(See section 27)
MODIFICATIONS TO THE INCOME-TAX ACT, 1961
(43 OF 1961)
(a) in section 10,—
(A) in clause (15), after sub-clause (vii), the following clause shall be inserted at the end, namely:—
“(viii) any income by way of interest received by a non-resident or a person who is not ordinarily
resident, in India on a deposit made on or after the 1st day of April, 2005 in an Offshore Banking Unit
referred to in clause (u) of section 2 of the Special Economic Zones Act, 2005;”;
(B) in clause (23G), after the words, brackets, figures and letters “sub-section (4) of section 80-IA”,
the words brackets, figures and letters “or sub-section (3) of section 80-IAB” shall be inserted;
(C) in clause (34), the following Explanation shall be inserted, namely:—
“Explanation.—For the removal of doubts, it is hereby declared that the dividend referred to in
section 115-O shall not be included in the total income of the assessee, being a Developer or
entrepreneur.”;
(b) in section 10A, after sub-section (7A), the following sub-section shall be inserted, namely:—
“(7B) The provisions of this section shall not apply to any undertaking, being a Unit referred to in
clause (zc) of section 2 of the Special Economic Zones Act, 2005, which has begun or begins to
manufacture or produce articles or things or computer software during the previous year relevant to the
assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone.”;
(c) after section 10A, the following section shall be inserted, namely:—
‘10AA. Special provisions in respect of newly established Units in Special Economic Zones.—(1)
Subject to the provisions of this section, in computing the total income of an assessee, being an
entrepreneur as referred to in clause (j) of section (2) of the Special Economic Zones Act, 2005, from his
Unit, who begins to manufacture or produce articles or things or provide any services during the previous
year relevant to any assessment year commencing on or after the 1st day of April, 2006, a deduction of—
(i) hundred per cent. of profits and gains derived from the export, of such articles or things or
from services for a period of five 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, as the case may be, and fifty per cent. of such profits and gains for further
five assessment years and thereafter;
(ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty
per cent. 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 for the purposes of the
business of the assessee in the manner laid down in sub-section (2).
(2) The deduction under clause (ii) of sub-section (1) shall be allowed only if the following conditions
are fulfilled, namely:—
(a) the amount credited to the Special Economic Zone Re-investment Reserve Account is to be
utilised—
(i) 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
(ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the
business of the undertaking other than for distribution by way of dividends or profits or for
remittance outside India as profits or for the creation of any asset outside India;
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(b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under
clause (b) of sub-section (IB) of section 10A have been furnished by the assessee in respect of
machinery or plant 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.
(3) Where any amount credited to the Special Economic Zone Re-investment Reserve Account under
clause (ii) of sub-section (1),—
(a) has been utilised for any purpose other than those referred to in sub-section (2), the amount so
utilised; or
(b) has not been utilised before the expiry of the period specified in sub-clause (i) of clause (a) of
sub-section (2), the amount not so utilised,
shall be deemed to be the profits,—
(i) in a case referred to in clause (a), in the year in which the amount was so utilised; or
(ii) in a case referred to in clause (b), in the year immediately following the period of three years
specified in sub-clause (i) of clause (a) of sub-section (2),
and shall be charged to tax accordingly:
Provided that where in computing the total income of the Unit for any assessment year, its profits and
gains had not been included by application of the provisions of sub-section (7B) of section 10A, the
undertaking being the Unit shall be entitled to deduction referred to in this sub-section only for the
unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from
income as provided in clause (ii) of sub-section (1):
Explanation.—For the removal of doubts, it is hereby declared that an undertaking being the Unit,
which had already availed before the commencement of the Special Economic Zone Act, 2005, the
deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible
for deduction from income under this section:
Provided further that where a Unit initially located in any free trade zone or export processing zone is
subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or
export processing zone into a Special Economic Zone, the period of ten consecutive assessment years
referred to above shall be reckoned from the assessment year relevant to the previous year in which the
Unit began to manufacture, or produce or process such articles or things or services in such free trade
zone or export processing zone:
Provided also that where a Unit initially located in any free trade zone or export processing zone is
subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or
export processing zone into a Special Economic Zone and has completed the period of ten consecutive
assessment years referred to above, it shall not be eligible for deduction from income as provided in
clause (ii) of sub-section (1) with effect from the 1st day of April, 2006.
(4) This section applies to any undertaking being the Unit, which has begun or begins to manufacture
or produce articles or things or services during the previous year relevant to the assessment year
commencing on or after the 1st day of April, 2006, in any Special Economic Zone.
(5) Where any undertaking being the Unit which is entitled to the deduction under this section is
transferred, before the expiry of the period specified in this section, to another undertaking, being the Unit
in a scheme of amalgamation or demerger,—
(a) no deduction shall be admissible under this section to the amalgamating or the demerged Unit,
being the company for the previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section shall, as they would have applied to the amalgamating or the
demerged Unit being the company as if the amalgamation or demerger had not taken place.
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(6) Loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74,
in so far as such loss relates to the business of the undertaking, being the Unit shall be allowed to be
carried forward or set off.
(7) For the purposes of sub-section (1), the profits derived from the 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 services bears to the total turnover of the business carried on by the assessee.
(8) The provisions of sub-sections (5) and (6) of section 10A shall apply to the articles or things or
services referred to in sub-section (1) as if—
(a) for the figures, letters and word “1st April, 2001”, the figures, letters and word “1st April,
2006” had been substituted;
(b) for the word “undertaking”, the words “undertaking, being the Unit” had been substituted.
(9) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be,
apply in relation to the undertaking referred to in this section as they apply for the purposes of the
undertaking referred to in section 80-IA.
Explanation 1.—For the purposes of this section,—
(i) “export turnover” means the consideration in respect of export by the undertaking, being the
Unit of articles or things or services received in, or brought into, India by the assessee but does not
include freight, telecommunication charges or insurance attributable to the delivery of the articles or
things outside India or expenses, if any, incurred in foreign exchange in rendering of services
(including computer software) outside India;
(ii) “export in relation to the Special Economic Zones” means taking goods or providing services
out of India from a Special Economic Zone by land, sea, air, or by any other mode whether physical
or otherwise;
(iii) “manufacture” shall have the same meaning as assigned to it in clause (r) of section 2 of the
Special Economic Zones Act, 2005;
(iv) “relevant assessment year” means any assessment year falling within a period of fifteen
consecutive assessment years referred to in this section;
(v) “Special Economic Zone” and “Unit” shall have the same meanings as assigned to them under
clause (za) and (zc) of section 2 of the Special Economic Zones Act, 2005.
Explanation 2.—For the removal of doubts, it is hereby declared that the profits and gains derived
from on site development of computer software (including services for development of software) outside
India shall be deemed to be the profits and gains derived from the export of computer software outside
India;
(d) after section 54G, the following section shall be inserted, namely:—
“54GA. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking
from urban area to any Special Economic Zone.—(1) Notwithstanding anything contained in
section 54G, where the capital gain arises from the transfer of a capital asset, being machinery or plant or
building or land or any rights in building or land used for the purposes of the business of an industrial
undertaking situate in an urban area, effected in the course of, or in consequence of the shifting of such
industrial undertaking to any Special Economic Zone, whether developed in any urban area or any other
area and the assessee has within a period of one year before or three years after the date on which the
transfer took place,—
(a) purchased machinery or plant for the purposes of business of the industrial undertaking in the
Special Economic Zone to which the said undertaking is shifted;
(b) acquired building or land or constructed building for the purposes of his business in the
Special Economic Zone;
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(c) shifted the original asset and transferred the establishment of such undertaking to the Special
Economic Zone; and
(d) incurred expenses on such other purposes as may be specified in a scheme framed by the
Central Government for the purposes of this section,
then, instead of the capital gain being charged to income-tax as income of the previous year in which the
transfer took place, it shall, subject to the provisions of sub-section (2), be dealt with in accordance with
the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost and expenses incurred in relation to all
or any of the purposes mentioned in clauses (a) to (d) (such cost and expenses being hereafter in this
section referred to as the new asset), the difference between the amount of the capital gain and the
cost of the new asset shall be charged under section 45 as the income of the previous year; and for the
purpose of computing in respect of the new asset any capital gain arising from its transfer within a
period of three years of its being purchased, acquired, constructed or transferred, as the case may be,
the cost shall be Nil; or
(ii) if the amount of the capital gain is equal to, or less than, the cost of the new asset, the capital
gain shall not be charged under section 45, and for the purpose of computing in respect of the new
asset any capital gain arising from its transfer within a period of three years of its being purchased,
acquired, constructed or transferred, as the case may be, the cost shall be reduced by the amount of
the capital gain.
Explanation.—In this sub-section,—
(a) “Special Economic Zone” shall have the meaning assigned to it in clause (za) of the Special
Economic Zones Act, 2005;
(b) “urban area” means any such area within the limits of a municipal corporation or municipality
as the Central Government may, having regard to the population, concentration of industries, need for
proper planning of the area and other relevant factors, by general or special order, declare to be an
urban area for the purposes of this sub-section.
(2) The amount of capital gain which is not appropriated by the assessee towards the cost and
expenses incurred in relation to all or any of the purposes mentioned in clauses (a) to (d) of
sub-section (1) within one year before the date on which the transfer of the original asset took place, or
which is not utilised by him for all or any of the purposes aforesaid before the date of furnishing the
return of income under section 139, shall be deposited by him before furnishing such return [such deposit
being made in any case not later than the due date applicable in the case of the assessee for furnishing the
return of income under sub-section (1) of section 139] in an account in any such bank or institution as
may be specified in, and utilised in accordance with, any scheme which the Central Government may, by
notification, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for
the purposes of sub-section (1), the amount, if any, already utilised by the assessee for all or any of the
aforesaid purposes together with the amount so deposited shall be deemed to be the cost of the new asset:
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for all or
any of the purposes mentioned in clauses (a) to (d) of sub-section (1) within the period specified in that
sub-section, then,—
(i) the amount not so utilised shall be charged under section 45 as the income of the previous year
in which the period of three years from the date of the transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme
aforesaid.”;
(e) in section 80-IA, after sub-section (12), the following section shall be inserted, namely:—
“(13) nothing contained in this section shall apply to any Special Economic Zones notified on or
after the 1st day of April, 2005 in accordance with the scheme referred to in sub-clause (iii) of
clause (c) of sub-section (4)”.
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(f) after section 80-IA, the following section shall be inserted, namely:—
“80-I AB. Deductions in respect of profits and gains by an undertaking or enterprise engaged in
development of Special Economic Zone.—(1) Where the gross total income of an assessee, being a
Developer, includes any profits and gains derived by an undertaking or an enterprise from any
business of developing a Special Economic Zone, notified on or after the 1st day of April, 2005 under
the Special Economic Zone Act, 2005, 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 ten consecutive
assessment years.
(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by
him for any ten consecutive assessment years out of fifteen years beginning from the year in which a
Special Economic Zone has been notified by the Central Government:
Provided that where in computing the total income of any undertaking, being a Developer for any
assessment year, its profits and gains had not been included by application of the provisions of
sub-section (13) of section 80-1A, the undertaking being the Developer shall be entitled to deduction
referred to in this section only for the unexpired period of ten consecutive assessment years and
thereafter it shall be eligible for deduction from income as provided in sub-section (1) or
sub-section (2), as the case may be:
Provided further that in a case where an undertaking, being a Developer who develops a Special
Economic Zone on or after the 1st day of April, 2005 and transfers the operation and maintenance of
such Special Economic Zone to another Developer (hereafter in this section referred to as the
transferee Developer), the deduction under sub-section (1) shall be allowed to such transferee
Developer for the remaining period in the ten consecutive assessment years as if the operation and
maintenance were not so transferred to the transferee Developer.
(3) The provisions of sub-sections (5) and sub-sections (7) to (12) of section 80-IA shall apply to
the Special Economic Zones for the purpose of allowing deductions under sub-section (1).
Explanation.—For the purposes of this section, “Developer” and “Special Economic Zone” shall
have the same meanings respectively as assigned to them in clauses (g) and (za) of section 2 of the
Special Economic Zones Act, 2005”;
(g) for section 80LA, the following section shall be substituted, namely:—
‘80LA. Deduction in respect of certain incomes of Offshore Banking Units and International
Financial Services Centre.—(1) Where the gross total income of an assessee,—
(i) being a scheduled bank, or, any bank incorporated by or under the laws of a country
outside India; and having an Offshore Banking Unit in a Special Economic Zone; or
(ii) being a Unit of an International Financial Services Centre,
includes any income referred to in sub-section (2), there shall be allowed, in accordance with and
subject to the provisions of this section, a deduction from such income, of an amount equal to—
(a) one hundred per cent of such income for five consecutive assessment years beginning
with the assessment year relevant to the previous year in which the permission, under clause (a)
of sub-section (1) of section 23 of the Banking Regulation Act, 1949 (10 of 1949) or permission
or registration under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or any
other relevant law was obtained, and thereafter;
(b) fifty per cent. of such income for five consecutive assessment years.
(2) The income referred to in sub-section (1) shall be the income—
(a) from an Offshore Banking Unit in a Special Economic Zone; or
(b) from the business referred to in sub-section (1) of section 6 of the Banking Regulation
Act, 1949 (10 of 1949) with an undertaking located in a Special Economic Zone or any other
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undertaking which develops, develops and operates or develops, operates and maintains a Special
Economic Zone; or
(c) from any Unit of the International Financial Services Centre from its business for which it
has been approved for setting up in such a Centre in a Special Economic Zone.
(3) No deduction under this section shall be allowed unless the assessee furnishes along with the
return of income,—
(i) the report, in the form specified by the Central Board of Direct Taxes under clause (i) of
sub-section (2) of section 80LA, as it stood immediately before its substitution by this section, of
an accountant as defined in the Explanation below sub-section (2) of section 288, certifying that
the deduction has been correctly claimed in accordance with the provisions of this section; and
(ii) a copy of the permission obtained under clause (a) of sub-section (1) of section 23 of the
Banking Regulation Act, 1949 (10 of 1949).
Explanation.—For the purposes of this section,—
(a) “International Financial Services Centre” shall have the same meaning as assigned to it in
clause (q) of section 2 of the Special Economic Zones Act, 2005;
(b) “scheduled bank” shall have the same meaning as assigned to it in clause (e) of section 2 of
the Reserve Bank of India Act, 1934 (2 of 1934);
(c) “Special Economic Zone” shall have the same meaning as assigned to it in clause (za) of
section 2 of the Special Economic Zones Act, 2005;
(d) “Unit” shall have the same meaning as assigned to it in clause (zc) of section 2 of the Special
Economic Zones Act, 2005;
(h) in section 115JB, after sub-section (5), the following sub-section shall be inserted, namely:—
“(6) The provisions of this section shall not apply to the income accrued or arising on or after the
1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a
Developer, in a Unit or Special Economic Zone, as the case may be.”.
(i) in section 115-0, after sub-section (5), the following sub-section shall be inserted, namely:—
“(6) Notwithstanding anything contained in this section, no tax on distributed profits shall be
chargeable in respect of the total income of an undertaking or enterprise engaged in developing or
developing and operating or developing, operating and maintaining a Special Economic Zone for any
assessment year on any amount declared, distributed or paid by such Developer or enterprise, by way
of dividends (whether interim or otherwise) on or after the 1st day of April, 2005 out of its current
income either in the hands of the Developer or enterprise or the person receiving such dividend not
falling under clause (23G) of section 10.”;
(j) in section 197A, after sub-section (1C), the following sub-section shall be inserted, namely:—
(1D) Notwithstanding anything contained in this section, no deduction of tax shall be made by the
Offshore Banking Unit from the interest paid—
(a) on deposit made on or after the 1st day of April, 2005, by a non-resident or a person not
ordinarily resident in India; or
(b) on borrowings, on or after the 1st day of April, 2005, from a non-resident or a person not
ordinarily resident in India.
Explanation.—For the purposes of this sub-section “Offshore Banking Unit” shall have the same
meaning as assigned to it in clause (u) of section 2 of the Special Economic Zones Act, 2005.’.