Deductions under section 80 IA and 80 IB of the Income Tax Act, 1961

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Chapter VIA of the Income Tax Act, 1961 deals with deductions allowed to assessees under section 80 of the Act. The assessee can reduce its tax liability under these provisions.

Amongst the sub-sections of chapter VIA, the most remarkable are section 80 IA and 80 IB as they relate to the deductions for profits arising out of infrastructures projects.

Provisions of Section 80 IA of the Income Tax Act, 1961 :

It deals with deductions for profits and gains from industrial undertakings dealing with infrastructure development, etc.

It states that where the total income of an assessee includes the profits and gains of an undertaking or from any business which is being referred to as “the eligible business”, there shall be allowed a deduction in computing the total income of the assessee. Such deduction shall amount to 100% of the profits and gains derived from such business for 10 following assessment years.

The deduction may at the option of the assessee be claimed for any 10 out of 15 consecutive assessment years starting from the year in which the undertaking develops and starts its operation.

However the deduction in computing the total income of an undertaking which is engaged in telecommunication services shall be 100% of the profits and gains of the business for the first 5 years starting at any time during the periods and thereafter 30% of such profits and gains for next 5 assessment years.

Conditions for availing deduction under section 80 IA of the Act:

This section applies only upon fulfillment of the following conditions:

(i) The enterprise is not formed by splitting up or by means of reconstruction of an existing business as is provided in section 33B of the Act in the circumstances and within the period stated in the section;
(ii) It is not formed by the transfer of any machinery which was previously used for any purpose of the new business.

However for the purposes of this section, any machinery which was used outside the boundaries of India by some other person shall not be considered as machinery previously used for any purpose, if the following conditions are satisfied:

(a) Such machinery was not used in India at any time before the date of the installation;
(b) Such machinery has been imported into India from any foreign country; and
(c) No deduction for depreciation in connection with such machinery has been allowed under the Act in computing the total income of an assessee for any period before the date of the installation of machinery by him.

Provisions of Section 80 IB of the Act:

Section 80IB of the Income Tax Act deals with deduction for profits and gains arising out of industrial undertakings except those undertakings which deal with infrastructure development.

It states that where the total income of an assessee includes the profits and gains from a business hereinafter referred to as “the eligible business”, there shall be allowed a deduction at the time of computing the total income of the assessee.

The amount of deduction shall be equal to such percentage and number of assessment years as have been specified in the Act.

This section applies to those undertakings which fulfill all the following conditions:
(i) The enterprise is not formed by splitting up or reconstruction of an existing business as has been provided in the Act;
(ii) It is not formed by the transfer to a new business of machinery or plant which was previously used for any purpose to a new business;
(iii) It manufactures an article which does not belong to the category of things specified in the list in the 11th Schedule of the Act, or operates any cold storage plant anywhere in India.

For the purposes of this section, any machinery used outside India by some other person shall not be considered as machinery previously used for any purpose, if the following conditions are fulfilled, namely:

(a) It was not at any time prior to the date of the installation by the assessee used in India;
(b) It has been imported into India from any foreign country; and
(c) No deduction for depreciation in connection with such machinery has been allowed under this Act in computing the total income of the assessee for any period before the date of the installation of the machinery by the assessee.

Judicial pronouncements:

1. Recently the Income Tax Appellate Tribunal, Chandigarh Bench in the case of Spray Engineering Devices Ltd. has held that the taking over of the business of two partnership concerns of the assessee cannot be considered as reconstruction of business of the undertaking and that the assessee is entitled to the deduction under Section 80 IB of the Income Tax Act, 1961.

2. The Chennai bench of the Income Tax Appellate has expressed its observations relating to set-off of previous year losses in computing deduction under section 80IA. The Tribunal has held that it is not required to make a notional set off of past year losses.

Brief facts of the case:

The assessee being a public company was involved in the business of generating power and was eligible to a deduction as per section 80IA of the Act. The deduction was available for any 10 consecutive years in last 15 years starting from the year in which the generation began. The assessee started three power generation projects in the years 1996-1997 and 1999-2000. It incurred losses for depreciation in the initial years and claimed deduction under section 80IA from financial year 2003-2004 onwards. While computing the profits of the business for the deduction, losses in earlier years were not set-off against the profits of the year 2003-2004.In other words, deduction was computed on the total profits from the financial year 2003-2004 onwards without set-off of any losses incurred in the previous years.

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