Income Tax Act, 1961

Section 9 .INCOME DEEMED TO ACCRUE OR ARISE IN INDIA.

(1) The following incomes shall be deemed to accrue or arise in India :- (i) All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India;

Explanation : For the purposes of this clause - (a) In the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;

(b) In the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; 

(c) In the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;

(d) In the case of a non-resident, being - (1) An individual who is not a citizen of India; or

(2) A firm which does not have any partner who is a citizen of India or who is resident in India; or

(3) A company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India;

(ii) Income which falls under the head "Salaries", if it is earned in India;

Explanation : For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for service rendered in India shall be regarded as income earned in India.

(iii) Income chargeable under the head "Salaries" payable by the Government to a citizen of India for service outside India;

(iv) A dividend paid by an Indian company outside India; 

(v) Income by way of interest payable by - (a) The Government; or

(b) A person who is a resident, except where the interest is payable in respect of any debt incurred or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) A person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India; 

(vi) Income by way of royalty payable by - (a) The Government; or 

(b) A person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) A person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India, or for the purposes of making or earning any income from any source in India :

Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government :

Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.

Explanation 1 : For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976.

Explanation 2 : For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for - (i) The transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; 

(ii) The imparting of any information concerning the working of or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) The use of any patent, invention, model, design, secret formula or process or trade mark or similar property; 

(iv) The imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

(v) The transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or

(vi) The rendering of any services in connection with the activities referred to in sub-clauses (i) to (v);

Explanation 3 : For the purposes of this clause, the expression "computer software" shall have the meaning assigned to it in clause (b) of the Explanation to section 80HHE;

(vii) Income by way of fees for technical services payable by - (a) The Government; or 

(b) A person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) A person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for thepurposes of making or earning any income from any source in India :

Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.

Explanation 1 : For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approvedby the Central Government before that date.

Explanation 2 : For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

(2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India.

Related Judgements

COMMISSIONER OF INCOME TAX v. MINOR SHANTHI CHANDRAN. (CIT v. MINOR

KAVITHA CHANDRAN)

2000-(158)-CTR -0112 -MAD 

COMMISSIONER OF INCOME TAX v. MINOR SHANTHI CHANDRAN. (CIT v. MINOR KAVITHA CHANDRAN) 

T.C. No. 823, 824 of 1992, decided on April 25, 1999. 

HIGH COURT OF MADRAS 

S. V. Subramanian, for C. V. Rajan, for the Applicant : 

None, for the Respondent 

ORDER 

R. JAYASIMHA BABU, J. : 

The question referred to us is "Whether, on the facts and circumstances of the case and having regard to the provisions of section 49 of the IT Act, the Tribunal is right in law in holding that the value of shares as mentioned in the family settlement deed and not the cost to the previous owner, should be taken as the cost of acquisition of share obtained by the assessee in the family settlement ? 

2. The assessee while they were minors and unmarried, being the daughters of one Jagadish Chandran, received certain shares from Premier Cotton Spinning Mills Ltd., under the settlement effected by their father on 2nd March, 1977. In that settlement the value of the shares mentioned was higher than the amount for which the said Jagadish Chandran had acquired the shares. Subsequently in the asst. yr. 1982-83, the assessees sold those shares and derived a capital gain therefrom. 

3. The assessees contended before the assessing authority that the cost of acquisition of the shares which they were entitled to deduct under section 48 (ii) of the Act should be taken as the amount mentioned in the settlement deed. The ITO did not accept their contention and hold that under section 49 of the Act, it was the cost to the previous owner that was required to be regarded as a cost of acquisition. The CIT(A) having held otherwise in appeal, the ITO appealed to the Tribunal which confirmed the order of the appellate authority. The Tribunal held that the shares had been obtained by the two daughters for a consideration and the consideration was in the view of the Tribunal their right to receive their marriage expenses. 

4. Sec. 9 of the Act deals with the cost with reference to certain modes of acquisition and provides that where the capital asset became the property of the assessee in any of the modes mentioned in sub-cls. (i) to (vi), the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee as the case may be. 

5. The sub-clauses of section 49 (1) of the Act refer to the distribution of assets on the total or partial partition of an HUF; the assets received under a gift or will; the assets received by way of succession; inheritance or devolution, the assets received on the distribution of assets on the dissolution of a firm; BOI or other AOP; the assets received on the distribution of assets on the liquidation of a company; and to the assets under a transfer to a revocable or an irrevocable trust, etc. 

6. In a partition, the consideration for the partition is the mutual relinquishment the rights of the parties in the joint family properties in which each has share, the fact that the daughters have a right to maintenance and marriage expenses and would have been entitled to a share at a partition does not render the value of the shares allotted to them under a settlement deed, the price for which they had sold or relinquished their rights over the properties of the family. The family settlement in this context is analogus to a partition. It is the cost to the previous owner that is to be taken into account as the cost of acquisition of shares and not the amounts mentioned in the family settlement deed by the settlor. 

7. The question referred to us is, therefore, answered in favour of the Revenue and against the assessee.

COMMISSIONER OF INCOME-TAX v. SMT. P. ANDAL AMMAL. (CIT v. SMT. P.

YAMUNA BAI.)

2000-(158)-CTR -0246 -MAD 

COMMISSIONER OF INCOME-TAX v. SMT. P. ANDAL AMMAL. (CIT v. SMT. P. YAMUNA BAI.) 

Tax Case Nos. 106 & 107, 1209 of 1987, decided on November 23, 1998. 

HIGH COURT OF MADRAS 

C. V. Rajan, for the Applicant : K. Rama Gopal, for the Respondent 

JUDGMENT 

N. V. BALASUBRAMANIAN, J. : 

The common question of law that expects our answer in the above batch of tax cases in short is whether the income derived by the assessee by way of rent in respect of the lodging house is assessable under the head, 'income from house property' or under the head, 'income from other sources'. 

2. As the question involves an interpretation of the provisions of section 56 (2)(iii) of the IT Act, 1961, (for short, 'the Act'), the provisions of the section, insofar as it is relevant for the purpose of the case, are reproduced as under : 

"Income from other sources : (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head 'income from other sources', if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. 

(2) In particulars, and without prejudice to the generality of the provisions of sub-section (1), the following income shall be chargeable to income-tax under the held 'Income from other sources', namely; 

(i) xxxxx xxxxx xxxxx 

(ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head, 'profits and gains of business or profession'. 

(iii) xxxxx xxxxx xxxxx" 

3. In deciding the question referred to us, we are of the opinion that it will be appropriate to notice the facts in T.C. Nos. 106 and 107 of 1987 as the facts in the two batch of cases are similar. The assessee therein is a co-owner of a lodging house having 1/3rd share therein and she along with other two owners of the property let out the lodging house to a firm styled, M/s Lakhsmi Lodge in which one of the co-owners, namely, P. E. Alwar was a partner. The claim of the assessee was that the entire income derived from the lodging house by way of letting out the same should be assessed under the head, 'income from other sources', but the ITO as well as the first appellate authority rejected her claim and held that a portion of the income referable to and derived from the letting out of the property should be charged under the head, 'income from house property' and the income referable to the use of amenities provided in the lodge should be charged under the head, 'income from other sources'. The Tribunal, on consideration of the terms of lease deeds and having regard to the construction and structure of the building and availability of number of rooms for letting out for lodging purposes and the existence of a restaurant and a number of parking stalls came to the conclusion that the building was let out for commercial exploitation as a lodging house. According to the Tribunal, the sanitary and other fittings like pipes were meant to cater to the needs of the lodgers, and they formed part of the building, and the agreement relating to the fittings covered not only items like cots, chairs, tables, Dunlop mattress, pillows, etc., but also motors and pump sets and sanitary fittings. The Tribunal, after going through the terms of two agreements of tenancy, came to the conclusion that the two agreements might, have been entered into for the purpose of reducing the levy of property-tax by the corporation of Chennai. The Tribunal, considering the copy of the partnership deed which provided for a composite payment of rent of Rs. 10,000 per month to the co-owners for the lease, came to the conclusion that the letting of the

premises and letting of the fittings formed part of a single indivisible transaction, and applying the law laid down by the Supreme Court in the case of Sultan Bros. (P) Ltd. vs. CIT (1964) 51 ITR 353 (SC) : TC 41R.500, it held that the income derived by way of letting of the lodging house belonging to the assessee as a co-owner should be assessed in accordance with the provisions of section 56 of the Act, under the head, 'income from other sources', and no part of the income received by way of rent was assessable under the head, 'income from house property'. The two separate orders passed by the Tribunal in two assessees' cases are the subject-matter of present tax case references and the common question of law referred, to us reads as under : 

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding and had valid materials to hold that the rental income in respect of the house property situate at No. 9, Kennet Lane, Egmore, Madras, should also be assessed under the head, 'income from other sources' and not under the head, 'income from property' ?" 

4. The submission of the learned counsel for the Revenue was that the Tribunal was not justified in treating the income derived from letting out the property as income from other sources, as the assessee was the owner of the property and derived the income by letting the same. He submitted that the agreement for providing amenities is a distinct and separate agreement and, therefore, it cannot be said that the letting out of the building is itself referable to the letting out of the machineries, plant and furniture. According to the learned counsel for the Revenue, the proper head of income insofar as it relates to the income derived from letting out of the property would be 'income from house property'. 

5. Learned counsel for the assessee, on the other hand, submitted that the letting but of the building and furniture with fittings is inseparable and therefore, the income was properly held to be chargeable under the head 'income from other sources'. 

6. We have carefully considered the submissions of the learned counsel for the parties. The Tribunal has recorded a finding that the letting out of the premises and fitting was a single indivisible transaction and the finding of the Tribunal, in our view, was arrived at on materials adduced before it. The Tribunal on examination of relevant agreements, viz., two agreements of tenancy and the copy of the partnership, came to the conclusion that the firm was required to pay a rent of Rs. 10,000 per month to the co-owners which would show that it was a payment of single

consideration, and the intention of the parties was to let out the building and the furnitures and amenities as a single indivisible transaction. The finding of the Tribunal has not been challenged in the present reference, and the relevant deeds of tenancy agreement and the copy of partnership deed were also not produced to establish that the conclusion of the Tribunal was in anyway erroneous or arrived at without any material. Though the question challenges the finding of the Tribunal that it had no valid materials for such a finding, the relevant documents are not part of the statement of the case to prove that the finding of the Tribunal was rendered without any material on record. 

7. We have seen that the Tribunal took into consideration the construction, structure of the building and other related aspects of the building to come to the conclusion that both the lettings were single and indivisible transaction. The Tribunal has also recorded a plausible reason for entering into two separate agreements, the reason being the apprehension of the assessee that he may have to shoulder higher burden of property-tax to be imposed on the building by the Corporation of Chennai if the transaction was reduced in a single document. Though the assessee had entered into two separate agreements, one for building and another for furnitures and other amenities, we are of the opinion that the letting of furnitures and building was a single indivisible transaction. We are of the opinion that so long as that finding of the Tribunal remains, the conclusion of the Tribunal that the income should be assessed under the head, 'income from other sources' is sustainable on the facts of the case. 

8. Learned counsel for the Revenue brought to our attention the decision of the Supreme Court in the case of Sultan Bros. vs. CIT (supra) and the Supreme Court laid down the following tests to determine what is inseparable letting : 

"It seems to us that the inseparability referred to in sub-section (4) is an inseparability arising from the intention of the parties. That intention may be ascertained by framing the following questions : Was it the intention in making the lease - and it matters not whether there is one lease or two, that is, separate leases in respect of the furniture and the building-that the two should be enjoyed together ? Was it the intention to make the letting of the two practically one letting ? Would one have been let alone and a lease of its accepted without the other ? If the answers to the first two questions are in the affirmative, and the last in the negative then, in our view, it has to be held that it was intended that the lettings would be inseparable. This view also provides a justification for taking the case of the income from the lease of a building out of section 9 and putting it under section 12 as a residuary head of income. It then becomes a new kind of income, not covered by section 9, that is, income not from the ownership of the building alone but an income which though arising from a building would not have arisen if the plant, machinery and furniture had not also been let along with it." 

Applying the tests laid down by the Supreme Court, the intention of the parties is that though there were two separate leases in respect of furniture and building, both the species of properties were enjoyed on payment of one lump sum which also gives an indication that the letting of

the building and letting of the furniture were one letting. The assessee would not have let out the building alone without the lease of furniture or other amenities and one does not exist without the other. The Tribunal, therefore, in our opinion, has come to the correct conclusion in holding that the tests laid down by the Supreme Court are satisfied in the instant case and that the income from the lease of building should be made under section 56 of the Act. In our view, it can be said the proper head of income would be 'income from other sources', as the assessee, in our view,

had let out the plant and machinery along with the building inseparably and the question whether the income is assessable under the head 'income from property' or 'income from other sources' would depend upon the facts of each case and the true intention of the parties. 

9. Learned counsel for the Revenue relied upon the decision of this Court in the case of CIT vs. Indian Metal & Metallurgical Corpn. (1995) 215 ITR 424 (Mad) : TC 41R.519 (one of us was a party) in support of the proposition of law put forward by him. In our opinion, the ratio of the decision in Indian Metal & Metallurgical Corp. case is not applicable to the facts of the case, as the assessee therein had not let out or hired the machinery belonging to the assessee along with others and, therefore, this Court held that the hire charges collected for the purpose of providing

amenities and the rent for the building would not come within the purview of section 56 (2) of the Act. The decision of the Karnataka High Court in the case of CIT vs. Shankaranarayana Hotels (P) Ltd. (1993) 109 CTR (Kar) 196 : (1993) 201 ITR 138 (Kar) : TC 41R.518 is also distinguishable from the facts of the case, as there were two lettings with reference to two separate entities. The decision of the Calcutta High Court in CIT vs. Kanak Investments (P) Ltd. (1974) 95 ITR 419 (Cal) : TC 40R.243 is also not applicable to the facts of the case, as the issues posed before the Calcutta High Court are entirely different, as the Court held that the question referred was limited one, whether the income from the building and the income attributable to the amenities provided by the assessee should be assessed under the head, 'income from other sources'. According to us, it is clear from the facts of the cases that the letting out of the premises with fittings was a single and indivisible transaction and therefore, the entire rent received by the assessee from such a composite letting was liable to be and it was rightly held to be assessable under the head, 'income from other sources'. The order of the Tribunal taking this view, in our view, is quite justified and sustainable on the facts of the case. 

10. Accordingly, we answer the common question of law referred in all the tax cases in the affirmative, against the Revenue and in favour of the assessee. However, in the circumstances of the case, there will be no order as to costs.

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Constitutional validity

Section 9(1)(vii)(b) cannot be said to be unconstitutional - Section 9(1)(vii)(b) cannot be said to be unconstitutional for want of legislative competence and violation of article 14 of the Constitution - G.V.K. Industries Ltd. v. ITO [1997] 228 ITR 564 (AP).

Scope and object

General principles - Mere existence of business connection may not result in income to non-resident assessee from transaction with such a business connection accruing or arising in India.

It would be wrong to equate permanent establishment with a business connection, since former is for purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and latter is for application of section 9.

Income arising out of turnkey project executed in India would not be assessable in India, only because a non-resident has a permanent establishment.

For attracting taxing statute, there has to be some activity through permanent establishment and, if income arises without any activity of permanent establishment, even under DTAA, taxation liability in respect of overseas services would not arise in India.

In cases where different severable parts of a composite contract are performed at different places, principle of apportionment as recognised by Explanation 1(a) of section 9(1)(i), can be applied, to determine which fiscal jurisdiction can tax that particular part of transaction.

Location of source of income within India would not render sufficient nexus to tax income from that source.

For section 9(1)(vii) to be applicable, it is necessary that services provided by a non-resident assessee under a contract should not only be utilized within India, but should also be rendered in India or should have such a live link with India that entire income from fees, etc., becomes taxable in India; thus, for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be a part of a business or profession carried on by such person in India. Whatever is payable by a resident to a non-resident by way of fees for technical services would not always come within purview of section 9(1)(vii) but it must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax - Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income-tax [2007] 158 Taxman 259 (SC).

Note : See also Explanation to section 9 inserted by Finance Act, 2007, with retrospective effect from 1-6-1970.

Income actually received is outside the scope of deeming fiction - Where the income, profits and gains are actually received in India, it is no longer necessary for the revenue authorities to have recourse to the fiction - Turner Morrison & Co. Ltd. v. CIT [1953] 23 ITR 152 (SC).

Actual accrual is different from deemed accrual - The concept of actual accrual or arising of income in the taxable territories, although not dependent upon the receipt of the income in the taxable territories, is quite distinct and apart from the notion of deemed accrual or arising of the income - Carborandum Co. v. CIT[1977] 108 ITR 335 (SC).

‘Deemed’ involves a number of concepts, like place, person and year - The term ‘deemed’ brings within the net of chargeability income not actually accruing but which is supposed notionally to have accrued. It involves a number of concepts. By statutory fiction income which can in no sense be said to accrue at all may be considered as so accruing. Similarly, the fiction may relate to the place, the person or be in respect of the year of taxability - CIT/CEPT v. Bhogilal Laherchand[1954] 25 ITR 50 (SC).

Conditions precedent - It is not necessary that income falling in one category under any one of the clauses of section 9(1) should also satisfy the requirements of the other clauses to bring it within the ambit of the expression ‘income deemed to accrue or arise in India’ - G.V.K. Industries Ltd. v. ITO [1997] 228 ITR 564 (AP).

Profits of PE must be computed as independent units - It is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India. A non-resident assessee may have several incomes accruing or arising to it in India or outside India but so far as taxability under section 5(2) is concerned, it is restricted to income which accrues or arises or is deemed to accrue or arise in India. The scope of this deeming fiction is mentioned in section 9. Therefore, as far as the income accruing or arising in India is concerned, an income which accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India. This business could be carried out through its branch(es) or through some other form of its presence in India such as office, project site, factory, sales outlet, etc. [PE]. It is, therefore, important to note that under the Act, while the taxable subject is the foreign General Enterprise (GE), it is taxable only in respect of the income including business profits which accrue or arise to that foreign GE in India. The Act does not provide for taxation of PE of a foreign enterprise, except taxation on presumptive basis for certain types of income such as those mentioned under sections 44BB, 44BBA, 44BBB, etc. Therefore, since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian PE of foreign enterprise are required to be computed under normal accounting principles and in terms of the general provisions of the Act. Therefore, ascertainment of a foreign enterprise’s taxable business profits in India involves an artificial division between profits earned in India and profits earned outside India. The Act is concerned only with the profits earned in India and, therefore, a method is to be found out to ascertain the profits arising in India and the only way to do so is by treating the Indian PE as a separate profit centre vis-a-vis the foreign enterprise. This demarcation is necessary in order to earmark the tax jurisdiction over the operation of a company. Unless the PE is treated as a separate profit centre, it is not possible to ascertain the profits of the PE which, in turn, constitute prof­its arising to the foreign GE in India. The computation of prof­its in each PE (taxable jurisdiction) decides the quantum of income on which the source country can levy the tax. Therefore, it is necessary that the profits of the PE are computed as inde­pendent units - CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 161 Taxman 191/291 ITR 482 (SC).

Business connection

There must be element of continuity as well as real and intimate connection - The expression ‘business connection’ undoubtedly means something more than ‘business’. A business connection involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories. The expression ‘business connection’ postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity - CIT v. R.D. Aggarwal & Co. [1965] 56 ITR 20 (SC).

‘Business’ include profession, vocation and callings - The expression ‘business’ does not necessarily mean trade or manufacture only. It is being used as including within its scope profession, vocations and calling from a fairly long-time.

In the context in which the expression ‘business connection’ is used in section 9(1), there is no warrant for giving a restricted meaning to it excluding ‘professional’ connection, from its scope - Barendra Prasad Ray v. ITO [1981] 129 ITR 295 (SC).

Mere purchase abroad and use in India is not ‘continuing business’ - The term ‘business connection’ postulates a continuity of business relationship between the foreigner and the Indian. There is no question of continuing business relation when a person purchase the machinery or other goods abroad and uses them in Indiaand earns profit. - CIT v. Fried Krupp Industries [1981] 128 ITR 27 (Mad.).

Isolated transactions are not covered - An isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection, does not attract the application of section 9, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realises the profits, such relationship does constitute a business connection - Anglo-French Textile Co. Ltd. v. CIT (No. 2) [1953] 23 ITR 101 (SC).

Capital gains derived outside India is excluded - If the words ‘business connection in India’ were wide enough to cover all transactions including transactions in capital assets, there was no reason for Parliament to specifically include income (a) through or from any property in India, (b) through or from any asset or source of income from India, and (c) through or from sale of a capital asset situate in India. From the very fact that the transfer of a capital asset situate in India has been brought within the purview of section 9 and rule 10(2), the intention of Parliament was not to bring within its purview any income derived out of sale or purchase of a capital asset effected outside India - CIT v. Quantas Airways Ltd. [2002] 256 ITR 84/122 Taxman 935 (Delhi).

General business operations - General business operations, which have no nexus to income under consideration, would not satisfy requirements of section 9(1)(i); rights and obligations under agreement cannot be taken as proof of existence of business connection; business connection must exist between a non-resident and an Indian resident, which is responsible for giving rise to activities which yield income or profit to non-resident - ABC Ltd., In re [2007] 159 Taxman 344/289 ITR 438 (AAR - New Delhi).

Source/property

‘Source’ is a practical and not legal concept - All income accruing or arising from any ‘source of income in India’ is deemed to accrue or arise in India. The word ‘source’ does not mean any legal concept, but refers to that which a practical man would regard as a real source of income - Performing Right Society Ltd. v. CIT[1974] 93 ITR 44 (Cal.).

‘Property’ must be tangible, but not confined to immovables - The word ‘property’ used in sub-section (1) of section 42 of 1922 Act means something tangible; though it is not confined to immovable property or to buildings or lands appurtenant thereto - CIT v. Currimbhoy Ebrahim & Sons Ltd. [1935] 3 ITR 395 (PC).

Capital asset situated in India - Even if transaction relating to a capital asset takes place outside India but if capital asset is situated in India, profits or gains thereon, will accrue or arise in India in consonance with provisions of section 9(1)(i) and be assessable under head ‘Capital gains’ - Triniti Corpn., In re [2007] 165 Taxman 272/295 ITR 258 (AAR - New Delhi).

Business operations

Onus is on revenue to prove existence of operations in India - In order to rope in the income of a non-resident under the deeming provision it must be shown by the department that some of the operations were carried out in India in respect of which the income is sought to be assessed - Carborandum Co. v. CIT [1977] 108 ITR 335 (SC).

If no operations are carried in India, deeming concept cannot apply - If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India - CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC)/CIT v. Fried Krupp Industries [1981] 128 ITR 27 (Mad.).

Transactions must be systematic and well-defined - It is not every business activity of a manufacturer that comes within the expression ‘operation’ to which the provisions of section 42(3) of the 1922 Act [corresponding to section 9 of the 1961 Act] are attracted. Activities which are not well defined or are of a casual or isolated character would not ordinarily fall within the ambit of this rule. In a case where all that may be known is that a few transactions of purchase of raw materials have taken place in British India, it could not ordinarily be said that the isolated acts were in their nature ‘operations’ within the meaning of that expression - Anglo-French Textile Co. Ltd. v. CIT (No. 2) [1953] 23 ITR 101 (SC).

Salary paid abroad

Explanation - Explanation to section 9(1)(ii) added by the Finance Act, 1983 with retrospective effect from 1-4-1979 cannot be considered to be declaratory nor can it apply to a period anterior to April 1, 1979 - CIT v. I.G. Belline [1999] 102 Taxman 339 (Guj.).

Explanation added to section 9(1)(ii) with retrospective effect from 1-4-1979 was not procedural in nature - CIT v. Goslino Mario [2000] 241 ITR 312 (SC).

From Explanation to section 9(1)(ii) it is not possible to infer corollary, that in all cases where services are rendered outside India, salary cannot be deemed to accrue in India ipso facto. In certain cases, even if the services are rendered outside India, the income can still accrue or arise in India. It would depend on the facts of each case - CIT v. Halliburton Offshore Services Inc. [2004] 140 Taxman 405/271 ITR 395 (Uttaranchal).

Explanation to section 9(1)(ii), substituted with effect from 1-4-2000, was not retrospective in nature; therefore in case of employees of appellant non-resident company working on rigs of Indian company, salary paid for field breaks in U.K. was not for service rendered in India within meaning of Explanation added to section 9 by Finance Act, 1983 and it could not be subjected to tax under section 9(1)(ii) for assessment years 1992-93 and 1993-94- Sedco Forex International Drills Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 (SC).

Payment to non-citizens are not covered under clause (iii) - If income is earned by a person who is not a citizen of India by rendering services outside India, then section 9(1)(iii) will have no application. Similar will be the case if salary is payable to a person by a private organisation for rendering services outside India -Grindlays Bank Ltd. v. CIT [1991] 56 Taxman 213 (Cal.).

Others - Where liability to pay salaries to assessees arose outside India in terms of contract between their employer - Italian company and Indian company and salary was payable outside India, section 9(1)(ii) would not apply - CIT v. Goslino Mario [2000] 241 ITR 312 (SC).

Dividend

Dividend income paid to a non-resident by Indian company is deemed to accrue in India only on payment and not on declaration - Under section 9(1)(iv), it is clearly stipulated that a dividend paid by an Indian company outside India will constitute income deemed to accrue in India on effecting such payment. In section 9(1)(iv), the words used are ‘a dividend paid by an Indian company outside India’. This is in contradistinction to section 8 which refers to a dividend declared, distributed or paid by a company. The words ‘declared or distributed’ occurring in section 8 do not find place in section 9(1)(iv). Therefore, it is clear that dividend income paid to a non-resident is deemed to accrue in India only on payment and not on declaration - Pfizer Corporation v. CIT [2003] 259 ITR 391/129 Taxman 459 (Bom.).

Royalty/fees for technical services

Deeming concept applies whether there is business connection or not - Whether there is a business connection or not, any income by way of fees for technical services should be taken to have been covered by the provision in section 9(1)(vii) - CIT v. Copes Vulcan Inc. [1987] 167 ITR 884 (Mad.).

Cases falling under clause (vi) cannot be brought under clause (vii) - If the case falls under clause (vi) of section 9(1) and is exempted from the operation of clause (vi) by virtue of the proviso, then one cannot refer to clause (vii) which is a general clause - Meteor Satellite Ltd. v. ITO [1980] 121 ITR 311 (Guj.).

Definition of royalty in Explanation 2 applies to clause (vi) only - The definition of the term ‘royalty’ in Explanation 2 to section 9(1)(vi) is not a general definition applicable wherever that term occurs but is applicable to section 9(1)(vi) only - Citizen Watch Co. Ltd. v. IAC [1984] 148 ITR 774 (Kar.).

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BASIS OF CHARGE

Charge of income-tax.

424. 43(1) Where any Central Act enacts that income-tax44 shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year 45in accordance with, and 46[subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income45 of the previous year 47[* * *] of every person :

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.

Scope of total income.

485. 49(1) Subject to50 the provisions of this Act, the total income45 of any previous year of a person who is a resident includes all income from whatever source derived which—

(a)  is received51 or is deemed to be received51 in India in such year by or on behalf of such person ; or

(b)  accrues or arises51 or is 51deemed to accrue or arise to him in India during such year ; or

(c)  accrues or arises51 to him outside India during such year :

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6)* of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to50 the provisions of this Act, the total income45 of any previous year of a person who is a non-resident includes all income from whatever source derived which—

(a)  is received51 or is deemed to be received51 in India in such year by or on behalf of such person ; or

(b)  accrues or arises51 or is 51deemed to accrue or arise to him in India during such year.

Explanation 1.—Income accruing or arising outside India shall not be deemed to be received51 in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued52 or arisen52 or is deemed to have accrued52 or arisen52 to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

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Residence in India.

546. For the purposes of this Act,—

(1) An individual is said to be resident in India in any previous year, if he—

(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or

(b) 55[* * *]

(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

56[Explanation.—In the case of an individual,—

(a) being a citizen of India, who leaves India in any previous year 57[as a member of the crew of an 58Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or] for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been substituted ;

(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and 59[eighty-two] days" had been substituted.]

(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management60 of its affairs60 is situated wholly60 outside India.

(3) A company is said to be resident in India in any previous year, if—

(i) it is an Indian company ; or

(ii) during that year, the control and management60 of its affairs60 is situated wholly60 in India.

(4) Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.

(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income.

61[(6) A person is said to be "not ordinarily resident" in India in any previous year if such person is—

(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.]

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1[Special provision in respect of newly established undertakings in free trade zone, etc.2

10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to 3manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :

Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years :

Provided further that where an undertaking 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 in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the 4[undertaking began to manufacture or produce such articles or things or computer software] in such free trade zone or export processing zone :

5[Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software :]

Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 6[2012] and subsequent years.

7[(1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be,—

  (i) hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter, fifty per cent of such profits and gains for further two consecutive assessment years, and thereafter;

 (ii) for the next three 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 Allowance Reserve Account") to be created and utilised for the purposes of the business of the assessee in the manner laid down in sub-section (1B) :

8[Provided that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139.]

(1B) The deduction under clause (ii) of sub-section (1A) shall be allowed only if the following conditions are fulfilled, namely:—

 (a)  the amount credited to the Special Economic Zone Re-investment Allowance Reserve Account is to be utilised—

  (i)  for the purposes of acquiring new machinery or plant which is first put to use before the expiry of a period of three years next following the previous year in which the reserve was created; and

 (ii)  until the acquisition of new 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;

 (b) the particulars, as may be prescribed9 in this behalf, have been furnished by the assessee in respect of new 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.

(1C) Where any amount credited to the Special Economic Zone Re-investment Allowance Reserve Account under clause (ii) of sub-section (1A),—

 (a) has been utilised for any purpose other than those referred to in sub-section (1B), 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 (1B), 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 (1B),

and shall be charged to tax accordingly.]

(2) This section applies to any undertaking which fulfils all the following conditions, namely :—

  (i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year—

(a) commencing on or after the 1st day of April, 1981, in any free trade zone; or

(b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park;

(c) commencing on or after the 1st day of April, 2001 in any special economic zone;

 (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section;

(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Explanation.—The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.

(3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.

Explanation 1.—For the purposes of this sub-section, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.

Explanation 2.—The sale proceeds referred to in this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.

10[(4) For the purposes of 11[sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, 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.]

(5) The deduction under 11[this section] shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed form12, alongwith the return of income, the report 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.

(6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,—

  (i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years 13[ending before the 1st day of April, 2001], in relation to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction;

 (ii) no 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, shall be carried forward or set off where such loss relates to any of the relevant assessment years 13[ending before the 1st day of April, 2001];

(iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80-IA or section 80-IB in relation to the profits and gains of the undertaking; and

(iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year.

(7) 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.

14[(7A) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger,—

 (a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and

 (b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place.]

15[(7B) The provisions of this section shall not apply to any undertaking, being a Unit referred to in clause (zc) of section 216 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.]

(8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years.

(9) 17[Omitted by the Finance Act, 2003, w.e.f. 1-4-2004.]

(9A) 18[Omitted by the Finance Act, 2003, w.e.f. 1-4-2004.]

Explanation 1.— 19[Omitted by the Finance Act, 2003, w.e.f. 1-4-2004.]

Explanation 2.—For the purposes of this section,—

  (i)  "computer software" means—

 (a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or

 (b) any customized electronic data or any product or service of similar nature, as may be notified20 by the Board,

which is transmitted or exported from India to any place outside India by any means;

 (ii) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force;

(iii) "electronic hardware technology park" means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified21 by the Government of India in the Ministry of Commerce and Industry;

(iv) "export turnover" means the consideration in respect of export 22[by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;

 (v) "free trade zone" means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette,23 specify for the purposes of this section;

(vi) "relevant assessment year" means any assessment year falling within a period of ten consecutive assessment years referred to in this section;

(vii) "software technology park" means any park set up in accordance with the Software Technology Park Scheme notified24 by the Government of India in the Ministry of Commerce and Industry;

(viii) "special economic zone" means a zone which the Central Government may, by notification in the Official Gazette, specify as a special economic zone for the purposes of this section.]

25[Explanation 3.—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.]

26[Explanation 4.—For the purposes of this section, "manufacture or produce" shall include the cutting and polishing of precious and semi-precious stones.]

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Special provisions in respect of newly established Units in Special Economic Zones.

10AA. (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 228of 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 utilized 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;

 (b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under clause (b) of sub-section (1B) of section 10A have been furnished by the assessee in respect of machinery or plant along with the return of income29 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 Zones 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.

30[(4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:—

  (i) it has begun or begins to manufacture or produce articles or things or provide 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;

 (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose.

Explanation.—The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.]

(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.

(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 31[by the undertaking] :

32[Provided that the provisions of this sub-section [as amended by section 6 of the Finance (No. 2) Act, 2009 (33 of 2009)] shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years.]

(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, 200533;

(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 clauses (za) and (zc)33 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.]

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[Special provisions in respect of newly established hundred per cent export-oriented undertakings35.

10B. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :

Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years :

36[Provided 37[further] that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software:]

Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 38[2012] and subsequent years :

39[Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139.]

(2) This section applies to any undertaking which fulfils all the following conditions, namely :—

  (i)  it manufactures or produces any articles or things or computer software;

 (ii)  it is not formed by the splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section ;

(iii)  it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Explanation.—The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.

(3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.

Explanation 1.—For the purposes of this sub-section, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.

Explanation 2.—The sale proceeds referred to in this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.

40[(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, 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.]

(5) The deduction under sub-section (1) shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed form41, along with the return of income, the report 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.

(6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,—

  (i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years 42[ending before the 1st day of April, 2001], in relation to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction;

 (ii) no 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, shall be carried forward or set-off where such loss relates to any of the relevant assessment years 43[ending before the 1st day of April, 2001];

(iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80-IA or section 80-IB in relation to the profits and gains of the undertaking; and

(iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year.

(7) 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.

44[(7A) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger—

 (a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and

 (b) the provisions of this section shall, as far as may be, apply to the amalgamated or resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or the demerger had not taken place.]

(8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment year.

(9) 45[Omitted by the Finance Act, 2003, w.e.f. 1-4-2004.]

(9A) 46[Omitted by the Finance Act, 2003, w.e.f. 1-4-2004.]

Explanation 1.— 47[Omitted by the Finance Act, 2003, w.e.f. 1-4-2004.]

Explanation 2.—For the purposes of this section,—

  (i) "computer software" means—

 (a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or

 (b) any customized electronic data or any product or service of similar nature as may be notified48 by the Board,

which is transmitted or exported from India to any place outside India by any means;

 (ii) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force;

(iii) "export turnover" means the consideration in respect of export 49[by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;

(iv) "hundred per cent export-oriented undertaking" means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 1450 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act;

 (v) "relevant assessment years" means any assessment years falling within a period of ten consecutive assessment years, referred to in this section.]

51[Explanation 3.—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.]

52[Explanation 4.—For the purposes of this section, "manufacture or produce" shall include the cutting and polishing of precious and semi-precious stones.]

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Special provisions in respect of export of certain articles or things.

10BA. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export out of India of eligible articles or things, shall be allowed from the total income of the assessee :

Provided that where in computing the total income of the undertaking for any assessment year, deduction under section 10A or section 10B has been claimed, the undertaking shall not be entitled to the deduction under this section :

Provided further that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years.

(2) This section applies to any undertaking which fulfils the following conditions, namely :—

(a)  it manufactures or produces the eligible articles or things without the use of imported raw materials;

(b)  it is not formed by the splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(c)  it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Explanation.—The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of this clause as they apply for the purposes of clause (ii) of sub-section (2) of that section;

(d)  ninety per cent or more of its sales during the previous year relevant to the assessment year are by way of exports of the eligible articles or things;

(e)  it employs twenty or more workers during the previous year in the process of manufacture or production.

(3) This section applies to the undertaking, if the sale proceeds of the eligible articles or things exported out of India are received in or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.

Explanation.—For the purposes of this sub-section, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.

(4) For the purposes of sub-section (1), the profits derived from export out of India of the eligible articles or things shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things bears to the total turnover of the business carried on by the undertaking.

(5) The deduction under sub-section (1) shall not be admissible, unless the assessee furnishes in the prescribed form54, along with the return of income, the report 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.

(6) Notwithstanding anything contained in any other provision of this Act, where a deduction is allowed under this section in computing the total income of the assessee, no deduction shall be allowed under any other section in respect of its export profits.

(7) 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.—For the purposes of this section,—

(a)  "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 (42 of 1999), and any rules made thereunder or any other corresponding law for the time being in force;

(b)  "eligible articles or things" means all hand-made articles or things, which are of artistic value and which requires the use of wood as the main raw material;

(c)  "export turnover" means the consideration in respect of export by the undertaking of eligible articles or things received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India;

(d)  "export out of India" shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance of any customs station55 as defined in the Customs Act, 1962 (52 of 1962).]

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60Income61 from property held for charitable or religious purposes.

6211. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—

63[(a) income derived from property61 held under trust wholly61 for charitable or religious purposes, to the extent to which such income61 is applied61 to such purposes in India; and, where any such income61 is 61accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart64 is not in excess of 65[fifteen] per cent of the income from such property;

 (b) income derived from property held under trust in part64 only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income64 is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of 65[fifteen] per cent of the income from such property;

 (c) income 66[derived] from property held under trust—

  (i)  created on or after the 1st day of April, 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and

 (ii)  for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India:

Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income;

67[(d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.]

68[Explanation.—For the purposes of clauses (a) and (b),—

 (1) in computing the 69[fifteen] per cent of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12shall be deemed to be part of the income;

 (2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of 70[eighty-five] per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount—

  (i)  for the reason that the whole or any part of the income has not been received during that year, or

 (ii)  for any other reason,

then—

 (a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and

 (b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount,

may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-section (1) 71[* * *] of section 139 72[* * *] for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.]

73[(1A) For the purposes of sub-section (1),—

 (a) where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:—

  (i)  where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain;

 (ii)  where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset;

 (b) where a capital asset, being property held under trust in part only for such purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:—

  (i)  where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of the appropriate fraction of such capital gain;

 (ii)  in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset.

Explanation.—In this sub-section,—

  (i) "appropriate fraction" means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purposes;

 (ii) "cost of the transferred asset" means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in sub-clause (b) of clause (1) ofsection 55;

(iii) "net consideration" means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.]

74[(1B) Where any income in respect of which an option is exercised under clause (2) of the Explanation to sub-section (1) is not applied to charitable or religious purposes in India during the period referred to in sub-clause (a) or, as the case may be, sub-clause (b), of the said clause, then, such income shall be deemed to be the income of the person in receipt thereof—

 (a) in the case referred to in sub-clause (i) of the said clause, of the previous year immediately following the previous year in which the income was received; or

 (b) in the case referred to in sub-clause (ii) of the said clause, of the previous year immediately following the previous year in which the income was derived.]

75[(2) 76[Where 77[eighty-five] per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:—]

 (a) such person specifies, by notice in writing given to the 78[Assessing] Officer in the prescribed79 manner80, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years;

81[(b) the money so accumulated82 or set apart is invested or deposited in the forms or modes specified in sub-section (5)]:]

83[Provided that in computing the period of ten years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded:]

84[Provided further that in respect of any income accumulated or set apart on or after the 1st day of April, 2001, the provisions of this sub-section shall have effect as if for the words "ten years" at both the places where they occur, the words "five years" had been substituted.]

85[Explanation.—Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.]

86[(3) Any income referred to in sub-section (2) which—

 (a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or

87[(b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or]

 (c) is not utilised88 for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof,

89[(d) is credited or paid to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10,]

shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited or 89[credited or paid or], as the case may be, of the previous year immediately following the expiry of the period aforesaid.]

90[(3A) Notwithstanding anything contained in sub-section (3), where due to circumstances beyond the control of the person in receipt of the income, any income invested or deposited in accordance with the provisions of clause (b) of sub-section (2) cannot be applied for the purpose for which it was accumulated or set apart, the 91[Assessing] Officer may, on an application made to him in this behalf, allow such person to apply such income for such other charitable or religious purpose in India as is specified in the application by such person and as is in conformity with the objects of the trust; and thereupon the provisions of sub-section (3) shall apply as if the purpose specified by such person in the application under this sub-section were a purpose specified in the notice given to the 91[Assessing] Officer under clause (a) of sub-section (2):]

92[Provided that the Assessing Officer shall not allow application of such income by way of payment or credit made for the purposes referred to in clause (d) of sub-section (3) of section 11:]

93[Provided further that in case the trust or institution, which has invested or deposited its income in accordance with the provisions of clause (b) of sub-section (2), is dissolved, the Assessing Officer may allow application of such income for the purposes referred to in clause (d) of sub-section (3) in the year in which such trust or institution was dissolved.]

(4) For the purposes of this section "property held under trust" includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the 94[Assessing] Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes 95[* * *].

96[(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.]

97[98(5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely :—

  (i)  investment in savings certificates as defined in clause (c) of section 299 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government;

 (ii)  deposit in any account with the Post Office Savings Bank;

(iii)  deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).

Explanation.—In this clause, "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);

(iv)  investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);

 (v)  investment in any security for money created and issued by the Central Government or a State Government;

(vi)  investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government;

(vii)  investment or deposit1 in any 1a[public sector company]:

2[Provided that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company,—

(A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company;

(B) such other investment or deposit shall be deemed to be an investment or deposit made under this clause for the period up to the date on which such investment or deposit becomes repayable by such company;]

(viii)  deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India and 3[which is eligible for deduction under clause (viii) of sub-section (1) of section 36];

(ix)  deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and 3[which is eligible for deduction under clause (viii) of sub-section (1) of section 36];

4[(ixa)  deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India.

Explanation.—For the purposes of this clause,—

(a) "long-term finance" means any loan1 or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;

(b) "public company"5 shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);

(c) "urban infrastructure" means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport;]

 (x)  investment in immovable property.

Explanation.—"Immovable property" does not include any machi-nery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth;]

6[(xi)  deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964);]

7[(xii)  any other form or mode of investment or deposit as may be prescribed.8]

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Income of trusts or institutions from contributions.

1012. 11[(1)] 12Any voluntary contributions12a received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11be deemed to be income derived from12a property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.]

13[(2) The value of any services, being medical or educational services, made available by any charitable or religious trust running a hospital or medical institution or an educational institution, to any person referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3) of section 13, shall be deemed to be income of such trust or institution derived from property held under trust wholly for charitable or religious purposes during the previous year in which such services are so provided and shall be chargeable to income-tax notwithstanding the provisions of sub-section (1) of section 11.

Explanation.—For the purposes of this sub-section, the expression "value" shall be the value of any benefit or facility granted or provided free of cost or at concessional rate to any person referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3) of section 13.]

14[(3) Notwithstanding anything contained in section 11, any amount of donation received by the trust or institution in terms of clause (d) of sub-section (2) ofsection 80G 15[in respect of which accounts of income and expenditure have not been rendered to the authority prescribed under clause (v) of sub-section (5C) of that section, in the manner specified in that clause, or] which has been utilised for purposes other than providing relief to the victims of earthquake in Gujarat or which remains unutilised in terms of sub-section (5C) of section 80G and not transferred to the Prime Minister's National Relief Fund on or before the 31st day of March, 16[2004] shall be deemed to be the income of the previous year and shall accordingly be charged to tax.]

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Conditions for applicability of sections 11 and 12.]

1912A. 20[(1)] 21The provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely:—

  (a) the person in receipt of the income has made an application for registration of the trust or institution in the prescribed form22 and in the prescribed manner to the 23[***] Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, 24[whichever is later and such trust or institution is registered under section 12AA] :

25[Provided that where an application for registration of the trust or institution is made after the expiry of the period aforesaid, the provisions ofsections 11 and 12 shall apply in relation to the income of such trust or institution,—

 (i)  from the date of the creation of the trust or the establishment of the institution if the 26[***] Commissioner is, for reasons to be recorded in writing, satisfied that the person in receipt of the income was prevented from making the application before the expiry of the period27aforesaid for sufficient reasons;

(ii)  from the 1st day of the financial year in which the application is made, if the 28[***] Commissioner is not so satisfied:]

29[Provided further that the provisions of this clause shall not apply in relation to any application made on or after the 1st day of June, 2007;]

29[(aa) the person in receipt of the income has made an application for registration of the trust or institution on or after the 1st day of June, 2007 in the prescribed form30 and manner to the Commissioner and such trust or institution is registered under section 12AA;]

  (b) where the total income of the trust or institution as computed under this Act without giving effect to 31[the provisions of section 11 and section 12exceeds the maximum amount which is not chargeable to income-tax in any previous year], the accounts of the trust or institution for that year have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the pres-cribed form32 duly signed and verified by such accountant and setting forth such particulars as may be prescribed.]

  (c) 33[***]

34[(2) Where an application has been made on or after the 1st day of June, 2007, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately following the financial year in which such application is made.]