Decoding Deduction under 80-IAC of Income Tax Act 1961: A Complete Guide

Background and Objective of Section 80-IAC

Section 80-IAC of Income Tax Act, 1961 provides a tax incentive to domestic companies for promoting investments in startups and other eligible businesses. It was introduced with the objective of promoting innovation, utilization of research and development and creating a vibrant entrepreneurial ecosystem in India. It is available only to domestic companies who make investments as equity shares or as such other instruments as may be notified. 80-IAC is a provision in the Income Tax Act that allows eligible start-ups to claim a deduction of one hundred percent of the profits and gains derived from any eligible business like software development, knowledge based activities and biotechnology, among others. This deduction can be claimed for a period of up to three consecutive assessment years.

Special provision in respect of specified business.

80-IAC. (1) Where the gross total income of an assessee, being an eligible start-up, includes any profits and gains derived from 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 one hundred per cent of the profits and gains derived from such business for three consecutive assessment years.

(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any three consecutive assessment years out of five years beginning from the year in which the eligible start-up is incorporated.

(3) This section applies to a start-up which fulfils 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 a start-up which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as 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 this clause, 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 all 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;

(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 the machinery or plant by the assessee.

Explanation 2.—Where in the case of a start-up, 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) The provisions of sub-section (5) and sub-sections (7) to (11) of section 80-IA shall apply to the start-ups for the purpose of allowing deductions under sub-section (1).

Explanation.—For the purposes of this section,—

(i)  “eligible business” means a business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property;

(ii)  “eligible start-up” means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions, namely:—

 (a)  it is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2019;

 (b)  the total turnover of its business does not exceed twenty-five crore rupees in any of the previous years beginning on or after the 1st day of April, 2016; and

 (c)  it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government;

(iii) “limited liability partnership” means a partnership referred to in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009).

Points to be noted in deduction under 80-IAC:

1. The business must have been set up during or after April 1, 2016.

2. The business must have begun operations within 7 years of the date of its incorporation or registration.

3. The business must have been set up as an unlisted Indian company.

4. The business must have obtained a certificate from the Department of Industrial Policy and Promotion as an eligible business.

5. Invests in equity shares or other notified instruments of an eligible business

6. The eligible business should be established and registered in India

7. Business has not received any prior venture capital or angel funding

8. Business has not been formed by a splitting up or reconstruction of a business already in existence

9. Business has not issued any convertible securities, before the date of investment

10. Business has not borrowed money (other than the borrowings used for making the investment in the eligible business) in excess of Rs. 25 crore in the three years

11. the total turnover of its business does not exceed twenty-five crore rupees in any of the previous years beginning on or after the 1st day of April, 2016

12. The business must be engaged in the following activities:

• • Innovation or,
  • Development or,
  • deployment or
  • commercialisation of new products or,
  • processes or
  • services driven by technology or
  • intellectual property
  • Software development
  • Knowledge based activities,
  • Biotechnology or
  • Any other business as notified by the government

13. Eligible Incomes

Income which is not chargeable to tax, earned or derived by the eligible investor (the domestic company) from the investments made in eligible businesses, qualifies for the tax incentive under Section 80-IAC. The incentive is only applicable for investments made within the period starting from 1 April 2019.

14. Exclusions from Eligible Incomes

The deduction is not applicable for the following incomes:

• • Dividend
  • Interest
  • Quantitative discounts
  • Retirement benefits
  • Capital Gains
  • Any sale, exchange or transfer of shares or securities of any kind

Benefits of claiming the deduction:

1. The amount of deduction is equal to one hundred percent of the profits and gains derived from eligible business for three consecutive assessment years.

2. You may be eligible for step up or carry forward of losses if the business is closed before the end of the assessment year.

3. The deduction is available to all assessees, including individuals, Hindu Undivided Families, companies and trusts.

4. The deduction can be used to offset tax on other income, such as salary, interest or dividend income.

5. There is no need to pay Advance Tax.

In conclusion, Section 80-IAC of the Income Tax Act, 1961 provides a tax incentive to domestic companies for investing in startups and other eligible businesses. It encourages businesses to innovate and develop new products and services, and thereby provides a much-needed boost to the Indian entrepreneurial ecosystem. In order to claim 80-IAC deduction, certain forms are required to be filled and submitted to the Income Tax Department. It is important to consult a professional tax advisor in order to understand the eligibility criteria and the process of claiming the deduction.

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(Author can be reached at email address casharma.sharad2000@gmail.com or on Mobile No. 9990365673)

Disclaimer:  “Neither this article nor the information contained herein shall in any way be construed as forming a contract or shall constitute professional advice required before acting upon any matter. CA Sharad Kumar Sharma has taken all due care in the preparation of this article for accuracy in its contents at the time of publication. However, no liability shall be accepted by him in the event of any direct, indirect or consequential damages arising out of or in any way connected with the use of this article or its contents. “