Section 205 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 205 is the rule book behind the concessional tax options in sections 199 to 204. It lists the deductions that must be given up, the conditions for the new manufacturing company and co-operative society options in sections 201 and 204, how excess profits from a close connection are dealt with, and what counts as "manufacture or production". This article reads it as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, sub-section by sub-section.
For the options in sections 199, 200, 201, 203 and 204, total income is computed without the deductions and exemptions in seven provisions listed in section 205(1). A company or co-operative society using section 201 or 204 must also meet the conditions in section 205(2): no splitting up or reconstruction of an existing business, previously used plant limited to 20% of the total value of plant and machinery used, no building previously used as a hotel or convention centre for which a certain deduction was claimed, and no business other than manufacture or production. Excess profits from a close connection are taxed at 30%.
Scope
Section 205 is in Chapter XIII, Part C. The Act came into force on the 1st April, 2026 (section 1(3)), save as otherwise provided. The section carries no figure of its own other than the 20% value limit in sub-section (2)(b)(ii); the rates are in the sections it supports. Later amendments, rules and notifications should be checked.
The sections it supports are in our other articles: sections 199 and 201, section 200 (22% company regime) and sections 203 and 204. For the next section, see section 206 (MAT and AMT). For the Chapter overview, see Chapter XIII of the Income-tax Act, 2025. If you are choosing between these options, our tax planning advisory team can help.
Section 205(1): deductions and exemptions to be given up
For the purposes of sections 199(1)(c)(i)(C), 200(1)(a)(iii), 201(3)(a)(iii), 203(1)(a)(ii) and 204(3)(a)(ii), total income is computed without any deduction or exemption under:
| Clause | Provision |
|---|---|
| (a) | section 33(8) |
| (b) | section 45(3)(a) or (b) or (c) |
| (c) | section 46 |
| (d) | section 47(1)(a) |
| (e) | section 48 |
| (f) | section 49 |
| (g) | section 144 |
Section 33 is the depreciation section; see our post on section 33.
Section 205(2): conditions for sections 201 and 204
For the purposes of section 201 or 204, the following apply to the assessee:
- No splitting up or reconstruction. Its business is not formed by splitting up, or the reconstruction, of a business already in existence, unless it is formed as a result of the re-establishment, reconstruction or revival of the business of an undertaking referred to in section 140(4), in the circumstances and within the period specified in that section.
- Previously used plant and machinery. It does not use any machinery or plant previously used for any purpose, other than (i) permitted machinery or plant used outside India; or (ii) machinery or plant, or any part, previously used for any purpose where the total value of such machinery or plant (or part) put to use by the assessee does not exceed 20% of the total value of the machinery or plant used by the assessee.
- Buildings. In the case of a domestic company, it does not use any building previously used as a hotel or a convention centre, in respect of which a deduction under section 80-ID of the Income-tax Act, 1961 (43 of 1961) has been claimed and allowed. The reference to the 1961 Act is the Act's own and nothing is added here.
- Business restriction. It is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, that article.
If any difficulty arises in fulfilling clause 2, 3 or 4, the Board may, with the previous approval of the Central Government, issue guidelines to remove the difficulty and to promote manufacturing or production of an article or thing using new plant and machinery.
The 20% test is on value. If the total value of the machinery or plant used is the base, the previously used part (other than permitted machinery used outside India) must be no more than 20% of it. The sub-section does not say at what date the values are measured; the reader should check the rules for any method.
Section 205(3): guidelines laid before Parliament
Every guideline issued by the Board under sub-section (2) is laid before each House of Parliament while it is in session for a total period of thirty days, comprised in one session or in two or more successive sessions. If, before the expiry of the session immediately following, both Houses agree in making any modification in it, or agree that it should not be issued, the guideline has effect only in the modified form or is of no effect, without prejudice to the validity of anything previously done under it.
Section 205(4): close connection and excess profits
For the purposes of sections 201 and 204:
- (a) where it appears to the Assessing Officer that, owing to the close connection between the person to which the section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such business, the Assessing Officer takes, in computing the profits and gains of the business, such profits as may be reasonably deemed to have been derived. Where the arrangement involves a specified domestic transaction referred to in section 164, profits from the transaction are determined having regard to the arm's length price as defined in section 173(a); and
- (b) the amount, being the profits in excess of the profits determined under clause (a), is deemed to be the income of the person and is chargeable at the rates specified in section 201(1) (the item for income deemed under section 205(4), column C, clause (d)) or section 204(1) (column A, clause (d)), as the case may be.
Both of those rates are 30%, as printed in the Tables of sections 201 and 204. The cross-reference in clause (b) to the section 204 Table is printed with a serial number, but that Table has no serial numbers, so the reference is to column A, clause (d) of that Table.
See our articles on section 164 (specified domestic transaction) and sections 171 to 173 (arm's length price definition).
Section 205(5): meaning of manufacture or production and other terms
For the purposes of Part C of the Chapter:
- (a) The business of manufacture or production of any article or thing includes the business of generation of electricity but does not include the business of (i) development of computer software in any form or in any media; (ii) mining; (iii) conversion of marble blocks or similar items into slabs; (iv) bottling of gas into cylinder; (v) printing of books or production of cinematograph film; or (vi) any other business as may be notified by the Central Government. What has been notified is not in the text consulted.
- (b)(i) "hotel" and "convention centre" have the meanings assigned in clause (b) and clause (a) of section 80-ID(6) of the 1961 Act, again as the Act itself provides.
- (b)(ii) "permitted machinery and plant used outside India" means machinery or plant previously used outside India by any other person, if (A) it was not, at any time previous to the date of installation, used in India; (B) it is imported into India from any country outside India; and (C) no deduction for depreciation in respect of it has been allowed or is allowable under the Act in computing the total income of any person for any period before the date of installation by the person.
- (b)(iii) "unabsorbed depreciation" has the meaning in section 116(13)(e).
- (b)(iv) "Unit" has the meaning in section 2(zc) of the Special Economic Zones Act, 2005 (28 of 2005), which the reader should check.
A worked example
Names and amounts are invented; the 20% limit is as printed.
Sahyog Packaging Private Limited has opted under section 201. It installs machinery with a total value of Rs. 5,00,00,000, of which Rs. 70,00,000 is previously used machinery bought from an Indian owner (not permitted machinery used outside India).
- 20% of Rs. 5,00,00,000 = Rs. 1,00,00,000.
- Previously used machinery of Rs. 70,00,000 does not exceed Rs. 1,00,00,000, so condition 2 is met.
- If the previously used machinery had been worth Rs. 1,20,00,000, it would exceed 20%, and the condition would not be met unless the extra consisted of permitted machinery used outside India.
Separately, Sahyog buys raw materials from a closely connected company at a price that produces profits more than the ordinary profits expected. If the Assessing Officer so finds under sub-section (4)(a), he takes the profits as may be reasonably deemed, and the excess is deemed to be Sahyog's income, taxable at 30% under section 201(1).
Need help meeting the section 205 conditions?
The options in sections 201 and 204 are lost from the year in which a condition fails, so the plant register, the business mix and the related-party prices matter. Our tax planning advisory service can review them before you opt.
Key takeaways
- Section 205(1) lists seven provisions whose deductions and exemptions must be given up for sections 199, 200, 201, 203 and 204.
- Sections 201 and 204 need a business not formed by splitting up or reconstruction (subject to the section 140(4) exception).
- Previously used plant must not exceed 20% of the value of plant and machinery used, unless it is permitted machinery used outside India.
- The Board may issue guidelines to remove difficulty; they are laid before Parliament for thirty days.
- Excess profits from a close connection are deemed income at 30%.
Read next
- Sections 199 and 201: tax on manufacturing domestic companies
- Sections 203 and 204: tax on resident co-operative societies
- Section 206: MAT and AMT
- Section 200: the 22% company regime
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.