Deductions Under Section(s) 80IA, 80IB, 80IC & 80JJA

1. All India Chartered Accountants’ Society 6th Annual Workshop on Direct Taxes 9th July , 2010 Presented By: Mr. Anil Chopra Dewan P.N. Chopra & Co. H-57 Connaught Circus N.Delhi-110001 Ph : 24645891, 92,93 E-mail: dpnc@dpncindia.com Deductions Under Section(s) 80IA, 80IB, 80IC & 80JJA

2. Section 80 A Deductions to be made in computing total income Assessee will be allowed deduction specified under section 80 C to 80U from his Gross Total Income (GTI) The aggregate amount of deduction shall not exceed, in any case, the GTI If any deduction is allowed under Chapter VI A to any AOP or BOI, then no deduction shall be allowed to any member of such AOP or BOI from share of income from such AOP or BOI If deduction allowed under section 10A, 10AA, 10B and 10BA, it should not exceed GTI and further no deduction shall be allowed under any other provision of the Act

3. No deduction to be allowed If the assessee fails to make the claim. Transfer of goods and services to any other business of the assessee shall be taken to be at market value for computing deduction under this chapter Market Value defined in Explanation to be the value which the goods and service will fetch if sold in the market or will cost if acquired from the market.

4. Section 80AB Deduction to be made with reference to the income included in the gross total income Where any deduction is required to be made or allowed under any section included in this chapter under the heading “C– Deduction in respect of certain income” in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then notwithstanding anything contained in that section, the amount of income of that nature as computed in accordance of the provision of this Act, (before making any deduction under this chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.

5. Section 80AC Deduction not to be allowed unless return furnished No deduction under section 80IA, 80IAB, 80IB, 80IC, 80ID, 80IE, shall be allowed unless return is furnished on or before due date u/s 139 (1)

6. 80-IADeductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. • Assessment years from which applicable 01.04.2000 • Original Section was for only industrial undertakings etc. w.e.f. 01.04.1991 • Deduction • 100% deduction for 10 Consecutive Years out of 15 Years (20 years in case of Development etc of specified Infrastructure Facilities) • In case of Telecommunication Services 100% for first 5 years and 30% for further 5 years

7. Deduction is available to • Undertaking engaged in development or operation & maintenance or development, operation and maintenance of Infrastructure facilities • Starts Operation on or after 01.04.1995 • Owned by Indian Company or their consortium • Agreement with central/state government etc. • Infrastructure facility means road, toll road, a bridge, rail system, highway projects, water supply projects, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system, port, airport, inland waterway, inland port or navigational channel in sea.

8. Undertaking engaged in Telecommunication Services • Which starts operation during 01.04.1995 to 31.03.2005 • Undertaking engaged in development and operation or operation and maintenance in industrial park and Special economic zone • Notified by the government for 01.04.1997 to 31.03.2006 • In case of industrial park notified upto 31.03.2011 in place of 31.03.2006 • Benefit of deduction available to transferee if operation & maintenance is transferred to another undertaking.

9. Undertaking engaged in Power generation, transmission and distribution of power • Begins to generate or distribute power between 01.04.1993 to 31.03.2011 • Begins to transmit or distribute power between 01.04.1999 to 31.03.2011 by laying network of new distribution lines. • Begins to undertake substantial renovation and modernization between 01.04.2004 to 31.03.2011

10. Undertaking owned by Indian company & set up for reconstruction of a Power generating plants • Company formed before 30.11.2005 with majority equity participation by PSU • Such Indian company notified by central Government before 31.12.2005 • Begin to generate power before 31.03.2011 • Deduction under clause v to an Undertaking operating a cross country natural gas distribution has been withdrawn with effect from 1/4/2010.

11. Computation of deduction as and independent and stand alone unit • Transfer of goods/services at fair market value • Deduction to the extent allowed under this section not to be allowed under any other sections • Accountant’s Report in form 10CCB read with Rule 18 BBB. • No tax on Profits arising from Housing Projects or other activities forming part of Highway Projects provided profits are transferred to a special reserve account and utilized before 3 years for Highway Project (excluding Housing). Accountant’s Report in Form 10 CCC read with Rule 18 BBE.

12. AO has the power to re-compute profit of the undertaking if owing to close connection, the eligible undertaking result in higher profits • Provision of this section not to apply to any eligible business in the nature of work contract • Power of Central Government to issue notification directing that the exemption shall not apply to any class(s) of undertaking(s) • In case of amalgamation or demerger on or after 01.04.2007, benefit under the section will not be available to the amalgamated or demerged company • In case of SEZ notified on or after 01.04.2005, provisions of this section will not apply as separate deduction u/s 80IAB was introduced w.e.f. 10.02.2006 by Special Economic Zones Act, 2005

13. Undertaking engaged in providing Telecommunication services or generation of power referred to in Clause ii & iv of s/s 4: • Should not be formed by splitting up, or reconstruction • Should not be formed by the transfer of a used plant and machinery except where the used plant and machinery does not exceed 20% of total value of plant and machinery. User of P & M used outside India subject to fulfillment of specified conditions would not amount to used of previously used P & M. • Relevant Circulars on Section (s) 80IA • Circular No. 1 dated Jan 12, 2006 clarifies that the ‘effluent treatment and conveyance system’ treated as ‘Infrastructure Facility’

14. Circular No.7 dated August 26, 2002 provides that benefit under section 80-IA would be available in respect of infrastructure facilities for which agreement was executed between 01.04.1995 to 31.03.2001 & notified by Central Board of Direct Taxes prior to March 31, 2001. • Circular No.793 classifies port as infrastructure facility for the purpose of sections 10 (23G) and 80-IA of the Income Tax Act, 1961. • Circular No. 4/2010 dated May 18, 2010 clarifies that widening of an existing road by constructing additional lanes as a part of a highway project by an undertaking would be regarded as a new infrastructure facility. • Circular No.733 dated January 3, 1996 clarifies that the BOLT Scheme of the Indian Railways shall be eligible for the benefit of section 80-IA of the Income Tax Act, 1961.

15. 80IB. Deduction in respect of profits & gains from certain industrial undertakings other than infrastructure development undertakings • Assessment years from which applicable 01.04.2000 • Eligible Business • Business of Industrial Undertaking in backward area • Operation of Ship • Hotel • Multiple Theaters/Convention centre • Scientific research • Production of mineral oil • Developing and building housing projects • Integrated handling, storage & transportation of food grains units • Operation and maintenance of hospital in rural area

16. Specific Condition • Business of Industrial undertaking in backward states • Does not manufacture article specified in ‘Eleventh Schedule’ • Set up in an industrial backward area • Employ 10 or more worker, 20 or more in case of manufacturing process without the aid of power • Deduction varies according to nature of undertaking ranging from 25% to 100% for 8 to 12 years • Commences production from the dates specified in sub sections. • Not formed by splitting up, or reconstruction

17. Should not be formed by the transfer of a used plant and machinery except where the used plant and machinery does not exceed 20% of total value of plant and machinery. User of P & M used outside India subject to fulfillment of specified conditions would not amount to used of previously used P & M. • Operation of a Ship • Owned by an Indian company and wholly used for the business • Brought in use between 1.04.1991 to 31.03.1995 • Not used in Indian Territorial water by a person resident in India. • Deduction @ 30% for first 10 years

18. Specified Hotels/ Non- Specified Hotels • Owned by an Indian company with paid up capital of 5 lacs or more • Located in a hilly area, rural area, place of pilgrimage or other places specified by Central Government • Specified Hotel starts functioning during 01.01.1990 to 31.03.1994 or during 01.04.1997 to 31.03.2001 & Non- Specified Hotel starts functioning during 01.01.1991 to 31.03.1995 or during 01.04.1997 to 31.03.2001 in places other than 4 metropolitan cities • Approved by the prescribed authority as per Rule 18BBC

19. Deduction : 50% for Specified and 30% for Non Specified Hotels for first 10 years • Not formed by splitting up, or reconstruction or transfer to new business building or plant and machinery previously used . • Multiplex theaters/Convention Centre • Construction during 01.04.2002 to 31.03.2005 • Located except municipal jurisdiction of four metropolitan cities in case of multiplex theaters • Not formed by splitting up, or reconstruction or transfer to new business building or plant and machinery previously used .

20. Accountant’s Report in Form 10 CCBA r/w Rule 18 DB for Multiplex and Form 10 CCBB r/w Rule 18DC for convention centre certifying deduction. • Deduction 50% for initial 5 years • Scientific Research • Company registered in India • Main object of the company scientific and industrial research and development • Approved by prescribed authority in accordance with Rule 18 BBD. • Deduction if approved before 01.04.1999 100% for initial 5 years • Deduction if approved after 31.03.2000 to 31.03.2007 100% for initial 10 years

21. Production / Refining of Mineral Oil • Is located in North-Eastern Region and started commercial production before 1.04.1997 • Is located in any part of India and started commercial production after 1.04.1997 • Is engaged in refining of mineral oil and begins such refining on or after 1.10.1998 but on or before 31.03.2012. • Is engaged in commercial production of natural gas in blocks licensed under New Exploration Licensing Policy of Govt. of India and begins production on or after 1.4.2009.

22. Is engaged in commercial production of natural gas in blocks licensed for Coal Bed Methane blocks and begins commercial production on or after 1.04.2009. • Deduction: 100% for first 7 years • Developing and Building Housing Project approved by local authority upto 31/3/2008 • Size of plot of land minimum of one acre • Commences construction after 1.10.1998 and completes • On or before 31.03.2008, if housing project approved before 01.04.2004 • Within 4 years, if housing project approved between 01.04.2004 to 31.03.2005

23. Within 5 years, if housing project approved after 01.04.2005 • Stipulation regarding size of plot or date of completion not to apply for projects in slum area as notified by the Board. • Built up area of commercial establishment not exceed 3% or 5000sq ft whichever is less • Maximum limit of built up area of a unit within city of Delhi and Mumbai or within 25 Kms thereof 1000 sq ft (1500 sq ft for any other place) • Not more than one residential unit in the housing project is allotted to any person not being an individual (w.e.f. 01.04.2010)

24. if any unit is allotted to an individual, no other unit in such housing project, shall be allotted to the individual, spouse or minor children of such individual or to HUF in which he is the karta or to any person representing such individual, spouse, minor children or HUF in which he is the karta (w.e.f. 01.04.2010) • Deduction 100% of the profits. • Provisions of section would not apply to a contractor • Processing, preservation , integrated handling, storage and transportation of food grains, vegetables, poultry etc. • Begins operation on or after 01.04.2001 • Deduction 100% for first 5 years and 25% (30% in case of Company)for next 5 years

25. Provisions not to apply to an undertaking engaged in the business of processing, preservation and packaging of meat or meat products or poultry or marine or dairy products, if it begins operation before 01.04.2009 • Operation and maintaining hospital in rural area • Such hospital is constructed during 01.10.2004 to 31.03.2008 • Minimum 100 beds for patients • Construction is as per regulation of local authorities. • Accountant’s report 10CCBC r/w Rule 18DD certifying amount of deduction . • Deduction 100 % for initial 5 years

26. Operation and maintaining hospital located anywhere in India except excluded area • The hospital is constructed and starts functioning between 01.04.2008 to 31.03.2013 • At least 100 beds for patients • Construction is as per the regulations or the bye-laws of the local authority • Accountant’s report 10CCBD r/w Rule 18DDA certifying amount of deduction • Excluded area to include Greater Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bangalore, Ahemdabad, Districts of Faridabad, Gurgaon, GautamBudh Nagar, Ghaziabad, Gandhinagar and City of Secunderabad • Deduction 100% for initial 5 years

27. Accountant’s Report in form 10CCB to be obtained.. • Subsections 5 & 7 to 12 of Section 80IA shall apply to 80 IB . • In case of amalgamation and demerger, deductions to be allowed to amalgamated or demerged undertaking • Relevant Circular on Section 80IB • Circular No.788 dated 11.4.2000 clarifies that the Word “State” in sub-section (4) of section 80-IB includes Union Territories specified I Eighth Schedule.

28. 80IC Special provisions in respect of certain undertakings or enterprises in certain special category states • Applicable from AY 01.04.2004 to an undertaking carrying on or undertaking substantial expansion of specified business in a special category state. • Conditions • Not formed by splitting up or reconstruction except business discontinued due to extensive damage etc. • Not formed by the transfer of a used plant and machinery except where the used plant and machinery does not exceed 20% of total value of plant and machinery. • Set up in certain special category states • Manufacture or produce specified goods

29. Deduction varies from 25% to 100% for 10 years, according to the nature of undertaking, article manufactured and produced, and the specified category of states • Accountant’s Report in form 10CCB to be obtained.. • Subsections 5 & 7 to 12 of Section 80IA shall apply to 80 IB . • Substantial expansion means increase in an investment in plant and machinery by at least 50% of book value (without considering depreciation) of plant and machinery as on the 1st day of the previous year in which substantial expansion is undertaken

30. 80JJA Deduction in respect of profits and gains from business of collecting and processing of bio-degradable waste • Business of collecting and processing or treating of bio-degradable waste for generating Power or producing bio-fertilizers, bio-pesticides or other biological agents for producing bio-gas or making pellets or briquettes for fuel or organic manure. • Deduction 100% for 5 initial years

31. Propositions • Meaning of undertaking • A unit qualifies to be an undertaking when it undertakes production or manufacture of articles or things in its own right and produces such articles or things by itself as a separate and independent unit. 114 ITD 189 (Mum.) – Joint CIT Vs. Associated Capsules P. Ltd. • Meaning of the word ‘ Derived from’ • Duty drawback receipts & DEPB benefits are not derived from eligible industrial undertakings for the purpose of the deduction under section 80-I / 80-IA / 80-IB of the Income-tax Act,1961. 317 ITR 0218 (SC) - Liberty India v. CIT [1999] 237 ITR 579 (SC) CIT v. Sterling Foods

32. Interest on deposit not derived from business of undertaking [2003] 262 ITR 278 (SC) Pandian Chemicals Ltd. v. CIT Favouring Assessee 301 ITR 427 ( Jharkhand) CIT vs. Eastern Tar ( P.) Ltd. • Interest on late payment received from customers is part of sale price and derived from Industrial Undertaking 324 ITR 221 (Bom) – CIT v. Vidyut Corporation (after considering decision of SC on Liberty India) 303 ITR 0411 (P &H)- PhatelaCotgin Industries P. Ltd. v. C I T 286 ITR 201 ( Mad) CIT vs. Indo Matsushita Carbon Co. Ltd.

33. Amounts realised from sale of packing material not part of profit of Industrial undertaking 219 CTR (MP) 499 CIT vs. Alpine Solvex Ltd. • Amounts received from insurance company for loss of goods by fire is from industrial undertaking 183 Taxman 312 (Delhi) CIT vs. Sportking India Ltd.

34. Splitting up or Reconstruction • Succession or sale does not amount to reconstruction 167 ITR 586 (A.P.) CIT vs U Foam Private Limited s. 80J 35 ITR 662 (Mum)CIT vsGaekwar Foam & Rubber Company Limited. s. 15C • Take over of a firm by a company is not reconstruction 35 ITR 662 (Mum)CIT vsGaekwar Foam & Rubber Company Limited. s. 15C

35. Transfer of Plants & Machineries previously used- negligible value or less than 20% value of Plant & Machinery previously used would not make an undertaking disentitled to benefit [2009] 30 SOT 340 PembrilIndl. & Engg. Co. (P) Ltd. v. DCIT 304 ITR 365 (GUJ.) – CIT Vs. Lakhanpal National Ltd. 196 ITR 188 (SC) Bajaj Tempo vs. CIT 137 ITR 851 CIT v. Hindustan General Industries Ltd. (Delhi) • Factory destroyed in fire, new machinery installed, no reconstruction of old business, assessee entitled to deduction 167 ITR 586 CIT v. U Foam Private Limited (Andhra Pradesh)

36. Undertaking need not to have its own P&M to manufacture goods and article. 124 ITD 249 (DEL) – ITO V. Techdrive (India) (P.) Ltd. 130 ITR 477 (DEL)- Orient Longman Ltd. Vs. CIT 113 ITR 718 (CAL) ACIT vs. A Mukherjee & Co. P. Ltd. 137 ITR 879 (BOM.) CIT vs. Neo Pharma Pvt. Ltd.

37. Computation of deduction only with reference to profits of the undertaking and not total profit of the business and without adjusting loss of other units 161 ITR 320 (SC) CIT, (Central) Madras vsCanara Workshops Pvt. Limited s. 80E 160 Taxman 343 (Delhi) CIT vs. Dewan Kraft System P LTD. [2008] 297 ITR 0305 251 ITR 471 (A.P.) CIT vs Visakha Industries Ltd s. 80AB , s. 80B , s. 80HH , s. 80J

38. Loss from other unit to be adjusted before allowing deduction 299 ITR 444 ( SC) Synco Industries Ltd. Vs. AO 243 ITR 26 (SC) CIT vs. Motilal Pesticides Pvt. Ltd. 245 ITR 605 ( Mad) CIT vs. Sundaravel Match Industries P. Ltd. • Profit and gain are to be reduced by current depreciation including initial depreciation relating to new undertaking 318 ITR 352 ( Bom) (FB) Plastiblends India Ltd vs. ACIT 213 ITR 721 (Raj) CIT vsLoonkar Tools Pvt. Limited s. 80AB, s. 80HH

39. Previous Year’s losses & unabsorbed depreciation to be adjusted before claiming deduction 234 ITR 529 (Mad) CIT vs. Veeraraghava Textiles P. Ltd. • Past depreciation/ business losses already set off against other income of that year, are not to be set off against the income of the unit in subsequent year 115 ITR 640 (SC) CIT, Patiala vs Patiala Flour Mills Co. Pvt. Limited s. 80J 96 ITD 160 (Mum.) ACIT vs. Ashok Alco Chem Ltd., 80-IA(7) 2010 (231) CTR 0368 MAD Velayudhaswamyspining Mills (P) Ltd.

40. Meaning of words Manufacture/ Production 235 ITR 5 (Ker)CIT vs Indian Resins And Polymers 204 ITR 412 (SC) CIT vs N.C. Budharaja and Co. & another (P) Ltd. 80HH • “Production" has a wider connotation than the word "manufacture” Delhi Cold Storage Pvt. Limited. Vs CIT. 191 ITR 656 (SC)

41. “The expression process is wider than manufacture, production” • Conversion of Polymer Granules into powder amounts to manufacture u/s 80 IB 300 ITR 115 (MAD) CIT vs. Shri Swasan Chemicals ( M) Pvt. Ltd.  • Blending & bottling of IMFL would amount to manufacture u/s 80 IB 218 CTR ( Mad) 634 CIT vs. Vinbros & Co. 

42. Twisting & texturing of partially oriented yarn amounts to manufacture 305 ITR 309 (Bom) CIT vs. Emptee Poly- Yarn (P.) Ltd. • Cutting & Polishing of marble stones into marble slabs and tiles amounts to manufacture 295 ITR 148 ( Raj) Arihant Tiles & Marbles Pvt. Ltd 225 CTR (Delhi) 410 CIT vs. Sophisticated Marbles & Granite Industries

43. Conversion of a blank disc to a software loaded disc is a manufacturing activity 292 ITR 353 ( Delhi) CIT vs. Oracle Software India Ltd. • Conversion of jumbo rolls into saleable packets/ rolls of standard size does not amount to manufacture 308 ITR 96 ( Mad) Computer Graphics Ltd vs. ACIT • Poultry business is not entitled to 80 I deduction 159 Taxman 93 ( P & H) CIT vs. Bee Pee Poultries

44. Common expenditure to be proportionately distributed 243 ITR 26, (SC) Motilal Perticides (I) Pvt Ltd. Vs CIT, s 80AA,80AB,80HH 95 TTJ 139 ITAT Chennai C Bench Alstom Ltd. Vs Deputi CIT 84 TTJ 241 (Del) DCIT vs. Catvision Products Ltd. • Fair Market Value of Consideration in sister concern / Inter Unit 254 ITR 187 (Bom) CIT Vs Win Laboratories P. Ltd. s. 80HH 103 ITD 19 West Coast Paper Mills Ltd. V Asst CIT ITAT Mumabi

45. Both 80HHC and 80IB may be claimed but not to exceed GTI 292 ITR 1 (SC) JCIT vs. Mandideep Eng. & Pkg Ind. (P) Ltd. s. 80HH, 80I 285 ITR 423 (Del) CIT vs S. K. G. Engineering P. Limiteds. 80HH , s. 80I

46. Worker Worker mean casual, permanent or temporary. 152 ITR 152 (Kar) CIT vs. K.G. Udiyurappa & Co., s.80HH Average number to be worked out 122 ITR 259 (Bom) CIT vs Sawyer's Asia Limited. s.40(c), s. 84(2) 176 ITR 470 (Bom) CIT vsOrmerods (I.) Pvt. Limited. s. 84(2) Owner can not be counted as worker 173 ITR 82 (Mad)CIT vs P. R. Alagappan s. 80J

47. Position during abnormal situation like strike should not be considered 220 ITR 84 (A.P.) CIT. Vs Abirami Cotton Mills (Private) Limited. s. 80J Employment during substantial period may suffice CIT vsTaluja Enterprises (P.) Ltd 250 ITR 675 (Del) • Contract labourer, job worker etc can not be counted for determination of the number of worker 279 ITR 536 (ALL) R & P Exports vs CIT s. 80HH , s. 80-I Contra Case 280 ITR 94 (Guj) CIT vs. PrithvirajBhoorchand, s.80I

48. Filing of audit report with return is not a mandatory condition 317 ITR 249 (Delhi) CIT vs. Contimeters Electricals Pvt. Ltd s. 80 IA (7) 209 ITR 63 (BOM) CIT vsShivanand Electronics. s. 80J 238 ITR 257 (Calcutta) Murali Export House And Others vs CIT s. 80HHC

49. DISCLAIMER The contents in this presentation are merely for reference and must not be taken as having authority of or binding in any way on the author. For authoritative information please refer to the relevant provisions of the Income Tax Act , Rules, Circulars and Judicial Precedents.

50. Thank You