TAX HOLIDAY FOR NEWLY ESTABLISHED UNITS IN SPECIAL ECONOMIC ZONES [SECTION 10AA]
A deduction of profits and gains which are derived by an assessee being an entrepreneur from
the export of articles or things or providing any service, shall be allowed from the total income
of the assessee.
(1) Assessees who are eligible for exemption
Exemption is available to all categories of assessees who derive any profits or gains from an
undertaking being a unit engaged in the export of articles or things or providing any service.
Such assessee should be an entrepreneur referred to in section 2(j) of the SEZ Act, 2005 i.e.,
a person who has been granted a letter of approval by the Development Commissioner under
section 15(9).
(2) Essential conditions to claim exemption
The exemption shall apply to an undertaking which fulfils the following conditions:
(i) It has begun or begins to manufacture or produce articles or things or provide any
service in any SEZ during the previous year relevant to A.Y.2006-07 or any subsequent
assessment year but not later than A.Y.2020-21.
(ii) It should not be formed by splitting up or reconstruction of a business already in
existence (except in circumstances referred to in section 33B) or formed by transfer to a
new business, of plant and machinery previously used for any purpose exceeding 20%
of the total value of machinery and plant used in the business.
Note: Circumstances referred to in section 33B
The undertaking, being the unit, is formed as re-establishment, reconstruction or revival
by the assessee of the business of such undertaking which is discontinued by reason of
extensive damage to or destruction of, any building, machinery, plant or furniture owned
by the assessee and used for the purpose of such business.
Such damage or destruction should be affected as a direct result of flood, typhoon,
hurricane, cyclone, earthquake or other convulsion of nature or riot or civil disturbance or
accidental fire or explosion or action by an enemy or action taken in combating an enemy.
(iii) For this 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 for
any purpose if the following conditions are fulfilled:
(a) such machinery or plant was not at any time used in India;
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction on account of depreciation has been allowed or allowable under this
Act in respect of such machinery or plant to any person earlier for any prior period.
(iv) The assessee should furnish in the prescribed form, alongwith the return of income, the
report of a chartered accountant certifying that the deduction has been correctly
claimed.
(3) Period for which deduction is available
The unit of an entrepreneur, which begins to manufacture or produce any article or thing or
provide any service in a SEZ on or after 1.4.2005, shall be allowed a deduction of:
(i) 100% of the profits and gains derived from the export, of such articles or things or from
services for a period of 5 consecutive assessment years beginning with the assessment
year relevant to the previous year in which the Unit begins to manufacture or produce
such articles or things or provide services, and
(ii) 50% of such profits and gains for further 5 assessment years.
(iii) A further deduction for next 5 consecutive years shall be so much of the amount not
exceeding 50% of the profit as is debited to the profit and loss account of the previous
year in respect of which the deduction is to be allowed and credited to a reserve account
(to be called the "Special Economic Zone Re-investment Reserve Account") to be
created and utilised in the manner laid down under section 10AA(2).
However, Explanation below section 10AA(1) has been inserted to clarify that amount of
deduction under section 10AA shall be allowed from the total income of the assessee
computed in accordance with the provisions of the Act before giving effect to the provisions of
this section and the deduction under section 10AA shall not exceed such total income of the
assessee.
(4) Conditions to be satisfied for claiming deduction for further 5 years (after 10 years) [Section 10AA(2)]
Sub-section (2) provides that the deduction under (3)(iii) above shall be allowed only if the
following conditions are fulfilled, namely:-
(i) the amount credited to the Special Economic Zone Re-investment Reserve Account is
utilised-
(1) for the purposes of acquiring machinery or plant which is first put to use before the
expiry of a period of three years following the previous year in which the reserve
was created; and
(2) until the acquisition of the machinery or plant as aforesaid, for the purposes of the
business of the undertaking. However, it should not be utilized for
(i) distribution by way of dividends or profits; or
(ii) for remittance outside India as profits; or
(iii) for the creation of any asset outside India;
(ii) the particulars, as may be specified by the CBDT in this behalf, have been furnished by
the assessee in respect of machinery or plant. Such particulars include details of the
new plant/machinery, name and address of the supplier of the new plant/machinery,
date of acquisition and date on which new plant/machinery was first put to use. Such
particulars have to be furnished along with the return of income for the assessment year
relevant to the previous year in which such plant or machinery was first put to use.
(5) Consequences of mis-utilisation / non-utilisation of reserve [Section 10AA(3)]
Where any amount credited to the Special Economic Zone Re-investment Reserve Account -
(i) has been utilised for any purpose other than those referred to in sub-section (2), the
amount so utilized shall be deemed to be the profits in the year in which the amount was
so utilised and charged to tax accordingly; or
(ii) has not been utilised before the expiry of the said period of 3 years, the amount not so
utilised, shall be deemed to be the profits in the year immediately following the said
period of three years and be charged to tax accordingly.
(6) Computation of profit and gains from exports of such undertakings
The profits derived from export of articles or things or services (including computer software) shall
be the amount which bears to the profits of the business of the undertaking, being the unit, the
same proportion as the export turnover in respect of such articles or things or computer software
bears to the total turnover of the business carried on by the undertaking i.e.
other than the assessee shall not be regarded as machinery or plant previously used for
any purpose if the following conditions are fulfilled:
(a) such machinery or plant was not at any time used in India;
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction on account of depreciation has been allowed or allowable under this
Act in respect of such machinery or plant to any person earlier for any prior period.
(iv) The assessee should furnish in the prescribed form, alongwith the return of income, the
report of a chartered accountant certifying that the deduction has been correctly
claimed.
(3) Period for which deduction is available
The unit of an entrepreneur, which begins to manufacture or produce any article or thing or
provide any service in a SEZ on or after 1.4.2005, shall be allowed a deduction of:
(i) 100% of the profits and gains derived from the export, of such articles or things or from
services for a period of 5 consecutive assessment years beginning with the assessment
year relevant to the previous year in which the Unit begins to manufacture or produce
such articles or things or provide services, and
(ii) 50% of such profits and gains for further 5 assessment years.
(iii) A further deduction for next 5 consecutive years shall be so much of the amount not
exceeding 50% of the profit as is debited to the profit and loss account of the previous
year in respect of which the deduction is to be allowed and credited to a reserve account
(to be called the "Special Economic Zone Re-investment Reserve Account") to be
created and utilised in the manner laid down under section 10AA(2).
However, Explanation below section 10AA(1) has been inserted to clarify that amount of
deduction under section 10AA shall be allowed from the total income of the assessee
computed in accordance with the provisions of the Act before giving effect to the provisions of
this section and the deduction under section 10AA shall not exceed such total income of the
assessee.
(4) Conditions to be satisfied for claiming deduction for further 5 years (after 10 years) [Section 10AA(2)]
Sub-section (2) provides that the deduction under (3)(iii) above shall be allowed only if the
following conditions are fulfilled, namely:-
(i) the amount credited to the Special Economic Zone Re-investment Reserve Account is
utilised-
(1) for the purposes of acquiring machinery or plant which is first put to use before the
expiry of a period of three years following the previous year in which the reserve
was created; and
(2) until the acquisition of the machinery or plant as aforesaid, for the purposes of the
business of the undertaking. However, it should not be utilized for
(i) distribution by way of dividends or profits; or
(ii) for remittance outside India as profits; or
(iii) for the creation of any asset outside India;
(ii) the particulars, as may be specified by the CBDT in this behalf, have been furnished by
the assessee in respect of machinery or plant. Such particulars include details of the
new plant/machinery, name and address of the supplier of the new plant/machinery,
date of acquisition and date on which new plant/machinery was first put to use. Such
particulars have to be furnished along with the return of income for the assessment year
relevant to the previous year in which such plant or machinery was first put to use.
(5) Consequences of mis-utilisation / non-utilisation of reserve [Section 10AA(3)]
Where any amount credited to the Special Economic Zone Re-investment Reserve Account -
(i) has been utilised for any purpose other than those referred to in sub-section (2), the
amount so utilized shall be deemed to be the profits in the year in which the amount was
so utilised and charged to tax accordingly; or
(ii) has not been utilised before the expiry of the said period of 3 years, the amount not so
utilised, shall be deemed to be the profits in the year immediately following the said
period of three years and be charged to tax accordingly.
(6) Computation of profit and gains from exports of such undertakings
The profits derived from export of articles or things or services (including computer software) shall
be the amount which bears to the profits of the business of the undertaking, being the unit, the
same proportion as the export turnover in respect of such articles or things or computer software
bears to the total turnover of the business carried on by the undertaking i.e.
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