Section 205 — Conditions for tax on income of certain companies and co-operative societies. Successor to s.115BA, s.115BAA, s.115BAB, s.115BAD, s.115BAE of the 1961 Act.
Section 205 is in Chapter XIII — Determination of Tax in Special Cases, which runs from section 190 to section 235.
The section supplies the qualifying conditions for the concessional rate regimes in sections 199 to 204. Sub-section (1) requires total income, for the five specific sub-clauses it names in sections 199, 200, 201, 203 and 204, to be computed without any deduction or exemption under sections 33(8), 45(3)(a), (b) or (c), 46, 47(1)(a), 48, 49 and 144. Sub-section (2) imposes four eligibility conditions for sections 201 and 204 — the business must not be formed by splitting up or reconstruction of an existing business (unless it is a section 140(4) re-establishment within the period specified there); it must not use previously used machinery or plant except permitted machinery used outside India or used machinery whose total value does not exceed 20% of the total value of machinery or plant used; a domestic company must not use a building previously used as a hotel or convention centre for which a section 80-id deduction under the Income-tax Act, 1961 was claimed and allowed; and it must not be engaged in any business other than manufacture or production of an article or thing and research into or distribution of what it makes — with power in the Board, with the Central Government's previous approval, to issue difficulty-removing guidelines on the last three. Sub-section (3) requires those guidelines to be laid before each House of Parliament for thirty days and subjects them to modification or annulment. Sub-section (4) lets the Assessing Officer substitute reasonable profits where a close connection or other arrangement has produced more than ordinary profits, applying the arm's length price under section 173(a) where a specified domestic transaction under section 164 is involved, and charges the excess at the rates in the Table entries it names. Sub-section (5) defines manufacture or production for the whole Part, along with "hotel", "convention centre", "permitted machinery and plant used outside India", "unabsorbed depreciation" and "Unit".
The concessional rates in this Part are meant for genuinely new manufacturing capacity, so the section blocks the route of dressing up an existing business, recycled plant or a re-used hotel building as a new undertaking, and strips out the incentive deductions that would otherwise stack on top of the lower rate. Sub-section (4) prevents the concession being inflated by steering profit into the low-taxed entity through connected parties.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Ceiling on previously used machinery or plant | 20% | The total value of previously used machinery or plant put to use must not exceed 20% of the total value of machinery or plant used by the assessee; permitted machinery previously used outside India is outside this test altogether | 205(2)(b)(ii) |
| Period for which Board guidelines must be laid before Parliament | Thirty days | In one session or two or more successive sessions; both Houses may modify or annul the guideline, without prejudice to anything already done under it | 205(3) |
Before opting into any of these rate regimes, test the entity against all four conditions in sub-section (2) — formation, plant, building and line of business — because failing one of them is enough. The plant condition is a value test, not a count: measure the total value of second-hand machinery put to use against the total value of all machinery used, and keep it at or below 20%; imported machinery previously used only outside India is excluded from the test only if it was never used in India, was imported from outside India, and no depreciation on it has been allowed or is allowable to anyone here. The line-of-business condition is narrower than it looks, because sub-section (5)(a) takes software development, mining, conversion of marble blocks into slabs, gas bottling, and printing of books or production of cinematograph film out of "manufacture or production" while putting generation of electricity in. Where profits look inflated by dealings with a closely connected person, the Assessing Officer can substitute the profits reasonably expected and tax the excess at the rates in the Table rows named in sub-section (4)(b).
A domestic company opts for the concessional rate under section 201 and computes its total income after claiming a deduction under section 144. Sub-section (1) does not permit that: for the sub-clauses it names, total income must be computed without any deduction or exemption under sections 33(8), 45(3)(a) to (c), 46, 47(1)(a), 48, 49 and 144. The company has also put previously used machinery worth Rs. 6 crore into a business whose total machinery is Rs. 25 crore — 24%, above the 20% ceiling in sub-section (2)(b)(ii), which is a test of value and not of the number of assets — so the condition fails outright and the option goes with it. Even a clean plant position would not have saved it if its activity were bottling of gas into cylinders or development of computer software, both of which sub-section (5)(a) puts outside 'manufacture or production' for the whole Part.
You meet it when opting into one of the concessional-rate sections 199 to 204: the conditions are tested in that year's return and in the assessment, and again if the Assessing Officer forms the view under sub-section (4) that a close connection has produced more than ordinary profits and charges the excess at the rates in the Table entries named there. Any guideline the Board issues under sub-section (2), with the Central Government's previous approval, must be laid before each House of Parliament for thirty days.
it does not use any machinery or plant, previously used for any purpose, other than— (i) permitted machinery or plant used outside India; (ii) machinery or plant or any part thereof previously used for any purpose and the total value of such machinery or plant or any part thereof put to use by the assessee does not exceed 20% of the total value of the machinery or plant used by such assessee
See the full 1961 to 2025 concordance.
See the circulars index.
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