Section 10AA provides a deduction from total income of such profits and gains derived by an assessee being an entrepreneur from the export of articles or things or services for certain consecutive assessment years. It is applicable to an undertaking which has begun or begins to manufacture or produce articles 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.
[Section 10AA(4)] Essential Conditions to be Fulfilled
1. Deduction under Section 10AA is available to an assessee/undertaking manufacturing and exporting articles or things or services
This section does not provide for any particular form of organisation for running the undertaking. Thus, undertaking can be operated as sole proprietorship. partnership firm, company, etc.
2. What to Manufacture or Produce [Section 10AA(1)]
The undertaking must manufacture or produce articles or things or provide any service. For this purpose the term "manufacture" shall have the same meaning as assigned to it in clause (r) of Section 2 of the Special Economic Zones Act, 2005.
3. Location of Undertaking [Section 10AA(1)]
For being eligible to claim deduction under Section 10AA, the undertaking must be located in any Special Economic Zone'. The term "Special Economic Zone" shall have the meaning assigned to it under section 2 of the Special Economic Zones Act, 2005.
4. Undertaking not Eligible to Claim Deduction U/S 10AA. [Explanation to Section 10AA(3)]
The deduction under this section shall not be available to an undertaking being the unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deduction referred to in Section 10A for ten consecutive assessment years.
5. Commencement of Operations [Section 10AA(4)(i)]
The undertaking must begin to manufacture or produce articles or things or provide any service during previous year relevant to assessment year 2006-07 or thereafter. In simple words, it implies that undertaking must commence operations either during previous year 2005-06 or any subsequent previous year.
6. No Split up or Reconstruction allowed [Section 10AA(4)(ii)]
Such undertaking must not have been formed by splitting up, a reconstruction of a business already in existence. However, this condition shall not apply in respect of an undertaking formed as a result of the re-establishment, reconstruction or revival of such undertaking, in the circumstances and within the period as specified in Section 33B. Section 33B deals with re-establishment, reconstruction or revival by the assessee of the business in which the Indian business is discontinued by reason of extensive damage to or destruction of, any building. machinery, plant or furniture owned by the assessee for the purpose of such business due to specified reasons.
The specified reasons are as follows:
(i) Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(ii) Riot or civil disturbance; or accidental fire or explosion; or
(iii) Action by any enemy or action taken in combating an enemy (whether with or without a declaration of war).
7. Restriction on use of old plant and machinery [Section 10AA(4)(iii)]
The undertaking must not have been formed by the transfer of plant and/or machinery previously used for any other purposes in India. 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 previous to the date of the installation by the assessee, 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 in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of installation of the machinery or plant by the assessee.
Hence, if an assessee imports second hand foreign machinery then it shall be treated at par with purchase of new plant or machinery, if above conditions are fulfilled.
8. Export out of India
The undertaking must export out of India, the articles or things or services. 'Export' in relation to the "Special Economic Zone" 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.
9. Receipt in India/Repatriation to India of convertible foreign exchange
The sale proceeds of articles or things or computer software exported out of India must be received in India and if not received in India, then must be brought into India, in convertible foreign exchange within 6 months from the end of relevant previous year. This period can be extended by the competent authority.
What is the Amount of Deduction?
a) 100% of Profits and Gains derived from the export of articles or things or from services are eligible for 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.
b) 50% of such profit gains are eligible for next 5 consecutive assessment years.
c) So much of the amount not exceeding 50% of the profits as is debited to profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to Special Economic Zone' Re investment Reserve Account to be created and utilised for the purpose of the business of the assessee in the manner laid down in sub-section (2) are eligible for next 5 consecutive assessment years.
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