[Opinion] Incentive Deductions Under the Income Tax Act, 1961

There are incentives by way of deduction out of the total income, extended under the Income Tax Act, 1961 and two such incentives are there viz. Section 80ID and 80IE. In fact, various other incentive deductions under the Income Tax Act, 1961 inter-alia are given such as u/s 80IA in respect of ‘Profits and Gains from Industrial Undertakings or Enterprises Engaged in Infrastructure Development, etc.’, Section 80IB in respect of such Profits and Gains From certain Industrial Undertakings other than the Undertakings covered by section 80IA, Section 80IC in respect of such Profits of Certain Undertakings or Enterprises in certain Special Category States, Section 80ID in respect of such Profits and Gains from Business of Hotels and Convention Centres in the Specified Area and in that series of incentive deductions, section 80IE provides for deduction in respect of Profits and Gains of Certain Undertakings situated in North Eastern States.

These incentive sections have been brought into effect from time to time, such as section 80IA and section 80IB by the Finance Act, 1999, section 80IC by the Finance Act, 2003 w.e.f 01.02.2004, section 80ID by Finance Act, 2007 w.e.f 01.04.2008 and section 80IE by Finance Act, 2007 w.e.f. 01.04.2008.

One of the conditions which is common to all these incentives deduction is that provisions contained in sub-section (5) and sub-section (7) to (12) of section 80IA shall apply to the eligible undertakings u/s 80IE, 80ID, 80IC, 80IB also. It is therefore expedient to reproduce sub-section (5) and sub-section (7) to (12) of 80IA as under:

“Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.

80-IA. (5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.
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(7) The deduction under sub-section (1) from profits and gains derived from an undertaking shall not be admissible unless the accounts of the 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 sub-section (2) of section 288, before the specified date referred to in section 44AB and the assessee furnishes by that date the report of such audit in the prescribed form 85 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 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 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.

(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.”

For this purpose, Income Tax Rule 18BBB and Form no.10CCB have been prescribed and audit report in Form no.10CCB shall be filed under the proviso to Rule 12(2) electronically.

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