Section 85C

CHAPTER VII — INCOMES FORMING PART OF TOTAL INCOME ON WHICH NO INCOME-TAX IS PAYABLE

SECTION 85C — DEDUCTION IN RESPECT OF ROYALTIES, ETC., FROM CERTAIN FOREIGN ENTERPRISES (OMITTED)

Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)

STATUTORY POSITION (Income-tax Act, 1961, as in force)

Marginal heading (as originally enacted): Deduction In Respect Of Royalties, Etc., From Certain Foreign Enterprises

81. to 85C. [Omitted by the Finance (No. 2) Act, 1967, w.e.f. 1-4-1968. Provisions of sections 81, 82, 83, 84, 85, 85A, 85B and 85C were incorporated from the same date in sections 80P, 80Q, 10(29), 80J (now omitted), 80K (now omitted), 80M (now omitted), 80N (now omitted) and 80-O, respectively.]

A. SECTION COMMENTARY

A.1 Original subject-matter (pre-1968 position)

Section 85C was a foreign-exchange-earning incentive: it relieved income by way of royalties, commission, fees or similar payments received by an Indian assessee from a foreign Government or foreign enterprise for the use outside India of patents, inventions, designs or know-how, or for technical services rendered outside India, where the income was received in convertible foreign exchange.

A.2 Insertion and statutory history

Original provision was part of the Income-tax Act, 1961 (inserted in the mid-1960s).

A.3 Omission and migration of the provision

With effect from 1 April 1968 the relief was recast as the section 80-O deduction ('deduction in respect of royalties, etc., from certain foreign enterprises'). Section 80-O remained the principal know-how/technical-services foreign-exchange incentive for decades (progressively reduced and finally phased out for AY 2005-06 onward). The scope of the qualifying consideration was authoritatively settled under the successor provision.

A.4 Current status

Section 85C does not exist as a live operative provision of the Income-tax Act, 1961. The Chapter VII slot bears only the omission entry reproduced above. Its policy lives on in section 80-O (and the provisions that have in turn succeeded it). For an assessment under the 1961 Act there is nothing to apply under section 85C itself; the analysis must proceed under the successor provision and the head of income to which the receipt belongs.

A.5 CA practitioner pointers

(1) Do not cite section 85C in a current return, computation, assessment or appeal — it has stood omitted since the date shown above and any reference to it is liable to be treated as a mistake. (2) Where the receipt in question is of the kind the old section addressed, frame the claim under the successor provision and satisfy its conditions. (3) When relying on older judgments decided on the omitted section, treat them as authority on the underlying concept only, and check that the successor provision has not altered the conditions on which the earlier ruling turned.

B. FA 2026 IMPACT NOTE

The Finance Act, 2026 does not revive or amend section 85C; the section remains omitted. FA 2026 makes no change to Chapter VII. (For completeness, the only live section of Chapter VII — section 86 — is also not amended by FA 2026.)

Transition note: the Income-tax Act, 2025 (which commences on 1 April 2026 and replaces the 1961 Act) does not re-enact this omitted provision under its old number; the relief, to the extent it still exists, is found in the corresponding deduction/exemption of the new Act.

C. CASE LAW

No case law subsists under section 85C as a live provision: it was omitted with effect from the date noted above, so no assessment is decided under it today. The jurisprudence on its subject-matter now resides under the successor provision (section 80-O). For cross-reference and continuity of doctrine, the leading authorities on the successor provision are set out below; they are noted here as authority on the underlying concept, decided under the successor section and not under section 85C.

1. Continental Construction Ltd. v. CIT (1992) 195 ITR 81 (SC)

Facts: An Indian construction company executing foreign projects claimed deduction under section 80-O in respect of fees/consideration for technical and professional services rendered to foreign enterprises and received in convertible foreign exchange.

Held: The Supreme Court analysed the scope of section 80-O, holding that the deduction is confined to income by way of royalty, commission, fees or similar payment for the use outside India of patents, know-how or for technical/professional services rendered from India, received in convertible foreign exchange; turnkey/works-contract receipts as such do not qualify save to the extent attributable to the qualifying technical services.

Relevance: Leading authority on section 80-O (royalties/fees from foreign enterprises) into which old section 85C was carried; defines the foreign-exchange-earning incentive's boundaries.