SEZ board approval / unit approval letter / leased premises agreement. (v) FOUR-HEAD AGGREGATION -- collate (i) plant + (ii) building/land + (iii) transfer expenses + (iv) CG-scheme expenses for cost-base maximisation. (vi) S. 87 vs S. 88 SELECTION -- if SEZ destination, s. 88 overrides s. 87; if non-urban-non-SEZ destination, s. 87 only. (vii) CGAS DISCIPLINE -- before s. 263 due date; designated bank; submit proof. (viii) 3-YEAR HOLDING LOCK -- DO NOT transfer new SEZ plant / building within 3 years of acquisition / construction; cost-reduction claw-back. (ix) POST-SHIFT OPERATIONAL OPTIMISATION -- pair s. 88 reinvestment exemption with s. 144 SEZ unit tax holiday (15-year staircase: 100% / 50% / 50%-with-reserve).

CROSS-REFERENCES

Section 67 -- CG charge.
Section 70 -- Transactions not regarded as transfer.
Section 72 -- Mode of computation.
Section 87 -- Urban-to-non-urban shift (parallel; superseded by s. 88 for SEZ destinations).
Section 89 -- DVO reference for valuation.
Section 144 -- SEZ unit tax holiday (1961 s. 10AA equivalent; FA 2017 sunset 31-Mar-2026).
Section 145 -- SEZ developer regime.
Section 263 -- Return-filing due date.
CGAS-88 scheme.
SEZ Act 2005 -- SEZ designation framework.
SEZ Rules 2006 -- operational details.
Ministry of Commerce SEZ notifications and BoA approvals.

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