Section 205 Conditions for tax on income of certain companies and co-operative societies.

Income-tax Act, 2025

At a Glance

Clause 205 of the Income Tax Bill, 2025 (Old Version) sets conditions for concessional tax treatment under specified clauses (sections 199, 200, 201, 203 and 204) by prescribing that total income be computed without specified deductions/exemptions, and by laying down eligibility conditions and administrative safeguards. It matters to companies and co-operative societies seeking concessional tax rates under the cited provisions, and to revenue authorities supervising compliance. Effective date or decision date: Not stated in the document.

Background & Scope

The provision sits within the Bill's "New tax regime" and is a statutory hook for concessions referenced in sections 199(1)(c)(i)(C), 200(1)(a)(iii), 201(3)(a)(iii), 203(1)(a)(ii) and 204(3)(a)(ii). Clause 205 prescribes how "total income" is to be computed for these purposes by excluding certain deductions or exemptions (narrowly identifying sections from the principal Act such as sections 33(8), 45(3), 46, 47(1)(a), 48, 49 and 144). It also sets eligibility conditions for assessees claiming rates u/s 201 (and allied provisions), empowers the Board (with Central Government approval) to issue guidelines to address difficulties in meeting conditions, includes parliamentary laying requirements for such guidelines, and gives the Assessing Officer (AO) a power to recharacterise profits where inter-party arrangements produce more than ordinary profits. Definitions and specific exclusions to the meaning of "manufacture or production" are provided.

Statutory Provision Mode

Text & Scope

Clause 205 operates in three principal veins: (1) mechanical computation rule for "total income" when concessional clauses apply; (2) eligibility conditions for availing the concessional computation; and (3) administrative/assessorial powers to adjust profits and to issue guidelines. The listed provisions that must not be allowed as deductions or exemptions for computing total income are: section 33(8) (as prescribed), section 45(3)(a)/(b)/(c), section 46, section 47(1)(a), section 48, section 49 and section 144. The clause then sets four conditions (sub-section (2)(a)-(d)) concerning origin of the business (no split-up/reconstruction except subject to section 140(4) carve-out), restriction on used plant/machinery (with a 20% value cap and permitted foreign-used machinery exception), prohibition on using buildings previously used as hotels/convention centres (in respect of which section 80-ID deduction was claimed), and limitation of business activity to manufacture/production (plus related research/distribution). The AO is authorised, for purposes of section 201, to determine deemed profits where related-party or other arrangements yield more than ordinary profits, and where such arrangements involve a specified domestic transaction (section 164), the arm's length principle (section 173(a)) applies.

Interpretation

The text manifests a legislative intent to restrict the scope of preferential taxation by (a) mandating computation of total income without several specific deductions or exemptions, and (b) placing qualitative/quantitative conditions on the nature and origin of the business and on the use of assets. The inclusion of an AO power to determine "profits as may be reasonably deemed" and to apply arm's length principles for specified domestic transactions indicates an intent to deter related-party arrangements engineered to obtain concessional rates. The Board-with-Central-Government guideline mechanism is intended to provide administrative flexibility to resolve difficulties in meeting the enumerated conditions.

Exceptions/Provisos

The Bill contains explicit carve-outs: businesses formed by re-establishment/reconstruction/revival pursuant to section 140(4) are permitted; foreign-used machinery imported into India that was not previously used in India and in respect of which no depreciation had been allowed is exempted as "permitted machinery or plant used outside India"; and the 20% cap permits limited use of previously used machinery/plant. The definition of "manufacture or production" explicitly excludes certain activities (e.g., development of computer software, mining, conversion of marble blocks into slabs, bottling of gas into cylinders, printing of books or production of cinematograph films) and allows the Central Government to notify other exclusions.

Illustrations

• Example 1: A domestic company set up by splitting an existing undertaking would be ineligible to claim the concessional computation unless it qualifies as a re-establishment within section 140(4). (Derived from sub-section (2)(a).)
• Example 2: An assessee imports second-hand machinery that was used outside India and had never been used in India; no depreciation was previously claimed for that machinery anywhere - it falls within "permitted machinery or plant used outside India." (Derived from sub-section (6)(b)(ii) as numbered in the Bill.)
• Example 3: A group arranges intra-group transactions yielding above-ordinary profits; the AO may determine deemed excess profits and treat that excess as income chargeable u/s 201 at the specified concessional rate, applying arm's length pricing if the transaction is a specified domestic transaction. (Derived from sub-section (5).)

Interplay

The clause cross-references multiple provisions of the Income Tax Act, 1961: sections 33(8), 45(3), 46, 47(1)(a), 48, 49, 80-ID(6) meanings for "hotel" and "convention centre," section 140(4) for revival/reconstruction carve-out, section 164 for specified domestic transactions, section 173(a) for arm's length price, and section 116(13)(e) for "unabsorbed depreciation." It also references the Special Economic Zones Act, 2005 for the meaning of "Unit." The Board's guideline power requires previous approval of the Central Government and is subject to parliamentary laying (procedural oversight). No rules or notifications beyond these cross-references are reproduced in the Bill text.

Differences between the two provisions and practical impact

• Sunset clause for issuance of guidelines: The Bill (Document 2) contained an express time-limit: "No guideline under sub-section (2) shall be issued after the expiration of two years from the 1st April, 2026." The Act (Document 1) omits this proviso and instead provides procedural parliamentary laying (now placed as sub-section (3) in the Act).
  • Practical impact: removal of the two-year sunset in the Act gives the Board-with-Central-Government approval continuing discretion to issue guidelines beyond 1 April 2028; administrative flexibility is increased and industry may face an indefinite period of potential guideline issuance.
• Locus and scope of assessing officer power: In the Bill the provision conferring power on the Assessing Officer to determine deemed excess profits is located in sub-section (5) and explicitly applies "for the purposes of section 201." The Act places a substantively similar provision in sub-section (4) and expressly states it applies "for the purposes of sections 201 and 204."
  • Practical impact: in the Act the assessing officer's power to compute deemed profits is extended to both sections 201 and 204, broadening the circumstances where the AO may attribute excess profits and charge them at the specified concessional rates; taxpayers facing assessments u/s 204 may therefore be subject to these transfer-pricing style adjustments.
• Reordering and numbering: Substantive topics (guidelines, parliamentary laying, AO powers, definitions) are presented in different sub-section order between the Bill and the Act.
  • Practical impact: reordering does not change substance (aside from the differences above) but may affect ease of reference.

Practical Implications

• Compliance and risk areas: Claimants of concessional taxation must ensure the business is not a prohibited re-creation of an existing business (absent section 140(4) coverage), must monitor the provenance and aggregate value of previously used machinery (20% ceiling), must avoid using buildings previously qualifying u/s 80-ID for hotel/convention centre deductions, and must ensure their activity falls within the statutory definition of manufacture/production (subject to enumerated exclusions). Related-party arrangements should be structured mindful of the AO's power to recharacterise profits and apply arm's length pricing for specified domestic transactions.
• Record-keeping/evidence: taxpayers should retain documentary evidence proving origin of business (formation/reconstruction records), invoices and import documentation for foreign-used machinery (showing non-use in India and date of import), valuation records demonstrating the 20% threshold calculation, and contemporaneous transfer-pricing/arm's-length documentation for intra-group transactions to counter AO adjustments. Evidence of prior claims of section 80-ID deductions for buildings will be relevant.

Key Takeaways

• Clause 205 prescribes that, for certain concessional tax clauses, total income must be computed ignoring specific deductions/exemptions listed in the text.
• Eligibility is conditioned on non-splitting/reconstruction (with a narrow section 140(4) exception), limits on previously used machinery (20% value cap), prohibition on certain previously used buildings, and restriction to manufacturing/production (with enumerated exclusions).
• The Board may issue guidelines (with Central Government approval) to resolve difficulties in meeting these conditions; such guidelines must be laid before Parliament.
• The Assessing Officer is empowered to determine and charge as income profits deemed to be in excess of ordinary profits where related arrangements inflate profits; arm's length principles apply to specified domestic transactions.
• Extensive cross-references to existing Income-tax Act provisions and the SEZ Act indicate interaction with transfer-pricing, depreciation, and past incentives (section 80-ID).

Full Text:

Section 205 Conditions for tax on income of certain companies and co-operative societies.