Corporate Income Tax

Introduction
A company has been defined as a juristic person having an independent and separate legal entity from its shareholders. Income of the company is computed and assessed separately in the hands of the company. however the income of the company which is distributed to its shareholders as dividend is assessed in their individual hands. Such distribution of income is not treated as an expenditure in the hands of company, the income so distributed is an appropriation of the profits of the company.

Indian Company

An Indian company means a company formed and registered under the Companies Act, 1956.

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. Foreign Company: Foreign Company means a company which is not a domestic company.

Residence of a company :
A company is said to be a resident in India during the relevant previous year if: it is an Indian company. if it is not an Indian company then, the control and the management of its affairs is situated wholly in India. A company is said to be non-resident in India if it is not an Indian company and some part of the control and management of its affairs is situated outside India.

Taxable Corporate Income

Corporate Sector Taxes : The taxability of a company's income depends on its domicile. Indian companies are taxable in India on their worldwide income. Foreign companies are taxable on income that arises out of their Indian operations, or, in certain cases, income that is deemed to arise in India. Domestic Corporate Income Taxes Rates Tax Rate Effective Tax Rate with surcharge Domestic Corporations 30% 30%1

Note : A surcharge of 10% of the income tax is levied, if the taxable income exceeds Rs. 1 million. All companies incorporated in India are deemed as domestic Indian companies for tax purposes, even if owned by foreign companies.

Foreign Companies Tax Rates Withholding Tax Rate for non-treaty foreign companies Dividends Interest Income Royalties Technical Services Other Income 20% 20% 30% 30% 55% Tax Rate for US companies under the treaty 15%1 15%2 20%2 20%2 55%

Note :Inter-corporate rates where there is minimum holding. 10% or 15% in some cases. Withholding tax is charged on estimated income, as approved by the tax authorities. There are other favorable tax rates under various tax treaties between India and other countries.

Asessing taxable income

In ascertaining taxable income, all expenditure incurred for business purposes are deductible. This includes interest on borrowings paid in the financial year and depreciation on fixed assets. Certain expenses are specifically disallowed or their quantum of deduction is restricted. These include : Entertainment expenses Interest or other amounts paid to a non-resident without deducting without tax Corporate taxes paid Indirect general and administrative costs of a foreign head office.

Assessment and Rate of Income Tax

Assessment of companies : The principle officer of the company is required to file the return of total income of the company on or before 30th November of the assessment year. A company is assessed like any other assessee. However, its liability differs in two respects. No exemption limit : A company does not enjoy any exemption limit Flat rate of Tax : A company pays income tax at a flat rate instead of slab rate

Rates of Income Tax : The rates which are applicable to companies are:

Category

Rates

Tax on long-term capital gains

20 %

Tax on winnings form lotteries, cross word puzzles, races etc.

40%

Tax on any other income a) domestic company b) foreign company

35% 48%

Tax concession and incentives

The classical system of corporate taxation is followed Domestic companies are permitted to deduct dividends received from other domestic companies in certain cases. Inter Company transactions are honored if negotiated at arm's length. Special provisions apply to venture funds and venture capital companies. Long-term capital gains have lower tax incidence. There is no concept of thin capitalization. Liberal deductions are allowed for exports and the setting up on new industrial undertakings under certain circumstances.

There are liberal deductions for setting up enterprises engaged in developing, maintaining and operating new infrastructure facilities and powergenerating units. Business losses can be carried forward for eight years, and unabsorbed depreciation can be carried indefinitely. No carry back is allowed. Specula tax provisions apply to activities carried on by nonresidents.

A minimum alternative tax (MAT) on corporations has been proposed by the Finance Bill 1996. Dividends, interest and long-term capital gain income earned by an infrastructure fund or company from investments in shares or long-term finance in enterprises carrying on the business of developing, monitoring and operating specified infrastructure facilities or in units of mutual funds involved with the infrastructure of power sector is proposed to be tax exempt.

General Tax Incentives The Government offers many incentives to investors in India with a view to stimulating industrial growth and development. The following are some of the important incentives offered, which significantly reduce the effective tax rates for the beneficiary companies: Five year tax holiday for: Power projects. Firms engaged in exports. New industries in notified states and for new industrial units established, in electronic hardware/software parks. Export Oriented Units and units in Free Trade Zones. As of 1994-95 budget firms engaged in providing infrastructure facilities, can also avail of this benefit. Tax deductions of of 100 per cent of export profits. Deduction of 30 per cent of net (total) income for 10 years for new industrial undertakings. Deduction of 50 per cent on foreign exchange earnings by construction companies, hotels and on royalty, commission etc. earned in foreign exchange. Deduction in respect of certain inter-corporate dividends to the extent of dividend declared.

1.

2. 3. 4.

5.

Concessions offered to specific sectors

Oil Companies Oil and Gas Services Power Projects

Depreciation
Depreciation is normally calculated on the declining 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 writtendown value of the block of assets plus the additions to the block less the sale proceeds/ scrap 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. 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 minerals and oil etc.

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 indefinitely. However, this carry forward benefit is not available to closely-held (private) companies in which there has been no continuity of business or shareholding pattern. Also, any change in beneficial interest in the shares of the company exceeding 51 per cent disqualifies the private company from the carry forward benefit.

Tax on distributed profits of Domestic Companies

The Finance act, 1997 has introduced a new scheme of taxation of dividend by inserting sections 115-O, 115P and 115Q. Basis of Charge: A separate and additional charge has been created by section 115-O(1). It is subject to the following propositions:

Tax on distributed profit is in addition to income-tax chargeable in respect of total income. Only a domestic company (not a foreign company) is liable for above tax. Any amount declared, distributed or paid by a domestic company by way of dividend shall be charged to dividend tax. It is applicable whether the dividend is interim or otherwise.

It is applicable only if such dividend is declared, distributed or paid on or after June 1, 1997 but before April 1, 2002 or after March 31, 2003. It is applicable whether such dividend is paid out of current profit or accumulated.

What is Dividend ?
Under section 2(22), the following payments or distributions by a company to its shareholders are deemed as dividends to the extent of accumulated profits of the company: A. Any distribution entailing the release of companys assets. B. Any distribution of debenture, debenture-stock, deposit certificates and bonus to preference shareholders. C. Distribution on liquidation of company. D. Distribution on reduction of capital. E. Any payment by way of loan or advance by a closely held company to a shareholder holding substantial interest provided the loan should not have been made in the ordinary course of money-lending should not be a substantial part of the companys business.

If dividend comes under A to D (supra), then the payercompany will pay dividend tax under section 115-O and in the hands of recipient shareholders, it is not chargeable to tax. Conversely, if dividend comes under (E) (supra), then it is taxable in the hands of the shareholders. In such a case, the payer-company will not pay dividend tax. With effect from the assessment year 2000-01, the following shall not be treated as dividend A. any payment made by a company on purchase of its own shares in accordance with the provisions contained in section 77A of the companies Act; or B. any distribution of shares made in accordance with the scheme of demerger by the resulting company to the shareholders of the demerged company whether or not there is a reduction of capital in the demerged company.

Taxable Income-How Computed

It is determined as follows: First ascertain income under the different heads of income. Income of other persons may be included in the income of the company under section 60 and 61. Current and brought forward losses should be adjusted according to the provisions of sections 70 to 80. The total of income computed under different heads in gross total income. From the gross total income so computed deduct the concessions or rebates allowed. The resulting sum is net income.

Tax liability-How Computed

Compute the tax liability on income chargeable to tax. It may be noted that there is no exemption limit.
1. apply the tax rate. 2. from the income so computed, deduct rebate under section 88E. 3. find out (1)-(2). 4. add: surcharge @ 2.5% of (3). 5. find out (3)-(4). 6. add: education cess @ 2% of (5). 7. find out (5)+(6). 8. from the tax so computed, tax rebates or tax credit under sections 86, 90, 91 and 115JAA should be deducted. 9. find out (7)-(8).

10. the tax liability so computed can not be lower than the following by virtue of section 115JBIncome 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 7.84123% of book profit 7.84123% of book profit

11. find out (9) or (10) whichever is higher.

From the gross total income so computed, the following deductions are permissible under sectionsSection Nature of deduction 80G 80GG A 80-IA 80-IAB 80-IB 80-IC 80JJA 80JJA A 80LA Donations to charitable institutions and funds Donations for scientific research and rural development

80GGB Contribution to political parties Profits and gains from industrial undertakings engaged in infrastructure, etc. Profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone Profits and gains from certain industrial undertakings other than infrastructure development undertakings Profits and gains of certain undertakings in certain states Profits from the business of collecting and processing of biodegradable waste Employment of new workmen Income of offshore banking units

Amalgamation
Amalgamation is defined by 2(1B). For the purpose of the income tax act, amalgamation of companies means either merger of one or more companies with another company or the merger of two or more companies to form one company. For instance, the definition of amalgamation under section 2(1B) covers the following cases:

Merger of A Ltd with X Ltd. (A Ltd. goes out of existence). Merger of A Ltd and B Ltd with X Ltd. (A Ltd. And B Ltd go out of existence). Merger of A Ltd and B Ltd into a newly incorporated company X Ltd. (A and B Ltd go out of the existence). Merger of A Ltd, B Ltd and C Ltd into a newly incorporated company X Ltd. (A, B and C Ltd go out of existence).

Conditions
For a merger to qualify as an amalgamation for the purpose of income tax act, it has to satisfy the following conditions:
1.

2.

3.

All the property of the amalgamating company immediately before the amalgamation should become the property of the amalgamated company by virtue of the amalgamation. All liabilities of the amalgamating company immediately before the amalgamation should become the liabilities of the amalgamated company by virtue of the amalgamation. Shareholders holding less than three-fourths in value of the shares in the amalgamating company should become shareholders of the amalgamated company by virtue of the amalgamation.

Transactions not treated as amalgamation

Section 2(1B) specifically provides that in the following two cases there is no amalgamation for the purpose of the Income Tax Act, though the element of merger exists: Where the property of the company which merges is sold to the other company and the merger is a result of a transaction of sale; Where the company which merges is wound up in liquidation and the liquidator distributes its property to the other company. In these two cases, there would not be an amalgamation within the meaning of section 2(1B).

Actual cost and written down value when assets are transferred in a scheme of amalgamation: It is covered by the following two provisions: where an asset is transferred, in a scheme of amalgamation, to an Indian company, the actual cost of the transferred will be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purpose of its own business. when a block of asset is transferred , to an Indian company then the actual cost of block assets in the amalgamated company, shall be the written down value of block of assets.

Transfer of capital assets in amalgamation: when not treated as transfer: By virtue of section 47, the following are not treated as transfer:
transfer of capital assets to amalgamated Indian company is not taken as transfer if the following conditions are satisfied--the scheme of amalgamation satisfies the conditions of section 2(1B); and --the amalgamated company is Indian company. transfer of shares in an Indian company held by a foreign company to another foreign company in a scheme of amalgamation by virtue of section 47, if the following conditions are satisfied, the transaction is not treated as transfer--shares in an Indian company are held by a foreign company; --he business of the above foreign company is taken over by another foreign company in a scheme of amalgamation; --t least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; --such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.

Expenditure on amalgamation demerger: Section 35DD has been inserted with effect from the assessment year 2000-01. it provides that where as assessee, being an Indian company, incurs expenditure on or after April 1, 1999, wholly and exclusively for the purpose of amalgamation or demerger, the assessee shall be allowed a deduction equal to one-fifth of such expenditure for five successive previous years beginning with the previous year in which amalgamation or demerger take place. No deduction shall be allowed in respect of the above expenditure under any other provisions of the act.

Appeals
The expression appeal has been defined in Mozley and Whiteleys Law dictionary as a complaint to a superior court of an injustice, done by an inferior one. The party complaining is styled as the appellant. The other party is known as respondent. Appellate hierarchy: Appeal against the order of the assessing officer lies with the Deputy Commissioner (Appeals) or the Commissioner (Appeals). Alternatively, the assessee can file revision petition to the Commissioner. Appeal against the order of the Deputy Commissioner (Appeals) or the Commissioner (Appeals) can be preferred by the assessee or the income tax department and such appeal lies with the Appellate Tribunal. The assessee or the Commissioner of the income tax may require the Appellate Tribunal to refer to the High Court of law arising out of the Tribunal. Order of the high court can be challenged by the assessee or by the income tax department by preferring an appeal to

the Supreme Court which is the final appellate authority. The table given below highlights the provisions of appeal in brief

Nature of action

To whom it should be filed

Against which order it can be preferred Against the order of the Assessing Officer Against the order of the CIT(A) Substantial question of law arising out of ITAT order

Who can prefer Taxpayer Taxpayer or Commissioner of Income Tax Taxpayer or Commissioner of Income Tax

First appeal Commissioner(App eals) [CIT(A)] Second appeal The Income Tax Appellate Tribunal [ITAT]

Appeal to High Court High Court Appeal to Supreme Court Supreme Court

Judgment of High Court Taxpayer or Commissioner of Income Tax

Appeal to the Commissioner

Procedure for filing appeal:

Appeal under section 246A shall be in form number 35 and should be verified in the manner prescribed therein. Form no. 35, the grounds of appeal and the form of verification appended thereto relating to an assessee shall be signed and verified by the person who is authorized to sign the return of income under section 140 as applicable to the assessee. Appeal is required to be made in duplicate. The memorandum of appeal, statement of facts and the grounds of appeal must be in duplicate and should be accompanied by a copy of the order appealed against and the notice of demand in original. The appeal shall be presented within 30 days of the following dates: the date of payment of tax, the date of the service of the notice of demand relating to penalty.

1.

2.

3.