Corporate Tax Concepts

8/6/2019 Corporate Tax Concepts

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CORPORATE TAXATION BASIC CONCEPTS

Governed & administered under Income Tax Act, 1961 and Income

Tax Rules, 1962.

Income tax is a central levy & proceeds are shared between Centre

& States.

Definitions & concepts

ASSESSEE(S) 2(7)A person by whom any tax is payable under the Income Tax Act, 1961 &

includes: Individual, including minors. ( Income of minors can only be

assessed in the hands of legal guardian or manager as Deemed

assessee)

HUF, comprising persons linearly descendent from a commonancestor & includes their wives & un-married daughters. Assessment

will continue till a partition takes place.

Company, whether registered in India or abroad.

Firm, distinct from its partners

Association of persons, formed for common purpose or commonaction, with a view to produce income, profits, gains. Persons can

include companies, firms, HUF as its members.

Local Authority, having autonomous status, formed by election of

local residents, performs governmental functions- municipal

committee, district board or other authority authorized by Govt.

Artificial juridical person residuary classification. An idol, deity,

trust.

Deemed AssesseePerson who has been treated as Assessee for assessment of income

or loss of any other person.

Ex.

Legal representative of deceased, guardian of a minor, agent of a

non-resident & trustee of a trust.


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Financial Year (FY)Period of 12 months commencing from 1st April & ending with 31st March

Previous Year (PY) 3Year in which income is earned ie year immediately preceding the AY.

From AY 1989-90 onwards previous year for all assesses & all sources of

income is from 1st April to 31st March.

It is not compulsory that books of account have to be maintained on the

basis of PY or FY. Books can be maintained on the basis of any 12 months,

but for tax purposes income of PY will be subject to tax.

Assessment Year (AY) 2(9)Period of 12 , following the financial year, starting from 1st April of everyyear & ending with 31st March, next year.

For financial year 2008-09 AY will be 2009-10.

Income of a financial year is taxed during the relevant assessment year, at

rates prescribed for such AY by the relevant Finance Act.

Ex.

Acctg year Income as per books of a/c Break up of incomeCalender year Jan-March Apr-Dec

2007 60000 18000 42000

2008 70000 26000 44000

2009 90000 21000 69000

Taxable Income

PY(April to March) AY Income

2007-08 2008-09 42000+26000

2008-09 2009-10 44000+21000

For a newly set up business, 1st PY will commence from date of setting

business & end with immediately following 31st March. In such case 1st

PY can be less than 12 months.

All subsequent PY will be of 12 months 1st April to 31st March.


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In certain circumstances income of a PY can be assessed in

same PY, instead of AY. (PY & AY will be same)

Shipping business of Non-resident for transporting goods from

an Indian port. Ship can leave the port only after paying tax to

Indian authorities. (172) Persons leaving India in a PY w/o intention of coming back(174)

Ex.

A furnishes return for PY 2006-07 in July 2007.

AY for this is 2007-08.

While making assessment in February 2008 AO came to know that

A is leaving India for good in May 2008.

In AY 2008-09 AO can ask A to furnish return for PY 2007-08 as

also from April 2008 to 31st

May 2008.

AoP or AJP set up for a short duration & likely to be dissolved

within PY of formation. (174 A)

Person likely to transfer property to avoid tax (175)

Business discontinued (176)

Residential status

For Individual Determined on basis of period of stay of assesseein India during PY.

Four classifications of residential status

Resident,

A. Stay in India for a period or periods of 182 days or more

during PY OR

B. Stay in India for a period or periods of 60 days or more

during PY AND

Stay in India for a period or periods of 365 days or more

out of 4 years immediately preceding PY

Non-resident, [If none of A & B are satisfied]


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Resident and ordinarily resident

Resident in India for 2 or more years out of 10 years

preceding PY AND

Has been in India for 730 days or more out of 7 years

preceding PY Resident but not ordinarily resident.

Non-resident in India in 9 out of 10 years preceding PY OR

Has been in India for 729 days or less out of 7 years

preceding PY.

Purpose of stay is immaterial

Stay in India may not be continuous

For Companies Determined on basis of degree of control or

management of affairs of Co. during PY.

Tax liability varies according to residential status of assessee.

Resident assessee is taxed on Global income.

Citizen of India or a foreign national who is Non-resident in India

is taxed only on Indian income.

Tax liabilityIncome tax is payable on TOTAL INCOME of PY, less:

Rebates & reliefs, Advance tax & TDS

+ surcharge & applicable cess.

Rebate deduction allowed from income tax payable

Relief In case of arrears of salary or salary received inAdvance

Deductions reduction of income chargeable to tax

Surcharge levied as % of income tax payable, for a specific

Objective

Advance tax Income tax payable in advance of completion


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of PY, in 4 installments, on estimated income

of PY on 15 of June, September, December &

March.

Tax deducted at source Income tax+ surcharge + cess to be

deducted before making payment of any income. This has tobe deposited with Govt. by 7th of following month.

Tax rate For companies & partnership firms @ 30% +

Surcharge @10% +

Education cess @ 2% +

Secondary & Higher education cess @ 1%.

INCOME Income may be received in cash or kind.

Income in kind is valued on market rate basis or as prescribed

by Income Tax Authorities.

Income is taxable eitheron receipt basisoraccrual

basis. Income can accrue w/o actual receipt.

Assessee can select cash or accrual system of accounting for

income under profits or gain from business or profession &

income from other sources. Any system adopted is to befollowed consistently.

Illegal income is taxable in same manner as legal income.

Expenditure for earning such income are not deductible.

Reimbursement of expenses is not income.

Gifts of personal nature is not treated as income, unless its

value is more than Rs.50,000 &/or is received from a person

other than a relative.

Tax free income is to be taxed after adding tax paid by giverof income.

Revenue receipt v/s capital receipt.

Revenue receipts (income) flow in with some regularity &

from a definite source. All revenue receipts are taxable.


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Capital receipts are not taxable. [Subsidies, pre-

commencement receipts, compensation,

Ex.

Anita had applied for a job at B Co. B Co. informed Anita though she had cleared

competitive test but was not being offered job.

In response to suit filed by Anita, for discrimination on

ground of sex for not offering job, Anita was paid

compensation by B Co.

This can not be treated as revenue receipt as this is not

regular source of receipt because employer-employee

relationship had not been established between Anita & B Co.

Amount received by Anita is in nature of capital receipts.

For business or profession only net profit is treated as

taxable income.

Income is taxable under five heads: (14) Salary

Income from house property

Profits & Gains from business or profession

Capital gains

Income from other sources

Income tax is payable on aggregate of incomes under

all heads @ rate applicable to each income / assessee.


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Assessment procedure

After the end of PY, companies are required to

voluntarily submit Return of Income toIncome tax office, in prescribed form within the

Due date.

Return has to be filed by companies, firms even

if they have incurred loss in a particular PY.

For companies whose accounts are required to be

statutorily audited, due date is 30.09.2009.

On receipt of RoI Assessing Officer (AO) will assess

income or loss either by himself or by calling

assessee with books of accounts & or other

documents.

During assessment, AO can increase/decrease incomehe thinks appropriate as per Income Tax Act & re-

calculate tax liability.

Based on his assessment AO can either issue

Demand notice for paying further tax than already

paid or refund order if excess tax is paid.


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A.Y.

2009-10New Income Tax Return Forms Forms

ITR 1 For Individuals having Income fromSalary/ Pension/ family pension &Interest

ITR-2 For Individuals and HUFs not havingIncome from Business or Profession

ITR-3

For Individuals/HUFs being partners

in firms and not carrying out businessor profession under any

proprietorship

ITR-4For individuals & HUFs having incomefrom a proprietary business or

profession

ITR-5 For firms, AOPs and BOIs

ITR-6 For Companies other than companies

claiming exemption under section 11

ITR-7

For persons including companiesrequired to furnish return under

section 139(4A) or section 139(4B) or

section 139(4C) or section 139(4D)Acknowle

dgementAcknowledgement for e-Return andnon e-Return


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PERSONAL

INFORMATION

First name Middle

name

Last name PAN

Flat/Door/Block No Name Of

Premises/Building/VillageStatus (Tick)Individual

HUF

Road/Street/Post Office Area/locality Date of Birth

(DD/MM/YYYY)

( in case of individual

/ /

Town/City/District State Pin code Sex (in case of individu

(Tick) MaleFemale

Email Address (STD code)-Phone

Number

Employer Category (i

employment) (Tick)( ) Govt PSU

Others

FILINGSTATUS

Designation of Assessing Officer (Ward/Circle) Return filed under

Section

[Please see instructionnumber9(i)]

Whether original or Revised return? (Tick) Original Revised

If revised, then enter Receipt No and Date of

filing original return (DD/MM/YYYY)

Residential Status (Tick) Resident Non-Resident Resident but Not Ordinarily Resident

Whether this return is being filed by a representative assessee? (Tick) Yes No

If yes, please furnish following information -(a) Name of the representative

(b) Address of the representative

( c) Permanent Account Number (PAN) of the representative

FORM

ITR-4

INDIAN INCOME TAX RETURN( For individuals and HUFs having income from a

proprietory business or profession)(Please see rule 12 of the Income-tax Rules,1962)

Assessment

Year

2 0 0 9 - 1

Part A-GEN GENERAL


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Part B - TI Computation of total income

TOTALINCOME1 Salaries 1

2 Income from house property (enter nil if loss) 2

3 Profits and gains from business or profession

i Profit and gains from business

other than speculative business

3i

ii Profit and gains from speculative

business

3ii

iii Total (3i + 3ii) 3iii

4 Capital gainsa Short term

i Short-term (under section

111A)

4ai

ii Short-term (others) 4ai

i

iii Total short-term (4ai + 4aii) 4ai

ii

b Long-term 4b

c Total capital gains (4aiii + 4b) 4c5 Income from other sources

a from sources other than from

owning race horses

5a

b from owning race horses 5bc Total (5a + 5b) 5c

6 Total (1 + 2 + 3iii +4c +5c) 6

AUDITINFORMATI

ON Are you liable to maintain accounts as per section 44AA? (Tick) Yes

Are you liable for audit under section 44AB? (Tick) Yes No,If yes, furnish following information-

(a) Name of the auditor signing the tax audit report

(b) Membership no. of the auditor

(c) Name of the auditor (proprietorship/ firm)

(d) Permanent Account Number (PAN) of the proprietorship/ firm

(e) Date of audit report.


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7 Losses of current year to be set off against 6 7

8 Balance after set off current year losses (6 7) 8

9 Brought forward losses to be set off against 6 9

10 Gross Total income (8-9) 10

11Deductions under Chapter VI-A

11

12 Total income (10 11) 12

13 Net agricultural income/ any other income for rate purpose 13

14 Aggregate income (12 + 13) 14

15 Losses of current year to be carried forward 15

Part B - TTI Com utation of tax liabilit on total income

COMPUTATIONOFTAXLIAB

ILITY

1 Tax a able on total incomea Tax at normal rates 1ab Tax at s ecial rates 1b

2 Tax Pa able on Total Income 1a + 1b 23 Surchar e on 2 34 Education cess includin secondar and hi her education 45 Gross tax liabilit 2+ 3 + 4 56 Tax relief

a Section 89 6ab Section 90 6bc Section 91 6cd Total 6a + 6b + 6c 6d

7 Net tax liabilit 5 6d 78 Interest a able

a For default in furnishin the 8a

b For default in a ment of advance 8bc For deferment of advance tax 8cd Total Interest Pa able 8a+8b+8c 8d

9 A re ate liabilit 7 + 8d 9

TAXESPAID

10 Taxes Paida Advance Tax 10ab TDS 10

c TCS 10cd Self Assessment Tax 10e Total Taxes Paid (10a+10b+10c + 10d) 10e

11 Amount a able (Enter i 9 is reater than 10e, else enter 0) 11

REFUND

12 Refund (I 10e is reater than 9, also ive Bank Account details below) 12

13 Enter our bank account number (mandator in14 Do ou want our refund b che ue or de osited directl into our bank acc15 Give additional details of our bank account

*MICR Code

Type of Account (tick as applicable )Savings Current

*Magnetic Ink Character Recognition


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VERIFICATION

I, son/ daughter of , holding permanent account number ____________ solemnly declare that to the best o

knowledge and belief, the information given in the return and schedules thereto is correct and complete anthe amount of total income and other particulars shown therein are truly stated and are in accordance with

provisions of the Income-tax Act, 1961, in respect of income chargeable to Income-tax for the previous ye

relevant to the Assessment Year 2009-10.

Place DateSign here

CORPORATE TAX PLANNING

Tax planning

Arranging financial affairs of a Co. such as by availing all

deductions, exemptions, allowances & rebates available

under Income tax Act 1961, Co.s tax liability reduces to

minimum or nil.

Objective of Cos. should be not only to maximize profitsbut also maximize post- tax profits.

EX.

Residential status

Reimbursements instead of allowances- medical, LTC,

80C investments, HRA, interest on educational loans,

If owning more than one house, other house can betransferred in the name of daughter-in-law, no

clubbing applicable.

If house is in wifes name she can collect rent from

husband; husband will get relief in HRA


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Capital gain time of selling

Form of business entity Salary paid to HUF

members is deductible

Tax management

Compliance with provisions of law.

Filing of proper tax returns in time, all claims must be

supported by relevant documents, proper & timely

deduction of TDS, taking corrective action based on past

assessments, thereby avoiding penalties, prosecution etc.

Tax avoidance

Legitimately reducing/minimising Co.s tax liability by

taking benefits available within the ambit of legal

framework even by taking help of loopholes in tax laws.

Intentional tax planning before the tax liability arises.Ex.

Income generated from gift made by husband to wife is

taxable in hands of husband.

However if gift is made out of HUF funds by Karta of HUF

to his wife clubbing is not applicable & income will be

taxable in hands of wife. Husbands tax liability will be

reduced to that extent.

Courts have observed A transaction which is permissible

under the law & has the effect of reducing the tax burden of

the assessee, should not be looked upon with disfavour.


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Tax evasion

Try illegally to avoid paying tax.

Avoiding tax by unfair/ illegal methods. submitting

wrong documents knowingly, suppressing of material facts,

stating income without base on records

Assessee resorting to this method is subject to penalties/

punishment/prosecution.

Ex.

A manufacturing Co. to avail tax exemption rents factory

building in

J&K. it carries on no activity there. Actual production is done

in Haryana.

COMPANY

Indian Company 2(26)A Co. formed & registered under the Companies

Act 1956 &

Having its registered office in India.

o Corporation established by or under a Central or

state Act LIC, SFCs, Road Transport corporations.

Domestic Company- 2(22) AAn Indian Co. or

o Any other Co., including a foreign company,

which, has made arrangements for declaration & payment of


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dividends in India ( on Equity or Preference shares), out of

its income liable to tax under Income tax Act, 1961.

Arrangements for declaration & payment of dividends in India-

1.Share register of Co. should regularly be maintained at itsprincipal place of business in India;

2.AGM for passing of accounts & declaring of dividend

should be held in India

3. Dividend so declared should be payable within India

to all shareholders.

Foreign Company

o Co. which is not a Domestic Co.

Industrial Company

A Co. which is mainly engaged in the business of:

o Generation or distribution of power or

o Construction of ships or

Manufacture or processing of goods or

Mining.

Mainly engaged Gross income from one or more such

activities is not less than 51% of total income.

Company in which public is substantially interested 2(18)

o All listed Companies on the last day of PY;

oCo. in which Central or State Govt./RBI owns not less

than 40% or more shareholding (in value) , even if it is a

Pvt. Ltd. Co.

o Co. registered for promotion of commerce, art, religion,

charity, science without profit motive & prohibits of

payment of dividend to its members.

o Co. in which 50% or more voting power is held by Co-

operative society/ies throughout the PY.


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oCo. without share capital & having regard to its objects &

its members, declared by CBDT to be Co.in which

public is substantially interested

PSUs

Widely/Closely held Cos.

Cos.in which public is/is not substantially interested.

Residential status of a Company & Tax liability6 (3)

Indian Co. Always resident in India

Foreign Co.- Resident if:If control & management of its affairs is situated wholly in

India during PY.

If Control & management is partly situated outside India

during PY, foreign Co. becomes Non-resident Co.

Place of control Residential statusIndian Co. Other than Indian Co.

Wholly in India Resident Resident

Wholly outside India Resident Non-resident

Partly in India Resident Non-resident

Control & Management Basis is what, by whom and where

policy decisions are taken

Central control/directing powers in respect of policy, finance

& disposal of profits

Lies where such power is exercised with some degree of

permanence.


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Should be de facto & not only de jure.

Centre of Control & Management

Companies Board of DirectorsHUF Karta

Partnership firm Partners

AoP Principal officer

Relationship between residential status & incidence of Tax-

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Tax liability depends upon:o Residential status &

o Place & time of receipt & accrual of income.

COMPANY Tax rate-%

Domestic Company 30

Foreign Company 40

Receipt & accrual of income

Income received in India

When assessee or his authorised agent, (could be bank) gets

actual control over the income on first occasion.

If income is received in India by authorized agent of non-

resident assessee, income is received in India.

If assessee has got control of income for the first time

outside India & subsequently same is remitted to India it

can not be treated as income received in India.


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CASE

Where a commission agent effected sale & recovered

proceeds in India on behalf of foreign principal, profits on

sale would be received in India, even if commission agenthad remitted a substantial portion of value of goods to

foreign principal abroad before actual realization of sale

proceeds in India.

Where a foreign consignor sent goods to India, consignee

who effected sale in India & collected sale proceeds & after

deducting commission remitted balance to foreign

consignor, it was held that income from sale of goods wasreceived in India by consignee on behalf of consignor.

Income accruing in India

Income accrues when :

An enforceable right to receive it vests with assessee &

There is unconditional liability on behalf of payer.

Dividend accrues only when approved by AGM

Profit to partners accrue only at the end of accounting period,

after finalization of accounts

CASE

A non-resident Co. had a subsidiary registered in India. Indian subsidiary declared dividend of Rs.50 lakh but

was remitted to parent Co. after 2 years, when it got

RBIs approval for remittance under FEMA.


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AO assessed & taxed dividend income in AY relevant

to PY in which dividend was declared, as same is

accrued on being declared.

Court held that:

Obligation to pay dividend arose only after receiving

statutory approval from RBI.

Assessees right to receive dividend accrued only after

RBI granted approval.

Therefore there was no liability to pay dividend on

declaration; hence will be taxed in AY relevant to PY in

which RBI approval was received.

Place of accrual of income

Income accrues at a place:

Where services are rendered by recipient;

In case of buying/selling where contract of sale is made;

in case of foreign trade- where documents of title are

handed over by seller to buyer or his agent.EX.

If Bill of lading is made out in buyers name & handed

over to buyers agent in India, sale has happened in India

& profits have accrued in India.

If Bill of lading is made out in name of seller & is

handed over to buyer or his agent at destination against

payment, property in goods passes at buyers place &profits accrue at that place.

Indian income Any of following income:


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o Received & accrued in India;

o Received in India, accrued outside India;

o Received outside India, accrued in India

Indian income is always taxable in India irrespective of

residential status of Co.

Foreign income- Income that neither accrues nor received

in India.

Foreign income is taxable in India only in hands of

Resident Co.

Foreign income is not taxable in India in the hands of non-

resident Co..

COMPANY Resident in India Non-resident in

India

Indian income Taxable in India Taxable in India

Foreign income Taxable in India Not taxable in

India

Corporate Tax Concepts

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