INFRASTRUCTURE PROJECTS – TAX PROVISIONS
By
H Padamchand Khincha
BCom, LLB, FCA
Chartered Accountant
Bangalore
* * * * *
POWER GENERATING UNDERTAKINGS
DepreciationSec 44BBExemptionDeduction DDT MAT
u/s 80IA u/s 150-O u/s 115JB
U/s 32(1)(i) U/s 41(2) U/s 50AU/s 10(40) U/s 10(41) U/s 80 IA(4)(iv) U/s 80 IA(5)
Miscellaneous Issues
TAXATION OF INFRASTRUCTURE UNDERTAKINGS
Section 4Section 28Section 44ADSection 10(23G)Section 80 IA
General SpecificDeemed income Exemption Deduction
Charge charge
Section 115 OSection 115 JBMisc issues
D D T M A T
TAXATION OF INFRASTRUCTURE UNDERTAKINGS
Issue – 1:
Exemption available:
Section 10(23G) [inserted by the Finance (No 2) Act, 1996 wef 01-04-1997]:
Any income by way of dividends other than dividends referred to in section 115 O, interest or long term capital gains of an infrastructure capital fund or an infrastructure capital company fund or an infrastructure capital company or a co-operative bank from investments made by way of shares or long term finance in any enterprise or undertaking wholly engaged in the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility referred to in section 80 IA(4).
The income of an infrastructure capital company is exempt. Such income shall however be taken into account while computing book profit and income tax payable under section 115JB.
Explanation:
(1)Infrastructure capital company means such company as has made investments by way of acquiring shares or providing long term finance to an enterprise wholly engaged in the business referred in this clause.
(2)“Infrastructure capital fund” means such fund operating under a registered trust deed, established to raise money for investment by way of acquiring shares or providing long term finance to an enterprise wholly engaged in the business of:
(i)Developing;
(ii)Operating & maintaining;
(iii)Developing, operating & maintaining an infrastructure facility.
(3)“Interest” includes any fees or commission received by a financial institution for giving any guarantee to or enhancing credit in respect of, an enterprise which has been approved by the Central Government for the purpose of this clause.
Issue – 2:
Presumptive Taxation:
Section 44AD:
In the case of an assessee carrying on the business of civil construction or supply of labour for civil construction whose gross receipts from such business does not exceed Rs 40 lakhs, a sum equal to 8% of the gross receipts paid or payable to the assessee or such higher sum as declared by the assessee in the return of income shall be deemed to be the income from such business.
Other points:
(1)All deductions under sections 30 to 38 including depreciation shall be deemed to have been allowed.
(2)WDV of assets used for the purposes of such business shall be calculated as if depreciation has been actually allowed.
(3)Provisions of sections 44AA and 44AB shall not apply to these businesses and while computing the monetary limits for these sections with reference to other business carried on by the assessee, the gross receipts or the income from the businesses covered by section 44AD shall be excluded.
(4)The assessee can claim that the profits and gains of these businesses are lower than the income deemed in these provisions provided the assessee maintains books of accounts as per section 44AA, and gets the books of accounts audited and furnishes audit report as required under section 44AB.
(5)In the case of an assessee which is a firm, to which the provisions of section 44AD are applied, salary and interest paid to its partners shall be deducted from the income computed under these provisions. The allowance of the salary and interest shall be subject to the conditions and limits specified in section 40(b).
Explanation:
For the purpose of this section, “civil construction” includes:
(a)the construction or repair of any building, bridge, dam or other structure or of any canal or road;
(b)the execution of any works contract.
Case Law:
(1)Brij Bhusan Lal Parduman Kumar Vs CIT 115 ITR 824 (SC):
The material supplied by the contractee at fixed cost to the civil construction contractor shall not be included in the gross receipts of turnover under section 44AD.
Issue – 3:
Deduction Available:
Section 80IA (4)(i)
An enterprise carrying on the business of
Developing
Operating and maintaining
Developing, Operating and maintaining
Any infrastructure facility which fulfils all the following conditions namely
(a)It is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act.
(b)It has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for
Developing or
Operating and maintaining or
Developing, operating and maintaining a new infrastructure facility
(c)It has started or starts operating and maintaining the infrastructure facility on or after the 1st day of April 1995.
Provided that; where an infrastructure facility is transferred on or after 01.04.1999 by an enterprise which developed such infrastructure facility to another enterprise for the purpose of operating and maintaining the infrastructure facility on its behalf in accordance with the agreement with the Central Government, State Government, Local authority or statutory body, the provisions of this section shall apply to the transferee enterprise as if it were the enterprise to which this clause applies and the deduction from profits and gains would be available to such transferee enterprise for the unexpired period during which the transferor enterprise would have been entitled to the deduction if the transfer would not have taken place.
Explanation:
Infrastructure facility means;
(a)A road including toll road, a bridge or a rail system
(b)A highway project including housing or other activities being an integral part of the highway project
(c)A water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system
(d)A port, airport, inland waterway or inland port
Other relevant points:
(i)Option to Asessee
The deduction can be claimed at the option of the assessee. For any 10 consecutive assessment years out of 15 years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility.
In respect of a highway project including housing or other activities being an integral part of the highway project, road including toll road, a bridge or a rail system and a water project, water treatment system, irrigation project, sanitation and sewerage system or solid state management system, assessee can claim deduction for any 10 consecutive assessment years out of 20 years beginning from the year of operation.
(ii)Conditions
(a)The industrial undertaking is not formed by splitting up or reconstruction of an existing unit.
(b)The undertaking is not formed by transfer of machinery or plant previously used for any purpose [up to 20% of total value of plant and machinery can be plant and machinery earlier used]
- For above purpose, 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 in any purpose if the following conditions are fulfilled.
such machinery or plant was not at any time used in India
such machinery or plant is imported into India from any country outside India and
no deduction on account of depreciation has been allowed in respect of such machinery or plant to any person earlier.
(iii)Sub section (5) to Section 80IA
The profits and gains eligible for deduction under this section in respect of the initial assessment year or subsequent years shall be computed as if the above mentioned eligible business is the only source of the income of the assessee during these years. Therefore, the amount of any loss incurred from eligible business in any of the years falling within the period for which deduction is opted shall reduce the profits in the subsequent years from that source even though it might have been set off against other income of the assessee during the earlier years.
(iv)Audit of Accounts
Deduction shall be allowed only if the accounts are audited by a Chartered Accountant and audit report thereof is furnished along with the return of income –Section 80IA (7)
(v)Power of Assessing Officer
As laid down in section 80IA (8) read with section 80IA (10) where any goods or services held for the purpose of eligible business are transferred to any other business carried on by the assessee or any goods or services held for any other business are transferred to the eligible business and in either case, if the consideration for such transfer as recorded in the accounts of the eligible business does not correspond to the market value thereof, then the profits eligible for deduction shall be computed by adopting market value for such goods or services.
In case of practical difficulty in this regard, the profits shall be computed by the assessing officer on a reasonable basis. Another aspect in this regard which confers substantial amount of power in the hands of assessing officer is that, where due to the close connection between the assessee and other person or for any other reason, it appears to the assessing officer that the profits of eligible business is increased to more than the ordinary profits, the assessing officer shall compute the amount of profits on a reasonable basis for allowing the deduction.
(vi)Power of Central Government
The Central Government may notify that the benefit conferred by this section shall not apply to any class of industrial undertaking or enterprise with effect from any specified date.
(vii)Situation of Amalgamation or Demerger
Sub section (12) of section 80IA specifically provides that, where any undertaking of an Indian Company which is entitled to the deduction under this section is transferred before the expiry of the period of deduction to another Indian company in a scheme of amalgamation or demerger, no deduction shall be admissible to the amalgamating or demerged company for the previous year in which the amalgamation or demerger takes place and the amalgamated or the resulting company shall be entitled to the deduction as if the amalgamation or demerger had not taken place
Issue – 4:
Recent amendments to section 80 IA:
Under the existing provisions contained in section 80 IA(4)(i) any enterprise carrying on the business of:
(i)Developing or;
(ii)Operating & maintaining or;
(iii)Developing, operating & maintaining an infrastructure facility.
Any infrastructure facility which starts operating and maintaining such infrastructure facility on or after 1st April 1995 is eligible for 100% deduction of profits for a period of 10 years. One of the conditions to claim this deduction is that the enterprise shall be owned by a company registered in India or by a consortium of such companies.
The amendment seeks to extend the benefit to enterprise owned by an authority or a board or a corporation or any other body established or constituted under any Central or State Act.
Issue – 5:
Comparison between section 10(23G) & section 80 IA 4(i):
Both sections 10(23G), inserted with effect from 01-04-1997, and section 80 IA, insertedwith effect from 01-04-2000, are incentive provisions to promote infrastructure.
Relief under section 10(23G) is an exemption provision being part of Chapter III targeting infrastructure capital company and venture capital fund.
Section 80 IA on the other hand would cover all assessees reliefbeing admissible as a deduction out of gross total income. The activities covered as “infrastructure”have been harmonized and are now the same for both sections.
For purposes of relief under section 10(23G), the company or the fund has to comply with conditions prescribed under rule 2E on an application to be made in form 56E and approved by the Central Government.
But section 80 IA expects that the undertaking should be a new one with conditions parallel to those prescribed for other classes of undertakings covered by section 80 IB.
The period of relief under section 80 IA is restricted, while there is no such limitation for relief under section 10(23G).
TAXATION OF POWER GENERATING UNDERTAKING
Important Sections
Issue – 1
Depreciation for power sector
Sec. 32(1)(i) In respect of depreciation of –
(i)building, Machinery, Plant or Furniture, being tangible assets ;
(ii)Know now, Patent, Copyrights, trade marks, Licences, Franchies or any other business or commercial rights of similar nature, being intangible assets acquired on or after the Ist day of April 1998.
Owned wholly or partly by the assessee and used for the purposes of the business or profession, the following deduction shall be allowed –
in the case of assets of an undertaking engaged in generation or generation and distribution of power, Such percentage on the actual cost thereof to the assessee as may be prescribed.
Rates of Depreciation :
Rule 5(1A) and Appendix 1-A specify the table of rates at which depreciation is admissible with effect from April 2, 1997.
Option to Assessee :
It is open to such an undertaking to opt for claiming depreciation under WDV method on the basis of percentage prescribed in Appendix 1. Such an option has to be exercised before the due date for furnishing the return of income U/s.139(1) for the assessment year 1998-99, in case of U/T which began to generate power prior to 01-04-1997 and in the case of any other such undertaking for the assessment year relevant to previous year in which it begins to generate power.
Such an option once exercised shall be final and shall apply to all subsequent years.
Where an undertaking generating or generating and distributing power opts to avail depreciation on SLM in respect of each individual asset, the block of assets “ Concept does not apply”.
Issue 2
Relationship of Section 32(1)(i) with section 41(2) and Section 50A.
Where any asset, on which Sec.32(1)(i) depreciation is claimed is sold then in such a case the following provisions would apply;
(i) Where sale value or moneys payable is less than WDV
or
Terminal Depreciation (Sec.32(1)(iii)
Sec. 32 provides that where any such asset in respect of which straight time method depreciation has been claimed is sold, discarded, demolished is destroyed in the previous year, the short fall if any in the money payable in respect of any such asset as compared to the written down value shall be allowed as “terminal depreciation” in that year.
Condition : Such deficiency is actually required to be written off in the books of the . assessee.
‘Moneys payable ‘ Includes :
- Any insurance
- Salvage or compensation moneys payable or
- Where the building Machinery, Plant or Furniture is sold the price for which it is sold.
Restriction : The concept of terminal depreciation does not apply, if the asset is sold
discarded, demolished or destroyed in the same previous year in which
it is first put to use.
Where sale value or money relisable is more than WDV
or
Balancing change (Sec.41(2).
Balancing change on assets in respect of which depreciation U/s.32(1)(i) claimed, is sold/discarded/demolished.
Balancing charge = Net consideration less WDV
NOTE : Taxable in year in which the amount becomes due.
Case law : UNITED PROVINCES ELECTRIC SUPPLY CO (2000)
(244 ITR 764 110 Taxman 134(SC))
In the above quoted case, Honorable SC held that, in case of acquisition of property under any law, the balancing charge U/s.41(2) is taxable as income of the previous year in which it becomes due and not in the year in which it was settled.
By taxing balancing charge, Revenue takes back what it had given by way of depreciation allowance in the earlier year.
Sec.50A implication :
Where the capital asset is an asset in respect of which a deduction on account of depreciation under clause (i) of subsection (1) of Section 32 has been obtained by the assessee in any previous year, the provisions of section 48 and 49 shall apply subject to the modification that the written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset.
In other words :
Surplus over and above the actual cost shall be assessed as ‘ capital gains ‘.
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