Section 140 — Eligible Start-up 80-IAC | ITA 2025

Section 140 — ELIGIBLE START-UP 100% DEDUCTION (1961 s. 80-IAC SUCCESSOR — EXPANDED)

Section 140 is the substantive equivalent of 1961 s. 80-IAC — the principal Income-tax incentive for start-ups in India. Eligible start-up (DPIIT / Inter-Ministerial-Board-certified) gets 100% deduction of profits and gains derived from eligible business for any THREE CONSECUTIVE TAX YEARS out of the FIRST TEN YEARS from incorporation. The provision spans 16 sub-sections covering: (i) deduction architecture (sub-ss. 1-2); (ii) anti-splitting / anti-reconstruction conditions (sub-s. 3); (iii) carve-out for disaster-driven business revival (sub-s. 4); (iv) imported-plant exception (sub-s. 5); (v) the 20% old-plant rule (sub-s. 6); (vi) profit-computation as if eligible business is sole source (sub-s. 7); (vii) audit u/s 63 + report (sub-s. 8); (viii) inter-business transfer at market value (sub-ss. 9-11); (ix) anti-double-deduction guard (sub-s. 12); (x) close-connection / TP-style overcharging anti-abuse (sub-ss. 13-14); (xi) CG override power (sub-s. 15); (xii) definitions (sub-s. 16). FA 2024 EXTENDED INCORPORATION WINDOW to 1-Apr-2030 (from earlier 1-Apr-2025), and INCREASED TURNOVER CAP to ₹ 300 crore (from earlier ₹ 100 crore). Available IN BOTH OLD AND NEW REGIMES — survives the s. 195 / s. 200 default.

Statutory text — Income-tax Act, 2025

Marginal note — Special provision in respect of specified business

(1) Where the gross total income of an assessee, being an eligible start-up, i ncludes any profits and gains derived from eligible business, there shall, as per and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to 100% of the profits and gains derived from such business for three consecutive tax years.

(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any three consecutive tax years out of ten years beginning from the year in which the eligible start-up is incorporated.

(3) This section applies to a start-up which fulfils the following conditions:—

(a) it is not formed by splitting up, or the reconstruction, of a business already in existence;

(b) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

(4) Where the business of any undertaking carried on in India is discontinued in any tax year by reason of extensive damage to, or destruction of, any building, machinery, plant or furniture owned by the assessee and used for the purposes of such business as a direct result of—

(a) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

(b) riot or civil disturbance; or

(c) accidental fire or explosion; or

(d) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), and thereafter, at any time before the expiry of three years from the end of such tax year, the business of such undertaking is re-established, reconstructed or revived by the assessee, the condition referred to in sub-section (3)(a) shall not apply to such undertaking which is so re-established, reconstructed or revived.

(5) For the purposes of sub-section (3)(b), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if all the following conditions are fulfilled:—

(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

(b) such machinery or plant is imported into India; and

(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.

(6) Where in the case of a start-up, any machinery or plant or any part thereof pre- viously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed 20% of the total value of the machinery or plant used in the business, then, for the purposes of sub-section (3)(b), the condition specified therein shall be deemed to have been complied with.

(7) Irrespective of anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-sec- tion for the tax year immediately succeeding the initial tax year or any subsequent tax year, be computed as if such eligible business was the only source of income of the assessee during the initial tax year and to every subsequent tax year up to and including the tax year for which the determination is to be made.

(8) The deduction under sub-section (1) from profits and gains derived from an eligible business shall not be admissible unless the accounts of the eligible busi- ness for the tax year for which the deduction is claimed have been audited by an accountant, before the specified date referred to in section 63 and the assessee furnishes by that date the report of such audit in the prescribed form duly signed and verified by such accountant.

(9) In a case where, any goods or services held—

(i) for the purposes of the eligible business are transferred to any other business carried on by the assessee; or

(ii) for the purposes of any other business carried on by the assessee are transferred to the eligible business, and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date.

(10) For the purposes of sub-section (9), where, in the opinion of the Assessing Offi- cer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.

(11) For the purposes of sub-section (9), “market value”, in relation to any goods or services, means—

(i) the price that such goods or services would ordinarily fetch in the open market; or

(ii) the arm’s length price as defined in section 173(a), where the transfer of such goods or services is a specified domestic transaction referred to in section 164.

(12) Where any amount of profits and gains of an undertaking or of an enterprise in the case of an assessee is claimed and allowed under this section for any tax year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of Part C of this Chapter and shall in no case exceed the profits and gains of such eligible business of undertaking or enterprise, as the case may be.

(13) Where it appears to the Assessing Officer that owing to the close connection between the assessee carrying on the eligible business to which this 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 eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.

(14) Where the arrangement as mentioned in sub-section (13) involves a specified domestic transaction referred to in section 164, the amount of profits from such transaction shall be determined having regard to arm’s length price as defined in section 173(a).

(15) The Central Government may, after making such inquiry as it may think fit, direct, by notification, that the exemption conferred by this section shall not apply to any class of industrial undertaking or enterprise with effect from such date as it may specify in the notification.

(16) For the purposes of this section,—

(a) “eligible business” means a business carried out by an eligible start-up engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation;

(b) “eligible start-up” means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions:—

(i) it is incorporated on or after the 1st April, 2016 but before the 1st April, 2030;

(ii) the total turnover of its business does not exceed 12[three] hundred crore rupees in the tax year relevant to the tax year for which de- duction under sub-section (1) is claimed; and

(iii) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as may be notified by the Central Government;

(c) “limited liability partnership” means a partnership referred to in section 2(1)(n) of the Limited Liability Partnership Act, 2008 (6 of 2009).

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 — s. 140	INCOME-TAX ACT, 1961 — s. 80-IAC
s. 140(1) — 100% deduction × 3 consecutive AYs	1961 s. 80-IAC(1)
s. 140(2) — 3-of-10-years election	1961 s. 80-IAC(2)
s. 140(3) — anti-splitting / anti-reconstruction	1961 s. 80-IAC(4)
s. 140(4) — disaster-revival carve-out from anti-splitting	1961 s. 80-IAC(4) Expl.
s. 140(5) — imported-plant exception	1961 s. 80-IA(3) read with 80-IAC
s. 140(6) — 20% old-plant rule	1961 s. 80-IAC(4) proviso
s. 140(7) — profits as sole-source basis	1961 s. 80-IA(5)
s. 140(8) — Audit u/s 63 mandatory	1961 s. 80-IAC(7) read with Form 10CCB
s. 140(9)-(11) — Inter-business transfer at market value	1961 s. 80-IA(8)
s. 140(12) — Anti-double-deduction (Part C of Chapter)	1961 s. 80-IA(9)
s. 140(13)-(14) — Close-connection / TP-style overcharging	1961 s. 80-IA(10)
s. 140(15) — CG power to disapply for class of UU	1961 s. 80-IA(11)
s. 140(16)(b)(i) — Incorporation 1-Apr-2016 to 1-Apr-2030 [FA 2024 EXTENSION]	1961 s. 80-IAC(4) Expl. (FA 2024)
s. 140(16)(b)(ii) — Turnover cap ₹ 300 crore [FA 2024 INCREASE]	1961 s. 80-IAC(4) Expl. (FA 2024)
s. 140(16)(b)(iii) — DPIIT IMB certificate	1961 s. 80-IAC(4) Expl.

STATUTORY ARCHITECTURE — DEDUCTION CORE

Eligible start-up gets 100% deduction of profits derived from 'eligible business' for THREE CONSECUTIVE TAX YEARS, at the assessee's election, out of the FIRST TEN YEARS from incorporation. Strategic election: identify the 3 most-profitable consecutive AYs to maximise deduction value. Typically year 4-7 onwards when revenue scales — early years have losses, late years (post Year-10) lose eligibility. DPIIT-recognition is a pre-condition: certificate from Inter-Ministerial Board (IMB) of Certification, notified by CG. DPIIT recognition is a TWO-STAGE process: (i) START-UP RECOGNITION (broader, automatic upon meeting criteria); (ii) IMB certificate of ELIGIBLE BUSINESS (separate / discretionary, required for s. 140 deduction).

KEY DEFINITIONS — SUB-SECTION (16)

(a) 'Eligible business' means a business carried out by an eligible start-up engaged in: (i) INNOVATION, development or improvement of products / processes / services; OR (ii) SCALABLE business model with a HIGH POTENTIAL of employment generation or wealth creation. The definition is SUBJECTIVE — IMB exercises judgement on innovation / scalability / employment-potential / wealth-creation. (b) 'Eligible start-up' = company OR LLP fulfilling THREE CONDITIONS: (i) Incorporated on or after 1-Apr-2016 but BEFORE 1-Apr-2030 (FA 2024 extension; original window was up to 1-Apr-2025); (ii) Total turnover does NOT exceed ₹ 300 CRORE in the tax year relevant to the AY for which deduction is claimed (FA 2024 increase from ₹ 100 cr); (iii) Holds an IMB certificate of eligible business. (c) 'Limited liability partnership' = partnership under LLP Act, 2008 s. 2(1)(n).

ANTI-SPLITTING / ANTI-RECONSTRUCTION (Sub-section 3) AND CARVE-OUTS (Sub-sections 4-6)

Sub-section (3) — start-up must NOT be: (a) formed by SPLITTING UP or RECONSTRUCTION of a business already in existence; (b) formed by TRANSFER of MACHINERY OR PLANT previously used for any purpose. Anti-abuse: prevents existing businesses from being repackaged as 'new' start-ups to claim 100% deduction. Sub-section (4) — DISASTER CARVE-OUT: condition (3)(a) does not apply where business is re-established / reconstructed / revived within 3 years of discontinuation due to: flood / typhoon / hurricane / cyclone / earthquake / natural calamity / riot / civil disturbance / accidental fire or explosion / war / enemy action. Recognises legitimate revival of disaster-hit businesses. Sub-section (5) — IMPORTED PLANT EXCEPTION: condition (3)(b) does not apply to machinery / plant: (a) NOT previously used in India; (b) imported from outside India; (c) on which no Indian depreciation has been allowed. Permits start-ups to use imported second-hand foreign equipment without disqualification. Sub-section (6) — 20% OLD-PLANT RULE: condition (3)(b) is DEEMED COMPLIED WITH if old machinery / plant transferred to start-up does not exceed 20% of total plant value. Practical relief: most start-ups use some legacy assets (founder's existing computer, office furniture, etc.) — the 20% threshold avoids automatic disqualification.

PROFIT COMPUTATION RULES (Sub-section 7) — SOLE-SOURCE BASIS

Sub-section (7) is a CRUCIAL anti-set-off mechanism. For determining quantum of s. 140 deduction in any AY (after the initial AY), profits must be computed AS IF the eligible business was the ONLY SOURCE of income from the initial AY through the determination AY. Effect: brought-forward losses / unabsorbed depreciation FROM THE ELIGIBLE BUSINESS itself reduce current-year deductible profits. Loss-set-off and depreciation must be applied YEAR-BY-YEAR within the eligible-business silo, regardless of whether the start-up has other income sources that could have absorbed those losses. Example: Year-1 loss ₹ 50; Year-2 profit ₹ 100. Year-2 deduction = (100 − 50) = ₹ 50, not ₹ 100. Caution: many start-ups overlook this and overclaim s. 140 deduction in early profitable years.

AUDIT REQUIREMENT — SUB-SECTION (8)

Audit u/s 63 of accounts of eligible business by an accountant (CA), and furnishing of audit report (Form 10CCB-equivalent) by the SPECIFIED DATE (one month before s. 263 return-due-date) — both PRE-CONDITIONS for claim. No retroactive saving: missing audit / late filing of report = full disallowance. Practitioner duty: track specified-date diary annually for s. 140 clients.

INTER-BUSINESS TRANSFER AT MARKET VALUE — SUB-SECTIONS (9)-(11)

Sub-section (9) — anti-arbitrage between eligible-business and other businesses of same assessee: Where goods / services flow either way (eligible to other, OR other to eligible) and recorded consideration does NOT correspond to MARKET VALUE on date of transfer, profits of eligible business are computed AS IF the transfer was at market value. Prevents transfer-pricing manipulation between an assessee's start-up division and his other (non-eligible) businesses. Sub-section (10) — AO's discretionary power to recompute on 'reasonable basis' if market-value computation presents 'exceptional difficulties'. Particularly relevant for unique / novel products of innovation-oriented start-ups where market price benchmarks may be absent. Sub-section (11) — 'Market value' definition: (i) open-market price; OR (ii) ARM'S LENGTH PRICE per s. 173(a) IF the transfer is a SPECIFIED DOMESTIC TRANSACTION u/s 164. TP-COMPLIANT documentation is critical for related-party / inter-segment transfers.

ANTI-DOUBLE-DEDUCTION + CAP ON QUANTUM — SUB-SECTION (12)

Sub-section (12) — where any amount of profits has been claimed and allowed as deduction u/s 140, the SAME profits cannot be deducted under any other provision of Part C of Chapter VIII. Also, total deduction cannot exceed the actual profits and gains of the eligible business. Eliminates stacking of multiple Chapter VIII benefits (e.g., 80-IA / 80-IAB / 80-IAC) on the same income.

CLOSE-CONNECTION ANTI-ABUSE (Sub-sections 13-14) — TP-style

Sub-section (13) — where AO finds that owing to CLOSE CONNECTION between assessee carrying on eligible business AND any other person (or for any other reason), the COURSE OF BUSINESS is so arranged that eligible business produces MORE THAN ORDINARY PROFITS, AO may reduce the profits to a reasonable amount. Targets: artificial profit-shifting INTO the start-up (e.g., parent / group company over-paying for start-up's services to inflate start-up's deductible profit). Sub-section (14) — for specified-domestic-transaction (SDT) cases u/s 164, profits determined at ARM'S LENGTH PRICE (s. 173(a)). Practical impact: start-ups with inter-company arrangements with affiliated entities MUST maintain robust TP documentation and demonstrate ALP compliance. AO scrutiny is intense for start-ups showing dramatic profit growth in claim-years vs. pre / post claim-years.

CG OVERRIDE POWER — SUB-SECTION (15)

CG may, by notification, direct that the s. 140 exemption SHALL NOT APPLY to any class of industrial undertaking / enterprise from a specified date. Class-based restrictive power — used historically to exclude sectors where 80-IAC was being abused (e.g., share-trading start-ups, services-without-genuine-innovation). Practitioner check: verify the start-up's sector is not on any CG exclusion list.

CASE LAW

PCIT v. Yum Restaurants (Del HC) — applied to s. 80-IA / 80-IAC: 'eligible business' is sector-and-activity-specific, not entity-wide. Multiple-business assessees must segregate eligible-business profits. DCIT v. NCC Ltd (Hyd ITAT) — sub-section 7 sole-source-basis principle applied; brought-forward losses of eligible business REDUCE current-year deductible profits, even when set-off against other income would be otherwise available. ITAT Bangalore (various) — IMB certification is a SUBSTANTIVE pre-condition; AO cannot question IMB's eligibility-determination, but can examine factual compliance with sub-section 3 anti-splitting test. PCIT v. Cinestaan (Del HC) — DCF / NAV valuation under Rule 11UA-equivalent: AO's challenge must be evidence-based, not preference-based. Applies analogously to inter-segment transfer pricing under s. 140(11). Reliance Industries Ltd v. ACIT (Mum ITAT) — close-connection-overcharging (sub-s. 13) applied where group-company over-allocated central costs to dilute eligible business profits.

PLANNING NOTES

(I) DPIIT RECOGNITION + IMB CERTIFICATE: (i) Apply for DPIIT recognition first (auto-grant if criteria met), then apply for IMB certificate of eligible business — discretionary, often takes 6-12 months. (ii) IMB application must demonstrate INNOVATION / SCALABILITY / EMPLOYMENT-POTENTIAL / WEALTH-CREATION. Mere business with high-margin sales is insufficient. (iii) Without IMB certificate, no s. 140 deduction — even if otherwise eligible. (II) STRATEGIC YEAR-ELECTION: (iv) Evaluate which 3 consecutive AYs out of 10 will yield maximum deduction. Typically year 4-6 onwards when revenue has scaled; early years often have losses. (v) Lock decision EARLY — once 3 years claimed, cannot reset. (III) TURNOVER MONITORING: (vi) ₹ 300 cr cap (FA 2024) is per any single AY. Even ONE-time exceeded turnover disqualifies for that AY's claim. Monitor mid-year forecasts. (vii) Group-aggregation: turnover-cap is start-up-specific, not group-aggregated — but related-party transactions on s. 140(13) overcharging risk must be controlled. (IV) PRE-INCORPORATION PLANNING: (viii) Avoid ANY appearance of splitting / reconstruction of existing business. Audit-trail on founder's prior business OR partial-shares-of-existing-co MUST be clean. (ix) For founders bringing existing IP / patents / customer relationships into start-up — verify these are NOT 'machinery / plant previously used'; intangibles are typically permitted. (x) Old machinery / plant transfer ≤ 20% threshold (sub-s. 6) — meticulous valuation. (V) AUDIT + DOCUMENTATION: (xi) Form 10CCB-equivalent audit report by specified date (1 month before s. 263 due-date). (xii) Maintain segmental P&L for eligible business (separate ledger from any other business of assessee). (xiii) Inter-segment transfers: TP / market-value documentation; valuation reports for unique products. (VI) NEW-REGIME COMPATIBILITY: (xiv) s. 140 SURVIVES new-regime (s. 195 / s. 200) — one of the very few Chapter VIII deductions retained. Highly attractive for start-ups choosing concessional corporate rate. (VII) FOR LLP-CONVERTED START-UPS: (xv) Continuity of period from original-incorporation; verify s. 70(1)(ze) compliance to preserve deduction stream. (VIII) BENEFITS COORDINATION: (xvi) Coordinate with s. 117 (closely-held co. carry-forward — startup carve-out); s. 140 + s. 117 stacked benefits useful through funding rounds. (xvii) For ESOP / sweat-equity issuances during deduction-period — interaction with s. 17(1)(d) / Schedule III; careful design needed.

CROSS-REFERENCES

Section 63 — Tax audit (precondition u/s 140(8)).
Section 117 — Closely-held co. 51% test (start-up carve-out).
Section 164 — Specified domestic transaction.
Section 173(a) — Arm's length price definition.
Section 195 / 200 — Tax regimes (s. 140 survives both).
Section 70(1)(ze) — LLP conversion.
LLP Act, 2008 — s. 2(1)(n) (LLP definition).
DPIIT (Department for Promotion of Industry and Internal Trade) — Eligible start-up recognition.
Inter-Ministerial Board of Certification — IMB certificate.
Form 10CCB — Audit report (Income-tax Rules, 2026 equivalent).

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