It is a UK company law case, concerning the enforceability of an company's constitution and the idea of

an company share. It is likewise one of the uncommon exemptions to the rule that a transfer of assets
which only takes effect upon a person's bankruptcy is normally void.

Steel Bros Ltd's articles of association said if a shareholder went bankrupt his offers would be exchanged
to assigned people at a reasonable cost not better than average esteem. Mr JE Borland held 73 £100 shares
and went bankrupt, thus the organization gave Borland's trustee notice of the transfer. The trustee
contended the article was void since it traded off proprietorship and property rights which kept an eye on
unendingness, against the rule against perpetuities. It asked for an order against the offer exchange by any
stretch of the imagination, or at anything not as much as a reasonable esteem.

Section 80-IA – Eligibility Criteria and Allowed Deductions

Deduction for Businesses Involved in the Development of Infrastructure

Facilities

An undertaking / enterprise carrying business of:

a. developing; or
b. operating and maintaining; or
c. developing, operating and maintaining

any infrastructure facility is eligible for claiming tax deduction under section 80-IA.

Here, infrastructure facility means:

i. a road, including toll road, a bridge or a rail system;

ii. a highway project including housing or other activities being an integral part of the
highway project;
iii. a water supply project, water treatment system, irrigation project, sanitation and
sewerage system or solid waste management system;
iv. a port, airport, inland waterway or inland port or navigational channel in the sea.
Conditions to Claim Deduction

I. It must be owned by

 An Indian company or a consortium of such companies; or

 An authority or a board or a corporation or any other body established or constituted
under any Central or State Act.

II. There should be an agreement with any Government or a local authority or statutory body for
developing (etc.) a new infrastructure facility.

III. Operating and maintenance of such infrastructure facility starts on or after 1st April, 1995.

Deduction Amount

100% of profits and gains derived from such business are allowed as deduction for a period of any 10
consecutive years out of 20 years from the year in which it starts its operations except in case of port,
airport, inland waterway or inland port or navigational channel in the sea where deduction allowed is
for any 10 consecutive years out of 15 years.

Deduction for Businesses Conducting Telecommunication Services

Any undertaking, who starts providing telecommunication services, basic or cellular, including radio
paging, domestic satellite service or network of trunking (not), broadband network and internet
services on or after 1st April 1995 but before 1st April 2005.

Conditions to Claim Deduction

I. It is not formed by splitting up or reconstruction of a business already in existence.

Exceptions

Undertaking formed as a result of reconstruction of any business:

1. Discontinued due to extensive damage or destruction of any building, machinery, plant or

furniture owned and used for such business due to

a. flood, typhoon, hurricane, cyclone, earthquake or other natural calamities, or

b. riot or civil disturbance, or
c. accidental fire or explosion, or
 d. Enemy action or action taken in combat.

2. Such business is re-established or revived within 3 years from the end of such previous year.

II. It is not formed by the transfer of machinery or plant previously used for any purpose.

Exceptions

3. Transfer (whole or part), of machinery or plant previously used by a State Electricity Board.

4. Import of second-hand machinery or plant, if the following conditions are fulfilled:

a. Such machinery or plant was not used in India prior to the date of installation by the
assessee.
b. No deduction on account of depreciation was allowed to any person prior to the date of
installation by the assessee. Total value of second-hand plant or machinery previously
does not exceed 20% of the total value of the machinery or plant used in the new
business.
Deduction Amount

100% of profits for the first 5 assessment-years is allowed as a deduction and 30% for the next 5
assessment years out of 15 years from the year in which it starts its services.

Businesses Involved in the Development of Business Parks and SEZs

Any undertaking which:

a. Develops, or
b. Develops and operates, or
c. Maintains and operates

an industrial park or a Special Economic Zone (SEZ) notified by the Central Government.

Conditions to Claim Deduction

I. It shall start to operate in accordance with the scheme framed and notified by the C.G. for the
period starting from 1st April, 1997 and ending on

 31st March, 2006 for SEZs.

 31st March, 2011 for industrial parks.

However, deduction shall not be available for any SEZ notified on or after 1st April, 2005.
Deduction Amount

100% of profits derived from such business for any 10 consecutive years out of 15 years from the
year in which it starts its services.

Businesses Involved in the Generation and Distribution of Power

Any undertaking which:

a. is set up in India for the generation or generation and distribution of power (started
generating power between 1st April, 1999 to 31st March, 2011).
b. Starts transmission or distribution by laying new transmission and distribution lines at
any time between 1st April, 1999 and 31st March, 2011.
c. Undertakes substantial renovation and modernization of the existing network, at any
time between 1st April, 2004 and 31st March, 2011.
Renovation and Modernisation means an increase in the plant and machinery in the
network by at least 50% of the book value of such plant and machinery as on 1st April,
2004.
Conditions to Claim Deduction

I. It is not formed by splitting up or reconstruction of a business already in existence.

Exceptions

Undertaking formed as a result of reconstruction of any business:

1. Discontinued due to extensive damage or destruction of any building, machinery, plant or

furniture owned and used for such business due to

 flood, typhoon, hurricane, cyclone, earthquake or other natural calamity, or

 riot or civil disturbance, or
 accidental fire or explosion, or
 Enemy action or action taken in combat.

2. Such business is re-established or revived within 3 years from the end of such previous year.

II. It is not formed by the transfer of machinery or plant previously used for any purpose.

Exceptions

1. Transfer (in whole or part), of machinery or plant previously used by a State Electricity Board.

2. Import of second-hand machinery or plant, if the following conditions are fulfilled:

  Such machinery or plant was not used in India prior to the date of installation by the
assessee.
 No deduction on account of depreciation was allowed to any person prior to the date of
installation by the assessee. Total value of second hand plant or machinery previously
does not exceed 20% of the total value of the machinery or plant used in the new
business.
Deduction Amount

100% of profits derived from such business for any 10 consecutive years out of 15 years from the
year in which it starts its services.

Business Involved in the Reconstruction of Power Plant

An undertaking:

a. owned by an Indian company and

b. set up for reconstruction or revival of a power generating plant.
Conditions to Claim Deduction

I. Formed before 30th November 2005 and notified by C.G. before 31st December 2005.
II. It starts to generate or transmit or distribute power before 31st March 2011.

Deduction Allowed

100% of profits derived from such business are allowed as a deduction for any 10 consecutive years
out of 15 years from the year in which it starts its services.

Businesses Involved in the Distribution of Natural Gas

An undertaking which lays and begins to operate a cross-country natural gas distribution network,
including pipelines and storage facilities being an integral part of such network.

Conditions to Claim Deduction

I. Same as (I) in 2.

II. Same as (II) in 2.

III. It must be owned by an Indian company or a consortium of such companies or a board or

corporation established or constituted under any Act.

IV. It must be approved by the Petroleum and Natural Gas Regulatory Board.
V. 1/3 of its total pipeline capacity must be available for use on common carrier basis by any person
other than the assessee or an associated person.

VI. It starts to operate on or after 1st April 2007.

VII. Any other condition as may be prescribed.

Here, associated person means a person who:

a. Participates in the management or control or capital of the assessee.

b. Holds shares of the assessee having more than 20% voting rights.
c. Appoints more than half of the BOD, or one or more executive directors or executive
members of the governing board of the assessee.
d. Guarantees at least 10% of the total borrowings.
Deduction Amount

100% of profits derived from such business are allowed as a deduction for any 10 consecutive years
out of 15 years from the year in which it starts its services.

Explanation of the Term Initial Assessment Year

 The deduction under section 80-IA can be claimed for any 10 years at the option of the
assessee out of 15 years or 20 years as may be prescribed for particular cases.
 However, for the purpose of claiming deduction the term initial assessment year means
the first year from which the assessee starts to claim the deduction and not the year in
which the business starts its operations.
 The period of deduction, i.e. 10 years solely depends on the assessee from whichever
year it wants to claim out of 15 years or 20 years as may be prescribed for particular
cases.
Other Important Points to be Considered

1. The date for the purpose of computing deduction shall be the date from which the business starts
commercial production and not just on trial basis.
And it should also be noted that the date shall be the date of starting the project and not the date of
approval of the project.

2. For computing deduction under this section, the profits and gains of the eligible business shall be
computed as if such eligible business were the only source of income during the relevant previous
years.

3. The industrial undertaking should have begun to manufacture or produce articles or things on or
before March 31, 2004. Licence for manufacturing should have been applied before this date. The
grant of the licence would not relate back to the original date of application.
4. Deduction u/s 80IA shall not be available in relation to an eligible business, in the nature of a
works contract awarded by any person (including any Government) and executed by the undertaking
or enterprise.

5. The accounts of such eligible business are required to be audited by a Chartered Accountant and
the audit report shall be furnished in the prescribed form along with ROI.

6. The deduction under this section shall not exceed the amount of profits or gains of such business.

7. The Central Government may declare any class of industrial undertaking or enterprise as not being
entitled to deduction under this section.

8. Where an infrastructure facility or SEZ or Industrial park is transferred on or after 1st April, 1999
by an enterprise who developed it for the purpose of operating and maintaining it in accordance with
the agreement with any Government, local authority or statutory body, section 80IA shall apply to
the transferee enterprise for the unexpired period of deduction which was available to the first
enterprise.
The transferee shall not be eligible for deduction for the entire period.

9. Where housing or other activities are an integral part of a highway project and the profits and gains
have been calculated in accordance with the section, the profits shall be exempt if the following
conditions have been fulfilled, namely-

 The profits have been transferred to a special reserve account; and

 The same is actually utilised for the highway project excluding housing and other
activities before the expiry of 3 years following the year of transfer to the reserve
account.

10. Where any goods or services held for the purposes of the eligible business are transferred to any
other business carried on by the assessee, or vice versa, and if the transfer does not take place at the
market value of the goods or services then the profits and gains of the eligible business shall be
computed as if the transfer was made at market value.

Note:

 If in the opinion of the A.O., such computation presents exceptional difficulties, the A.O.
may compute the profits on such reasonable basis as he may deem fit.
 Market value means the price such goods or services would ordinarily fetch in the open
market.

11. No deduction for the profits or gains of such business shall be allowed under any other section of
this chapter, if the assessee has claimed deduction under section 80IA.

12. Where the A.O. feels that the assessee has derived more than ordinary profits from eligible
business being whatsoever reason, A.O. may consider such amount of profits as he finds reasonable
for the purpose of computing deductions.
13. Transfer of undertaking before the expiry of tax holiday period. Where an undertaking eligible
for deduction under section 80IA has been transferred from one Indian Company to another Indian
Company under the scheme of amalgamation or demerger.

 No deduction to the amalgamating or demerged company, in the year of

amalgamation or demerger.
 The provisions of this section will apply to the amalgamated or resulting company as
they would have applied to the amalgamating or demerged company if the
amalgamation or demerger had not taken place.

Note: The above provision shall not be applicable for transfer on or after 1st April 2007.

Infrastructure, both economic and social, is essential for the development of a country. As a support
system, it directly influences all economic activities. In the past few decades, India has made a
considerable progress in building infrastructure. However, India still lacks behind in the global
competition in terms of infra and still has a scope of growth. And, here is how the government is
trying to boost the infrastructure industry by providing 100% tax exemptions under section-80IA as
explained above. Therefore, it is utmost important to know the tax implication and benefits arising
out of it. Reach out our experts of the industry to have more broadened vision and ways to save tax at
H&R Block, India.
The rule against perpetuities is a lead in the Anglo-American precedent-based law that keeps individuals
from utilizing lawful instruments (for the most part a deed or a will) to apply control over the
responsibility for a period long past the lives of individuals living at the time the instrument was
composed. In particular, it prohibits a man from making future interests (generally unforeseen remnants
and executory interests) in property that would vest past 21 years after the lifetimes of those living at the
season of production of the intrigue. Generally, the manage keeps a man from putting capabilities and
criteria in a deed or a will that would keep on affecting the responsibility for long after he or she has died,
an idea regularly alluded to as control by the "dead hand" or "mortmain".

The essential components of the rule against perpetuities began in England in the seventeenth century and
were "solidified" into a solitary rule in the nineteenth century. The definition was given in 1886 by the
American researcher John Chipman Gray.

The rule against perpetuities fills various needs. In the first place, English courts have for a long time
perceived that enabling proprietors to join dependable possibilities to their property hurts the capacity of
future ages to openly purchase and offer the property, since few individuals would purchase property that
had uncertain issues with respect to its possession hanging over it. Second, judges regularly had worries
about the dead having the capacity to force over the top confinements on the possession and utilization of
property by those as yet living. Hence, the law just permits departed benefactors (will-creators) to put
possibilities on proprietorship upon the accompanying age in addition to 21 years. In conclusion, the rule
against perpetuities was in some cases used to anticipate vast, potentially noble domains from being kept
in one family for more than a couple of ages at once.
CASE ANALYSIS

Steel Bros & Co Ltd was incorporated in 1890. The capital of the company was
reorganised by an extra-ordinary general meeting (EGM) on 11 June 1897, when new
articles of association were adopted and the company’s share capital was divided
into 1,600 £1 preference shares (fully paid) and 1,600 £100 ordinary shares (£80 paid).

JE Borland held 160 £1 preference shares and 80 £100 ordinary shares.

The company’s articles of association, following the 1897 EGM, provided that a
shareholding be surrendered if the shareholder became bankrupt. The articles gave
pre-emptive rights to existing shareholders to purchase any shares in the company
for a sum described by article 50 as ‘the fair value’. Article 53 stated:

‘the sum fixed by a transfer notice as the fair price for a share should in no case exceed the
par value of the share; and that the par value of a share should, for p. 20 → the purpose
of the article, be deemed to be the amount paid up, or properly credited as paid up, on such
share, plus, in the case of an ordinary share, (a) a sum bearing the same ratio to the market
value of the investments of the reserve fund account of the company as the capital paid up
on the share sold should bear to the total paid-up ordinary capital; (b) a sum equal to one
quarter of a sum bearing the same ratio to the company’s “plant depreciation account” as
the capital paid up on the share sold should bear to the total paid-up ordinary capital; and
(c) interest at 5 per cent per annum on the total sum arrived at after making such additions
as aforesaid, computed from such times and in such manner as were therein more
particularly specified. And it was further provided by the same article that a certificate of the
auditor of the company should be final and conclusive on all parties as to the par value of
any share.’

The par value of JE Borland’s 73 shares, calculated according to article 53, was
about £8,650, whereas the real value of them, Mr Borland’s trustee in bankruptcy
alleged, having regard to the amount of the dividend paid upon them between the
years 1892 and 1899, and to the general financial position of the company, was about
£34,000.

The company had paid large dividends in some years, but the dividends had
fluctuated from £51 per share in 1893 to £2 12s 6d per share in 1896; the average
dividend for the years 1892–99 was about £45 per share.

Counsel for the trustee in bankruptcy submitted that the valuation provisions of the
articles of association should be set aside on one of two alternate grounds.

1.There is a long standing rule of trust law that any provision is void if it operates to
hold property in trust in perpetuity. (This is recognised in modern trust deeds by
normally restricting the life of the trust to 80 years, 100 years in the case of a trust
under the law of Jersey.) The restriction in the Articles, submitted Counsel, is a
restriction of absolute ownership and, thus, creates (or is akin to) a trust which is
void as it offends the law of perpetuities.

2.The effect of the valuation provision in the articles is to limit the sum receivable by
the trustee in bankruptcy and, thus, restrict the amounts he can distribute to the
bankrupt’s creditors. The provision in the article, thus, Counsel argued, was void as
a fraud on the bankruptcy law.

Farwell J, in a robust judgement, upheld the freedom of the members of a company

to establish articles of association in accordance with their wishes and supported the
proposition that the Articles, once established, were binding on the shareholders
subsequently.

In respect of the first submission, Farwell J identified the nature of articles of

association as personal contracts and said:

‘In my opinion the rule against perpetuity has no application whatever to personal contracts.’
(See para. 2 below)

‘[Counsel for the trustee in bankruptcy] is applying to company law a principle which is
wholly inapplicable thereto. It rests, I think, on a misconception of what a share in a
company really is. A share is the interest of a shareholder in the company measured by a
sum of money, for the purpose of liability in the first place, and of interest in the second, but
also consisting of a series of mutual covenants entered into by all the shareholders inter se
in accordance with s. 16 of the Companies Act 1862.’ (See para. 1 below)

‘Mr Borland was one of the original shareholders, and he and his trustee in bankruptcy are
bound by his own contract. I do not know that I am concerned to consider the case of other
shareholders who come in afterwards; but if I am, the answer so far as they are concerned
is that each of them on coming in executes a p. 21 → deed of transfer which, in the terms
in which it is executed, makes him liable to all the provisions of the original articles.’ (See
para. 3 below)

Farwell J then dismissed the argument that the articles contravened bankruptcy law
by noting that all shares in the company are subjected to the same valuation
provision. He pointed out that there is no provision that applies to any one person in
a way that is different to another, other than by reference to the class of shares that
is held:

‘I find the price is a fixed sum for all persons alike’.

This case is, thus, the basis for the valuation principle that one must always look
first at the articles of association and treat those articles as applying to the shares
being valued. If, as will nearly always be the case, the articles provide rights and
liabilities expressed in terms of a class of shares, there is then no scope for arguing
that the identity of an individual shareholder gives that shareholder greater or lesser
rights or greater or lesser liabilities than any other person who may hold those
shares. In a fiscal valuation, we consider the price that would reasonably be expected
to be offered by a hypothetical unconnected purchaser of the shares. Our valuation
must be undertaken on the basis that this notional person acquires the shares
subject to any valuation formula in the articles.

It is important to note that the decision in Borland’s Trustee v Steel Bros & Co Ltd
does not mean that a share valuation is the adoption of a simple arithmetic valuation
formula in the articles. The valuation must always reflect the statutory hypothesis for
fiscal purposes, which is that the value is the amount that would be offered by a
hypothetical unconnected purchaser who has full knowledge of all relevant rights
and obligations arising from the articles and from any shareholder’s agreement,
including any formula for valuation given in either the articles or the agreement. It is
perfectly possible for the hypothetical unconnected purchaser to offer more than the
value given by a formula in the articles; this will be the case where the dividend flow
(for example) gives a return on the investment to justify a payment greater than the
formula in the articles.