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Unit 5: Exemptions and Deductions – II

1. The Special Reserve Account should be utilised for the purpose of acquiring new plant and Notes
machinery.
2. The new plant and machinery should be first put to use before the expiry of 3 years from
the end of the year in which the Special Reserve Account was created. For instance, if the
reserve account was created during the previous year ending March 31, 2007, it should be
utilized for acquiring machinery or plant on or before March 31, 2010.
3. Until the acquisition of new plant and machinery the Special Reserve Account can be
utilised for the business purposes of the undertaking but it cannot be utilised for distribution
of dividends/profits or for remittance outside India as profits or for creating an asset
outside India.
4. Prescribed particulars [Form No. 56FF] should be submitted in respect of new plant and
machinery along with the return of income for the previous year in which such plant and
machinery was first put to use.
5. If the Special Reserve Account is misutilised, then the deduction would be taken back in
the year in which the Special Reserve Account is misutilised. If the Special Reserve Account
is not utilised for acquiring new plant and machinery within three years as stated above
then the deduction would be taken back in the year immediately following the period of
three years. For instance, if ` 1,50,000 is transferred to the reserve account for the year
ending March 31, 2007 and out of which only ` 96,000 is utilized for acquiring plant and
machinery up to March 31, 2010, then ` 54,000 would be taxable for the previous year
2010–11.
Special Provisions for Existing Units
The following points should be noted:
1. In respect of an undertaking setup in Special Economic Zone on or after April 1, 2003 a
deduction is available under section 10A(1A). This deduction is available for 10 assessment
years. If an undertaking is setup in a Special Economic Zone during April 1, 2003 and
March 31, 2005, then such undertaking can claim deduction for the first then assessment
years under the provisions of section 10A(1A). Such undertaking can further claim deduction
from eleventh year to fifteenth year.
2. If deduction has already been claimed by an undertaking (other than the undertaking
mentioned above) under section 10A for ten consecutive assessment years before the
commencement of SEZ Act, such Unit shall not be eligible for deduction under section
10AA.
3. 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 10 consecutive assessment years referred to above, it shall not be eligible for
deduction.

Example: X Ltd. owns an industrial undertaking in a notified special economic zone. It
starts manufacturing on April 10, 2004. It can claim deduction under sections 10A and 10AA as
follows:
First 5 years: For the assessment years 2005–06 to 2009–10, it can claim 100 per cent deduction
under section 10A.

Next 2 years: For the next two assessment years, i.e., 2010–11 and 2011–12, it can claim 50 per cent
deduction under section 10A.

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