FAQs on deduction available from Gross Total Income

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Section 80-IA(1) provides a  ten-year tax holiday in respect of profits and gains derived by an undertaking or an enterprise from an eligible business i.e., business referred to in sub-section (4) of the said section.

The Explanation to the said section clarifies that the tax holiday u/s 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).

Therefore, the assessee cannot claim deduction u/s 80-IA(4) in respect of the profits derived from this undertaking for the A.Y. 2022-23, since, during the year ended on 31.3.2022, the undertaking was solely engaged in executing works contract awarded by the State Government.

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2A. Section 80-IB(13) provides that the provisions contained in section 80-IA(5) shall, so far as may be, apply to the eligible business u/s 80-IB. Accordingly, for the purpose of computing the deduction under section 80-IB, the profits and gains of an eligible business shall be computed as if such eligible business was the only source of income of the assessee. Therefore, the entity should claim deduction under section 80-IB on profit from the eligible unit without setting off loss suffered in the other unit. It may be noted that the aggregate deduction under Chapter VIA, however, cannot exceed the gross total income of the assessee.

2B. Under section 80-IB, where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking referred to in the section, there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gains at the specified percentage and for such number of years as specified in the section.

In CIT vs. Sterling Foods (1999)(SC) and Liberty India vs. CIT 2009)(SC), it was held that sale of import entitlement and duty drawback cannot be construed as income derived from industrial undertaking. Therefore, such income cannot be included in computing income for the purpose of deduction under section 80-IB.

However, interest income derived by an undertaking on delayed collection of sale proceeds shall be treated as income derived from the industrial undertaking, and therefore, the same would be eligible for deduction under section 80-IB.

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Computation of total income for the A.Y. 2022-23:

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Section 80-IB provides for allowing deduction in respect of profits and gains derived from eligible business of the industrial undertaking. The issue under consideration is whether duty drawback can be regarded as “profits and gains” derived from eligible business of the industrial undertaking”.

For a receipt to be treated as having been “derived from” the industrial undertaking, the same should be directly and inextricably connected with the business of the industrial undertaking. The connection should be direct and not remote.
The facts of the case are similar to the facts in Liberty India v. CIT (2009), where the Supreme Court held that export incentives like duty drawback receipts, DEPB benefits are on account of statutory provisions or schemes framed by the Central Government and do not form part of profits of the eligible undertaking for the purposes of Sec. 80-IA and 80-IB.
Applying the same rationale to the present case, duty drawback would not form part of profit of eligible undertaking for the purpose of deduction under section 80-IB.

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Computation of Total Income of Mr. K for the A.Y. 2022-23:

Ans: In the case of  CIT v. Swarnagiri Wire Insulations Pvt. Ltd. (2012), the Karnataka High Court observed that it is a generally accepted principle that the deeming provision of a particular section cannot be breathed into another section.

Therefore, the deeming provision contained in section 80-IA(5) cannot override the provisions of section 70(1). Where the assessee incurs loss in eligible business on account of claiming depreciation, section 80-IA becomes insignificant, since there is no profit from which this deduction can be claimed. It is thereafter that section 70(1) comes into play, whereby an assessee is entitled to set off the losses from one source against income from another source under the same head of income.

Therefore, the court held that the assessee was entitled to the benefit of set off of loss of eligible business against the profits of non-eligible business. However, once set-off is allowed under section 70(1) against income from another source under the same head, a deduction to such extent is not possible in any subsequent assessment year i.e., the loss (arising on account of balance depreciation of eligible business) so set-off under section 70(1) has to be first deducted while computing profits eligible for deduction under section 80-IA in the subsequent year.

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As per Sec. 80DD, an assessee would be eligible for deduction for the amount paid or deposited under a scheme framed by LIC or any other insurer approved by the CBDT in respect of medical treatment including nursing, training and rehabilitation for the maintenance of a dependent relative with disability. The amount of deduction shall be ` 75,000 [FLAT] (in case of severe disability ` 1,25,000 [FLAT]), irrespective of actual amount of expenditure incurred on maintenance or treatment.

In this case, the assessee would be eligible for deduction u/s 80DD in respect of amount deposited with LIC for maintenance of his mother. As his mother is suffering from severe disability (i.e. 80% or more of one or more disabilities) and is wholly dependent on him, he would be eligible for deduction of ` 1,25,000.

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The assessee would be eligible for deduction u/s 80G in respect of the donations as follows:

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Computation of the taxable profit and amount admissible as deduction u/s 80-IA:

Therefore, the amount admissible as deduction u/s 80-IA is Rs. 30 lakh.

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The facts of the case are similar to the case of CIT v. Shree Govindbhai Jethalal Nathavani Charitable Trust (2015), where it was observed that, while considering the application for the purpose of Section 80G, the authority cannot act as an assessing authority and the enquiry should be confined to finding out if the institution satisfies the prescribed conditions.

The High Court also observed that Sec. 80G does not relate to assessment of the trust or the institution whose income is not liable to be included in the computation of taxable income under various provisions of the Act instead it is related to giving deduction in respect of donations made by a person to such trusts and institutions. The High Court, therefore, set aside the order passed by the Commissioner refusing to grant registration u/s 80G(5) to the assessee-trust due to the reason that it has not applied 85% of its income for charitable purposes.

By applying the Gujarat High Court decision in this case, the action of the Commissioner to reject the application on the ground that it had not spent 85% of its income for charitable purposes is not valid.

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Computation of Total Income of the assessee for the A.Y. 2022-23:

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As per Sec. 80-IAC, the deduction is available to the assessee, being an eligible start-up whose gross total income includes any profits and gains from eligible business of innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

“Eligible start-up” means a company or a LLP engaged in eligible business and fulfils the following conditions:

(a) it is incorporated on or after 01.04.2016 but before 01.04. 2023[1];

(b) the total turnover of its business does not exceed ` 100 crores in the previous year relevant to the assessment year for which deduction is claimed;

(c) it holds a certificate of eligible business from the Inter Ministerial Board of Certification as notified by the Central Government.

Deduction shall be 100% of the profits and gains derived from such eligible business for any 3 Consecutive Assessment Years out of 10 Assessment Years beginning from the year in which eligible start-up is incorporated and the deduction shall not exceed the profits derived from the business of start-up.

In this case, the entity is a company and incorporated on 01.04.2021 i.e. between 01.04.2016 to 01.04. 2023. Its total turnover does not exceed Rs. 100 crores in the previous year relevant to the assessment year for which deduction is claimed and it also holds a certificate of eligible business from the Inter Ministerial Board of Certification as notified by the C.G. Therefore, the entity fulfils all the conditions of being an eligible start-up. Since, the entity satisfies all the conditions of being an eligible start-up and also engaged in the business of innovation, development, deployment and commercialization of new processes driven by technology and therefore, it is eligible for deduction u/s 80-IAC.

The entity will get the deduction of 100% of the profits and gains derived from such eligible business for any 3 consecutive assessment years out of 10 assessment years beginning from the A.Y. 2022-23.

For the first and second year i.e. P.Y. 2021-22 and P.Y. 2022-23, the entity has incurred a loss. In the subsequent 5 years i.e. P.Y. 2023-24 to P.Y. 2027-28, it has earned profits from eligible business and hence, can claim 100% of its profits as deduction for 3 consecutive assessment years u/s 80-IAC.

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As per Sec. 80-IAC, the deduction is available to the assessee, being an eligible start-up whose gross total income includes any profits and gains from eligible business of:innovation,

• • development,
  • improvement

of products, processes, services or a scalable business model with a high potential of employment generation or wealth creation.

Deduction shall be 100% of the profits and gains derived from such eligible business for 3 consecutive assessment years out of 10 Assessment Years beginning from the year in which eligible start-up is incorporated.

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“Eligible start-up” means a company or a LLP engaged in eligible business and fulfils the following conditions:

(a) it is incorporated on or after 01.04.2016 but before 01.04.2023[2] ;

(b) the total turnover of its business does not exceed ` 100 crores in the previous year relevant to the assessment year for which deduction is claimed;

(c) it holds a certificate of eligible business from the Inter Ministerial Board of Certification as notified by the Central Government.