13 Assessment of Various Entities

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1 13 Assessment of Various Entities 13.1 Assessment of Companies Meaning of Company for purposes of income-tax: Under the Income-tax Act, 1961, the term company has a much wider meaning than what has been given to it under the Companies Act. The company is considered as a person for all purposes of assessment proceedings [Section 2(iii)]. Section 2(17) of the Income-tax Act, 1961 defines a company for income-tax purposes. Accordingly, company means (1) any Indian company (as defined in Section 2(26)) or (2) any body corporate, incorporated by or under the laws outside India or (3) any institution, association or body assessable as a company either under the Indian Income-tax Act, 1922 or for any assessment year commencing on or before 1st April, 1970, or (4) any institution, association, or body, whether incorporated or not and whether Indian or non-indian which is declared by general or special order of the CBDT to be a company Tax Liability: A company is a juristic person and becomes a body corporate upon the issue of the certificate of incorporation; it is a legal person separate and distinct from the share holders. The legal personality of a company created by the statute can also be modified by legal fiction. For the purpose of income-tax, even an unincorporated association may be declared by the Board to be a company and, consequently, what is not a legal entity in the eyes of law may be assessable as a company. Even companies which have no share capital and those which are limited by guarantee are companies for purposes of the Income-tax Act, 1961 even though the general framework of the Act mainly contemplates companies with share capital. A chamber of commerce or any association without a profit motive and registered under section 25 of the Companies Act, would be a company for income-tax purposes. The tax-liability of such non-profit making associations arises in respect of the profits from specific services to their members under section 28(iii). A company incorporated for a purpose other than that of carrying on a business, a company in liquidation, a statutory corporation, the Government of any State carrying on a trade or business would be deemed to be a company within the meaning of the Income-tax Act, 1961 for the purposes of levy and collection of tax on the business profits assessable to Income-tax. However, an assessment cannot be made on a company after it has ceased to exist and has been struck off the register of companies. Holding companies and their subsidiaries have to be separately assessed in respect of their profits since they are separate and distinct legal entities. 1 Section 8 of the Companies Act, 2013

2 13.2 Income Tax Piercing the corporate veil: Since the law does not prescribe any minimum number of shares to be held by a shareholder nor a maximum, even a one-man company is a distinctly assessable legal entity as much as any other company. However the incometax authorities are entitled to examine the genuineness and the true nature of the connected transactions of such a company. A company being a separate legal entity, the mere fact that only one individual is beneficially interested in all the shares and that the company, in effect, acts as his agent or nominee will not, by itself make its income the income of the shareholder. However, the Assessing Officer can tax the shareholders after examining the genuineness of such one-man companies on the basis of the true nature of the transaction e.g., when dividends are disguised as loans, when the company is doing the business of the individual who controls it. As the Supreme Court has observed in CIT vs. Shri Meenakshi Mill Ltd. (1967) 63 ITR 609, It is true that from the juristic point of view, the company is a legal personality entirely distinct from its members, and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. However, in certain exceptional cases, the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent a tax obligation. A foreign company or association which desires that the status of a company be accorded to it, for purposes of assessment under the Income-tax Act, 1961, must apply to the CBDT for such a status to be vested in it. Generally, the Board agrees to grant such a status to every foreign body corporate or association possessing the usual characteristics of a company limited by shares and having a separate legal personality recognised by the laws of the country in which the body corporate or association has its registered office. However, since the purpose in obtaining the status of company obviously is to obtain a reduction in the rate of tax at which the body corporate or association would be otherwise taxed, before any foreign body corporate or association is invested with the status of a company, the CBDT would examine the loss of revenue that such a concession would involve. Liability of shareholders distinct: Since the company itself is chargeable to tax on its income as a distinct taxable entity, it pays the tax in the discharge of its own liability and not on behalf of or as the agents of the shareholders as was held by the Supreme Court in Howrah Trading Co. Ltd. vs. CIT (1959) 36 ITR 216 and Purshotamdas vs. CIT (1963) 48 ITR 206. Consequently, the shareholders whether corporate or non-corporate, are liable to tax in respect of the gross dividend (other than dividends referred to in section 115-O) without any credit for the tax assessed in the hands of the company unless a specific provision is made in the Act to the contrary. Where the tax payable by the shareholders is deducted at source from the dividends or other items of income under sections 192 to 195, the tax is deemed to have been deducted and paid by the company on behalf of the recipient shareholders of the income and credit for same shall be given to them in their individual assessments.

3 Assessment of various entities Classes of Companies Indian Company [Section 2(26)]: An Indian company means a company formed and registered under the Companies Act, 1956 and includes: (a) a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir) and the Union territories specified in (c) below: (b) in the case of the State of Jammu and Kashmir a company formed and registered under any law for the time being in force in that State; (c) in the case of any of the Union Territories of Dadra and Nagar Haveli, under any law for the time being in force in that Union Territory; and (d) any corporation established by or under a Central, State or Provincial Act and having its registered or principal office in India, and also any institution, association or body which is declared by the Board to be a company under section 2(17) where the principal office of the institution, association or body is in India. It is, however, essential that in all cases the registered, or as the case may be, the principal office of the company, corporation, institution, association or body must be in India. Domestic and Foreign: Companies can be classified into two groups, viz. (1) Domestic company (2) Foreign company. Domestic company is one which is an Indian company or any other company, which, in respect of its income liable to tax under the Income-tax Act, 1961 has made the prescribed arrangements for the declaration and payment within India of the dividends including dividends on preferential shares payable out of such income [Section 2(22A)]. A company that is not a domestic company is a foreign company [Section 2(23A)]. Closely-held and widely-held: Domestic companies are again divided into broad groups, viz (1) companies in which public are substantially interested and (2) companies in which public are not substantially interested. The former type of companies are also referred to as widelyheld companies while the latter are also referred to as closely-held companies. To determine whether a company is one in which the public are substantially interested, one has to apply the tests laid down in section 2(18). Briefly, the following companies fall under this category: (1) companies owned by the Government or the Reserve Bank of India or in which not less than 40% of the shares are held by the Government or the Reserve Bank of India or a corporation owned by that bank, (2) companies registered under section 25 of the Companies Act 2, 1956 [i.e., a company having as its object the promotion of commerce, arts, science, religion, charity or any other useful object and which prohibits payment of dividends to its members], 2 Section 8 of the Companies Act, 2013

4 13.4 Income Tax (3) companies having no share capital but declared by the Board to be companies in which the public are substantially interested, (4) mutual benefit finance company i.e., a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, to be a Nidhi or Mutual Benefit Society, (5) public limited companies whose shares are quoted in the stock exchange and (6) public limited companies whose equity shares carrying not less than 50% (40% in the case of industrial companies) of the voting power have been allotted unconditionally to or acquired unconditionally by and were throughout the relevant previous year beneficially held by the Government or statutory corporation or other widely-held companies or their subsidiaries, whose entire share capital has been held by the parent company throughout the previous year. (7) Companies whose equity shares carrying not less than 51% of the voting power were throughout the relevant previous year held by one or more co-operative societies. Thus, it should be noted that all public limited companies must automatically be treated as companies in which public are substantially interested, whereas all private limited companies will be treated as companies in which public are not substantially interested. Relevance of the above classification: (1) All domestic companies are taxed at 30% while a non-domestic company will be taxed at 50% or 40%, depending upon the composition of its total income. A surcharge of 5% of the tax payable is to be charged in the case of domestic companies and 2% of tax payable in the case of foreign companies, if the total income exceeds ` 1 crore but does not exceed ` 10 crore. Surcharge@10% of the tax payable is to be charged in the case of domestic companies and 5% of tax payable in the case of foreign companies, if the total income exceeds ` 10 crore. (2) The question as to whether a company is one in which public are substantially interested or not is relevant for determining the application of section 2(22)(e) and section 79 also. Special Provisions: There are certain special provisions which are applicable only to companies in which public are not substantially interested. These relate to the provisions governing deemed dividend under section 2(22)(e), carry forward of losses under section 79, liability of directors under section 179 and liability to wealth-tax in case of closely held companies Tax liability of a company: A company is chargeable to income-tax on its total income that had accrued or arisen in the previous year calculated under the different heads of income and in accordance with the basic principles explained in the initial chapters of the book. The determination of the total income of a company is dependent on whether or not the 3 Section 406 of the Companies Act, 2013

5 Assessment of various entities 13.5 company was resident in India during the relevant previous year. Chapter 2 discusses in detail as to how the residential status of a company is to be determined and it also explains how to determine the scope of total income of company under section 5. Students are also advised to study the provisions of section 9 explained in that chapter which has much relevance to company taxation. Thus we may conclude that the liability of a company to tax depends on the following: (a) Whether it is an Indian company as defined in section 2(26)? (b) Whether the company has made the prescribed arrangements for the declaration and payment of dividends within India or not? (c) The pattern of its shareholding: Is it a company in which the public are substantially interested or a subsidiary of such a company? Flat rates and no initial exemption: Companies are taxed at flat rates, as stated above, as distinguished from the progressive rates of taxes applicable to individuals and Hindu undivided families. The initial exemption from tax available to these entities does not apply to companies Tax on income from life insurance business: Section 115B provides for a concessional rate of tax for taxing the profits and gains derived from the business of life insurance. Under these provisions, in the case of an assessee whose total income includes any profits and gains derived from the business of life insurance computed in accordance with the First Schedule to the Income-tax Act, 1961, the income-tax payable shall be the aggregate of (i) the amount of income-tax calculated on the income from life insurance business included in total income at the rate of 12½% and (ii) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of profits and gains from the life insurance business. Income accruing or arising to a company from life insurance business referred to in section 115B would not be subject to MAT. Taxation of investment income/loss of non-life insurance business: Rule 5 of the First Schedule to the Income-tax Act, 1961 provides that the profits and gains of non-life insurance business would be the profit before tax and appropriations as disclosed in the profit and loss account prepared in accordance with the provisions of the Insurance Act, 1938 or the IRDA Act, 1999, after adjustment for unexpired risk and disallowances under sections 30 to 43B. Any provision for diminution in the value of investment debited to profit and loss account has to be added back. Any gain or loss on realization of investments not credited or debited to profit and loss account, shall be added or deducted, as the case may be Taxation of non-resident companies: The rates at which tax would be payable by such a company on the different categories of its income are stated above. A non-resident company which operates through an Indian branch would also be liable to pay tax on the prescribed rate on its income derived from a branch of India. When a non-resident company declares dividends outside India, then non-resident shareholders of such company would not have to pay any tax in India on their individual income even though the dividends would have been declared out of profits made by the company in India.

6 13.6 Income Tax Foreign companies deriving income from royalties, patents, licence fees and fees for technical services in India are liable to be taxed in India. In the case of fees for technical services rendered, only that portion of income which relates to the services rendered in India is liable to tax in India and that received for services rendered outside India is not so liable. In respect of the income arising to a foreign company in India by way of specified royalties or fees for technical services rendered, the rate of tax is 50% if the royalties or fees are received from Government or an Indian concern pursuant to an agreement approved by the Government of India between and (in case of royalties) and between and (in case of fees for technical services). Special rates of tax for taxing dividends, fees for technical services and royalties in the case of foreign companies [Section 115A] 1. Where the income of a non-resident non-corporate assessee or a foreign company consists of - (i) dividends (other than dividends referred to in section 115-O) (ii) interest received from Government or from an Indian concern on monies borrowed or debt incurred by the Government or the Indian concern in foreign currency; or (iii) income received in respect of units purchased in foreign currency of a mutual fund specified under section 10(23D) or of the Unit Trust of India, the same will be taxed at 20%. However, the following interest income would be subject to a concessional rate of 5% on gross interest - (i) Interest income received by a non-corporate non-resident or a foreign company from an infrastructural fund referred to in section 10(47). (ii) Interest of the nature and to the extent referred to in section 194LC i.e., interest received by a foreign company or a non-corporate non-resident, in respect of borrowing made by an Indian company in foreign currency from sources outside India between and (iii) Interest of the nature and to the extent referred to in section 194LD i.e., interest payable during the period between and in respect of investment made by an Foreign Institutional Investor (FII) or Qualified Foreign Investor (QFI) in a rupee denominated bond of an Indian company or a Government security. 2. No deduction in respect of any expenditure or allowance shall be allowed to the assessee under sections 28 to 44C in computing the aforesaid income. Further, where the gross total income of these assessees consists only of incomes mentioned above, no deduction shall be allowed to them under Chapter VIA of the Income-tax Act, Further, where the gross total income includes the aforesaid incomes, Chapter VIA deductions will be allowed as if the gross total income as so reduced were the gross total income of the assessee.

7 Assessment of various entities It shall not be necessary for the aforesaid assessees to furnish a return of their income under section 139 if the total income in respect of which they are assessable under the Act during the previous year consisted only of the income referred above, and the tax deductible at source has been deducted from such income. 4. Where the total income of a non-corporate non-resident or a foreign company includes royalty or fees for technical services, other than income referred to in section 44DA(1), received from Government or an Indian concern in pursuance of an agreement made by the foreign company after , the same will be subject to the following conditions: (a) such agreement must be made with an Indian concern ; (b) the agreement must be approved by the Central Government, or (c) where it relates to a matter included in the industrial policy for the time being in force the Government of India, the agreement should be in accordance with that policy. Illustration 1 X Ltd., an Indian company, entered into an agreement with Mr. M, a non-resident, on and pursuant to the agreement, fees for technical services (FTS) of ` 10 lakh, which is taxable under section 115A, is payable to Mr. M every year. Examine the tax consequence of the said transaction in the hands of Mr. M for the A.Y , if (i) Mr. M is a resident of a country with which India has no DTAA. (ii) Mr. M is a resident of a country, with which India has a DTAA, which provides for taxation of such FTS@15%. (iii) Mr. M is a resident of a country with which India has a DTAA, which provides for taxation of such FTS@28%. Answer (i) The FTS would be taxable@25% as per section 115A, since India does not have a DTAA with the other country. (ii) The FTS would be taxable@15%, being the rate specified in the DTAA, even though section 115A provides for a higher rate of tax, since as per section 90, the provisions of the DTAA would apply if they are more beneficial. (iii) The FTS would be taxable@25% as per section 115A even though the DTAA provides for a higher rate of tax, since as per section 90, the provisions of the Income-tax Act, 1961 (i.e., section 115A, in this case) would apply if they are more beneficial. Tax on income from units purchased in foreign currency or capital gains arising from the transfer [Section 115AB] 1. Where the total income of an overseas financial organisation (Off-shore Fund) includes the following incomes namely: (a) income received in respect of units purchased in foreign currency, or

8 13.8 Income Tax (b) income by way of long term capital gains arising from the transfer of units purchased in foreign currency, the same will be taxed at the rate of 10%. 2. Where the gross total income of the off-shore fund consists only of income from units or income by way of long-term capital gains arising from the transfer of units or both, no deduction will be allowed to the assessee under sections 28 to 44C or under section 57 or under Chapter VIA. The provisions of the second proviso to section 48 will not apply to any long-term capital gains arising from the transfer of units purchased in foreign currency. 3. Where the gross total income consists of the aforesaid income as well as other income, the deductions under Chapter VIA shall be allowed only on that portion of the gross total income which does not include income from units purchased in foreign currency. 4. For the purposes of this section, Overseas financial organisation or off-shore fund means any fund, institution, association or body, whether incorporated or not, established under the laws of a foreign country, which has entered into an agreement for investment in India with any public bank or public financial institution or a mutual fund specified under section 10(23D). Such arrangement must be approved by SEBI. Tax on income from bonds or shares purchased in foreign currency or capital gains arising from their transfer [Section 115AC] 1. Where the total income of a non-resident includes the following types of income namely, (a) income by way of interest on bonds of an Indian company issued in accordance with such scheme as may be notified by the Government or on bonds of a public sector company, sold by the Government, and purchased by him in foreign currency; or (b) income by way of dividends (other than dividends referred to in section 115-O) on Global Depository Receipts (i) issued in accordance with such scheme as the Central Government may specify against the initial issue of shares of an Indian company and purchased by him in foreign currency through an approved intermediary; or (ii) issued against the shares of a public sector company sold by the Government and purchased by him in foreign currency through an approved intermediary; or (iii) issued or re-issued against the existing shares of an Indian company purchased by him in foreign currency through an approved intermediary in accordance with a specified scheme; or (c) income by way of long-term capital gains arising from the above bonds or shares. The income-tax will be at the rate of 10% on the above income.

9 Assessment of various entities Where the gross total income includes interest or dividends in respect of bonds or shares referred to in this section, no deduction shall be allowed to him under sections 28 to 44C or under section 57 or under Chapter VI-A. 3. Where the gross total income includes interest or dividend (other than dividends referred to in section 115-O) or income by way of long-term capital gains, such gross total income shall be reduced by the amount of such income and Chapter VI-A deduction will be allowed on such balance. 4. The indexation provisions contained in the first and second proviso to section 48 shall not apply for the computation of long-term capital gain arising out of the transfer of bonds or shares. 5. Where the total income of the non-resident consists only of interest or dividends on bonds and GDRs and tax has been deducted at source from such income, he need not file a return under section 139(1). 6. Where the assessee acquired Global Depository Receipts or bonds in an amalgamated or resulting company by virtue of its holding Global Depository Receipts or bonds in the amalgamating or demerged company (as the case may be) these provisions shall apply to such Global Depository Receipts or bonds. Tax on income from GDRs purchased in foreign currency [Section 115ACA]: This section applies to resident individuals who are employees of an Indian company engaged in specified knowledge based industry or service, or its subsidiary engaged in specified knowledge based industry or service. Sub-section (1) of the section provides that the income-tax payable shall be the aggregate of (i) ten per cent of the income by way of dividends (other than dividends referred to in section 115-O) in respect of Global Depository Receipts of an Indian company purchased in foreign currency in accordance with such employees stock option scheme as the Central Government may, by notification in the Official Gazette, specify in this behalf, if any, (ii) ten per cent in case of long-term capital gains arising from the transfer of the aforesaid Global Depository Receipts, if any, and (iii) the amount of income-tax on the total income as reduced by the aforesaid income from the said Global Depository Receipts. Sub-section (2) of the section provides that in the case of the aforesaid resident employee, no deduction shall be allowed under any provisions of this Act where the gross total income consists only of income from Global Depository Receipts. However, where the total income includes income from Global Depository Receipts, the deduction under any provisions of the Act shall be allowed as if the gross total income does not include the income from the Global Depository Receipts. Sub-section (3) of the section provides that the first and second provisos to section 48 relating to the computation of capital gains shall not apply in case of transfer of Global Depository Receipts of an Indian company purchased by the resident employee in foreign currency. In other words, no indexation will be available even if the assets are long term capital assets. The Explanation to the section defines the related expressions as follows:

10 13.10 Income Tax (a) Global Depository Receipts means any instrument in the form of a depository receipt or certificate (by whatever name called) created by the Overseas Depository Bank outside India and issued to non-resident inventors against the issue of ordinary shares or foreign currency convertible bonds of issuing company; (b) Specified knowledge based industry or service means - (i) information technology software; (ii) information technology service; (iii) entertainment service; (iv) pharmaceutical industry; (v) bio-technology industry; and (vi) any other industry or service, as may be notified by the Central Government. (c) Subsidiary includes subsidiary incorporated outside India. (d) Information technology service means any service which results from the use of any information technology software over a system of information technology products for realising value addition; (e) Information technology software means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form and capable of being manipulated or providing inter-activity to a user, by means of automatic data processing machine falling under heading information technology products but does not include non-information technology products; (f) Overseas Depository Bank means a bank authorised by the issuing company to re-issue Global Depository Receipts against issue of Foreign Currency Convertible Bonds or ordinary shares of the issuing company. Tax on income of Foreign Institutional Investors from securities or capital gains arising form their transfer [Section 115AD]: This section relates to tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer. In the case of a Foreign Institutional Investor, income-tax payable shall be the aggregate of the following: (1) 20% of the income (other than income by way of dividends referred to in section 115-O) received in respect of securities (other than those units referred to in section 115AB). However, in case of interest referred to in section 194LD, income-tax is payable@5% of gross income. (2) 30% of the short-term capital gains arising from the transfer of the said securities. However, the amount of income-tax payable on their income by way of short-term capital gains referred to in section 111A is to be calculated at 15%. (3) 10% of long term capital gains arising from the transfer of the said securities. (4) The amount of income-tax on the total income as reduced by the aforesaid items of income.

11 Assessment of various entities Where the gross total income consists only of income from the aforesaid securities no deduction will be allowed under sections 28 to 44C or under section 57. However, where the gross total income includes income from securities or capital gains arising from the transfer of such securities, the deduction under Chapter VIA will be allowed as if the gross total income does not include the aforesaid items of income. The first and second provisos of section 48 relating to computation of capital gains will not apply in the case of transfer of aforesaid securities by the Foreign Institutional Investors. Concessional rate of tax on dividends received by Indian companies from specified foreign companies [Section 115BBD] (i) Dividends received by Indian companies from specified foreign companies to be subject to a concessional rate of 15% (as against the general rate of 30% applicable to Indian companies) for A.Y , A.Y and A.Y (ii) This rate of 15% would be applied on gross dividend, in the sense, that no expenditure would be allowable in respect of such dividend. (iii) However, this concessional rate would not be applicable in respect of dividend received from a foreign company in which the holding of the Indian company is less than 26% of the nominal value of the equity share capital. (iv) Therefore, if the total income of an Indian company, includes income by way of dividend declared, distributed or paid by a specified foreign company, the income tax payable would be the aggregate of (a) on gross dividend from such specified foreign company; and (b) Income-tax with which the assessee would have been chargeable had its total income been reduced by such dividend. (v) Specified foreign company means a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital of the company. Other special provisions: Section 44D and 44DA incorporates special provisions for computing income by way of royalties and fees for technical services chargeable to tax in the case of foreign companies and these provisions would apply notwithstanding any thing to the contrary contained in section 28 to 44C. These provisions have been explained under the head Profits and Gains of Business or Profession. The special provisions in respect of deduction of head office expenditure, applicable to all non-residents contained in section 44C have also been explained. All these special provisions should be borne in mind while determining the liability of foreign companies to income-tax in India Capital Gains of companies Special Provisions: (1) Where the assets of a company are distributed to its shareholders in species on its liquidation such a distribution is not deemed to be a transfer made by company for purposes of capital gains tax. In the absence of this specific provision, the company would be deemed to have made capital gain on the assets transferred and would

12 13.12 Income Tax consequently be liable to tax in respect of such distribution [Section 46(1)]. Where a shareholder receives any money or assets from a company on its liquidation, he is chargeable to tax under the head capital gains in respect of the money or the market value of the assets on the date of distribution, reduced by the amount of notional dividends, if any, assessed under section 2(22)(c) and the sum so arrived at shall be the full value of consideration for computation of capital gains under section 48 [Section 46(2)]. (2) Section 47 provides that the following transfers of capital assets will not be considered for the purposes of levying tax on capital gains under section 45: (i) By a holding company to its Indian subsidiary company provided the latter holds all the share capital of the former. (ii) By a subsidiary company to its Indian holding company provided the latter holds all the share capital of the former. (iii) In a scheme of amalgamation, by the amalgamating company to its amalgamated Indian company. (iv) In a scheme of amalgamation, by the amalgamating foreign company to the amalgamated foreign company subject to prescribed conditions. (v) In a demerger, by the demerged company to the resulting company, if the resulting company is an Indian company. (vi) Any transfer in a demerger of shares held in an Indian company by the demerged foriegn company to the resulting foreign company subject to prescribed conditions. (vii) Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is in consideration of the demerger. Exceptions: However, the proviso to clause (v) of section 47 provides to the effect that the exemptions at (i) and (ii) above will not apply to the transfer of capital asset made after as stock in trade. This seeks to plug the loophole which facilitated the transferee holding/subsidiary companies to circumvent the operation of section 47A by resorting to the device of converting capital asset as stock in trade at the time of transfer itself. Now, the proviso secures that any profits derived by a holding company in a transfer of a capital asset after 29th February, 1988 to its wholly owned subsidiary company or vice versa will be subject to tax under the head capital gains in case where the capital asset is taken over as stock-in-trade by the transferee company at the time of transfer itself. Inter-corporate transfer of capital assets [Section 47A]: Section 47A provides for the withdrawal of the exemption in respect of capital gains in certain cases covered by (i) and (ii) above. Under the provisions of Section 47(iv) the transfer of a capital asset by a company to its wholly owned subsidiary company is exempt from capital gains tax levy. Similarly section 47(v) exempts transfer from subsidiary company to holding company. The only condition for such an exemption is that the transferee company must be an Indian company. Section 47A provides that where the transfer of a capital asset between a parent company and its hundred per cent subsidiary company has been exempted from any

13 Assessment of various entities charge to capital gains tax by virtue of provisions of clause (iv) or (v) of section 47 such exemption will be revoked in either of the two under noted cases by an order of rectification under section 155(7A) of the Income-tax Act, (i) Within a period of eight years from the date of the transfer the capital asset in question is converted by the transferee company into or as, stock-in-trade of its business; or (ii) within a period of eight years from the date of the transfer the parent company or its nominee or as the case may be, the holding company ceases to hold the whole of the share capital of the subsidiary company. Section 43C: Section 43C(1) provides that where an asset which has become the property of an amalgamated company under a scheme of amalgamation, is sold after the as stock-in-trade, then in computing the profits and gains received from such transfer, the cost of acquisition of the asset to the amalgamating company shall be the cost of acquisition of the asset to the amalgamating company, as increased by the cost of any improvement made thereto and the expenditure incurred wholly and exclusively in connection with such transfer. This provision is intended to curb the device earlier adopted by the tax payers, under which the stock-in-trade taken over by an amalgamated company was revalued at the time of amalgamation. Prior to the insertion of this provision, the amalgamating company was not liable to tax on the difference arising on account of revaluation of the stock-in-trade at a value and the amalgamated company also reduced its tax liability on the profit accruing to it in the subsequent sale of the stock-in-trade. Capital gains arising on the conversion of a partnership firm into a company or succession of a sole proprietary concern by a company are exempt subject to certain conditions specified. For a detailed discussion, students may refer to the chapter dealing with capital gains Special provisions in regard to taxation of companies: (1) Amalgamation : The definition of the term amalgamation is contained in section 2(1A) and the other provisions in respect of amalgamation are contained in sections 32, 35, 35ABB, 35D, 35DD, 35E, 47, 49, 55, and 72A. (2) Demerger : The definition of demerger is contained in section 2(19AA) and the related provisions are contained in sections 32, 35ABB, 35D, 35E, 47, 49, 55, and 72A. Students may refer to chapter 6 (Profits and Gains of Business or Profession), chapter 7 (Capital Gains) and chapter 10 (Set off and Carry Forward of Losses) for detailed discussions Liability for deduction of tax at source: The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, before making any payment in cash or before making distribution or payment to a shareholder falling within the definition of dividend in section 2(22) shall deduct from the amount of all such dividends, income tax at the rate or rates prescribed by the relevant Finance Act relating to the year in which the dividend was declared. The rates for deduction of tax at source have been specified in Part II of the First Schedule to the Finance Act.

14 13.14 Income Tax Further, the liability of the company extends as well to the deduction of tax at source from salaries, interest on securities, interest other than interest on securities, payments to contractors or sub-contractors and other sums payable to non-residents in accordance with the provisions of the sections 192 to 206B. Deductions available for certain expenses 1. Expenditure on scientific research (Section 35) 2. Expenditure for obtaining licence to operate telecommunication services (Section 35ABB) 3. Expenditure on eligible projects or schemes (Section 35AC) 4. Amortisation of certain preliminary expenses (Section 35D) 5. Amortisation of expenditure in case of amalgamation or demerger (Section 35DD) 6. Expenditure on prospecting, etc. for minerals (Section 35E) 7. Expenditure for promoting family planning among employees [Section 36(1)(ix)] Tax incentives on certain incomes: 1. Profits and gains from industrial undertakings, etc. engaged in infrastructure development (Section 80-IA) 2. Profits and gains from industrial undertaking other than infrastructure development undertakings (Section 80-IB) 3. Profits and gains in respect of certain undertakings or enterprises in certain special category States (Section 80-IC) 4. Profits from business of collecting and processing of bio-degradable waste (Section 80JJA) 5. Deduction in respect of employment of new workmen (Section 80JJAA) Restrictions on the deductibility of certain expenditure/payments of special significance to companies 1. Head Office expenditure in the case of non-residents (Section 44C) 2. Computation of income by way of royalties etc., in the case of foreign companies (Section 44DA) 3. Set-off of losses in the case of a company in which public are not substantially interested (Section 79) Tax liability of a company in liquidation [Section 178]: This has been discussed later in this chapter under the heading Liability in Special Cases. The tax implications of liquidation in the context of taxation of capital gains and in the matter of dividends have been explained in the respective chapters. Liability of directors of private companies in liquidation: Section 179 provides that when any private company is wound up and any tax is assessed on the company whether before or during the course of or after its liquidation in respect of its income of any previous year and it cannot be recovered from the company, then every person who was a director of the company at any time during the relevant previous year shall be jointly and severally liable

15 Assessment of various entities for the payment of such tax, penalty, interest or any other sum of money assessed on the company and remaining unpaid unless he proves to the satisfaction of the Assessing Officer, that the non-recovery of the amounts cannot be attributed to any gross neglect or misfeasance of duty on his part in relation to the affairs of the company. Section 179 provides for the collection and recovery of tax in the case of all private companies. According to section 179, the directors of a private company would be personally liable to pay the taxes due from the company not only at the time when the company is wound up but even in case where the company is not in liquidation. Thus, the directors of private company are jointly and severally liable for the payment of any tax due from a private company in respect of its income liable to tax in any accounting year or from any other company in respect of any income of any previous year during which time, such other company was a private company. Tax due includes penalty, interest or any other sum payable under the Income-tax Act, In cases where a private company is converted into a public company and the taxes assessed in respect of any income of any year during which such company was a private company could not be recovered from the company, then any tax due in respect of the income of private company could be recovered from any of the persons who were directors of the private company before it became a public company. The directors would be in a position to get away from this personal liability to pay the taxes of the company, only if it could be proved that the non-recovery of the taxes due from the private company is not attributable to any gross negligence, misfeasance or breach of duty on their part in relation to the affairs of the private company. Thus the personal liability of the directors has extended to cases of private companies which are not in liquidation and those which might have subsequently become public companies Carry forward and set off of losses incurred by closely-held companies: Section 79 applies only in cases where a change in share holding has taken place in the case of company in which the public are not substantially interested. Such companies will be entitled to the benefit of carry forward and set off of any earlier year s losses in the following previous year only if on the last day of the previous year shares carrying not less than 51% of the total voting power are beneficially held by persons who beneficially held those shares on the last day of the previous year in which such loss was incurred. The object of the section is to counter avoidance of tax by persons taking advantage of the corporate personality of the company. The section does not, however, affect the right of the company to set off its current losses against other current income nor does it affect the carry forward of unabsorbed depreciation allowance, development rebate, or investment allowance, expenditure on scientific research, patents or copyright, and expenses on the prospecting or the extraction of any mineral or group of associated minerals subject, however, to the other provisions of the Act for the carry forward and set-off of these items. The proviso to section 79, however provides for an exception in this regard. Accordingly, carry forward and set off of past years losses shall not be denied to a closely held company where a change in the shareholding resulting in a change in voting power to the extent of 51% or more has taken place consequent upon the death of a shareholder or gift of shares made by a shareholder to any of his relatives.

16 13.16 Income Tax Prescribed arrangements for the declaration and payment of dividends within India: The arrangements (specified in Rule 27 of the Income-tax Rules, 1962) are the following: (i) The share register of the company concerned for all its shareholders shall be maintained regularly at its principal place of business within India in respect of any assessment year from a date not later than 1st April of each assessment year. (ii) The general meeting of the shareholders for passing the accounts of the previous year relevant to the assessment year and for declaring any dividends in respect thereof shall be held only at a place within India. (iii) the dividends declared, if any, shall be made payable only within India to all the shareholders. It is obligatory for Indian companies to make the prescribed arrangements stated above; non- Indian companies will be treated as domestic companies only if they make the prescribed arrangements for the declaration and payment of dividends in India Minimum Alternate Tax on companies [Section 115JB]: As per section 115JB(1), in case of company (domestic or foreign), if the income-tax payable on the total income computed under the Income-tax Act, 1961 is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 18.5% (add surcharge, if applicable, i.e., 5% for domestic companies and 2% for foreign companies, where the total income exceeds ` 1 crore but does not exceed ` 10 crore, and 10% for domestic companies and 5% for foreign companies where the total income exceeds ` 10 crore). Further, education and secondary and higher education cess@1% shall be added on the aggregate of income-tax and surcharge As per section 115JB(2), prior to amendment by the Finance Act, 2012, every company was required to prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, However, as per the proviso to section 211(2) of the Companies Act, , certain companies like insurance companies, banking companies, companies engaged in generation or supply of electricity etc., are allowed to prepare their profit and loss account in accordance with the form specified in or under the Act governing such class of company. In order to align section 115JB(2) with the proviso to section 211(2) of the Companies Act, 1956, sub-section (2) of section 115JB has been substituted w.e.f. A.Y to require such companies to prepare their profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company. Companies, other than companies referred to in the proviso to section 211(2) of the Companies Act, 1956, shall continue to prepare their profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, Second Proviso to section 129(1) of the Companies Act, Schedule III to the Companies Act, 2013

17 Assessment of various entities For computing the book profit, the net profit shall be increased by the following amounts if debited to the profit and loss account: (a) income-tax paid or payable, and the provision therefor; or [It may be noted that income-tax includes (1) dividend distribution tax / tax on distributed income; (2) interest; (3) surcharge; (4) education cess; and (5) secondary and higher education cess] (b) amount carried to any reserves, by whatever name called, other than any amount transferred to Special Reserve under section 33AC; or (c) amounts set aside to provision for meeting liabilities other than ascertained liabilities; or (d) amount of provision for losses of subsidiary companies; or (e) amount of dividends paid or proposed; or (f) amount of expenditure relatable to any income to which section 10 [other than section 10(38)] or 11 or 12 apply; or (g) the amount of depreciation; or (h) the amount of deferred tax and provision therefor; or (i) the amount set aside as provision for diminution in the value of any asset. Further, the net profit shall also be increased by the amount standing in revaluation reserve relating to the revalued asset on the retirement or disposal of such asset, in case the same is not credited to the profit and loss account. The net profit shall be reduced by the following amounts: (i) amount withdrawn from any reserve or provision, if any, such amount is credited to the profit and loss account. However, the amount withdrawn from reserves/provisions shall not be reduced from the book profit unless the book profit of that year has been increased by those reserves/ provisions; (ii) amount of income to which section 10 [other than section 10(38)] or 11 or 12 apply, if such amount is credited to the profit and loss amount; (iii) the amount of depreciation debited to the profit and loss account (excluding the claim of depreciation on account of revaluation of assets); (iv) the amount withdrawn from the revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on revaluation of assets; (v) amount of brought forward loss or unabsorbed depreciation, whichever is less as per books of account. The loss shall not include depreciation; If either the figure of brought forward loss or unabsorbed depreciation is NIL, no deduction will be allowed from the book profit of the relevant year;

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