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 common
ancestor & includes their wives & un-married daughters. Assessment
will continue till a partition takes place.
 Company, whether registered in India or abroad.
 Firm, distinct from it’s partners
 Association of persons, formed for common purpose or common
action, with a view to produce income, profits, gains. Persons can
include companies, firms, HUF as it’s 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 Assessee
Person 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.
 Financial Year (FY)
Period of 12 months commencing from 1st April & ending with 31st March

Previous Year (PY) 3

Year 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 every
year & 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 income
Calender 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.
 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 assessee
in 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]

  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 liability
Income 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 in
Advance
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
 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 to
be 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 either on “receipt” basis or “accrual”
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 be
followed 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 it’s
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 giver
of income.
 Revenue receipt v/s capital receipt.
Revenue receipts (income) flow in with some regularity &
from a definite source. All revenue receipts are taxable.
 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.
Assessment procedure
 After the end of PY, companies are required to
voluntarily submit “Return of Income” to
Income 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 income

he 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.
 A.Y.
New Income Tax Return Forms Forms
2009-10
ITR 1 For Individuals having Income from
Salary/ Pension/ family pension &
Interest
ITR-2 For Individuals and HUFs not having
Income from Business or Profession
For Individuals/HUFs being partners
ITR-3 in firms and not carrying out business
or profession under any
proprietorship
For individuals & HUFs having income
ITR-4 from a proprietary business or
profession
ITR-5 For firms, AOPs and BOIs

ITR-6 For Companies other than companies

claiming exemption under section 11
For persons including companies
ITR-7 required to furnish return under
section 139(4A) or section 139(4B) or
section 139(4C) or section 139(4D)
Acknowle
Acknowledgement for e-Return and
dgement
non e-Return
 INDIAN INCOME TAX RETURN Assessment
FORM ( For individuals and HUFs having income from a Year
ITR-4 proprietory business or profession)
(Please see rule 12 of the Income-tax Rules,1962) 2 009 - 10
Part A-GEN GENERAL
First name Middle Last name PAN
name
Flat/Door/Block No Name Of Status (Tick) 
Premises/Building/Village
 Individual 
HUF
PERSONAL INFORMATION

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 individual)
(Tick) 
 Male 
Female
Email Address (STD code)-Phone Employer Category (if in
Number employment) (Tick) 
( )  Govt  PSU 
Others
Designation of Assessing Officer (Ward/Circle) Return filed under
Section
[Please see instruction
number9(i)]
Whether original or Revised return? (Tick)   Original
 Revised
If revised, then enter Receipt No and Date of
FILING STATUS

/
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
AUDIT INFORMATION

Are you liable to maintain accounts as per section 44AA? (Tick)   Yes  No
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.

Part B - TI Computation of total income

TOTAL INCOME

1 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 3i
other than speculative business
ii Profit and gains from speculative 3ii
business
iii Total (3i + 3ii) 3iii
4 Capital gains
a Short term
i Short-term (under section 4ai
111A)
ii Short-term (others) 4ai
i
iii Total short-term (4ai + 4aii) 4ai
ii
b Long-term 4b
c Total capital gains (4aiii + 4b) 4c
5 Income from other sources
a from sources other than from 5a
owning race horses
b from owning race horses 5b
c Total (5a + 5b) 5c
6 Total (1 + 2 + 3iii +4c +5c) 6
 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
11 Deductions 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 Computation of tax liability on total income

1 Tax payable on total income
a Tax at normal rates 1a
COMPUTATION OF TAX LIABILITY

b Tax at special rates 1b

2 Tax Payable on Total Income (1a + 1b) 2
3 Surcharge on 2 3
4 Education cess, including secondary and higher education 4
5 Gross tax liability (2+ 3 + 4) 5
6 Tax relief
a Section 89 6a
b Section 90 6b
c Section 91 6c
d Total (6a + 6b + 6c) 6d
7 Net tax liability (5 – 6d) 7
8 Interest payable
a For default in furnishing the 8a
b For default in payment of advance 8b
c For deferment of advance tax 8c
d Total Interest Payable (8a+8b+8c) 8d
9 Aggregate liability (7 + 8d) 9
10 Taxes Paid
TAXES PAID

a Advance Tax 10a

b TDS 10
b
c TCS 10c
d Self Assessment Tax 10
e Total Taxes Paid (10a+10b+10c + 10d) 10e
11 Amount payable (Enter if 9 is greater than 10e, else enter 0) 11
12 Refund (If 10e is greater than 9, also give Bank Account details below) 12
13 Enter your bank account number (mandatory in
REFUND

14 Do you want your refund by  cheque, or  deposited directly into your bank account?
15 Give additional details of your bank account
*MICR Code Type of Account (tick as applicable  )
 Savings  Current

*Magnetic Ink Character Recognition

 VERIFICATION
I, son/ daughter of , holding permanent account number ____________ solemnly declare that to the best of my
knowledge and belief, the information given in the return and schedules thereto is correct and complete and that
the amount of total income and other particulars shown therein are truly stated and are in accordance with the
provisions of the Income-tax Act, 1961, in respect of income chargeable to Income-tax for the previous year
relevant to the Assessment Year 2009-10.
Sign here
Place Date
è

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 profits

but 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 be
transferred in the name of daughter-in-law, no
clubbing applicable.
 If house is in wife’s name she can collect rent from
husband; husband will get relief in HRA
  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.
 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)
o “A Co. formed & registered under the Companies
Act 1956 &
o Having it’s registered office in India.”
o Corporation established by or under a Central or
state Act – LIC, SFCs, Road Transport corporations.

 Domestic Company- 2(22) A

o An Indian Co. or
o Any other Co., including a foreign company,
which, has made arrangements for declaration & payment of
 dividends in India ( on Equity or Preference shares), out of
it’s 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 it’s
principal 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
o Manufacture or processing of goods or
o 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;
o Co. 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 it’s members.
o Co. in which 50% or more voting power is held by Co-
operative society/ies throughout the PY.
 o Co. without share capital & having regard to it’s objects &
it’s members, declared by CBDT to be Co. in which
public is substantially interested
o PSUs

Widely/Closely held Cos. –

Cos. in which public is/is not substantially interested.
Residential status of a Company & Tax liability
6 (3)

Indian Co. – Always resident in India

Foreign Co.- Resident if:

If control & management of it’s 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 status

Indian 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.
  Should be “de facto” & not only “de jure”.

Centre of Control & Management

Companies Board of Directors
HUF Karta
Partnership firm Partners
AoP Principal officer

Relationship between residential status & incidence of Tax-

5
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.
 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 agent
had 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 was
received 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
RBI’s approval for remittance under FEMA.
  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.
 Assessee’s 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 buyer’s 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 buyer’s place &
profits accrue at that place.

Indian income – Any of following income:

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