a) Section 80- IA – Unit-wise deduction should be allowed
Plain reading of section 80-IA gives the impression that deduction under section 80-IA is available ‘unit wise’. But, nowadays, losses of other units are clubbed to deny deduction under section 80-IA of the Income-tax Act, 1961 on the reasoning that all units constitute one single business. Since total income from eligible business is loss, deduction under section 80-IA is disallowed (Even when loss of other unit has been set off against profit of non eligible business income). This practice is discretionary in nature. An assessee/company who is claiming deduction under section 80-IA from one unit cannot start another unit of similar business as the initial losses of new unit will get adjusted with the profits of old unit However, if the new unit is started by another assessee/ company ,old unit will not suffer any disallowance under section 80-IA. This put existing assessee/company into disadvantageous position vis-à-vis new assessee/company. Many Tribunal benches (Bangalore, Mumbai etc.) have already rejected this practice.
A specific clarification/ provision should be made in section 80-IA itself to provide that deduction under section 80-lA is ‘UNIT SPECIFIC’. For each unit deduction under section 80-IA should be separately calculated.
(SUGGESTIONS TO REDUCE/ MINIMIZE LITIGATIONS)
b) Benefit u/s 80-IA shall be allowable to the resulting / amalgamated company in case of demerger / amalgamation
Section 80-IA of the Income-tax Act, 1961 provides exemption from income tax on infrastructure projects subject to specified conditions in order to encourage investment in these areas. Sub-section (12) provides that in case of demerger or amalgamation, the benefits to the undertaking under Section 80-IA will continue in the hands of the transferee company and will cease in the hands of the transferor company.
However, as per sub-section (12A) inserted by the Finance Act, 2007 the benefits will cease, if there is a transfer in a scheme of amalgamation or demerger, on or after 1st April, 2007. The unfortunate result of this amendment is that neither the transferor nor the transferee company will enjoy the benefit of section 80-IA in case there is an amalgamation or demerger. The original position, under which the transferee company will enjoy the benefit in case of a demerger or amalgamation, needs to be reinstated based on the following reasons:
(i) Incentives of this nature have been traditionally linked to a unit/undertaking/ investment, and not to an entity. It is logically so, because the objective is to incentivize an investment regardless of which entity houses that investment.
(ii) Amalgamations or demergers are restricted forms of transfer which are also subject to (i) stringent guidelines as prescribed in the Income-tax Act, 1961 and (ii) Court supervision and approval. The benefits under 80IA used to be allowed in the hands of the transferee companies in such restricted forms of transfer. Such rationale remains valid even now and the benefits under Section 80-IA may therefore, continue to be available in the hands of the transferee, like in the past, prior to insertion of Subsection (12A) by the Finance Act 2007.
(iii) The benefits of this section, rightly, covers a long span of 15/20 years as infrastructure projects by nature take a long time to give economic returns corresponding to their risks. In such a long span of time, the dynamic and ever changing market place, especially in a growing economy like India, will necessitate a company to undergo many changes (amalgamation or demerger being some of these) in order to continue to operate efficiently. Removal of benefits like that of 80-IA would lead to economic inefficiencies by preventing necessary amalgamations or demergers.
(iv) The amendment therefore is an undue constraint and may even defeat the original purpose of encouraging infrastructure projects (especially given the long span of time), which are necessary building blocks of our economy.
The concept of an amalgamation or demerger deserving appropriate treatment is well recognized under the Income-tax Act, 1961 which rightly provides for several benefits for such transactions including exemption from capital gains tax. Further, fiscal benefits similar to 80-IA like those under Sections 80-IB, 80-IC or 10A of the Income-tax Act, 1961 continues to be available, rightly, even after any amalgamations or demergers, and these have not been deleted. Extending the timelines for some of these benefit years, in the Finance Act of 2011 clearly underscores and reiterates their importance.
The original position, under which the transferee company enjoys the benefit in case of a demerger or amalgamation, may be reinstated.
(SUGGESTIONS FOR RATIONALIZATI ON OF THE PROVISIONS OF DIRECT TAX LAWS)