Incentive to Corporate Sector

INCENTIVES TO CORPORATE SECTOR

INTRODUCTION The provision of efficient infrastructure services is essential to realise the full potential of growth in the economy. The infrastructure sector includes power, telecommunication, roads, and industrial parks as well as power generation, distribution and transmission. It has been recognised that government alone cannot fulfill all the requirements of providing infrastructure and that the private sector also needs to be actively engaged in the process by providing an appropriate policy framework which gives them adequate confidence and incentives to invest on a large scale, while simultaneously preserving adequate checks and 1

balances through transparency, competition and regulation .

Tax incentives can be defined as any incentive that reduces the tax burden of enterprises in order to induce them to invest in particular projects or sectors or geographical areas. Tax incentives or tax preferences include reduced rates of taxes on profits, tax holiday, accelerated depreciation, deferrals, credits, etc. In developing an incentive system, the government needs to clearly list and analyse the deficiencies in the system that the incentives are designed to reduce. The costs of granting incentives can then be compared to the benefits of removing or reducing such deficiencies. Periodic review of the incentive system would help to plug revenue leakage as also appropriately modify the incentive scheme.

Objective of the review

The review seeks to examine the benefit of deduction under section 80IA of the Act in respect of industrial undertakings or enterprises with a view to: i) determine the extent of underassessment/loss of revenue and other irregularities due to mistakes in assessment ii) determine the degree of compliance by the specified undertakings or enterprises with the provisions of the Act iii) derive an assurance that the systems and procedures are sufficient and promote compliance with the provisions of the Act/Rules.

Background of section 80IA

Section 80IA of the Income Tax Act (Act) provides the extent and scope of deductions available to undertakings involved in the business of infrastructure development. The Finance Act, 1999 substituted section 80IA with a new section 80IA and section 80IB. Section 80IA as it originally stood in the Act 1

Chapter 9 of the Economic Survey 2006-07

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provided for deductions in respect of profits and gains of industrial undertaking in certain cases. With effect from 1 April 2000, deduction under section 80IA is available to the following business carried on by an undertaking: •

Provision of infrastructure facility which includes roads, highway projects, water supply, water treatment projects, sanitation and sewerage systems, solid waste management systems and ports including airport, inland waterway or inland port

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Telecommunication services Industrial parks Power generation, transmission and distribution.

The eligible profits have to be taken as if they are the only source of income and computed accordingly. The deduction is admissible only if the accounts of the undertaking have been audited by a chartered accountant and the tax audit report in Form no. 10CCB duly signed and verified by such accountant is furnished along with the return of income.

Scope of review

The review was conducted on both summary and scrutiny assessments completed during the financial years 2003-04 to 2006-07 (upto the date of audit). Audit test checked assessment records of 685 assessees in company and non company circles involved in the specified infrastructure activity for verifying claims of deduction under section 80IA of the Act.

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SECTION – 80 I S. 80 – I. (1) Where the gross total income of an assesse includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel 2[or the business of repairs to ocean - going vessels or other powered craft] to which this section applies, there shall, in accordance with and subject to the provision of this section, be allowed, in computing the total income of the assesse, a deduction from such profits and gains of an amount equal to twenty per cent. Thereof : 3

Provided that in case of an assesse, being a company, the provisions of this sub- section [ shall have effect in elation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel] as if for the words “twenty per cent.”, the words “twenty-five per cent.” Had been substituted. 4

[(1A) Notwithstanding anything contained in sub- section (1), in relation to any profits and gains derived

by an assesse from – i.

An industrial undertaking which begins to manufacture or produce articles or things or to operate its cold storage plant or plants; or

ii. iii.

a ship which is first brought into use; or the business of a hotel which starts functioning,

on or after the first day of April, 1990, 5[but before the 1st day of April, 1991,] there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assesse, a deduction from such profits and gains of an amount equal to twenty-five per cent. there of: Provided that in case of assesse, being a company, the provisions of this sub-section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel as if for the words “twenty-five per cent.”, the words “thirty per cent.” had been substituted.] (2) This section applies to any industrial undertakings which fulfills all the following conditions, namely:i. ii.

it is not formed by the splitting up, or the reconstruction, of a business already in existence; it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;

iii.

It manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any pat of India, and begins to manufacture or produce articles or things or to operate such plant or plants, at any

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Ins. By the Finance Act, 1983 (11 of 1983), s 18 (w.e.f. 1-4-1984). See Circular no. 372, December 8, 1983, 146 ITR, (St.) 9. Subs., for “shall have effect”, by the Finance Act, 1983 (11 of 1983), s 25 (a) (ii) (w.e.f. 1-4-1984).

Sub-section (1A) has been inserted by the Finance Act, 1983 (11 of 1983), s 25 (a)(ii) (w.e.f. 1 – 4 – 1984). See Circular No. 572, August 3, 1990, 186 ITR (St.) 81 5 Ins. by the Finance (No. 2) Act, 1992 )49 of 1991), s 31(a) (w.e.f. 1-4-1991). See Circular No. 621, December 19, 1991, 195 ITR (St.) 154

INCENTIVES TO CORPORATE SECTOR 6

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time within the period of [ten years] next following the 31 day of March, 1981, or such fuether period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking; iv.

In a case where the industrial undertaking manufactures or produces articles or thing, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power:

Provided that the condition in clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assesse of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section: Provided further that the condition in clause (iii) shall, in relation to a small-scale industrial undertaking, apply as if the words “not being any article or thing in the list in that section: Explanation 1.- For the purposes of clause (ii) of this sub-section, any machinery or plant which was used outside India by any person other than the assesse shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :a) Such machinery or plant was not, at any time previous to the date of installation by the assesse, used in India; b) Such machinery or plant is imported into India from any country outside India; and c) No deduction on account of depreciation in respect of such machinery o plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assesse. Explanation 2.- Where in the case of industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant used in the business, then, for the purpose of the clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with. Explanation 3.- for the purpose of this sub-section, “small-scale industrial undertaking” shall have the same meaning as in clause (b) of the explanation below sub-section (8) of section 80HHA. (3) this section applies to any ship, where all the following conditions are fulfilled, namely :-

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Subs., for “fourteen years”, by Finance (No. 2) Act, 1991 (49 of 1991)

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i.

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It is owned by an Indian company and is wholly used for the purposes of the business carried on by it;

ii.

It was not, previous to the date of its acquisition by the Indian company, owned o used in Indian territorial waters by a person resident in India ; and

iii.

It is brought into use by the Indian company at any time within the period of

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[ten years] next

following the first day of April, 1981. (4) This section applies to the business of any hotel, where all the following conditions are fulfilled, namely: i.

The business of the hotel is not formed by the splitting up, or the reconstruction, of a business of a already in existence or by the transfer to a new business of abuilding previously used as a hotel or of any machinery or plant previously used for any purpose;

ii.

The business of the hotel is owned and carried on by a company registered in India with a paid-up capital of not less than five hundred thousand rupees;

iii.

The hotel is for the time being approved for the purposes of this sub-section by the Central Government;

iv.

The business of the hotel starts functioning after the 31 st day of March, 1981, but 8[before the 1st 9

day of April, [1991]] [(4A) this section applies to the business of repairs to ocean-going vessels or other powered craft which fulfills all the following conditions, namely :i.

The business is not formed by the splitting up, or the reconstruction, of a business already in existence;

ii.

It is not formed by the transfer to anew business of machinery or plant previously used for any purpose;

iii.

It is carried on by an Indian company and the work by way of repairs to ocean-going vessels or other powered craft has been commenced by such company after the 31 st day of March, 1983, but st

before the 1 day of April, 1988; and iv.

It is for the time being approved for the purposes of this sub-section by the Central Government]

(5) The deduction specified in the sub – section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants o the ship is first brought into use o the business of the hotel starts functioning [or the company commences work by way

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Subs., for “fourteen years], by the Finance (No. 2) Act, 1991, s 31 (w.e.f. 1-4-1991). Subs., for “before the 1 st day of April, 1990”’ by the Finance Act, 1990 (12 of 1990), s 24(d) (w.e.f. 1-4-1990).

Subs., for”1995”, by the Finance (no. 2) Act, 1991 (49 of 1991), s 31 (d) (w.r.e.f. 1-4-1985).


of repairs to ocean-going vessels or other powered craft] (such assessment year) and each of the seven assessment years immediately succeeding the initial assessment year: Provided that in the case of an assesse, being a co-operative society , the provision of this sub-section shall have effect as if for the words “seven assessment years” the words :nine assessment yeas” had been substituted: [ Provided further that in the case of an assesse carrying on the business of repairs to ocean-going vessels or other powered craft, the provisions of this sub-section shall have effect as if for the words “seven assessment years”, the words “four assessment years” had been substituted :] [ Provided also that in the case of – i.

An industrial undertaking which begins to manufacture or produce articles or things or to operate its cold storage plant or plants; or

ii. iii.

A ship which is first brought into use; or The business of a hotel which starts functioning,

On or after the 1st day of April, 1990, [but before the 1 st day of April, 1991] provisions of this sub – section shall have effect as if for the words “seven assessment years”’ the words “nine assessment years” had been substituted: Provided also that in the case of an assesse, being a co-operative society, deriving profits and gains from an industrial undertaking or a ship or a hotel referred to in the third proviso, the provisions of that proviso shall have effect as if for the words “nine assessment years”, the words “eleven assessment years had been substituted.] (6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel [or the business of repair of ocean-going vessels or powered craft] to which the provisions of sub – section – 1 apply shall, for the purposes of determining the quantum of deduction under sub-section-1 for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel [or the business of repairs to ocean-going vessels or other powered craft] were the only source of income of the assesse during the previous year relevant to the initial assessment yea and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. (7) Where the assesse is a person other than a company or a co-operative society, the deduction under the sub-section (1) from profits and gains derived from an industrial undertaking shall not be admissible unless the accounts of the industrial undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below

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sub-section (2) of sec – 288 and the assesse furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant. (8) Where any goods [or services] held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods 55[or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services] as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods 55[or services] as on that date : Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. [Explanation.—For the purposes of this sub-section, “market value”, in relation to any goods or services, means— (i) the price that such goods or services would ordinarily fetch in the open market; or (ii) the arm’s length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.] (9) Where any amount of profits and gains of an [undertaking] or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading “C.—Deductions in respect of certain incomes”, and shall in no case exceed the profits and gains of such eligible business of [undertaking] or enterprise, as the case may be. (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom: [Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm’s length price as defined in clause (ii) of section 92F.]

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(11) The Central Government may, after making such inquiry as it may think fit, direct, by notification in the Official Gazette, that the exemption conferred by this section shall not apply to any class of industrial undertaking or enterprise with effect from such date as it may specify in the notification. (12) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger— (a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place. [(12A) Nothing contained in sub-section (12) shall apply to any enterprise or undertaking which is transferred in a scheme of amalgamation or demerger on or after the 1st day of April, 2007.] [(13) Nothing contained in this section shall apply to any Special Economic Zones notified on or after the 1st day of April, 2005 in accordance with the scheme referred to in sub-clause (iii) of clause (c) of subsection (4).] [Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this section shall apply in relation to a business referred to in sub-section (4) which is in the nature of a works contract awarded by any person (including the Central or State Government) and executed by the undertaking or enterprise referred to in sub-section (1).]

Legislative History. – Section – 80-I was inserted by the Finance (No. 2) Act, 1967 with effect from April 1, 1968. It granted a deduction for priority industries and replaced s 80E. This section was omitted by finance act, 1972 with the effect from April 1, 1973 and remained omitted till April 1, 1981 when it was re-inserted by the Finance (No. 2) Act, 1980. In its new Avatar, this section granted profit based deduction to new industrial undertakings as against deduction on the capital employed under s 80J (now omitted). The deduction, subject to certain changes, was between 20 to 25 % of the profits for a period of 8 to 10 years. Industrial undertakings which wee formed up to Mach 31, 1981 received the benefit of s 80J and undertakings which were set up after this date could avail the deduction under s 80 –I. The scope the section was expanded later and, like all other provisions under Chapter VI-A, was frequently amended. The section granted benefits to industrial undertakings which commenced operations prior to March 31, 1997. Consequently, industries that commenced operations after this date entitled for the benefit of s 80-I but could avail the benefit of section80-IA.

would not be


This is one of group of sections which deals with eligibility of certain types of industrial and other undertakings to claim deduction on profits derived from that activity. Unfortunately, as discussed below, a string of erroneous decisions at the High Court and even Supreme Court level have substantially reduced the scope this provision.

Deleted Section- 80-I: Profits ‘Attributable to’.- In computing the profits “attributable to” a priority

industry and quantum of deduction under this section, the unabsorbed depreciation and development rebate carried forward from earlier years relating to that industry and the carried forward loss in that industry had to be taken into account, but not the carried forward deficiencies under section – 80-J (now omitted) nor the current year’s loss in another business, whether or not it was a priority industry.

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SECTION - 80 –J 10

80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases11 (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the 12

assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under section 80HH]13 or section 80HHA)] of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be,[ computed in the manner specified in sub- section (1A)] in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during 14

the previous year): Provided that in relation to the profits and gains derived by an assessee, being a company, from an industrial undertaking which begins to manufacture or produce articles or to operate its cold storage plant or plants after the 31st day of March, 1976 , or from a ship which is first brought into use after that date, or from the business of a hotel which starts functioning after that date, the provisions of this sub- section shall have effect as if for the words" six per cent", the words" seven and a half per cent" had been substituted.] 15

(1A) (1) For the purposes of this section, the capital employed in an industrial undertaking or the business of a hotel shall, except as otherwise expressly provided in this section, be computed in accordance with clauses (II) to (IV) and the capital employed in a ship shall be computed in accordance with clause (V).

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Inserted, in place of section 84 which was omitted, by the Finance (No. 2) Act, 1967, w. e. f. 1- 4- 1968. Substituted for" (reduced by the aggregate of the deductions, if any, admissible to the assessee under section 80H and section

80HH)" by the Taxation Laws (Amendment) Act, 1975, w. e. f. 1- 4- 1976.

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Inserted by the Finance (No. 2) Act, 1977, w. e. f. 1- 4- 1978. Substituted for" computed in the prescribed manner" by the Finance (No. 2) Act, 1980, w. r. e. f. 1- 4- 1972. Inserted by the Finance Act, 1975, w. e. f. 1- 4- 1976. Inserted by the Finance (No. 2) Act, 1980, w. r. e. f. 1- 4- 1972.


(II) The aggregate of the amounts representing the values of the assets as on the first day of the computation period of the undertaking or of the business of the hotel to which this section applies shall first be ascertained in the following manner:(i) in the case of assets entitled to depreciation, their written down value; (ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee; (iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business; (iv) in the case of assets, being debts due to the person carrying on the business, the nominal amount of those debts; (v) in the case of assets, being cash in hand or bank, the amount thereof. Explanation 1-In this clause," actual cost" has the same meaning as in clause (1) of section 43. Explanation 2.- In this clause and in clause (III)," computation period" means the period for which profits and gains of the industrial undertaking or business of the hotel are computed under sections 28 to 43A. Explanation 3.- In this cla use and in clause (V)," written down value" has the same meaning as in clause (6) of section 43. Explanation 4.- Where the cost of any asset has been satisfied otherwise than in cash, the then value of the consideration actually given for the asset shall be treated as the actual cost of the asset. (III) From the aggregate of the amounts as ascertained under clause (II) shall be deducted the aggregate of the amounts, as on the first day of the computation period, of borrowed moneys and debts owed by the assessee (including amounts due towards any liability in respect of tax). Explanation.- For the purposes of this clause,(i) " tax" means(a) income- tax or super- tax (including advance tax) due under any provision of this Act; (b) wealth- tax due under any provision of the Wealth- tax Act, 1957 (27 of 1957 ); (c) gift- tax due under any provision of the Gift- tax Act, 1958 (18 of 1958 ); (d) super profits tax due under any provision of the Super Profits Tax Act, 1963 (14 of 1963 ); (e) surtax due under any provision of the Companies (Profits) Surtax Act, 1964 (7 of 1964 ); (ii) any liability in respect of tax shall be deemed to have become due(a) in the case of advance tax due under any provision of this Act, on the date on which such advance tax is payable; and (b) in the case of any other tax, on the first day of the period within which it is required to be paid.

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(IV) The resultant sum as determined under clause (III) shall be diminished by the value, as ascertained under clause (II), of any investments the income from which is not taken into account in computing the profits of the business and any moneys not required for the purpose of the business, insofar as the aggregate of such investments or moneys exceed the amount of the borrowed moneys which under clause (III) are required to be deducted in computing the capital. (V) The capital employed in a ship shall be taken to be the written down value of the ship as reduced by the aggregate of the amounts owed by the assessee as on the computation date on account of moneys borrowed or debts. incurred in acquiring that ship. Explanation.- In this clause," computation date" in relation to a ship, means(a) in respect of the previous year in which the ship is first brought into use, the date on which it is so brought into use; (b) in respect of any subsequent previous year, the first day of such previous year.]

(2) The deduction specified in sub- section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (such assessment year being hereafter, in this section, referred to as the initial assessment year) and each of the four assessment years immediately succeeding the initial assessment year: Provided that in the case of an assessee, being a co- operative society, the provisions of this sub- section shall have effect as if for the words" four assessment years", the words" six assessment years" had been substituted.

(3) Where the amount of the profits and gains derived from the industrial undertaking or ship or business of the hotel, as the case may be, ITA- 26 included in the total income (as computed without applying the 16

provisions of section 64 and before making any deduction under Chapter VI- A ]) in respect of the previous year relevant to an assessment year commencing on or after the 1st day of April, 1967, (not being an assessment year prior to the initial assessment year or subsequent to the fourth assessment year as reckoned from the end of the initial assessment year) falls short of the relevant amount of capital employed during the previous year, the amount of such shortfall, or, where there are no such profits and gains, an amount equal to the relevant amount of capital employed during the previous year (such amount, in either case, being hereafter, in this section, referred to as deficiency) shall be carried forward and set off against the profits and gains referred to in subsection (1)[ as computed after allowing the 16

The words" or section 280-O" omitted by the Finance Act, 1988, w. e. f. 1- 4- 1988.

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deductions, if any, admissible under ] section 80HH] or section 80HHA] ] and the said sub- section (1)] in respect of the previous year relevant to the next following assessment year and, if there are no such profits and gains for that assessment year, or where the deficiency exceeds such profits and gains, the whole or balance of the deficiency, as the case may be, shall be set off against such profits and gains for the next following assessment year and if and so far as such deficiency cannot be wholly so set off, it shall be set off against such profits and gains assessable for the next following assessment year and so on: Provided that-

(i) in no case shall the deficiency or any part thereof be carried forward beyond the seventh assessment year as reckoned from the end of the initial assessment year;

(ii) where there is more than one deficiency and each such deficiency relates to a different assessment year, the deficiency which relates to an earlier assessment year shall be set off under this sub- section before setting off the deficiency in relation to a later assessment year: Provided further that in the case of an assessee being a co- operative society, the provisions of this. sub- section shall have effect as if for the words" fourth assessment year",- the words" sixth assessment year" had been substituted.

(4) This section applies to any industrial undertaking which fulfills all the following conditions, namely:(i) it is not formed by the splitting up, or the reconstruction, of. a business already in existence; (ii) it is not formed by the transfer to a new business of

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] machinery or plant previously used for any

purpose; (iii) it manufactures or produces articles, or operates one or more cold storage plant or plants, in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of 22 thirty- three] years next following the 1st day of April, 1948 , or such

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The words" section 80H" omitted by the Taxation Laws (Amendment) Act, 1975, w. e. f. 1- 4- 1976.

Inserted by the Direct Taxes (Amendment) Act, 1974, w. e. f. 1- 4- 1974. Inserted by the Finance (No. 2) Act, 1977, w. e. f. 1- 4- 1978. The words" section 80-I" omitted by the Finance Act, 1972, w. e. f. 1- 4- 1973. The words" a building (not being a building taken on rent or lease)" omitted by the Finance Act, 1975, w. e. f. 1- 4- 1976.

Substituted for" twenty- eight" by the Finance Act, 1975, w. e. f. 1- 4- 1975 which was earlier substituted for" twenty- three" by the Finance Act, 1969, w. e. f 14- 1969.


further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking; (iv) in a case where the industrial undertaking manufactures or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power: Provided that the condition in clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the reestablishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section:

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Provided further that, where any building or any part thereof previously used for any purpose is

transferred to the business of the industrial undertaking, the value of the building or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking:] 24 Provided also that in the case of an industrial undertaking which manufactures or produces any article specified in the list in the Eleventh Schedule, the provisions of clause (iii) shall have effect as if for the words" thirty- three years", the words" thirty- one years" had been substituted.] 25 Explanation 1-For the purposes of clause (ii) of this sub- section, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:-, (a) such machinery or plant was not, at any time, previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the Indian Income- tax Act, 1922 (11 of 1922 ), or this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2.- Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this subsection, the condition specified therein shall be deemed to have been complied with and the total value of

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Inserted by the Finance Act, 1975, w. e. f. 1- 4- 1976. Inserted by the Finance Act, 1979, w. e. f. 1- 4- 1979. Inserted by the Finance Act, 1975 ,, w. e. f. 1- 4- 1976.

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machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking.]

(5) This section applies to any ship, where all the following conditions are fulfilled, namely:(i) it is owned by an Indian company and is wholly used for the purposes of the business carried on by it; (ii) it was not, previous to the date of its acquisition by the Indian company, owned and used in Indian territorial waters by a person resident in India; and (iii) it is brought into use by the Indian company at any time within a period of 26 thirty- three] years next following the 1st day of April, 1948 .

(6) This section applies to the business of any hotel, where all the following conditions are fulfilled, namely:(a) the business of the hotel27 ] is not formed by the splitting up, or the reconstruction, of a business already in existence or by the transfer to a new business of a building previously used as a hotel or of any machinery or plant previously used for any purpose; (b) the business of the hotel is owned and carried on by a company registered in India with a paid- up capital of not less than five hundred thousand rupees; (c) 28 ] (d) the hotel is for the time being approved for the purposes of this sub- section by the Central Government; (e) 29 the business of the hotel starts functioning on or after the 1st day of April, 1961 , but before the 1st day of April, 1981 ]

30

Explanation.- Where in the case of the business of a hotel, any building, or any

part thereof, previously used as a hotel, or any machinery or plant, or any part thereof, previously used for

26

Substituted for" twenty- eight" by the Finance Act, 1975, w. e. f. 1- 4- 1975 which was substituted for" twenty- three" by the

Finance Act, 1969, w. e. f. 1- 4- 1969.

27

28

29

30

The words" starts functioning on or after the 1st day of April, 1961, and" omitted by the Finance Act, 1975, w. e. f. 1- 4- 1975.

Omitted by the Finance Act, 1973, w. e. f 1- 4- 1974. Inserted by the Finance Act, 1975, w. e. f. 1- 4- 1975. Substituted by the Finance Act, 1975, w. e. f. 1- 4- 1976.

15


any purpose, is transferred to a new business and the total value of the building, machinery or plant or part so transferred does not exceed twenty per cent of the total value of the building, machinery or plant used in the business, then, for the purposes of clause (a) of this sub- section, the condition specified therein shall be deemed to have been complied with and the total value of the building, machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the business of the hotel.]

(6A) 31 Where the assessee is a person other than a company or a cooperative society, the deduction under sub- section (1) from profits and gains derived from an industrial undertaking shall not be admissible unless the accounts of the industrial undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below subsection (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant. (6B) Where any goods held for the purposes of the business of the industrial undertaking or the hotel or the operation of the ship are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the business of the industrial undertaking or the hotel or the operation of the ship and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the business of the industrial undertaking or the hotel or the operation of the ship does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of the industrial undertaking or the business of the hotel or the operation of the ship shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date: Provided 32

that where, in the opinion of the Assessing] Officer, the computation of the profits and gains of the industrial undertaking or the business of the hotel or the operation of the ship in the manner hereinbefore specified presents exceptional difficulties, the Assessing] Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation.- In this sub- section," market value", in relation to any goods, means the price that such goods would ordinarily fetch on sale in the open market. (6C) Where it appears to the Assessing] Officer that, owing to the close connection between the assessee carrying on the business of the industrial undertaking or the hotel or the operation of the ship to which this section applies and any other person, or for any other reason, the course of business between them is

31

32

Inserted by the Finance Act, 1975, w. e. f. 1- 4- 1976.

Substituted for" Income- tax" by the Direct Tax Laws (Amendment) Act, 1987, w. e. f. 1- 4- 1988

16


so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in the business of the industrial undertaking or the hotel or the operation of the ship, the

33

Assessing] Officer shall, in computing the profits and gains of the industrial

undertaking or the hotel or the ship for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.]

(7) The Central Government may, after making such inquiry as it may think fit, direct, by notification in the Official Gazette, that the exemption conferred by this section shall not apply to any class of industrial undertakings with effect from such date as it may specify in the notification.]

Under section 80J of the Income Tax Act 1961, new industrial undertakings, including small-scale industries, are exempted from the payment of income- tax on their profits subject to a maximum of 6% per annum of their capital employed. This exemption in tax is allowed for a period of five years from the commencement of production.

A small-scale industry has to satisfy the following two conditions to avail of this tax exemption facility:

1. The unit should not have been formed by the splitting or reconstruction of an existing unit.

2. The unit should employ 10 or more workers in a manufacturing process with the power or at least 20 workers without power.

Depreciation:

Under Section 32 of the Income Tax Act, 1961, a small-scale industry is entitled to a deduction on depreciation account on block of assets at the prescribed rate. Small enterprise is allowed subject to a maximum of Rs. 20 lakh deduction for depreciation on plant and machinery on the diminishing balance method.

33

Ibid.

17


In case of an asset acquired before the accounting period, depreciation is calculated on its written down value. For plant and machinery that are used in manufacturing in double or triple shift, an additional allowance called ‘Extra Shift Allowance’ is also available.

A small-scale industry should satisfy the following conditions before it becomes eligible for deduction in depreciation:

1. The assets must be owned by the assessee.

2. The assets must actually be used for the purpose of the assessee’s business or profession.

3. Depreciations allowance or deduction is allowed only on fixed assets, i.e. building machinery, plant and furniture.

From assessment year 1991-92, in the case of a company, depreciation will be limited to Rs. 7,590/- of the amount calculated at the specified percentage on the written down value block of assets.

Rehabilitation Allowance:

A rehabilitation allowance is granted to small-scale industries under Section 33-B of the Income Tax Act, 1961 whose business is discontinued on account of the following reasons:

1. Flood, typhoon, hurricane, cyclone, earthquake, or other natural upheavals;

2. Riot or civil disturbance;

3. Accidental fire or explosion; and

4. Action by an enemy or action taken in combating an enemy.

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The rehabilitation allowance should be used for business purposes within three years of unit’s reestablishment, reconstruction, or revival .The rehabilitation allowance is allowed to the unit equivalent of 60 per cent of the amount of the deduction allowable to the unit.

Investment Allowance:

The Investment allowance was introduced way back in 1976 to replace the initial depreciation allowance. The investment allowance under Section 31 A of the Income Tax Act, 1961 is allowed at the rate of 25 per cent of the cost of acquisition of new plant or machinery installed.

Although the investment allowance has been made available for the articles or things except certain items of low priority, yet as per the Eleventh Schedule to the Income Tax Act 1961, a special dispensation has been provided for the plant and machinery installed in small-scale industries. In comparison with other industries, small-scale industries are at an advantage in claiming a deduction of investment allowance. A small-scale industry can avail of investment allowance provided it has put to use machinery or plant either in the year of installation or in the immediate following year failing which the benefit will be forfeited.

Expenditure on Scientific Research:

Under Section 35 of the Income Tax Act, 1961, the following deductions in respect of expenditure on scientific research are allowed:

1. Any revenue expenditure incurred on scientific research related to the business of the assessee in the previous year.

2. Any sum paid to a scientific research association or a university, college, institution or to a public company which has its object, the undertaking of a scientific research.

3. Any capital expenditure incurred on scientific research related to the business of the assessee subject to the provision of Section 35(2) of the Income Tax Act, 1961.

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In case of any unabsorbed capital expenditure incurred on scientific research, the provision of the Income Tax Act allow to carry it forward for adjustment against the profits earned by the business in the subsequent years for an indefinite time period.

Amortization of Certain Preliminary Expenses:

The Indian companies and resident persons, under Section 35D of the Income Tax Act 1961, are allowed to write off the preliminary and developmental expenses incurred by them in connection with the setting up of a new industrial unit or expansion of an existing industrial unit.

The examples of preliminary expenses are:

a. Expenses incurred in connection with the preparation of a feasibility report necessary for their business;

b. Engineering expenses related to the business; and

c. Legal charges, if any, for drafting agreements.

The writing off of the preliminary expenses is allowed against subject to a maximum of ten annual installments beginning with the previous year in which the new unit commences its production or expansion of an existing unit is completed. The aggregate amount of expenditure allowed be deducted is limited to 2.5 per cent of the total cost of the project.

A small-scale unit established in a backward area, under Section 80-HH, is allowed a deduction of 20 per cent on its profits and gains provided the unit satisfies the following conditions:

a. The unit began its production after 31st December 1970 in any backward area of the country;

b. It is a newly established unit in a backward area. It is neither split nor reconstituted out of a business already in existence in any backward area;

20


c. It has not been formed by the transfer to a new business plant or machinery which was previously used for any purpose in any backward area; and

d. It employs 10 or more workers in a manufacturing process with power or 20 or more workers without power.

Tax Concession to Small-Scale Industries in Rural Areas:

The Finance (No.2) Act of 1977 inserted a new Section 80-HHA in the Income Tax Act, 1961. The tax payers, under this Section 80-HHA, are entitled to a deduction of 20 % of the profits and gains derived by running small-scale industries in the rural areas.

The deduction is allowed for a period of 10 years from the year of commencement of manufacturing activity after 30th September 1977. For this purpose, the expression rural area means any area as defined under the Explanation to Section 35 CC (I) of the Income Tax Act, 1961. However, this tax deduction benefit is not allowed to the small-scale units engaged in mining activity.

The small-scale industry can avail of this tax deduction only after fulfilling the following conditions:

1. The small-scale unit is not formed by splitting or reconstruction of a business already in existence.

2. ‘It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

3. The accounts of the unit are audited by a chartered accountant.

4. It employs 10 or more workers in manufacturing process carried on without the aid of power.

5. The unit does not claim a simultaneous deduction under Section 80-HH of the Income Tax Act, 1961.

Tax Concessions to Small-Scale Industries in Backward Areas:

21


The Planning Commission of India, in 1970-71, declared 247 districts out of 435 districts as backward areas with a view to provide them special incentives and concessions to establish industries in these backward areas. The newly established small-scale industries in these areas specified in the Eighth Schedule to the Income Tax Act, 1961 are entitled to a deduction of 20% of their profits and gains from their gross total income.

This deduction is allowed for a period of 10 years beginning with the year of commencement of manufacture or production. However, if a small-scale industry has already been established in a non backward area and later shifted to backward area, the unit will be allowed this deduction on the profits earned from the undertaking after shifting in the backward area for a period of 10 years. A small-scale industry established in backward area but engaged in mining activity is not entitled to such deduction benefit.

The unit has to satisfy the following conditions to be eligible to avail of this tax benefit:

1. It is established on or after 31th December, 1970.

2. It employs at least 10 workers in a manufacturing process carried on with the aid of power or at least 20 workers manufacturing process carried on without the aid of power.

Expenditure on Acquisition of Patents and Copyrights:

Under Section 35-A of the Income Tax Act, 1961, any expenditure of capital nature incurred in acquiring a patent and copyright by a small-scale industry is deductible from its income. But the expenditure should be incurred after 28th February 1966. The expenditure can be deducted in 14 equal installments beginning with the previous year in which the expenditure was incurred in acquiring patents and copyrights for the unit.

Profits from Business of Publication of Books:

22


Under Section 80-1A of the Income Tax Act, 1961 which has replaced Section 80-1 w.e.f. the assessment year 1991-92, 20% of the profits earned by a small- scale industry from the business of publication of books is deductible from its gross total income. The deduction benefit is available for total period of five years beginning with the assessment year 1992-93.

In addition, deductions are also available in respect of:

1. Royalties from any company in India (Under Section 80 M)

2. Royalties from any certain foreign companies (Under Section 800)

3. Inter-corporate Dividends (Under Section 80 M)

4. Income of Co-operative Societies (Under Section SOP)

5. Carry forward and set -off business losses (Under Section 72)

23


CONLUSION Tax holidays in the form of deductions are available for private sectors and incentives to industries located in special area/regions are listed below:

Infrastructure Sectors (Section 80-IA)

Deduction of 100% of the profits from business for a period of 10 years for:

Development or operation and maintenance of ports, airports, roads, highways, bridges, rail systems, inland water ways, inland port or navigational channel in sea, water supply projects, water treatment systems, irrigation projects, sanitation and sewage projects, and solid waste management systems. Generation and distribution of power that commence before March 31, 2010 Laying and operating a cross country natural gas distribution network. Mineral Oil (Section 80-IB)

Deduction of 100% of profits from the Business of Refining Mineral Oil for a period of 10 Years for:

Undertaking wholly owned by a public sector Company or any other company in which Public Sector Company hold Forty Nine Percent of voting rights. Undertaking starts Refining on or before March 31, 2012. Hospital (Section 80-IB)

Deduction of 100% of profits from business of operating and maintaining Hospital for a period of 5 years for:

Hospital is constructed and has started or starts functioning at any time during April 1, 2008 & March 31, 2013. Hospital has at least one hundred beds for patients. Hospital is located anywhere in India other than excluded area. Hotels and Convention Centre in NCR (Sec 80-ID)

24


Deduction of 100% of the profits from business of hotels and convention centres for a period of 5 years for

Hotel and Convention Centre located in National Capital Territory of Delhi and the districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad. Hotel is constructed and has started or starts functioning at any time during April 1, 2007 and March 31, 2010. Likewise, the Convention Centre is constructed at any time during April 1, 2007 and March 31, 2010.

Hotel located in the specified district having a World Heritage site. Hotel is constructed and has started or starts functioning at any time during April 1, 2008 and March 31, 2013. Undertakings in North Eastern States (Sec 80-IE)

Deduction of 100% of the profits from business for a period of 10 years for:

Manufacture or production of goods or undertakes substantial expansion during April 1, 2007 and March 31, 2017. Providing eligible services during April 1, 2007 and March 31, 2017. Deduction is not available in respect of manufacture or production of tobacco, pan masala, plastic carry bag of less than 20 microns or goods produced by petroleum and gas refineries . Eligible services are hotel (2 star or above), nursing home(25 beds or more), old age homes, vocational training institutes for hotel management, catering and food crafts, entrepreneurship development, nursing and paramedical, civil aviation related training, fashion designing and industrial training, IT related training centres, IT hardware manufacture units and bio-technology. The aforesaid activity takes place in any North-Eastern States(i.e., Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura). Tax Exemptions

Following tax exemptions are available in different sectors:

Deduction of 100% of the Profit from Business of

Development or operation and maintenance of ports, airports, roads, highways, bridges etc. (Sec 80-IA).

25


Generation, distribution and transmission of power (Sec 80-IA). Development, operation and maintenance of an Industrial Park or SEZ (Sec 80-IAB). By undertakings set up in certain notified areas or in certain thrust sector industries in the North Eastern states and Sikkim (Sec 80-IC). By undertakings set up in certain notified areas or in certain thrust sector industries in Uttaranchal and Himachal Pradesh (Sec 80-IC). Derived from export of articles or software by undertakings in FTZ, EHTP/STP (Sec 10A). Derived from export of articles or software by undertakings in SEZ (Sec 10AA). Derived from export of articles or software by 100% EOU (Sec 10B). An offshore banking unit situated in SEZ from business activities with units located in the SEZ (Sec 80LA). Derived by undertakings engaged in Business of operating and maintaining Hospital located anywhere in India other than excluded area. (Sec 80-IB) Derived by an undertaking engaged in the integrated business of handling, storage and transportation of food grains (Sec 80-IB). Derived by an undertaking engaged in the commercial production or refining of mineral oil (Sec 80-IB). Derived by an undertaking from export of wood based handicrafit (Sec 10BA).

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BIBLIOGRAPHY KANGA & PALKHIVALA’S, THE LAW AND PRACTICE OF INCOME TAX, VOLUME

•

I, LEXISNEXIS, TENTH EDITION

PROF. JAGANNATH PANDA & DR. K. SREERAMULU, IMPACT OF INCOME TAX

•

ON CORPORATE FINANCE IN PRIVATE CORPORATE SECTOR, NEHA PUBLISHERS & DISTRIBUTORS, PRINT 2011

•

DR. VINOD K SINGHANIA & DR. MONICA SINGHANIA, STUDENTS GUIDE TO INCOME TAX, TAXMANN, PRINT 2015

•

DR. GIRISH AHUJA & DR. RAVI GUPTA, TAXATION - INCOME TAX, BHARAT LAW HOUSE, PRINT 2007

WEBSITES www.lawteacher.net www.indiankanoon.org

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Incentive to Corporate Sector

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