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III Module
Taxation of Companies Corporate Income tax
y

For companies, income is taxed at a flat rate of 30% for Indian companies, with a 10% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore and 3% educational cess.
Minimum Alternative Tax (MAT)

Some companies may have profit as per profit and loss account but as per incometax Act, when the deductions are made may not be liable for payment of any tax for that year. Such companies are called zero tax companies and they may be paying dividends also. These companies are brought under tax net by MAT. According to this a company needs to pay MAT of 18% on the book profits even if it has no liability applying the eligible deductions from profits under the incometax act. Th e tax paid in excess under MAT in such a case can be deducted from tax payable for a period of 5 years. Depreciation Depreciation means diminution in the value of the assets due to wear and tear, accidents, efflux of time and obsolescence.
Conditions for claiming depreciation
a. Asset must be owned by the assessee. b. It must be used for the purpose of business or profession c. It should be used during the relevant previous year and d. Depreciation is available on tangible and intangible assets.

Examples of tangible assets are Building, machinery, plant or furniture. Examples of intangible assets are know-how, patents, copyrights, trade mark, licences, franchises, etc.
Block of assets- Assets with the same rate of depreciation should be considered as a block and depreciation worked out.

No time limit is fixed for carrying forward of unabsorbed depreciation. It can be carried forward for indefinite period, if necessary. In the subsequent years, unabsorhed depreciation can be set off afainst any income whether chargeable under the head Profit and gains from business or profession or under any other head(except income from the head salaries).

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Depreciation is normally calculated on the reducing balance method at varying rates and is available for a full year, irrespective of the actual period of use of the asset in the year of the acquisition of the asset. Depreciation is allowed at half the normal rate, if the asset is used for less than 180 days in that year. No depreciation is available in the year of the sale of the asset. Depreciation is calculated on the opening written -down value of the block of assets plus the additions to the block less the sale proceeds/ scra p value of selections from the block. Depreciation at 100% is allowed in respect of machinery and equipment the unit cost of which does not exceed Rs. 5,000. E.g. Loose tools. No depreciation is allowed in respect of motorcars manufactured outside India, unless they are rental cars for tourists or where such motorcars are used outside India for the purposes of business. No depreciation is allowed on plant and machinery if actual cost is otherwise allowed as a deduction in one or more years under an agreement entered into with the Central Government for prospecting, etc. of mineral, oil. The rates applicable for the accounting year ending March 1996 :
Set-off & carry forward of losses

Business losses incurred in a tax year can be set off against any other income earned during that year, except capital gains. In the absence of adequate profits unabsorbed depreciation can be carried forward and set off against profits of the next assessment year, without any time limit. Unabsorbed business losses can be carried forward and set off against business profits of subsequent years for a period of eight years; the unabsorbed depreciation element in the loss can however, be carried forward idefinitely
Minimum Alternative Tax (MAT)

Some companies may have profit as per profit and loss account but as per income tax Act, when the deductions are made may not be liable for payment of any tax for that year. Such companies are called zero tax companies and they may be paying dividends also. These companies are brought under tax net by MAT. According to this a company needs to pay MAT of 18% on the book profits even if it has no liability applying the eligible deductions from pr ofits under the income tax act. The tax paid in excess under MAT in such a case can be deducted from tax payable for a period of 5 years.
Dividend Distribution Tax (DDT)

The DDT is taxed at 15% of the dividend declared by the company. But it spares the receiver of the dividend and instead is taxed at the hands of the dividend payer-the company.

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B) Exemption of dividend in the hands of shareholders

In view of the income tax now payable by the domestic company, any dividends declared, distributed or paid by such company, on or after 01-06-1997 shall be exempt in the hands of the shareholders.
Fringe Benefits Tax/Tax on Perquisites (FBTT/TP)

Fringe Benefit Tax (FBT) was an additional income tax payable by the employers on value of fringe benefits provided or deemed to have been provided to the employees till the FY 2008 -09. It was abolished in 2009-10 but reintroduced as tax on perquisites in Dec 2009 with retrospective effect from 1 st April 2009. Employees will now have to pay taxes on perquisites given to them by their employers. 1. Rent paid by employer- Actual rent, or 15% of salary, whichever is lower added to income and taxed 2. Company-owned car for personal use- Actual expenses, drivers salary added to income and taxed 3. ESOPs -Difference of mkt value & grant price added to income & taxed 4. Interest-free/concessional loan (except medical reasons) -Interest component to be added to income 5. Salary to sweeper, gardener, Personal Assistant -Added to income 6. Gas, electricity, water expenses- Added to income 7. Free/concessional education - Added to income 8. Company sponsored vacation- Added to income 9. Gift/vouchers of over Rs 5,000- Added to income 10. Club membership/annual fees on credit card (other than official) - Added to income
DDT( Dividend Distribution Tax) or Tax on Distributed income of the company

Domestic companies in india have to pay tax on dividend distributed by them. This tax at present is 15% of the dividend declared or paid. This tax should be remitted to the Government within 14 days of the declaration or payment of dividend. There will be no refund of tax for the recipient of the dividend under any circumstances and the dividend so received would be tax free.
Company in which public are substantially interested

It includes the following types of companies:

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a) Companies owned by the Government or RBI b) A company without share capital c) Section 25 companies(companies started for promoting arts, science, religion,etc and prohibit payment of dividend) d) A company owned by a listed company e) Listed companies( Companies whose names are included in the list of stock exchange and the shares of which are traded by thepublic) f) Government company whether registered or statutory corporation These companies are also known as widely held companies.
Company in which public are not substantially interested

All other companies are called companies in which public are not substantially interested and they are required to pay upto 90% of their income after tax to the shareholders. If they fail to declare adequate dividend then they will have to pay additional tax on the income not distributed as dividend in any year.
Tax Incentives
Government of India provides tax incentives for: Corporate profit Accelerated depreciation allowance Deductibility of certain expenses subject to certain conditions. These tax incentives are, subject to specified conditions, available for new investment in Infrastructure, Power distribution, Certain telecom services, Undertakings developing or operating industrial parks or special economic zones, Production or refining of mineral oil, Companies carrying on R&D, Developing housing projects, Undertakings in certain hill states, Handling of food grains, Food processing, Rural hospitals etc.

Questions and answers 1.Consider the admissibility or otherwise of the following payments in the incometax assessment of X Ltd.

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a) Interest of Rs.1,20,000 paid on money borrowed from A, one of its major shareholders, for the purchase of plant for the new tea gardenat Assam. X ltd was already engaged in the business of cultivation, manufacture and sale of tea in its tea garden at Darjiling. During the relevant previous year, the new plant so purchased was under installation. The company claims normal depreciation as also the said interest of Rs.1,20,000 as deduction in computing the business income. b) Loss of Rs. 45000 arising from non recovery of the amount lost in theft that took place in its Darjeeling garden cash office. An aggregate cash of Rs.100000 was initially lost. But, subsequently, the police were able to to recover Rs.55000. The balance sum of Rs.45000 has been claimed by the company as a bad debt. c) Legal charges of Rs.98000 which include, inter alia, (i) Rs. 36000 retainer fees paid to an advocate for advising on matters relating to comp any law, foreign exchange and excise at the rate of Rs.3000 per month; (ii) Rs.18000 fee paid to a firm of cost accountants during the relevant previous year for appearing before the tax authorities including the Income tax Appellate tribunal in commection with their assessment proceedings for the assessment year 1988 89; and (iii) Rs.20000 towards cost of execution of mortgage in respect of the companys tea garden at Darjeeling as a security against a long term loan of Rs.2000000 taken from the Assam State Financial Corporation. The loan was utilized in purchasing the new tea garden at Assam Answer: (a) Interest on money borrowed is a tax deductible expense. However, since the plant is not installed the interest and principal should be capitalized. Therefore, no deduction with respect to the interest of Rs.1,20,000 is allowed. Again depreciation on this plant is not allowed till the plant is used for production. (b) The loss of cash is eligible for deduction as revenue loss rather than bad debts as per Supreme court rulings. The retainer fee of the advocate, the fee paid to the cost accountant and the mortgage execution expenses are eligible for deduction from the income.

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Computation of Taxable Income of a Company Ascertain the 'total income' of the company by aggregating incomes falling under following four heads:y Income from House Property, whether residential or commercial, let-out or self-occupied. However, house property used for purpose of company's business does not fall under this head. y Profits and Gains of Business or Profession. y Capital Gains. y Income from other sources including interest on securities, winnings from lotteries, races, puzzles, etc. Also, income of other persons may be included in the income of the company. But, income under the head 'Salary' is not included under company.  To the total income so obtained, 'current and brought forward losses' should be adjusted for set off in subsequent assessment years to arrive at the gross total Income. Thus the total income so computed is the 'gross total income'. The 'set off ' means, adjustment of certain losses against the incomes under other sources/heads( Section 79 ).This section applies to all losses including losses under the head 'Capital Gains'. Unabsorbed depreciation may be carried-forward for set-off indefinitely. But carry back of losses or depreciation is not permitted. However, business losses can be carried forward for eight consecutive financial years and can be set off against the profits of subsequent years.

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From the gross total income, prescribed 'deductions' under Chapter VI A are made to get the 'net income'. Generally, all expenses incurred for business purposes are deductible from taxable income, given that the expenses must be wholly and exclusively incurred for business purposes and also that the expenses must be incurred/paid during the previous year and supported by relevant papers and records. But expenses of personal or of capital nature are not deductible. Capital expenditure are deductible only through depreciation or as the basis of property in determining capital gains/losses. Deductions shall also be allowed in respect of depreciation, as per Section 32 of Income Tax Act, of tangible assets such as machinery, buildings, etc and non-tangible assets such as know-how, patents, etc, which are owned by assessee and used for the purpose of business/profession. Depreciation is deducted from the written-down value of the block of assets mentioned under Section 43 of the Act. However, where an asset is acquired by assessee during the previous year and is put to use for business/profession purpose for a period of less than 180 days, t he deduction in respect of such assets shall be restricted to 50% of the normal value prescribed for all block of assets. But no deduction shall be allowed in respect of any expenditure incurred in relation to income which does not form part of total income.  Tax liability is computed on the 'net income' that is chargeable to tax. It is done either on accrual basis or on receipt basis (whichever is earlier). However if an income is taxed on accrual basis,it shall not be taxed on receipt basis. From the tax so computed, tax rebates or tax credit are deducted. Different kinds of Taxes Relating to a Company


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Minimum Alternative Tax (MAT) A company is liable to pay tax on the income computed according to the provisions of the Income Tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act.Provision of MAT has been introduced for the companies popularly known as the 'Zero Tax Companies'. These are the companies, which are showing book profits and declaring dividends to the shareholders, but are not paying any income tax. Book profit, means the net profit as shown in the profit and loss account. The company shall furnish a report in Form 29B after certifying it by Chartered Accountant that book profits have been computed in accordance with the said section. Under MAT, wherever the income tax payable on the total income of a company, in respect of any previous year, is less than the 'prescribed percentage of its book profits', such book profit shall be deemed to be the total income of the company and the tax payable on such total income shall be at the 'prescribed percentage of book profits', plus surcharge and education cess. Tax Credit for MAT:- As per Section 115JAA ,a tax credit is allowed,where a company pays MAT, against tax payable at normal rates in any of the prescribed subsequent assessment years.It shall be allowed on the difference between the tax on the total income and the MAT which would have been payable for that assessment year. Provision of MAT is not applicable to:-Income from the business of developing, maintaining, and operating certain infrastructure facilities  Income from units in specified zones or specified backward districts  Income of certain loss-making companies  Export profits Dividend Distribution Tax (DDT) or Tax on Distributed Profits of domestic companies Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to dividend tax. Only a domestic company (not a foreign company) is liable for the tax. Tax on distributed profit is in addition to income tax chargeable in respect of total income. It is applicable whether the dividend is interim or otherwise. Also, it is applicable whether such dividend is paid out of current profits or accumulated profits.

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The tax shall be deposited within 14 days from the date of declaration, distribution or payment of dividend, whichever is earliest. Failing to this deposition will require payment of stipulated interest for every month of delay under Section115-P of the Act. Wealth Tax on Companies Wealth tax is a direct tax, which is charged on the 'net wealth' of the 'assessee' under the Wealth Tax Act. All companies (public or private) are liable to wealth-tax if their taxable 'net wealth' exceeds the prescribed limits. All the companies have thus been brought at par with other wealth-tax assesses. Net wealth of a company is the excess of the 'aggregate value of specified assets' belonging to the company on the valuation date over the 'aggregate value of debts owned by the company' that are incurred in relation to the said assets. Wealth tax is at present 1% of the amount by which the net assets exceed Rs.15 lakhs. Wealth Tax Wealth tax is a direct tax, which is charged on the net wealth of the assessee. It is a tax on the benefits derived from ownership of property. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income. Wealth tax, in India, is levied under Wealth-tax Act, 1957. The Income tax department under the Department of Revenue in the Ministry of Finance administers the Wealth Tax Act, 1957 as well as the Wealth Tax Rules framed there under. Under the Act, the tax is charged in respect of the wealth held during the assessment year by the following persons : Individual  Hindu Undivided Family(HUF)  Company Chargeability to tax also depends upon the residential status of the assessee same as the residential status for the purpose of the Income Tax Act. Wealth tax is not levied on productive assets, hence investments in shares, debentures, UTI, mutual funds, etc are exempt from it. The assets chargeable to wealth tax are :-

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Guest house, residential house, commercial building  Motor car  Jewellery, bullion, utensils of gold, silver etc  Yachts, boats and aircrafts  Urban land  Cash in hand(in excess of 50,000), only for Individual & HUF The following will not be included in Assets : Any of the above if held as Stock in trade.  A house held for business or profession.  Any property in nature of commercial complex.  A house let out for more than 300 days in a year.  Gold deposit bond.  A residential house allotted by a Company to an employee, or an Officer, or a Whole Time Director ( Gross salary i.e. excluding perquisites and before Standard Deduction of such Employee, Officer, Director should be less than Rs. 5,00,000). The Assets exempt from Wealth tax are : Property held under a trust.  Interest of the assessee in the coparcenary property of a HUF of which he is a member.  Residential building of a former ruler.  Assets belonging to Indian repatriates.  One house or a part of house or a plot of land not exceeding 500sq.mts,for individual & HUF assessee. Wealth tax is chargeable in respect of Net wealth corresponding to Valuation date.(Net wealth means all assets less loans taken to acquire those assets. Valuation date means 31st March of immediately preceding the assessment year). In other words, the val ue of the taxable assets on the valuation date is clubbed together and is reduced by the amount of debt owed by the assessee. The net wealth so arrived at is charged to tax at the specified rates. Wealth tax is charged @ 1% of the amount by which the net wealth exceeds Rs.15 Lakhs.