chapter via of the income tax act, 1961 provisions & issues vikram naik 21 st march 2009

Chapter VIAof the Income Tax Act, 1961

Provisions & Issues

Vikram Naik21st March 2009

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Contents

Introduction

Deduction in Respect of Certain Payments

Deduction in Respect of Certain Incomes

80C

80IA, 80IB, 80IC

Overview

Issues

80P

80G

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Overview of Chapter VIA

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In computing the total income of the assessee, there shall be allowed from gross total income, in accordance with the provisions of this Chapter, the

deductions specified in sections 80C to 80U

Introduction

80A

Chapter VIADeductions to be made in computing total income

Sections 80A to 80U

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Introduction

80A: Aggregate total deduction under sections 80C to 80U cannot exceed gross total income

Essential rules governing deductions

Income from Salary xxxx

Income from House Property xxxx

Income from Business or Profession xxxx

Income from Capital Gains (with exceptions) xxxx

Income from Other Sources xxxx

Total xxxx

Less: Set off and carry forward of

losses (sections 70 to 74A) xxxx

Gross Total Income (section 80B) xxxx

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Deductions in respect of certain Payments

Deduction in respect of Payment Towards

80C* Life insurance premia, and others 100% of the amount paid or deposited, not

exceeding INR 1,00,000

Life insurance premia, Deferred annuity, Provident fund, Saving certificate, Superannuation fund, any scheme of the Central Government, Pension fund, Deposit scheme, Tuition fees, Mutual Fund, Others

80CCC* Contribution to certain pension funds100% of the amount paid or deposited, not

exceeding INR 1,00,000

Any annuity plan of Life Insurance Corporation of India or any other insurer for receiving pension from the fund

80CCD* Contribution to pension scheme of Central Government

100% of the amount paid or deposited, not exceeding 10% of salary

Contribution by the employee and contribution by the Central Government or any other employer towards pension scheme The 10% limit applies to both the above eligible contributions individually

80D Health insurance premia 100% of the amount paid or deposited with any

insurer, not exceeding INR 15,000 (INR 20,000 in case of senior citizens)

In case of an individual - Insurance for assessee and family, and Insurance for parentsIn case of a HUF, insurance for each member

80DD Maintenance of a dependant who is a disabled person

INR 50,000 for a disabled person and INR 75,000 for a severely disabled person

Medical treatment, training, or rehabilitation of a disabled dependant or amount paid or deposited with an insurer for a scheme of maintenance of a disabled person

Return of income along with a medical certificate is required

80DDB Medical treatment100% of the amount paid not exceeding INR

40,000 (INR 60,000 in case of a senior citizen)

Medical treatment of individual, family, or member of HUFCost of treatment to be reduced by the amount paid by an insurer or

employer*80CCE prescribes an aggregate limit of INR 1,00,000 for 80C, 80CCC, 80CCD

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Deductions in respect of certain Payments

Deduction in respect of Payment Towards

80E Interest on loan taken for higher education100% of the amount paid

Interest on a loan from a financial institution or a charitable institution for the purpose of higher education, for the assessee or a relative

Deduction allowed for initial assessment year (AY) and seven AYs after that or until the interest is paid back in full, whichever is earlier

80G Donations to certain funds, charitable institutions, etc.

50% or 100% of the eligible amount paid

Donations to specified funds or institutions

80GG Rents paidExcess of rent over 10% of adjusted gross income

or INR 2000 per month or 25% of total income, whichever is less

Any expenditure incurred in excess of 10% of total income towards payment of rent

For the purposes of own residence

80GGA Certain donation for scientific research and rural development Any sum paid

Scientific, social science, or statistical research to a scientific research association, a university, college or other institutionAn institution, public sector undertaking, or local authority undertaking a rural development program, or a rural development fundAssessee should not have income chargeable under the head “Profits and Gains of business or profession”

80GGB Contributions by companies to political parties100% of sums donated

Contributions to political parties

80GGC Contributions by any person to political parties100% of sums donated

Contributions to political parties

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Deductions in respect of certain Incomes

Deduction in respect of Eligible Business

80IA Profits and gains from industrial undertakings or enterprises engaged in infrastructure

development, etc.100% deduction on the profits and gains from

eligible businesses for a period of 10 years

Infrastructure facility Telecommunication services Industrial Park or Special Economic Zone (SEZ) Generation and distribution of power Transmission and distribution network Substantial renovation and modernization of a network Reconstruction of a power plant Laying and operating a cross-country natural gas distribution

networkKey Conditions Should not be formed by reconstruction or splitting up Should not be formed by transfer of plant and machinery Should have begun to operate between 1st April 1993 and 31st

March 2010, depending on the eligible business

80IAB Profits and gains by an undertaking or enterprise engaged in development of Special

Economic Zone100% deduction on income for developers of

Special Economic Zones (SEZ)

Developers of SEZs after 1st April 2005 100% for 10 consecutive years out of 15 years from the year in

which notified by the central government In case transfer of operating and maintenance of SEZ, then

deduction shall be allowed to transferee developer for unexpired period

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80IB Profits and gains from certain industrial undertakings other than infrastructure

development undertakingsDeductions on income from certain industrial

undertakings

Deduction on profits from an industrial undertaking in the − States of Jammu & Kashmir − Preservation and packaging of fruits and vegetables − Handling, storage and transportation of food grains

100% for the first five years, and 25% (30% in case of companies) for the next five years (7 years in case of co-operative societies)

Deduction on profits from the operation of a hospital in India of 100% for 5 years

Key Conditions Should not be formed by reconstruction or splitting up Should not be formed by transfer of plant and machinery

80IC Undertakings or enterprises in certain special category States

Deductions on income from certain industrial undertakings in certain states

Deduction on profits from an industrial undertaking in the specified areas in states of Himachal Pradesh and Uttaranchal of 100% for the first five years, and 25% for the next five years (30% in case of companies)-until April 1, 2012

Same conditions as above

80ID Profits and gains from business of hotels and convention centers in specified area

100% deduction on income from hotels and convention centers

Deduction on profits from the business of hotels and convention centers and hotels in World Heritage sites of 100% for 5 consecutive years

Same conditions as above

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80IE Certain undertakings in North-Eastern states100% on income from certain industrial undertakings in North Eastern States

Deduction on profits from an undertaking eligible manufacturing or other eligible business in the states of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura-upto April 1, 2017

100% of income for 10 consecutive assessment years. Eligible business- hotel, old age home, adventure and leisure sports

etc.

80JJA Profits and gains from business of collecting and processing of bio-degradable waste

100% on income

Deduction of 100% for 5 years on any profits from the business of collecting and processing or treating of bio-degradable waste for generating power, producing bio-fertilizers, bio-pesticides or other biological agents, producing bio-gas, making pellets or briquettes for fuel or organic manure

80JJAA Employment of new workmen30% of additional wages of new workmen

Industrial undertaking (by an Indian company) engaged in manufacturing of any article or thing

Deduction of 30% of additional wages to new regular workmen for a period of 3 years

Undertaking should not be formed by reconstruction or splitting up

80LA Certain incomes of Offshore Banking Units (OBU) and International Financial Services

Center (IFSC)

A bank with income from an OBU in an SEZ or income of a unit of an IFSC

Deduction of 100% for the first 5 years, and 50% for the next 5 years

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80P Income of co-operative societies Deduction on profits of a co-operative society of 100%, INR 1,00,000, INR 50,000 depending on the business the society is engaged in

80QQB Royalty income, etc., of authors of certain books other than text-books

100% of the eligible income or INR 3,00,000, whichever is less

An author (individual) − Resident in India− Income from the assignment or grant of his/her interests in the copyright of any book being a work of literary, artistic or scientific nature, or of royalty or copyright fees in respect of such book

Where there is no lump sum consideration, income in excess of 15% of the value of the books sold will be ignored

Income earned outside India

80RRB Royalty on payments100% of the royalty received or INR 3,00,000

whichever is less

Deduction of income from royalty to an individual who is resident in India

When the source is outside India, deduction is allowed on the amount brought into India within 6 months from the end of the year

Prescribed certificate must be furnished

Other Deductions80U A person with a disability

Deductions on income of a person with a disability Deduction of INR 50,000 from the total income of a person with a

disability Deduction of INR 75,000 from the total income of a person with a

severe disability Return of income to be furnished along with a medical certificate

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Important Issues

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Deductions in respect of life insurance premia and others

Issue: Whether investment out of borrowings are eligible

Case: CIT vs. Ramesh Chandra Khandelwal (2005) 273 ITR 363 (All). Such investments are eligible for deduction u/s 80C

Points: Source need not be currently taxable incomeearned. Assessee may well spend taxable income and invest borrowings

All incomes are amalgamated and spent, so it is not possible to distinguish savings from borrowings

80C is for the encouragement of thrift and its interpretation shouldn’t nullify that object

In favorof: Assessee

Issues80C

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Donations to certain funds, charitable institutions, etc.

Issue: Whether sums donated out of sources other than chargeable income are allowed

Case: Infosys Technologies vs. JCIT (2007) 10 TTJ (Bang) 631

Points: No stipulation that donation has to be only out of income chargeable to tax

Deduction available even when donations are out of■ Capital or gifts received■ Exempted Income■ Income out of earlier years


Issues80G

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Deduction in respect of profits and gains from industrial undertakings80IA(3), 80IB(2), 80IC(4): “This section applies to an undertaking…not formed by splitting up, or reconstruction, of a

business already in existence”

Case: Textile Machinery Corporation ltd vs. CIT (1977) 107 ITR 195 (SC)CIT vs. Hindustan General Industries Ltd (1982) 137 ITR 851 (Delhi)

Points: Reconstruction involves ■ Substantially the same persons carrying on substantially the same business■ Complete absorption and loss of identity into the old business

The following is NOT reconstruction■ Expansion of the existing undertaking (this would not deprive the assessee of the

benefit)■ New emergence of a separate unit which may exist on its own as a viable industrial

unitSplitting up indicates

■ That the integrity of a business earlier in existence is broken up■ Different sections of the activities previously carried out are carried on independently

In favorof: Assessee - Textile Machinery Corporation ltd vs. CIT

Assessee -CIT vs. Hindustan General Industries Ltd

Issues80IA, 80IB, 80IC

Issue: What constitutes reconstruction / splitting up?

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Deduction in respect of profits and gains from industrial undertakings80IA(3), 80IB(2), 80IC(4): “This section applies to an undertaking…not formed by splitting up, or reconstruction, of a

business already in existence”



Where there is substantial investment in new plant & machinery, and new employees are recruited substantially along with new services provided to new clients, then the new unit is not formed by splitting up of existing unit and is eligible for tax incentives on export profits

To hold that a business is formed by reconstruction, there must be some material to hold that Some assets of the existing business were diverted into another business This other business was formed from such splitting up The two business were the same and the business formed was an integral part of the earlier one

ITO vs. DSM Soft P. Ltd. (unreported) (Chennai ITAT)

Other Principles

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Deduction in respect of profits and gains from industrial undertakings


Case: CIT vs. M/s Mahaan foods Ltd. (2008) 177 Taxman 274 (Del)

Points: 80-IA does not require the new industrial undertaking to be on a separate plot of land leaving the earlier undertaking totally untouched

Deduction allowed where the entire business is a new industrial undertaking with

■ Newly acquired technology for increased production capacity■ A fresh dose of investment



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Deduction in respect of profits and gains from industrial undertakings80IA(3), 80IB(2), 80IC(4): “This section applies to an undertaking…not formed by the transfer to a new business of

machinery or plant previously used for any purpose”Explanations: Where the total value of transferred plant and machinery does not exceed 20% of the total plant and

machinery of the business, the provision is deemed to be complied with

Issue: Where the limit was exceeded in earlier years, can a subsequent reduction of old machinery below 20% secure deduction in a later year?


Case: CIT vs. Satellite Engineering Co ltd (1978) 113 ITR 208 (Guj)

Points: No additional limitation (to satisfy the condition on commencement) to be eligible for deduction in the subsequent years

If an undertaking satisfies the condition in the subsequent years, deduction is allowed

In favorof: Assessee - CIT vs. Satellite Engineering Co ltd

Case 1 :

Deduction allowed post-formation, if 20% condition is rectified

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Case: CIT vs. Nippon Electronics (India) Pvt Ltd (1990) 181 ITR 518 (Kar)

Points: Deduction allowed for an undertaking not “formed” by transfer of plant and machinery

Eligibility for deduction has to be tested at the initial AY

In favorof: Revenue- CIT vs. Nippon Electronics (India)

Case 2 :

Deduction allowed only if 20% condition satisfied on formation

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Case: ITO v. Laxmi Packers [2007] 14 SOT 303 (Mum)

Points: Legislature does not intend to keep the taxpayer (after formation of the undertaking) from purchasing second hand machinery to meet future demands

Additional machinery beyond the 20% limit can be purchased post-formation


Case 3 :

Deduction allowed post-formation, even if 20% condition is not subsequently met

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?

When considering the value of plant and machinery transferred, do we consider 20% of the book value, tax value, or market value?

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Issue: Does leasing of property amount to formation by transfer?

Case: Bajaj Tempo vs. CIT (1992) 196 ITR 188 (SC)

Points: Undertaking established on premises taken on lease does not amount to formation by transfer of building

To amount to “formation by transfer”, it must be implied that but for the transfer, the undertaking would not have come into being



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Deduction in respect of profits and gains from industrial undertakings 80IA(5): “…the profits and gains of an eligible business … shall be computed as if such eligible business were the

only source of income of the assessee during the previous year …”


Illustration

AY 2008-09 80IA Unit Other Unit Total 80IA Unit Other Unit TotalNet Profit / (Net Loss) (100) 200 100 (300) 200 (100) Less: Deduction u/s 80IA - - - - Total Income 100 (100) AY 2009-10 80IA Unit Other Unit Total 80IA Unit Other Unit TotalNet Profit / (Net Loss) 200 300 500 200 300 500Less: Set off of carry forward losses (notional) u/s 80IA(5) (100) 100 (200) - Total Income 400

Set off of Loss (100) Total Income 400

AY 20010-11 80IA Unit Other Unit TotalNet Profit / (Net Loss) 400 600 1000Less: Set off of carry forward losses (notional) u/s 80IA(5) (100) 300Total Income 700

Scenario 1 Scenario 2

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Deduction in respect of profits and gains from industrial undertakings 80IA(5): “… the profits and gains of an eligible business … shall 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 …”

Issue: What is the “initial assessment year”?

Case: Mohan Breweries & Distilleries ltd vs. ACIT (2008) 114 TTJ 532

Points: It is at the option of the assessee to choose the initial AY from which deduction can be claimed

Initial AY is the AY in which assessee has chosen to claim deduction under the section. It cannot be the year when operations began

Provisions of s. 80-IA(5) treating undertaking as a separate sole source of income cannot be applied to a year prior to the year in which assessee opted to claim relief for the first time.



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Deduction in respect of profits and gains from industrial undertakings 80IA(5): “…the profits and gains of an eligible business … shall be computed as if such eligible business were the

only source of income of the assessee during the previous year …”

Issue: Whether the profit from the eligible business has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed set off against other income in earlier years

Case: ACIT vs. Goldmine Shares and Finance (P) Ltd. (2008) 116 TTJ 705

Points: 80IA(5) is an over-riding provision. A fiction is created for determining the quantum of deduction of the eligible unit as if such unit is the only source of income of the assessee

Deduction would be computed after setting off carried forward losses of the eligible unit against profit of the eligible unit alone

Losses of earlier years, though already absorbed against other sources are once again to be notionally brought forward and set off against profits of the eligible unit to compute eligible deduction

In favorof: Revenue


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Deduction in respect of profits and gains from industrial undertakings 80IA Explanation: “… nothing contained in this section shall apply to a person who executes a work contract

entered into with an undertaking or enterprise…”80IA(4)(i): “Any enterprise carrying on the business of developing….an infrastructure facility which fulfills the

following conditions, namely…it is owned by a company registered in India…”Issue: Availability of benefit to a sub-contractor

Case: Patel Engineering Ltd vs. DCIT (2005) 94 ITD 411 (Bom)

Points: “Contractor”, as mentioned in a infrastructure development facility, is not necessarily contradictory to the term “developer”, who is eligible for deduction

Incentive intended for entrepreneurs who undertake entrepreneurial and business risk, and not contractors who only undertake business risk



Note*: Considering the huge infrastructure funding requirement of about USD 300 billion in the next 5 years, the withdrawal of tax incentives to works contractors will need to be reconsidered

*FICCI pre-budget memorandum

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Deduction in respect of profits and gains from industrial undertakings 80IA/IB/IC(1): “Where the gross total income….includes any profits and gains derived…from any business referred

to…”

Examples of income not derived from a business:

Import / export entitlements from an Export Incentive SchemeLease money from leasing property to an eligible undertakingSale of scrapInterest earned on deposit with a State Electricity Board


“Derived from” cannot have a wide import, unlike the phrase “attributable to”

There has to be a direct nexus between the profit and gains and the undertaking

Issue: When is income “derived from” an eligible business?

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80IA(12): Deduction shall be available to any enterprise transferred in a scheme of amalgamation or demerger

80IA(12A): Nothing in sub-section 12 shall apply to any enterprise transferred in a scheme of amalgamation or demerger

Issue: Is 80IA(12A) applicable to 80IB and 80IC?

Points: 80IA(12A) inserted as 80-IA benefit was intended to provide incentive to take initial investment and entrepreneur risk

80IA(5) and 80IA(7) to (12) apply to 80IB and 80IC. No mention of 80IA(12A) in 80IB and 80IC

CBDT Circular 3 of 2008 confirms the above.


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Issue: Is deduction available if there is transfer via slump sale or share sale?

Points: Amalgamation, as defined u/s 2(1B), doesn’t include slump sale or share sale

80IA(12) and 80IA(12A) do not mention transfer via slump sale or share sale

Deduction u/s 80IA is for an “undertaking”. One possible view is that deduction will be available in the case of a slump sale as only ownership changes


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Deduction u/s 80IA allowed to well integrated new units with a separate and distinct identity. It is not very relevant that The new units have the same management / premises The new units produce similar goods, or procure raw materials from a common source

– JCIT vs. Associated Capsules P. Ltd. (2008) 304 ITR (AT) 85 (Mum)

Deduction u/s 80IB(10) is allowed to the developer, even if the developer is not the owner, as The developer opted for the business risks associated, therefore could not be called a contractor Deduction is not exclusively to a taxpayer, but to a developing undertaking, be it an owner or contractor

– Radhe Developers & Ors vs. ITO (2008) 113 TTJ 300 (Ahm)

Deduction u/s 80-IB(10) is allowed to units of a larger housing project, as 80IB(10) uses the words ‘residential unit’, therefore deduction should be computed unit-wise The provision should be construed liberally so as to advance its objective

– DCIT vs. Brigade Enterprises (P.) Ltd. (2008) 119 TTJ 269 (Bangalore)

Other Principles

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Deduction u/s 80IB is available even if, once the requirements are met, the services provided by the eligible unit are used by the taxpayer itself or a third party

– Sanchita Marine Products (P.) Ltd. vs. DCIT 15 SOT 280 (Mum)

Other Principles

Mere facilitation from the head office of an eligible unit would not disentitle the eligible unit from claiming deduction– DCIT vs. Tribhovandas Bhimji Zaveri (2007) 110 TTJ 942 (Mum)

Providing installation, testing, commissioning facilities etc. of the cranes to a port in a BOLT scheme is an infrastructure facility u/s 80IA

– DCIT vs. ABG Heavy Industries Ltd. (2008) 20 SOT 525 (Mum)

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Issue: Should 80IA(12A) be reconsidered?

Thoughts*:Companies’ need to reposition themselves quickly, especially in the current economic environment

Mergers / demergers crucial to companies’ global competitiveness

Earlier position of 80IA(12) to be continued and benefit to be available to the amalgamated or resulting company



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80IB(9): Deduction to an undertaking which begins commercial production of mineral oil

Issues: Undertakings unable to avail benefit for the full 7 years due to the huge depreciation claims in the initial 3-4 years

Commercial viability of upcoming refineries affected by the Sunset Clause (tax holiday not available for undertaking beginning refining on or after 1st April 2009)

The term ‘mineral oil’ does not include petroleum and natural gas, unlike other sections of the Act

Thoughts*:100 % tax holiday for a period of any 10 consecutive years out of 15 years under section 80-IA instead of 80-IB

Flexibility to be provided of choosing any 7 consecutive years out of 15 years

Drop the sunset clause or extend to 31st March 2012 for private sector undertakings, to be on par with public sector undertakings



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80IB(9): Deduction to an undertaking with profits from operating and maintaining a hospital

Issues: Current 5 year tax holiday is very short. Entrepreneurs would hardly reach the break even point in the first 5 years

Thoughts*:5 year holiday to be extended to 10 years

Infrastructure status to be granted to the healthcare industry

Companies creating the following training and educational facilities to be eligible for exemption

■ Medical■ Dental■ Nursing■ Midwifery■ Paramedical■ Lab Technicians■ Biomedical Engineering



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Deduction in respect of income of co-operative societies

Issue: When a co-operative society (other than a credit co-operative) provided credit facilities to its members, is the interest earned eligible for deduction?

Case: CIT vs. Krishak Sahkari Ganna Samiti (2002) 258 ITR 594CIT vs. Madras Autorickshaw Drivers Co-operative Society (1983) 143 ITR 981

Points: Income “attributable to” an activity includes income from sources other than the main activity of the society

Interest from statutory investment in government securities deductible

However

Interest earned from goods sold on credit not deductible as the element of sale predominates the element of financing

In favorof: Assessee - CIT vs. Krishak Sahkari Ganna Samiti

Revenue - CIT vs. Madras Autorickshaw Driver’s Co-op

Issues80P

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Issue: Whether income from activities of a co-operative housing society is eligible for deduction u/s 80P(2)(c )

Case: CIT vs. Film Nagar Co-operative Housing Society Ltd (2004) 91 ITD 27Maker Tower A & B Co-op. Hsg. Society vs. ITO (2008) 20 SOT 253

Points: Income of a co-operative housing society is eligibleas a case of “other co-operative societies” (80P(2)(c )

Profit and gains are not from “business” but from “activities” carried out

In favorof: Assessee - CIT vs. Film Nagar Co-operative

Assessee - Maker Tower A & B Co-op.

Issues80P

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Issue: Whether a co-operative bank needs to carry on business only with members to be eligible for exemption

Case: Milli Co-op Urban Bank vs. ITO (2007) 106 ITD 151 (Hyd)

Points: Co-operative bank can do business with non-members and be eligible for deduction u/s 80P(2)(i)

The section should be read as income to a co-operative society carrying on the business of“banking” or “providing credit facilities to its members”


Issues80P

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Questions?

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• The information contained herein is of a general nature. The content provided here treats the subjects covered here in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. A detailed analysis of the tax and regulatory implications should be done prior to implementation in order to determine the feasibility of the transaction.

• There can be no guarantee that this information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Specialist advice should be sought with respect to any individual circumstances.

Disclaimer

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Thank You

chapter via of the income tax act, 1961 provisions & issues vikram naik 21 st march 2009

Documents

respect of profits

exempted income income

chargeable income

income chargeable

taxable income

certain funds

income tax act

assessee deductions