Clause 138 Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.

Income Tax Bill, 2025

Introduction

Clause 138 of the Income Tax Bill, 2025, represents a transitional provision intended to bridge the gap between the erstwhile Income-tax Act, 1961, specifically Section 80-IA, and the new legislative framework set to come into force from April 1, 2026. Section 80-IA of the Income Tax Act, 1961 has historically been a cornerstone for incentivizing investment in infrastructure and other specified sectors through substantial tax deductions. The present commentary undertakes a detailed analysis of Clause 138, juxtaposed with the intricate and comprehensive regime established u/s 80-IA. The analysis will address the legislative context, objectives, structural and substantive provisions, interpretative issues, and practical and comparative implications.

Objective and Purpose

Legislative Intent of Clause 138

Clause 138 is crafted as a savings and transitional provision. Its core objective is to ensure continuity of deduction benefits for undertakings or enterprises that qualified u/s 80-IA of the Income-tax Act, 1961, during the period of transition to the new tax code. The clause is significant because it prevents the abrupt cessation of tax benefits for ongoing eligible businesses, thereby protecting legitimate expectations and investments made under the previous regime.

Policy Considerations of Section 80-IA

Section 80-IA was introduced with the express purpose of promoting industrialization, infrastructure development, and economic growth by offering substantial tax incentives. Over the years, it has covered a wide array of activities including the development, operation, and maintenance of infrastructure facilities, telecommunication services, industrial parks, power generation and distribution, and more. The provision was periodically amended to respond to evolving economic priorities and to address interpretative challenges that arose in its practical application.

Detailed Analysis

I. Structure and Substance of Clause 138

Clause 138 of the Income Tax Bill, 2025, is succinct but layered in its operation. It provides that, for any tax year commencing on or after April 1, 2026:

• If the gross total income of an assessee includes profits and gains derived by an undertaking or enterprise from any business referred to in Section 80-IA of the Income-tax Act, 1961; and
• If the assessee would have been eligible to claim a deduction u/s 80-IA, had the Income Tax Act, 1961 not been repealed,

Then, a deduction shall be allowed in computing the total income, subject to:

1. The deduction amount being calculated as per the provisions of Section 80-IA of the Income Tax Act, 1961; and
2. The deduction being available only for such tax years as would have been allowed u/s 80-IA, as if the Income Tax Act, 1961 had not been repealed.

This structure is essentially a 'grandfathering' mechanism, preserving the rights of eligible assessees during the transition to the new tax regime.

II. Structure and Substance of Section 80-IA

Section 80-IA is a detailed and multi-layered provision, comprising several sub-sections and explanations. The principal features include:

• Eligible Businesses: Covers businesses engaged in infrastructure facility development, telecommunication services, industrial parks, power generation and distribution, among others.
• Quantum and Period of Deduction: Generally allows 100% deduction of profits and gains for 10 consecutive years out of a specified block, with variations for certain sectors (e.g., telecommunication, scientific research, etc.).
• Eligibility Conditions: Specifies that the undertaking must not be formed by splitting up or reconstruction of an existing business, nor by transfer of previously used machinery or plant, with detailed exceptions and explanations.
• Computation of Profits: Profits of the eligible business are computed as if it were the only source of income.
• Anti-abuse Provisions: Includes mechanisms to address transfer pricing, close connections, and arrangements leading to more than ordinary profits.
• Audit Requirement: Mandates audit and furnishing of a report for claiming deductions.
• Exclusion and Limitation: Ensures that double deduction is not allowed under other provisions for the same profits.
• Central Government's Power: Empowers the government to notify exclusions for certain classes of undertakings.
• Transfer Provisions: Deals with amalgamation, demerger, and transfer of undertakings, specifying continuity of benefits and exceptions.

III. Item-wise Comparative Analysis

1. Scope of Eligible Businesses

Section 80-IA: Provides an exhaustive list of eligible businesses, including infrastructure facilities (roads, bridges, ports, airports, water supply, etc.), telecommunication services, industrial parks, SEZs, power generation/distribution, and more. Each category has specific conditions regarding timeframes, modes of operation, and ownership.
Clause 138: Refers back to the businesses covered u/s 80-IA, thereby incorporating by reference the entire scope of eligibility as it stood under the repealed Act.
Analysis: Clause 138 does not expand or contract the list of eligible businesses; it merely ensures continuity for those that were already eligible. However, it raises interpretative issues regarding whether subsequent amendments or judicial interpretations of Section 80-IA will apply to Clause 138, or whether only the law as it stood at the time of repeal is relevant.

2. Quantum and Period of Deduction

Section 80-IA: Generally provides for a 100% deduction of profits for ten consecutive assessment years out of a block of fifteen (or twenty for certain infrastructure facilities). For telecommunication, there is a split regime (100% for five years, 30% for the next five).
Clause 138: States that the deduction amount is to be calculated as per Section 80-IA, and the deduction is available only for such tax years as would have been allowed u/s 80-IA, as if the Act were not repealed.
Analysis: The period and quantum of deduction are preserved on a pro rata basis for undertakings in the midst of their deduction period as of the commencement of the new Act. There is no extension or curtailment, and the "sunset" provisions of Section 80-IA continue to apply. Any business whose deduction period has expired under the old Act gets no benefit under Clause 138.

3. Eligibility Conditions and Compliance

Section 80-IA: Contains detailed eligibility criteria, such as:

• Not formed by splitting up or reconstruction of an existing business.
• Not formed by transfer of used machinery/plant, with a 20% threshold for used assets.
• Entry into agreements with government/statutory bodies for infrastructure projects.
• Audit of accounts and submission of audit report.

Clause 138: Is silent on these specifics but incorporates them by reference, since the deduction is to be computed "as per the provisions of Section 80-IA." Thus, all eligibility and compliance requirements remain in force.
Analysis: Clause 138 does not dilute or relax any compliance requirement. It is essential for claimants to continue to meet all conditions, including documentation and audit, as non-compliance would render the deduction inadmissible.

4. Computation of Profits and Anti-abuse Provisions

Section 80-IA: Mandates that profits for eligible business are to be computed as if such business were the only source of income. It also addresses transfer pricing for goods/services between eligible and other businesses of the assessee, and empowers the Assessing Officer to recompute profits in cases of excessive profits due to close connections or arrangements.
Clause 138: By requiring computation as per Section 80-IA, all these computational and anti-abuse provisions are carried forward.
Analysis: The anti-abuse framework remains intact. This is crucial to prevent artificial inflation of eligible profits and to ensure that only genuine business profits are incentivized.

5. Exclusion of Double Deduction

Section 80-IA: Explicitly bars double deduction under any other provision for the same profits and gains.
Clause 138: By incorporating Section 80-IA's regime, this limitation continues to apply.
Analysis: There is no scope for "stacking" deductions under Clause 138 and other provisions for the same profit stream.

6. Government's Power to Exclude

Section 80-IA: Empowers the Central Government to notify, by Official Gazette, that the exemption shall not apply to any class of undertakings with effect from a specified date.
Clause 138: Silent on this aspect, but since the deduction is to be computed "as per Section 80-IA," it can be argued that any exclusion notification in force at the time of repeal would continue to apply.
Analysis: New exclusions cannot be issued under the old Act post-repeal, but existing exclusions remain operative for the purposes of Clause 138.

7. Transfer, Amalgamation, and Demerger

Section 80-IA: Contains detailed provisions for cases where the eligible undertaking is transferred in a scheme of amalgamation or demerger, specifying who is entitled to the deduction and for what period.
Clause 138: Does not mention these situations specifically, but by incorporating Section 80-IA, the same treatment applies.
Analysis: The benefit can continue to the amalgamated/resulting company, provided all conditions are met, and the deduction period is not extended beyond what would have been available to the original undertaking.

8. Special Economic Zones and Works Contracts

Section 80-IA: Contains explicit carve-outs, such as exclusion of SEZs notified on or after April 1, 2005, and businesses in the nature of works contracts.
Clause 138: By reference, these exclusions persist.
Analysis: Businesses in these categories cannot claim the deduction under Clause 138 if they were ineligible u/s 80-IA.

9. Audit and Reporting Requirements

Section 80-IA: Mandates audit of accounts and furnishing of an audit report in the prescribed form and by the specified date.
Clause 138: Silent, but as deduction is to be computed as per Section 80-IA, this requirement continues.
Analysis: Ongoing compliance with audit and reporting is essential for continued benefit under Clause 138.

10. Ambiguities and Potential Issues

Several interpretative challenges may arise:

• Whether subsequent judicial pronouncements interpreting Section 80-IA apply to Clause 138 claims, or only those existing at the date of repeal.
• Whether procedural requirements (such as audit report formats or deadlines) that change under the new Act can be imposed on Clause 138 claimants.
• How to address situations where a business activity has become ineligible u/s 80-IA due to subsequent legislative amendments prior to repeal.

IV. Practical Implications

For Businesses and Investors

Clause 138 provides certainty and continuity for businesses that have made long-term investments on the basis of Section 80-IA. It ensures that the repeal of the Income Tax Act, 1961 does not result in the premature withdrawal of promised tax incentives, thereby honoring the principle of legitimate expectation and fostering investor confidence.

For Tax Administrators

Tax authorities must continue to apply the detailed and sometimes complex eligibility, computation, and compliance requirements of Section 80-IA, even though the rest of the Income Tax Act, 1961 is repealed. This may present administrative challenges, particularly in interpreting "as if the said Act had not been repealed" for procedural aspects.

For Policy and Law

Clause 138 exemplifies good legislative practice in providing for transitional relief. However, it also highlights the complexities of managing legacy provisions during statutory overhaul, especially where long-term tax incentives are involved.

V. Comparative Analysis with Other Jurisdictions

Many jurisdictions provide for "grandfathering" of tax incentives when shifting to new tax codes. The Indian approach in Clause 138 is consistent with international best practices, ensuring that incentives are not withdrawn retrospectively. However, the Indian model is unique in its method of incorporating by reference the entire substantive and procedural regime of the repealed provision, rather than restating or modifying it in the new law.

Conclusion

Clause 138 of the Income Tax Bill, 2025, operates as a savings provision, carrying forward the deduction regime established u/s 80-IA of the Income-tax Act, 1961, for ongoing eligible businesses. It preserves both the substantive and procedural framework of Section 80-IA, thereby ensuring continuity, certainty, and fairness for affected stakeholders. The clause does not confer any new benefit or extend the deduction period; it simply allows those already entitled to complete their deduction period as originally envisaged. While the approach is sound from a legal and policy perspective, practical challenges may arise in interpretation and administration, particularly as memories of the repealed Act fade over time. Ongoing judicial and administrative guidance may be required to address ambiguities and ensure that the objectives of the provision are fulfilled without abuse or undue hardship.

Full Text:

Clause 138 Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.