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TAXATION OF COMPANIES

Company [Sec. 2(17)]: Under Sec. 2(17), the expression Company is defined to mean the following: a. any Indian Company; or b. any body corporate incorporated under the lows of the foreign country; or c. any institution, association or a body which is assessed or was assessable / assessed as a company for any assessment year commencing on or before April 1, 1970; or d. any institution, association or a body, whether incorporated or not and whether Indian or non Indian, which is declared by general or special order of the Central Board of Direct Taxes to be a company. Domestic company: Domestic company means an Indian company or any other company which, in respect of its income liable to tax under the Act, has made prescribed arrangements for the declaration and payment of dividends within India in accordance with section 194. Three requirements are to be satisfied cumulatively by a company before it can be said to be a company which has made the necessary arrangements for declaration and payment of dividends in India within the meaning of section 194: 1. The share register of the company for all shareholders should be regularly maintained at its principal place of business in India, in respect of any assessment year, at least from 1st April from relevant assessment year. 2. The general meeting for passing of accounts of the relevant previous year and for declaring dividends in respect thereof should be held only at a place within India. 3. The dividends declared, if any, should be payable only within India to all shareholders. Foreign company: Foreign Company means a company which is not a domestic company. Industrial Company: Industrial company means a company which is mainly engaged in the business of generation or distribution of electricity

or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. Company in which the public are substantially interested [sec. 2(18)]:A company is regarded as a company in which public are substantially interested in the following cases: 1. Owned by Government/RBI 2. Section 25 companies: companies for promotion of commerce, art, science, religion, charity and prohibiting the payment of any dividend to its members. 3. A company without share capital and declared by CBDT. 4. Nidhi or mutual benefit society. 5. Company owned by a cooperative society. 6. Listed companies. 7. Public limited company owned by Government and/or a widely held company. Investment company: Investment company means a company whose gross total income consists mainly of income which is chargeable under the head Income from House Property, Capital Gains and Income from other sources. Closely- held company: A company in which the public are not substantially interested is known as closely held company.

Taxable Income and Income tax liability:


It is determined as follows 1. First ascertained income under the different heads of income. 2. Income of other persons may be included in the income of the company under section 60 and 61. 3. Current and brought forward losses should be adjusted according to the provisions of sections 70 to 80. Provisions of section 79 regarding setoff and carry forward of losses of closing held companies are given in para 335. 4. The total of income so computed under different heads is gross total income. 5. From the gross total income so computed, the following deduction are permissible under sections 80CCC to 80U-

Nature of deduction Donation to charitable institutions and funds. Donation for scientific research or rural development Contribution to political parties Profits and gains from industrial undertakings other then infrastructure development undertakings 80-IB Profits and gains from certain industrial undertakings other than infrastructure development undertakings 80-IC Profits and gains of certain undertakings in certain states 80JJA Profits from the business of collecting and processing of bio- degradable waste. 80JJAA Employment of new workmen 80LA Income of offshore 6. The resulting sum is net income. 7. Compute the tax liability on income chargeable to tax. It may be noted that there is no exemption limit. Generally, the following tax rates are applicable for the assessment year 2005-06Domestic companies Foreign companies Short term capital gain 10% 10% under section 111A Long-term capital gain 20% 20% Winnings from 30% 30% lotteries, etc. Other income 35% 40% 8. From the income so computed, deducted rebate under section 88E 9. Find out (8) (9) 10.Add: surcharge @2.5 per cent of (9) 11.Find out (9) (11) 12.Add: education cess @ 2 per cent of (11) 13.Find out (11) + (12) 14.From the tax so computed, tax rebates or tax credit under sections 86,90,91 and 115JAA 15.Find out (13) (14) 16.The tax liability so computed cannot be lower than the following by virtue of sections 115JB-

Section 80G 80GGA 80GGB 80-IA

Income-tax Domestic company Foreign company 7.5% of book profit 7.5% of book profit

surcharge 0.1875% of book profit 0.1875% of book profit

Education cess 0.15375%of book profit 0.15375%of book profit

Total 7.84125% of book profit 7.84125% of book profit

17. Find out (15) or (16) whichever is more.

Minimum Alternate Tax [Sec. 115JB]:


Section 115JB has been inserted from the assessement year 2001-02. It provides that in case the tax liability of a company (maybe Indian Company or foreign company) is less than 7.5% (plus surcharge and education cess) of the book profit, such book profit shall be deemed to be the total income chargeable to tax @ 7.5% (plus surcharge and education cess). Book Profit: Net Profit as per profit and loss account (after the following 13 adjustments) is book profit. The calulation of MAT requires the following steps: 1 Determination of Book Profit. 2 Adjustments to be done to net profit to convert net profit into book profit. 1. Determination of Book Profit: Net profit as per Profit & Loss account after adjustments is book profit. In following two cases Assessing officer can alter Net Profit: A If profit & Loss A/c is not prepared according to Companies Act i.e. in accordance with Parts II & III of the Sixth Schedule to the Companies Act. However if there is no fraud or misrepresentation but only difference of opinion as to whether a particular amount should be properly shown in profit & loss a/c or in balance sheet A.O. is not empowered to disturb the Profit & Loss A/c. B If accounting policies, accounting standards or rates or method of depreciation are different.

2. Adjustments to be done to net profit to convert net profit into book profit. A Positive adjustments: These are the amounts, which are to be added to the Net Profit if debited to Profit & Loss A/c. a: Income tax paid/ payable/ provision thereof b: Any reserves c: Any provisions made for meeting liabilities other than ascertained liabilities. d: Provision for losses of subsidiary companies. e: Dividend paid/proposed f: Expenditure relatable to any exempt income. B Negative adjustments: These are the amounts which are to be reduced from the Net Profit. a: Amount withdrawn from reserves or provisions, if any such amount is credited to the Profit & Loss A/c. b: Income to which any of the provisions of Sec 10, 10A, 10B, 11 or 12 apply if any such amount is credited to the Profit & Loss A/c. c: The amount of 1) Loss b/fd before depreciation or 2)unabsorbed depreciation, whichever is less as per books of accounts. d: The amount of profits of Sick industrial company for the Asst year commencing from the Asst year relevant to the previous year in which the said company has become a Sick industrial company. Minimum Income & Tax: In the case of a Company if tax payable as computed under other provisions (i.e. all provisions ignoring Sec 115JB) is lower than the amount given below, then book profit is taken as taxable income and the amount given below is taken as tax payable by the company. Income Tax (as % of book profit) 7.50 7.50 Surcharge (as % of book profit) 0.1875 0.1875 Education cess (as % of book profit) 0.15375 0.15375 Total (as % of book profit) 7.84125 7.84125

Domestic Company Non Domestic Company

Loss which can be carried forward: In respect of the relevant previous year, the amounts determined under the provisions of section 32(2), or section 73(1)(i) or section 73 or section 74 or section 74A(3), shall be allowed to be carried forward to the subsequent year or years.