Assignment on: SECTION 80 IA

Subject: Project Management

Professor: Marathe Sir

Submitted by: GROUP 5

SECTION 80IA

Section 80IA allows a deduction of 100%/30% of profits derived by undertakings

engaged in developing, maintaining and operating infrastructure facilities.

SECTION 80IA CONTROVERSY

According to the Union Budget 2008-09, the government has foregone maximum revenue under
Section 80 IA of the Income Tax Act, that is, Rs 14,740 crore. The section is also one of the
provisions which are contested maximum in the court of law.
No doubt, 80IA has become a hit among Indian corporate who are engaged in infrastructure
development activities. At the same time, it is one of the sections that have been misused
blatantly.
There were varying interpretations of this section, as some believed this exemption was
applicable to those owning the infrastructure asset, as it was originally aimed at BOT operators.
Others, however, believed the exemption was also applicable to those constructing the asset. As
a result, some companies paid full corporate tax, while others paid minimum alternate tax
(MAT).
CAG, in its recent report says, "The benefit of deduction under Section 80IA had been
irregularly extended to works contractors, although they could not be deemed to be engaged in
developing or maintaining an infrastructure facility within the meaning of section 80IA." CAG
had recommended the ministry to suitably clarify the provisions of section 80IA to prevent
misuse of the incentive by ineligible assessees.
Audit of assessment records of 685 assessees in company and non-company circles in the review
by CAG revealed mistakes in 91 cases with a revenue impact of Rs 2,037.22 crore of which Rs
932.29 crore relates to short levy of tax and Rs 1,104.93 crore relates to other issues, which have
potential impact on levy of tax such as non-restriction of deduction to reasonable profits, non-
preparation of separate accounts, etc in the states of Andhra Pradesh, Delhi, Gujarat, Karnataka,
Madhya Pradesh, Maharashtra, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal.

SEC 80 IA SOLVING THE CONTROVERSY

Construction companies will see their tax burden going up on account of the removal of Section
80 IA benefits.

Section 80-IA was introduced for encouraging private sector participation in the development of
infrastructure, and not for persons/entities who were merely executing the civil construction
work or any other works contract.
Thus, in a case where an entity makes the investment and carries out the civil construction work
will be eligible for tax benefit under section 80-IA. In contrast to this, an entity that enters into a
contract with an eligible participant for executing works contract will not be eligible for the tax
benefit under section 80-IA.
Construction contractors had so far been availing of the section 80IA benefit for projects
awarded by infrastructure developers viz NHAI and state government agencies-awarded projects
in roads & bridges, irrigation, water supply and sanitation.

These benefits meant that companies were paying a minimum alternate tax (MAT) of 11.2%.
However, the clarification to section 80IA now stipulates that these companies pay the full tax
rate of 33.66% from retrospective effect from 1st April, 2000. Going forward, companies will
have to provide for full tax

In section 80-IA of the Income Tax Act, 1961, after sub-section (13), a new explanation is
proposed to be added by the Finance Bill, 2007, which reads as under: “For the removal of
doubts, it is hereby declared that nothing contained in this section shall apply to a person, who
executes a works contract entered into with the undertaking or enterprise, as the case may be.”
On the face of it, the explanation looks innocuous and a routine one. However, if it is considered
in the background of legal provision, where it proposes to remove doubts, it becomes clear that
there are no doubts, which are proposed to be removed and in effect the Explanation is meant to
enable the tax department to detract from a position, which it had consciously taken in the year
1999 and now wants to go back from that position from retrospective effect ie, from the date the
relevant law was enacted.

This is nothing less but a breach of faith of taxpayers, who acted on the basis of law as laid down
by the Finance Act, 1999 and took benefit but which the tax department now intends to withdraw
without any ostensible grounds.

To understand the nature of the amendment, it is necessary to give a background as to what the
law is, which is proposed to be changed and why the Explanation has been made operative from
April 1, 2000 and see the legal provisions, which were operative before April 1, 2000 and those
operative from April 1, 2000.

A new sub-section (4) was brought in section 80-IA by the Finance Act, 1999. Before that, law
in relation to the same subject was contained in sub-section (4A). The position in regard to two
provisions is mentioned hereinafter.
Sub-section (4A) before April 1, 2000

The requirement for getting tax benefit u/s 80-IA was, besides other conditions, that the
enterprise, which claims the benefit of tax holiday, should start developing, operating and
maintaining the infrastructure facility on or after April 1, 1995.

Sub-section (4) after the amendment by the Finance Act, 1999

Section 80-IA was substituted by two sections - 80-IA and 80-IB - by the Finance Act, 1999
w.e.f. April 1, 2000. In this substitution, clause (4A) earlier (supra) became clause (4). The new
clause provides that for getting the tax holiday benefit, the company (or consortium of
companies) must enter into agreement with the prescribed body for “carrying on the business of
(i) developing or (ii) maintaining and operating or (iii) developing, maintaining and operating a
new infrastructure facility.”

SECTION 80 IA (Income tax department)

80-IA DEDUCTIONS IN RESPECT OF PROFITS AND GAINS FROM INDUSTRIAL

UNDERTAKINGS OR ENTERPRISES ENGAGED IN INFRASTRUCTURE
DEVELOPMENT, ETC.

(1) Where the gross total income of an assessee includes any profits and gains derived by
an undertaking or an enterprise from any business referred to in sub-section (4) (such
business being hereinafter referred to as the eligible business), there shall, in accordance
with and subject to the provisions of this section, be allowed, in computing the total
income of the assessee, a deduction of an amount equal to hundred per cent of profits and
gains derived from such business for ten consecutive assessment years.

(2) The deduction specified in sub-section (1) may, at the option of the assessee, be
claimed by him for any ten consecutive assessment years out of fifteen years beginning
from the year in which the undertaking or the enterprise develops and begins to operate
any infrastructure facility or starts providing telecommunication service or develops an
industrial park or develops or develops and operates or maintains and operates a special
economic zone referred to in clause (iii) of sub-section (4) or generates power or
commences transmission or distribution of power:

Provided that where the assessee develops or operates and maintains or develops,
operates and maintains any infrastructure facility referred to in clause (a) or clause (b) or
clause (c) of the Explanation to clause (i) of sub-section (4), the provisions of this sub-
section shall have effect as if for the words "fifteen years", the words "twenty years" had
been substituted.
(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), the
deduction in computing the total income of an undertaking providing telecommunication
services, specified in clause (ii) of sub-section (4), shall be hundred per cent. of the
profits and gains of the eligible business for the first five assessment years commencing
at any time during the periods as specified in sub-section (2) and thereafter, thirty per
cent. of such profits and gains for further five assessment years.

(3) This section applies to an undertaking referred to in clause (iv) of sub-section (4)
which fulfils all the following conditions, namely:-

(i) it is not formed by splitting up, or the reconstruction, of a business already in

existence:

Provided that this condition shall not apply in respect of an industrial undertaking which
is formed as a result of re-establishment, re-construction 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;

(ii) it is not formed by the transfer to a new business of machinery or plant previously
used for any purpose.

Explanation 1.-For the purposes of clause (ii), 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 this Act in computing the total
income of any person for any period prior to the date of the installation of 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 sub-section, the condition specified therein shall be deemed
to have been complied with.

(4) This section applies to-

(i) any enterprise carrying on the business any infrastructure facility which fulfils all the
following conditions, namely:-
(a) it is owned by a company registered in India or by a consortium of such companies;

(b) it has entered into an agreement with the Central Government or a State Government
or a local authority or any other statutory body for (i) developing or (ii) operating and
maintaining or (iii) developing, operating and maintaining a new infrastructure facility;

(c) it has started or starts operating and maintaining the infrastructure facility on or after
the 1st day of April, 1995:

Provided that where an infrastructure facility is transferred on or after the 1st day of
April, 1999 by an enterprise which developed such infrastructure facility (hereafter
referred to in this section as the transferor enterprise) to another enterprise (hereafter in
this section referred to as the transferee enterprise) for the purpose of operating and
maintaining the infrastructure facility on its behalf in accordance with the agreement with
the Central Government, State Government, local authority or statutory body, the
provisions of this section shall apply to the transferee enterprise as if it were the
enterprise to which this clause applies and the deduction from profits and gains would be
available to such transferee enterprise for the unexpired period during which the
transferor enterprise would have been entitled to the deduction, if the transfer had not
taken place.

Explanation.-For the purposes of this clause, "infrastructure facility" means,-

(a) a road including toll road, a bridge or a rail system;

(b) a highway project including housing or other activities being an integral part of the
highway project; and

(c) a water supply project, water treatment system, irrigation project, sanitation and
sewerage system or solid waste management system;

(d) a port, airport, inland waterway or inland port;

(ii) any undertaking which has started or starts providing telecommunication services
whether basic or cellular, including radio paging, domestic satellite service, network of
trunking, broadband network and internet services on or after the 1st day of April, 1995,
but on or before the 31st day of March, 2003;

(iii) any undertaking which develops, develops and operates or maintains and operates an
industrial park or special economic zone notified by the Central Government in
accordance with the scheme framed and notified by that Government for the period
beginning on the 1st day of April, 1997 and ending on the 31st day of March, 2006:

Provided that in a case where an undertaking develops an industrial park on or after the
1st day of April, 1999 and transfers the operation and maintenance of such industrial park
to another undertaking (hereafter in this section referred to as the transferee undertaking)
the deduction under sub-section (1), shall be allowed to such transferee undertaking for
the remaining period in the ten consecutive assessment years in a manner as if the
operation and maintenance were not so transferred to the transferee undertaking;

(iv) an undertaking which,-

(a) is set up in any part of India for the generation or generation and distribution of power
if it begins to generate power at any time during the period beginning on the 1st day of
April, 1993 and ending on the 31st day of March, 2006;

(b) starts transmission or distribution by laying a network of new transmission or

distribution lines at any time during the period beginning on the 1st day of April, 1999
and ending on the 31st day of March, 2006:

Provided that the deduction under this section to an undertaking under sub-clause (b)
shall be allowed only in relation to the profits derived from laying of such network of
new lines for transmission or distribution.

(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.

(6) Notwithstanding anything contained in sub-section (4), where housing or other

activities are an integral part of the highway project and the profits of which are
computed on such basis and manner as may be prescribed, such profit shall not be liable
to tax where the profit has been transferred to a special reserve account and the same is
actually utilised for the highway project excluding housing and other activities before the
expiry of three years following the year in which, such amount was transferred to the
reserve account; and the amount remaining unutilised shall be chargeable to tax as
income of the year in which such transfer to reserve account took place.

(7) Where the assessee is a person other than a company or a co-operative society, 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, 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.

(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 held for
the purposes of any other business carded 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 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 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 the price that such goods or services would ordinarily fetch in
the open market.

(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
industrial 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.

(11) The Central Government may, aftermaking 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.