Special provisions in respect of newly established units in Special Economic Zone (SEZ) - Section 10AA - Income Tax - Ready Reckoner - Income Tax

Special provisions in respect of newly established units in Special Economic Zone (SEZ) - Section 10AA Deduction under this section is available to all categories of assessees being individuals, firms companies etc. who derives profits and gains from an undertaking being a unit engaged in the export of articles or things or providing any service for the Ay commencing on or after 1-4-2006, but before 1-4-2021. However, such deduction shall not be allowed to the assessee who does not file ROI u/s 139(1) on or before the due date. [Amended by FA, 2023 ] Essential conditions to claim deduction:- The unit in SEZ begins to manufacture or produce articles or things or provide services during the financial year 2005-06 or any subsequent year. It is not formed by splitting up, or reconstruction, of a business already in existence. However deduction is allowed in case unit is formed by result of re-establishment, reconstruction or revival of the business. It is not formed by a transfer to a new business of machinery and plant previously used for any purpose. However deduction shall be allowed if the total value of the second hand machinery does not exceed 20% of the total value of machinery or plant used in the industrial unit. It is applied to such Unit, if the proceeds from sale of goods or provision of services is received in, or brought into, India by the assessee in convertible foreign exchange, within a period of 6 months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. [Amended by FA, 2023 ] The assessee should furnish in Form No. 56F alongwith the return of income, the report of CA certifying that the deduction has been correctly claimed in accordance with the provisions of the section. ( Rule 16D of Income Tax Rules N. No. 91/2023 dated 19.10.2023 ) The assessee has income from export of articles or things or from services from such unit. In other words, the assessee has exported goods or provided services out of India from the SEZ by land, sea, air or by any other mode, whether physical or otherwise. Books of the account of the taxpayer should be audited. Deduction under section 10AA is not available unless it is claimed in the return of income. In other words, if the assessee fails to make a claim in his return of income of this deduction, the same will not be allowed. For the purpose of meaning of Export Turnover following explanation added by FA, 2023 Export turnover means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee in convertible foreign exchange, but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India. Limit of Deduction In computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software in any SEZ, the deduction shall be: i. For first 5 Assessment Years 100% of export profits ii. For next 5 Assessment Years 50% of such profits or gains iii. For next 5 Assessment Years Amount debited to Profit Loss Account and credited to SEZ Reinvestment Allowance Reserve A/c subject to a maximum of 50% of export profits. Explanation - It has been clarified that the amount of deduction referred u/s 10AA shall be allowed from the total income of the assessee computed in accordance with the provisions of the Act before giving effect to the provisions of section 10AA and the deduction u/s 10AA shall, in no case exceed the said total income. Computation of Profits Note:- Conditions to be satisfied for claiming deduction for further 5 years (after 10 years):- The amount credited to the Special Economic Zone Reinvestment Reserve Account is to be utilised - for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created; until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India failing which the unutilized or wrongly utilized reserve would be deemed income as per the provisions of the Act and the Rules and shall be charged to tax accordingly. This section applies to an undertaking which:- (i) not be formed by splitting up or reconstruction of unit already in existence (ii) Should not be formed by transferring machinery or plant previously used. Export turnover means the consideration in respect of export received in, or brought into India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year period as may be permitted by the RBI, but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. If deduction is claimed under section 10AA in respect of a specified business u/s Section 35AD , no deduction in respect of that business is available under section 35AD . Provisions related to amalgamation and demerger: The benefit under this section is not available to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place and it is available to the amalgamated or the resulting company as it would have been available to the amalgamating or the demerged company if the amalgamation or demerger had not taken place. Section 10AA is a deduction and not an exemption. Therefore, losses and depreciation of undertaking to which section 10AA applies shall be carried forward normally. Clarification regarding allowability of deduction under section 10AA on transfer of Technical Man-power in the case of software industry. [ Circular no. 14/2014 dated 08/10/2014 ] T ​​​​​ the transfer or re-deployment of technical manpower from existing unit(s) to a new unit located in SEZ. in the first year of commencement of business, shall not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred as at the end of the financial year does not exceed 50% of the total technical manpower actually engaged in development of software or IT enabled products in the new unit.