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In case of conversion of partnership (eligibile for deduction u/s 80-IC) into company under Part IX, whether, for the year of conversion, the company should claim 80-IC deduction for the entire year or whether the partnership should claim 80-IC deduction till the date of conversion and company should claim 80-IC from the date of conversion?

As per section 115BBD, where the total income of an Indian company includes any dividend declared, distributed or paid by a specified foreign company (in which Indian company holds 26% or more), the dividend will be taxable at 15% (plus applicable surcharge and cess) on gross basis. Subsection 2 of section 115BBD denies any deduction in respect of any "expenditure" or "allowance" in computing income by way of dividend.

Whether deduction under Chapter VI-A can be claimed from such dividend income forming part of Gross Total Income? Whether deduction under Chapter VI-A can be treated as "ependiture or allowance"?

Can 80-IA deduction in respect of profits of eligible undertaking be claimed from the Gross Total Income which mainly comprises of income from other sources?

For example, the taxpayer is having 2 units eligible to claim 80-IA deduction with profits from business of Unit No. 1 of Rs. 20 and loss of Unit No. 2 of Rs. (80) thereby showing net loss from business at Rs. (60). The taxpayer has earned dividend income of Rs. 100. Can the taxpayer claim deduction u/s. 80-IA in repsect of profits of Unit No. 1 of Rs. 20 against Gross Total Income of Rs. 40 (100-60)? There are no brought forward losses.

Under the provisions of section 32(iia) of the Income-tax Act, 1961, additional depreciation would be available to an assessee engaged in the business of manufacture or production of any article or thing.

Whether generation of electricity can be considered as manufacture or production of 'article' or 'thing'?

The Income Tax Department has been disallowing deduction under section 80-IA to power generating units in respect of income from sale of carbon credits [units of Certified Emission Reduction ('CER')] relying on the Hon'ble Supreme Court's decision in the case of Liberty India.

The department is of the view that profits from sale of CERs are ancillary profits and not profits derived from eligible business and hence deduction u/s 80-IA should not be allowed to CER income.

In fact, the CERs are issued based on net electricity generated and hence do not fall in the category of investment linked incentives or Profit Linked incentives.

Whether comparison of income from sale of CERs with export incentives is justified?

As per section 10A(7B) of the IT Act,  deduction under section 10A can be claimed by the unit in SEZ, which has begun to manufacture or produce articles or things or computer software between 1 April 2000 to 31 March 2005. No deduction under section 10A will be allowed to the SEZ unit, which has begun (to manufacture or produce articles or things) on or after 1 April 2005 i.e. year ended 31 March 2006 (AY 2006-07).

As per the proviso to section 10AA(3) of the IT Act, if due to the application of 10A(7B), deduction under section 10A is not available to the eligible unit in SEZ, then the said unit shall be able to claim deduction under section 10AA for the unexpired period of 10 consecutive AYs.

From the above, it can be observed that proviso to section 10AA(3) entitles deduction for unexpired period of 10 consecutive AYs to an unit, which became ineligible to claim deduction under section 10A due to application of sub-section 7B of section 10A.

Section 10A(7B) makes those unit ineligible to claim deduction under section 10A, which have begun after 1 April 2005. Section 10AA(1) provides for deduction only to those units which began after 1 April 2005.

In view of the above, it is not clear that proviso to section 10AA(3) refers to which units to be eligible to claim deduction for the unexpired period. This is because by virtue of section 10A(7B), those units which have begun after 1 April 2005 are not eligible for deduction under section 10A as such units are automatically eligible to claim deduction under section 10AA as per proviso of section 10AA(1). In case of such units, there can not be question of unexpired period because they began only after 1 April 2005.     

Query:

Whether an SEZ unit, having claimed deduction under section 10A of the IT Act, would be eligible to claim deduction under section 10AA for the unexpired period by application of proviso to section 10AA(3)?

Following additional points may be considered:

- The Institute of Chartered Accountants of India ('ICAI') has in its draft Guidance Note on Accounting for Self-generated Certified Emission Reductions (CERs), observed that CERs are inventories of the generating entity as they are generated and held for the purpose of sale in the ordinary course of business.

- A CER is the technical term for the Carbon Credits output of CDM projects, as defined by the Kyoto Protocol. Generating hydroelectric power, which has low carbon emission, is eligible project under the CDM Mechanism. Thus it is business activity of generating electricity by the assessee that leads to earning income from sale of CER. CER cannot be equated with duty drawback. As against duty drawback / DEPB, the CERs are being issued based on net electricity generated in a particular period. Thus it needs to be appreciated that methodology of calculation of DEPB / duty drawback is altogether different from that of CERs, which is directly linked to generation of electricity.   

As per section 80-IC, deduction shall be available to an existing undertaking which begins to manufacture things or articles and undertakes substantial expansion during the specified period.

Such deduction under section 80-IC would be available from the assessment year relevant to FY in which substantial expansion is completed. 

However, for fulfilling condition of 'substantial expansion", gross block of plant and machinery as on 1st day of FY is required to be compared with purchase of new plant and machinery during such FY in which the substantial expansion is undertaken.

Query -
Whether substantial expansion started in the relevant FY should ideally be completed in the same FY so as to fulfill threshold limit of 50% and claim deduction under section 80-IC? This is because if the expansion falls beyond a particular FY, a situation may arise where threshold limit of 50% is achieved in a particular FY and in subsequent FY, though the substantial expansion is completed, the threshold limit of 50% is not achieved.

In a particular case, the Hon'ble ITAT has partly allowed the appeal. While passing the order, in respect of one of the grounds, Hon'ble ITAT has held that deduction u/s. 10A should be allowed on exchange gain. However, since from the order of CIT(A), the nature of exchange gain (whether the same is derived from the export) was not evident, the ITAT has restored the matter back to the Assessing Officer with the direction to ascertain the nature of exchnage gain. In the circumstances, under which section can the Assessing Officer issue notice for ascertaining the nature of exchange gain?

Whether tax needs to be deducted on payments by an Indian Company to its branch in the UK ? The branch of the Indian Company is assessed to tax in the UK as per UK tax regulations.