Chapter 5 Taxation of Companies

Carry forward and set-off of losses in the cases of certain companies [Sec 79]


Taxpayer is a company in which the public are not substantially interested Persons beneficially holding 51% of the voting power on the following dates are different:

On the last day of the PY in which the loss was incurred On the last day of the PY in which the company wants to set off the brought forward loss

After change of shareholding pattern if assessee becomes 100% subsidiary of a company in which the public are substantially interested then this would not be applicable

Exceptions


Change in voting power takes place because of death of shareholder or on account of any gift to any relative of the shareholder then sec 79 will not apply C/f of unabsorbed depreciation, capital expenditure on scientific research sec 79 will not apply Any change in the shareholding of an Indian company which is subsidiary of a foreign company arising as a result of amalgamation or demerger of the foreign company subject to 51% criteria

Questions


Section 79 is applicable for adjustment of current year losses in the current year

True False

Section 79 is not applicable in the case of adjustment of unabsorbed depreciation

False True

A ltd is a private ltd co. controlled by X and his family members. It has brought forward business loss pertaining to the previous year ending March 31, 2009.On March 31,2009 and March 31,2011, persons holding 51 per cent shares are different. The change takes place because of transfer of shares of way of sale between different members of the family. The loss can be set off during the previous year 2010-11.

False True

X ltd is a private limited company but it is a subsidiary of Y Ltd, which is a company in which the public are substantially interested. Section 79 is not applicable in the case of X Ltd

False True

X Ltd is a private ltd company controlled by X, his family members and close friends. It has brought forward business loss pertaining to the previous year ending March 31, 2008. On March31, 2008 and March 31, 2011, persons holding 51 percent shares are different. The change takes place because of transfer of shares by Will after the death of one of the family members to a close family friend. The loss can be set off during the previous year 2010-11

False True

Case Study


X and Y are two shareholders of Z Ltd, a closely held company. X holds 55 percent share capital. On January 30,2011, X transfers his shares to A. Z Ltd wants to set off brought forward loss of Rs. 4,00,000 (business loss 1,00,000, unabsorbed depreciation : Rs 3,00,000) of the previous year 2009-10 against the income of the previous year 2010-11 (i.e. Rs 9 lakh.) Can it do so

XYZ Ltd is a company which was started on April 1,1999 and in which there are only equity shares. The share are held throughout by X, Y and Z equally. The company has made losses/profits in the past as under and the same have been accepted in the income tax assessments

AY 07-08 08-09 09-10 Total



Business loss Nil Nil 9,50,000 9,50,000

Unabsorbed depreciation 30,00,000 18,00,000 8,70,000 56,70,000

Total Rs. 30,00,000 18,00,000 18,20,000 66,20,000

During the previous year ended on March 31,2010, X transferred his shares to P and during the previous year ended March 31, 2011, Y transferred his shares to Q. During the previous year ended March 31, 2010, the company made a profit of Rs. 12,00,000(before debiting Rs 6,00,000 for depreciation) and during the previous year ended March 31, 2011, the company made a profit of Rs 80,00,000 (before debiting Rs 5,00,000 for depreciation) Compute the taxable income of the company for the AY 2011-12.

Taxable Income
  

GTI Adjustment of brought forward losses Deductions permissible u/s 80C to 80U

Section 80G,80GGA,80GGB,80 IA, 80IAB, 80 IB, 80IC, 80ID, 80 IE, 80 JJA, 80JJAA, 80LA

Resulting income is Net Income Tax liability of company - Table

Tax liability calculation

1) Normal Provision Step 1 Find Taxable income Step 2 Tax rate 30%(40% Foreign Company) of step 1 Step 3 If Net income > 1 cr, surcharge 7.5%(2.5% FC) of step 2 (AY 12-13 it is 5% and 2 %) Step 4 (2) + (3) Step 5 Education cess 2% of Step 4 & secondary and higher education cess 1% of step 4 Step 6 Deduct tax rebate or tax credit u/s 86,90,90A,91 Step 7 (4) +(5) (6) 2) Minimum Alternate Tax Step 8 Find Book Profit Step 9 18% (18.5% from AY 12-13) of Step 8 Step 10 If Book Profit > 1 cr, surcharge 7.5%(2.5% FC) of step 9 (AY 12-13 it is 5% and 2 %) Step 11 (9) +(10) Step 12 Education cess 2% of Step 11 & secondary and higher education cess 1% of step 11 Step 13 (11) +(12)

Tax liability of a company is (7) or (13) whichever is more

Minimum Alternate Tax (Sec 115JB)



  

Find out normal tax liability ignoring provisions of Minimum Alternate Tax(Step 7) Find out book profit Find out minimum alternate tax (Step 13) If tax computed at Step 7 is more than or equal to tax computed in step 13, then minimum alternate tax is not applicable

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If tax computed at step 7 is less than tax computed at step 13 then minimum alternate tax is applicable as follows

Assumed that book profit is taxable income Tax liab as per minimum alternate tax Extra tax will be available as tax credit u/s 115AA and can be set off against future tax liability of the company subject to few conditions

Book profit assessing officer power to Alter net profit



If P/l is not prepared according to the companies act If accounting policies, accounting standard or rates or method of depreciation are different

Book Profit


Book Profit = Net Profit as per P/L account +/- 15 Adjustments

Positive Adjustments
 1)

It means Net profit is to be increased by the following amounts if debited to P/L A/c Income tax paid or payable

Income tax, interest under income tax, dividend tax, education cess and secondary and higher education cess to be added back No adjustment in respect of interest,penalty, fine,securities transaction tax, banking cash transaction tax, wealth tax, gift tax, fringe benefit tax, indirect taxes

Ctd
2) Amounts carried to any reserves by whatever name called. U/s 35AC from AY 03-04 no adjustment required 3) Amount or amount set aside to provisions made for meeting liabilities other than ascertained liabilities 4) Amount by way of provision for losses of subsidiary companies

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5) Amount or amount of dividend paid or proposed 6) Amount of expenditure relatable to any exempt income 7) The amount of depreciation 8) Amount of deferred tax and the provision and the amount set aside as provision for diminution in the value of assst (Inserted from AY 01-02)

Negative adjustment
 1)

Net profit will be reduced by these amounts Amount withdrawn from reserves or provisions, if any such amount is credited to profit and loss account
1)

2)

Reserve created before 1 April,1997 if debited in P/L account then reduce otherwise not Reserve created after 1 April,1997, if the same is not credited in the year of creation of reserve then not to be reduced or else reduce it

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2) Income exempt from tax: Long term capital gain tax u/s 10(38), exempt u/s 10(23G) upto AY 04-05, u/s 10, u.s 10A and 10B upto AY 07-08 and u/s 11 and 12 3) Depreciation other than because of revaluation of assets debited to P/L A/c. 4) Amount withdrawn from revaluation reserve credited to P/L to the extent it does not exceed the amount of depreciation on account of revaluation of assets

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5) Amount of loss brought forward or unabsorbed depreciation whichever is less as per books of accounts

Loss is always before depreciation Both loss before depreciation and unabsorbed depreciation has to be there Adjustment is to be made for the AY s Starting from the year in which company has become sick Ending with the AY when its net worth equals or exceeds the accumulated losses

6) Profit of sick industrial unit

7) The amount of deferred tax if any credited to P/L (Inserted from the AY 01-02)