Power sector - Income exemption under 80IA, Income Tax Act

[Sandeep Rawat]

Deductions in respect of profits and gains from undertakings or enterprises engaged in infrastructure development, Power undertakings etc. [Section 80-IA]

• POWER UNDERTAKINGS

Any undertaking which

(i) is set up in India for the generation or generation and distribution of power (begin to generate power during 1.4.1993 to 31.3.2017

(ii) starts transmission or distribution by laying a network* at any time during 1.4.1999 to 31.3.2017. (deduction in respect of profits from the laying of such network of new lines only)

iii) undertakes substantial renovation and modernization** of the existing network*, at any time during 1.4.2004 to 31.3.2017.
   
Conditions:

(i) It is not formed by splitting up or reconstruction of a business already in existence. Exception: undertaking formed as a result of reconstruction, re-establishment or revival of the business of any undertaking discontinued due to extensive damage or destruction of (any building, machinery, plant or furniture owned and used for such business) due to any natural calamity or other unforeseen circumstances such as:-

• Flood, typhoon, hurricane, cyclone, earthquake or other natural calamity, or
• riot or civil disturbance, or
•  accidental fire or explosion, or (iv)  enemy action or action taken in combat,

Ø and such business is re-established or revived within 3 years from the end of such previous year.

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

Exception:

Ø  transfer (in whole or part), of machinery or plant previously used by a State Electricity Board.

Ø  Import of second-hand machinery or plant, if the following conditions are fulfilled:

• Such machinery or plant was not used in India prior to the date of installation by the assessee.
• No deduction on account of depreciation was allowed to any person prior to the date of installation by the assessee.

(i) total value of second hand plant or machinery previously does not exceed 20% of the total value of the machinery or plant used in the new business.

Undertakings owned by an Indian company and set up for reconstruction or revival   of a power generating plant:

An undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant

Such Indian company should be formed before 30.11.2005 with majority equity participation by public sector companies for the purposes of enforcing the security interest of the lenders to the company owning the power generating plant

Such Indian company should have been notified before 31.12.2005 by the Central Government for the purposes of  this clause

Such undertaking should begin to generate or transmit or distribute power before 31.3.2011

Deduction:

100% of the profits and gains from such business
Period:

Any 10 consecutive A.Y.s out of 15 years from the year, in which it develops or begins to operate.

Period of tax holiday/concession

Assessee has the option to claim deduction for 10 consecutive assessment years out of 15 years beginning from the year in which the undertaking or the enterprise develops  or begins to operate generates power or commences transmission or distribution of power or undertakes substantial renovation and modernization of the existing transmission or distribution lines.

Eligible business to be considered as the only source of income

For the purpose of computing deduction under this section, the profits and gains of the eligible business shall be computed as if such eligible business were the only source of income of the assessee during the relevant previous years [Sub-section (5)].

Audit of accounts:

The deduction shall be allowed to the undertaking only if the accounts of the undertaking for the relevant previous year have been audited by a chartered accountant and the assessee furnishes the audit report in the prescribed form,  duly  signed and verified by such accountant along with his return of income [Sub-section (7)].

The report of the audit of the accounts of an assessee, which is required to be furnished under sub-section (7) of section 80-IA shall be in Form No. 10CCB.

A separate report is to be furnished by each undertaking or enterprise of the assessee claiming deduction under section 80-I or 80-IA or 80-IB [or 80-IC] and shall be accompanied by the Profit and Loss Account and Balance Sheet of the undertaking or enterprise as if the undertaking or the enterprise were a distinct entity.

the form shall be accompanied by a copy of the agreement, approval or permission, as the case may be, to carry on the activity signed or issued by the Central Government or the State Government or the local authority for carrying on the eligible business.]

Deduction not to exceed profits of eligible business

The deductions claimed and allowed under this section shall not exceed the profits and gains of the eligible business.  Further, where deduction is claimed and allowed under this section for any assessment year no deduction in respect of such profits will be allowed under any other section under this chapter under the heading “Deductions in respect of certain incomes”.

No deduction to any business carrying on specified activities in the nature of a work contract:

The tax holiday under section 80-IA would not be available in relation to a business referred to in sub-section (4) which is in the nature of a works  contract awarded by  any person (including the Central or State Government) and executed by the undertaking or enterprise referred to in section 80-IA(1).

For further clarification and professional assistance, feel free to contact at [email protected]

(Mr. Sandeep Rawat has vast experience & knowledge in dealing with Direct and Indirect Taxation. He is providing his expertise service as Managing Partner at SRT Consultancy & Service. He can be reached at  [email protected])