Section 205: shared conditions for the company and co-operative tax-rate options

Introduction

Section 205 collects conditions and definitions for the special company and co-operative tax regimes in this Chapter. It limits specified deductions and defines manufacturing and related concepts.

Key takeaways

The common list of denied deductions

For the purposes of sections 199(1)(c)(i)(C), 200(1)(a)(iii), 201(3)(a)(iii), 203(1)(a)(ii) and 204(3)(a)(ii), total income under those options is computed without deduction or exemption under:

• Section 33(8)
• Section 45(3)(a), (b) or (c)
• Section 46
• Section 47(1)(a)
• Section 48
• Section 49
• Section 144

Extra conditions for new manufacturing entities (Sections 201 and 204)

For a company or co-operative society relying on section 201 or 204, these additional conditions apply:

• Its business must not be formed by splitting up or reconstructing an existing business, unless formed by re-establishment, reconstruction or revival of an undertaking under the conditions in section 140(4).
• It must not use machinery or plant previously used for any purpose, except: (i) machinery or plant "permitted" as used outside India (as defined below), or (ii) previously used machinery/plant whose total value does not exceed 20% of the total value of all machinery/plant used by the assessee.
• A domestic company must not use a building previously used as a hotel or convention centre in respect of which a deduction under section 80-ID of the Income-tax Act, 1961 was claimed and allowed.
• It must not be engaged in any business other than manufacture or production of an article or thing (and related research or distribution).
• If any difficulty arises in fulfilling these conditions, the Board may, with the Central Government's approval, issue guidelines to remove the difficulty and promote manufacturing using new plant and machinery.

Parliamentary oversight of Board guidelines

Every guideline issued under sub-section (2) must be laid before each House of Parliament for a total period of thirty days (which may be in one session or more). If both Houses agree to modify or reject the guideline before the following session ends, the guideline takes effect only in the modified form, or ceases to have effect, without prejudice to anything already done under it.

Anti-abuse rule for related-party transactions

For sections 201 and 204, if the Assessing Officer finds that a close connection between the assessee and another person has produced more than the ordinary profits the assessee would otherwise be expected to earn, the Assessing Officer may recompute the profits of that business on a reasonable basis. Where a specified domestic transaction under section 164 is involved, profits are instead determined by reference to the arm's length price under section 173(a).

Any excess profit determined this way is deemed to be the assessee's income and is taxed at the specific rate in section 201(1) (Table Sl. No. 1.C(d)) or 204(1) (Table Sl. No. 1.A(d)) - i.e. the 30% rate for deemed income under those sections.

What counts as "manufacture or production" - and key definitions

For this Part, the business of manufacture or production of any article or thing includes generation of electricity, but excludes:

• Development of computer software in any form or media;
• Mining;
• Conversion of marble blocks or similar items into slabs;
• Bottling of gas into cylinders;
• Printing of books or production of cinematograph film; or
• Any other business notified by the Central Government.

Further defined terms

Step-by-step flow for applying Section 205

1. 1

   Which option is being tested?

   Section 205(1) applies to Sections 199, 200, 201, 203 and 204. Section 205(2) and (4) apply only to Sections 201 and 204.

2. 2

   Remove the deductions listed in Section 205(1)

   Total income is computed without deduction or exemption under Section 33(8) (in the prescribed manner), 45(3)(a), (b) or (c), 46, 47(1)(a), 48, 49 and 144.

3. 3

   For Section 201 or 204: is the business newly formed?

   It must not be formed by splitting up or reconstruction of an existing business, except a revival covered by Section 140(4).

   • Formed by split-up: The Section 201 or 204 conditions are not met.
   • Genuinely new: Go to the next step.
4. 4

   Is previously used machinery or plant within limits?

   Only permitted machinery used outside India, or previously used machinery whose value does not exceed 20% of the total value of machinery or plant used. A domestic company must also not use a building previously used as a hotel or convention centre for which a deduction under Section 80-ID of the 1961 Act was claimed and allowed.

5. 5

   Is the business purely manufacture or production?

   Generation of electricity is included; software development, mining, marble slab conversion, gas bottling, printing of books or film production, and any notified business are excluded (Section 205(5)(a)).

6. 6

   Are profits inflated by dealings with a closely connected person?

   The Assessing Officer takes reasonable profits (arm's length price for a specified domestic transaction); the excess is deemed income at the special rate in Section 201(1) or 204(1) (Section 205(4)).

Practical checklist

Glossary

Permitted machinery or plant used outside India

Machinery previously used outside India by another person, never used in India before installation, imported into India, and on which no depreciation has been allowed or is allowable in India (Section 205(5)(b)(ii)).

Manufacture or production

For this Part, includes generation of electricity but excludes the businesses listed in Section 205(5)(a).

Unabsorbed depreciation

As defined in Section 116(13)(e).

Board guidelines

Guidelines the Board may issue, with Central Government approval, to remove difficulties in meeting clauses (b) to (d) of Section 205(2); they must be laid before Parliament (Section 205(3)).

Frequently asked questions