INCOME TAX ACT, 1961

Deduction under section 80-IA- Allowability-Business of internet service provider

Assessee-company was engaged in business of providing fax mail services. The Department of Telecommunication granted licence to the assessee-company for carrying on business activities for Internet Services and Internet Telephony Services. The business of fax and email services which was being carried out earlier was discontinued and assessee was solely carrying on business of internet service provider and internet telephony services. It had claimed that since it filed income-tax regularly and as per the provisions of section 80-IA(4), it was entitled to deduction right from the assessment year in which he took licence. Assessee was of view that it could claim deduction under section 80-IA(4) for ten years out of 15 years starting from the year in which assessee started its business. Since the assessee did not claim deduction under section 80-IA(4) for the earlier assessment years and the first year of claim under section 80-IA(4) was current assessment year. As it had been granted deduction under section 80-IA(4) for the earlier assessment years , it was entitled to deduction for relevant assessment year. Assessing officer did not allow the claim of the assessee with a holding that it had not fulfilled the conditions laid down in section 80-IA(3). CIT (A) was upheld the order of assessing officer. But Tribunal allowed the deductions as claimed by assessee. Held: There was no dispute with regard to the fact that clause (ii) of section 80-IA(4) was inserted in section 80-IA(3) with effect from 1-4-2005 and that this was not with retrospective effect. It became applicable only after its insertion with effect from 1-4-2005. Tribunal had rightly recorded that business of fax and email had been started by the assessee in 1997 and the business of providing internet services during the year 2000 being from 17-10-2000, the relevant assessment year 2001-02. The question for consideration would be as to whether there was any violation of provisions in the claim of deduction under section 80-IA(4)(ii) for assessment year 2001-02 or at the maximum for the first year of deduction under section 80-IA being the assessment year 2004-05. But assessee was granted deduction under section 80-IA for the assessment year 2004-05. The Tribunal was right in holding that the revenue could not pick up the assessment year granting claim holding that there was violation of provisions of section 80-IA(3) on the ground that the business was formed by splitting up and reconstruction of business already in existence or that it was formed by transfer of plants and machinery to the new business. (Para 10)

Clause (ii) of section 4 of section 80-IA was inserted in sub-clause 3 of section 80-IA with effect from 1-4-2005 and the business of the assessee had been formed and started much prior to that. The restriction placed by section 80-IA(3) to the provisions of section 80-IA(4)(ii) would not bar the assessee for continuing its claim of deduction under section 80-IA. Since the provisions of section 80-IA(3) are not applicable to the assessee, it having commenced its business much prior to 1-4-2005, section 80-IA(3) would not disentitle it from claiming deduction under section 80-IA on its income from internet services and internet telephony services. (Para 11)