By CA Surekha Ahuja
Executive Summary: A Structural Shift, Not a Routine Amendment
The Income-tax Act, 2025 (effective April 1, 2026) introduces Section 85 (in place of Section 54EC), materially changing the capital gains exemption framework.
- The trigger shifts from “transfer of a long-term capital asset” to “long-term capital gains arising”
- This change effectively neutralizes the position flowing from V.S. Dempo & Co. Pvt. Ltd. v. CIT, where long-term holding enabled LTCG treatment even for depreciable assets
- Under the new regime, depreciable assets (plant & machinery) continue to be governed by Clause 75 (successor to Section 50) and are taxed as short-term capital gains
Practical Consequence
- Higher tax incidence in mixed-asset industrial transfers
- Removal of bond-based exemption for depreciable components
- Parallel exposure under Section 85 of the CGST Act (joint liability)
This represents a shift from asset-based eligibility to gain-character determination.
Legislative Mechanics: The “Two-Word Shift”
| Parameter | Earlier Framework (Section 54EC) | Revised Framework (Section 85) |
|---|---|---|
| Trigger condition | Transfer of long-term capital asset | Long-term capital gains arise |
| Position post-Dempo | LTCG possible even for depreciables | Not relevant under new trigger |
| Governing principle | Holding period of asset | Character of gain (Clause 75) |
| Relief availability | ₹50 lakh bond exemption | Not available for depreciables |
Interpretation:
The amendment does not expressly overrule Dempo; however, by modifying the statutory trigger, it changes the outcome prospectively without disturbing the judicial precedent.
Industrial Unit Sale: Comparative Tax Position
Illustration: ₹5 crore industrial unit
(₹3 crore land + ₹2 crore machinery; holding period: 5 years)
Position under Earlier Framework
- Land → LTCG (approx. ₹60 lakh tax post indexation)
-
Machinery → LTCG benefit through bonds (approx. ₹40 lakh tax)
Total tax outflow: ~₹1 crore
Position under Section 85
- Land → LTCG (approx. ₹60 lakh)
-
Machinery → STCG taxable at applicable slab rates (approx. ₹60 lakh)
Total tax outflow: ~₹1.2 crore
Corporate Structure Considerations
Where the transfer is undertaken through a company:
- Corporate tax (~25%)
- MAT implications (where applicable)
- Taxation at distribution stage
This may lead to a higher effective tax burden depending on structure and profit distribution strategy.
GST Section 85: Joint and Several Liability Risk
Under Section 85 of the CGST Act:
Upon transfer of business, the transferor and transferee are jointly and severally liable for pre-transfer GST dues.
Key Implications
- Liability includes tax, interest, and penalties
- Exposure may arise subsequently upon audit or investigation
- Contractual protections (indemnities) do not override statutory liability
Indicative Risk Areas and Controls
| Risk Area | Exposure | Suggested Control |
|---|---|---|
| Absence of GST reconciliation | Undetected liabilities | Two-year audit review |
| ITC mismatches | Credit denial/blockage | ITC mapping and validation |
| Partial business transfers | Allocation disputes | Asset-level documentation |
| Non-amendment of registration | Continuing liability | Timely GST updates |
Section 50C: Industrial Property Considerations
Section 50C continues to apply subject to:
- Safe harbour for variation within prescribed limits
- Non-applicability in case of stock-in-trade
- Relief in specific cases such as SEZ/STP allocations (subject to conditions)
- Valuation challenge through registered valuer reports
Practical Insight:
Proper segregation between land and depreciable assets is critical to mitigate unintended tax consequences.
Tax Regime Considerations (FY 2026–27)
| Parameter | New Regime | Old Regime |
|---|---|---|
| STCG | Slab rates (higher basic exemption) | Slab rates |
| LTCG | 12.5% (without indexation) | 20% (with indexation) |
| Deductions | Limited | Available |
Approach:
The choice should be based on asset composition, deduction availability, and overall tax position, rather than a uniform preference.
Transition Timeline
- Up to March 31, 2026 → Existing provisions continue
- From April 1, 2026 → Section 85 becomes applicable
- FY 2026–27 → First year of application
- Return filing for FY 2026–27 → Due July 2027
Illustrative Exposure Matrix
| Unit Type | Earlier Tax Position | Revised Position | GST Exposure | Overall Impact |
|---|---|---|---|---|
| Land only | Comparable | Comparable | Low | Neutral |
| Mixed assets | Moderate | Higher | Medium | Increased |
| Plant-heavy units | Higher | Significantly higher | High | Substantial |
| Slump sale | Variable | Higher | Elevated | Material |
Planning Considerations
Pre-April 2026
- Evaluate timing of proposed transfer
- Undertake GST reconciliation
- Obtain valuation bifurcation (land vs plant)
Post-April 2026
- Consider asset segregation strategies
- Evaluate restructuring or reinvestment options
- Align transaction structuring with combined tax and GST exposure
Conclusion
Section 85 represents a recalibration of capital gains taxation:
- Restricts exemption benefits for depreciable assets
- Elevates the importance of transaction structuring
- Introduces concurrent GST exposure requiring parallel diligence
For industrial and MSME transactions, integrated tax and GST planning at the structuring stage is now essential.
A combined income-tax and GST review prior to any business transfer is critical to manage exposure and optimise outcomes.
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