CS Professional Programme Tax Notes

CS Professional Programme Tax Notes Prepared by: CA R Giridharan FCA Collected by: Santhosh Thomas Thaikkadan

Courtesy: CA R Giridharan FCA 1

Tax Management

Tax Management is essential, Tax planning is desirable and Tax evasion is

objectionable. Elaborate.

Tax Planning Tax Management Tax Evasion

Tax planning is to avail

maximum benefit of

deductions, exemptions,

rebates etc and thereby

minimizing tax liability.

Tax management refers to

the steps taken to ensure

compliance with the

provisions of the tax laws.

Tax evasion refers to ways

and means adopted by a

tax payer to evade tax by

falsifying accounts or

concealing income,

inflating expenses etc.

It’s fully within the

framework of law and it

makes use of the beneficial

provisions in law.

It’s undertaken to fulfill the

requirements contained in

the provisions of the law.

It’s clearly violations of law

and unethical in nature. It

includes an element of

deceit.

The judiciaries in India

accept this concept.

It is obligatory to exercise

tax management.

This is clearly prohibited,

as it is fully illegal.

It is a rewarding concept

for professionals/ experts

as it allows making use of

beneficial provisions and

thus minimizing tax

liability.

It aims at avoiding costs

arising as consequences of

non – compliance of law.

Thus it helps the tax

planning to be successful.

When proved, tax evasion

invites stringent penalties

and prosecution against

the person who is found

engaged in it.

It is futuristic in approach

i.e. it aims at minimizing

the tax liability of the

future years.

Tax mgmt relates to the

past (assessment

proceedings, appeal,

revision, rectification etc),

present( filing of return)

and future (corrective

There is nothing like past,

present or future approach

in case of tax avoidance.



action)

Its benefits are substantial

particularly in the long run.

It aims at avoiding penalty,

interest, prosecution etc.

Tax evasion attracts

penalty and prosecution.

Tax Avoidance Is an arrangement if affairs so as to avoid payment of tax by the

use of devices which are sham or make-believe. It defeats the basic intent of the

legislature behind the statute.

Objectives of Tax planning

Reduction in tax liability

Minimizing litigation

Productive investment

Healthy growth of economy

Economic Stability

Definition

Company *sec 2(17) : “Company” means Indian company; or any body

corporate incorporated by or under the laws of a country outside India; or any

institution, association or body, declared by general or special order of the

Board to be a company for specified assessment years.

Indian company *sec2(26): “Indian company” means a company formed and

registered under the companies act, 1956 and includes statutory corporation;

and any institution, association or body declared by the board to be a company,

if the registered/ principal office of the company, corporation, institution,

association or body is in India.

Company in which public are substantially interested [section 2(18)]: It

means a –

I. A company owned by govt. / RBI or in which 40% or more of the shares are

held by the Government or RBI or a corporation owned by the RBI; or



II. Company which is registered under section 25 of the Companies Act, 1956;

or

III. Company having no share capital, if its declared for specified years by order

of the Board to be a company in which the public are substantially interested,

or

IV. Mutual benefit finance company; or

V. Company, wherein 50% or more of the voting power was throughout the

previous year held by one or more co-operative societies; or

VI. A public listed company as on the last day of the previous year; or

VII. A public company, if its 50% or more of voting power was throughout the

previous year held by – 1) Government 2) statutory corporation, or 3) any

company in which public are substantially interested; or 4) any 100%

subsidiary of a company in which public are substantially interested.

Closely held company: A Company in which public is not substantially

interested is called closely held company.

The incidence

The Incidence of income tax of a company depends upon its residential

status. The residential status may be resident or non resident depending upon

which the tax incidence is determined.

As per sec 6(3) an Indian company is always resident in India. A Foreign

company will be resident in India if during the previous year the control and

management of its affairs is wholly situated in India.

According to Sec5 (1), the incidence of income tax has been given below –

Tax Incidence

Particulars Resident Non - Resident

Income received in India by him or on his

behalf( whether accrued in India or outside

India)

Yes yes



Income deemed to be received in India by

him or on his behalf (whether accrued in

India or outside India)

Yes Yes

Income accruing or arising in India(

whether received in India or outside India)

Yes Yes

Income deemed to accrue or arise in India

(whether received in India or outside India)

Yes Yes

Income which accrues or arises outside

India(other than that covered in cases(1) to

(4) above

Yes No

MINIMUM ALTERNATE TAX (MAT)

Relevance IF the income- tax payable on total income of a company is less than

18% of its book profits, then such book profits shall be deemed to be the total

income and income tax payable by such a company shall be equal to 18% of the

book profits.

Mode of computation of book profits [explanation to section 115 –JB]

Net Profit as per Profit and Loss A/c

Add: ( If any of the following is debited to P&L a/c)

Amount of Income tax paid/ payable or provision thereof;

Amount carried to any reserves;

Amount of provisions made for meeting unascertained liabilities;

Amount by way of provision for losses of subsidiary companies;

Amount of paid or proposed dividends;

Expenditure relatable to any income exempt u/s 10 or 11 or 12, other than income

exempt u/s 10(38);

The amount of depreciation



Less:

Amount withdrawn from any reserve/provision, if such amount is credited to P&L

A/c.

Income exempt u/s 10 or 11 or 12, other than income exempt u/s 10(38), if any

such amount is credited to P&L A/c;

Amount of depreciated debited to the P&L a/c ( excl the depreciation on revaluation

reserves); or

Amount withdrawn from revaluation reserve and credited to the P&L a/c, to the

extent it doesn’t exceed the amount of depreciation on account of revaluation of

assets; or

Amount of loss brought forward or unabsorbed depreciation, whichever is LESS as

per books of account.

Amount of profits of sick industrial company during the period of its sickness;

{ Period of sickness starts from the PY in which such company becomes sick

industrial company u/s 17(1) of the SICA and ends with the PY during which the

entire net worth of such company becomes equal to or exceeds the accumulated

losses.

Book Profits of the Company u/s 115 J-B

Levy of surcharge and educational cess:

Surcharge: The amount of income tax under this section shall be increased by

surcharge @ 10% of the amount of income tax, if the total income chargeable

under this section exceeds Rs.1crore, in case of foreign companies, the

surcharge will be imposed @ 2.5%.

Marginal relief: Incase of companies having total income chargeable under this

section exceeding Rs.1 crore, marginal relief will be provided so as to ensure

that “income tax, including, surcharge, on the total income” doesn’t exceed

income tax on total income of Rs.1 crore plus the amount by which the total

income exceed Rs.1crore. In other words,



MR = Income tax, including surcharge on total income – [income tax on total

income of Rs.1 crore + (total income – Rs. 1 crore)], if such sum is positive.

Cesses: The amount of income tax including surcharge, as aforesaid, shall be

increased by Education Cess (EC) @ @% of income tax plus surcharge and also

by secondary and Higher secondary Education cess (SHEC) @ 1% of income tax

plus surcharge.

Other Provisions:

Section not to apply to SEZ units: This section shall not apply to the

income accrued or arising from any business carried on or services

rendered by an entrepreneur/ developer/unit in SEZ.

Preparation of accounts: The P&L a/c of the company should be

prepared in accordance with the provisions of parts II and III of schedule

VI to the companies Act, 1956.

Furnishing of report: Along with its return of income, every company is

required to furnish a report in prescribed form from a CA, certifying the

correctness of book profits.

Carry forward of losses and allowances: The provisions of this section do not

affect the determination of amounts of losses and allowances to be C/F.

Corporate Restructuring - Amalgamation, Mergers & Demergers,

Conversion & Slump sale

BENEFITS

Shareholders of the amalgamating company

As per section 47(vII), transfer of shares held by a shareholder in amalgamating

company is not regarded as “transfer”, if such transfer is in consideration of

allotment to him of shares in the amalgamated company.

When transfer is exempt, then for computing CG on shares:

Period of holding: period, for which shares in amalgamating company were held

by assessee, will be included in computing the period of holding of shares in

amalgamated company.



Cost of acquisition of shares in amalgamated company = cost of acquisition of

shares in the amalgamating company.

However, if the above 2 conditions aren’t satisfied, the transfer shall not be

exempt and the shareholder shall be liable to CG tax, further if besides shares,

bonds or debentures in consideration of such transfer is issued, the transfer

will not be exempt.

Amalgamating company the following will be exempt from CG tax.

1) Transfer of capital asset by an amalgamating company to Indian

amalgamated company.

2) Transfer of shares held in an Indian company by amalgamating foreign

company to amalgamated foreign company if – a) at least 25% of shareholders

of the amalgamating foreign company to remain shareholders of the

amalgamated foreign company and b) such transfer doesn’t attract CG tax in

the country in which the amalgamating company is incorporated.

3) Transfer of capital asset by an amalgamating banking company to the

amalgamated banking company institution, under a scheme of amalgamation

sanctioned by the central government.

Shareholders of the demerged company

When transfer is exempt,

a) Period of holding of shares in demerged company shall be included in

computing the period of holding of shares in resulting company.

b) Cost of acquisition : 1) shares in resulting company =[ cost of acquisition of

shares in demerged company X net book value of assets transferred to resulting

co. in demerger / net worth of the co. before demerger]

2) Shares in resulting co. = total cost of such shares LESS cost of shares in

resulting company as computed u/s 49(2C) above.

Demerged company the following shall be exempt from CG tax –

a) Transfer of capital assets by a demerged company to the resulting company.



b) Transfer of shares held in an Indian company by demerged company foreign

company to resulting foreign company if a) shareholders holding 75% or more of

value of shares of demerged foreign company continue to remain shareholders

of resulting foreign company and b) such transfer doesn’t attract CG tax in the

country in which demerged foreign company is incorporated.

Tax implications or benefits of Amalgamation or demerger

a) For expenses falling u/s 35 BB (telecommunication license), or 35D

(preliminary expenses), or 35 DDA (voluntary retirement) or 35 E/42

(prospecting for mineral oils), the expenditure remaining unallowed can be

claimed as deduction by the amalgamating company.

b) Expense on amalgamation/demerger is allowable in 5 equal annual

installments us 35DD.

c) Deemed profits u/s 41(1) are taxed in the hands of the amalgamated or

resulting company.

d) Actual cost of asset transferred or WDV of block transferred in the hands of

the transferor, is taken to be the actual cost or WDV in the hands of the

transferee company.

e) Transfer of capital assets in course of amalgamation/ demerger is exempt

from capital gains.

f) Transfer of shares held in amalgamating company/demerged company by the

shareholder for issue of shares in amalgamated / resulting company is exempt

from capital gains.

g) Unabsorbed business losses and unabsorbed depreciation is case of

transferor-company are allowed to be c/f by the transferee company u/s 72A.

h) The deductions allowable u/s 80I-A to 80-IC and 10A, 10AA or 10B continue

to remain allowed to the amalgamated/resulting company.

Reverse merger

It means that the profit making company merges into the sick company thereby

becoming eligible to carry forward of losses etc. without the aid of section 72S of

the act. The profit making or healthy company becomes extinct loosing its name



and the surviving sick company retains its name. The reverse merger is a

device, which by passes the requirements under section 72A of the act. Soon

after the merger or after a year or so, the name of the company is changed to

correspond with that of the profit making amalgamating company.

Reverse merger has 2 advantages:

a) Losses, which otherwise could not have been c/f and set off, are c/f and set

off, and

b) Goodwill consisting in the name of the profit making amalgamating company

is also retained.

Tax planning with reference to conversion of proprietorship / partnership firm into company

Basis Firm company Proprietorship company

Certain transfer exempt : If all the assets and liabilities of the

firm relating to their business

immediately before succession

become the assets and liabilities of

the company.

All its partners become shareholders

of the company in the same

proportion in which their capital

a/cts stood in the books of the firm

on the date of succession.

The partner rec. consideration only

by way of allotment of shares in the

company.

The partners shareholding in the

company in aggregate is 50% or more

of its total voting power and continue

to be as such for 5 yrs from the date

of succession.

All the assets and liabilities of sole

proprietary business immediately

before the succession become the

assets and liabilities of the

company

Sole Proprietorship’s shareholding

in the company is 50% or more of

the total voting power and

continues to be as such for 5 years

from the date of succession; and

Sole proprietor receives the

consideration only in form of

allotment of shares in the

company.



Depreciation The depreciation in the year of

succession shall be proportionately

shared by the successor company

and the succeeded firm.

The depreciation in the year of

succession shall be proportionately

shared by the successor company

and the prop. Firm.

Case law In CIT v. Veerbhadra Rao,

k.koteshwara and co., it has been

held that successor to a business is

entitled to deduction in respect of

debts incurred by the predecessor, as

the deduction is allowed to business

and not to assessee personally.

However, identity of business after

succession should remain the same

and it should not be dissolved.

In CIT v. Veerbhadra Rao,

k.koteshwara and co., it has been

held that successor to a business is

entitled to deduction in respect of

debts incurred by the predecessor,

as the deduction is allowed to

business and not to assessee

personally. However, identity of

business after succession should

remain the same and it should not

be dissolved.

C/F and set off of loses

and unabsorbed

depreciation in case of

reorganization of

business.

Such loss can be c/f for further 8

years in the hands of the successor

company

Such loss can be c/f for further 8

years in the hands of the successor

company

SLUMP SALE

Slump sale [sec 2(42C)] : means transfer of one or more undertakings as a

result of the sale for a lump sum consideration w/o values being assigned to

the individual assets and liabilities in such sales.

Charge and nature of CG:

P&G arising from slump sale shall be taxable as “CG” in PY in which slump sale

is effected. If the capital asset, being one or more undertakings, was owned and

held by the assessee for not more than 36 months, the CG will be “STCG”. In

any other case, it shall result into LTCG.



Method of computation of CG:

Full value of consideration

Less: expenses wholly and exclusively in connection with such transfer

Less: cost of acquisition and cost of improvement being net worth** of the

undertaking (no indexation benefit even in case of long term capital asset)

XXX

XXX

XXX

ST/LT CG XXXX

** net worth shall be computed as follows

Aggregate value of total assets of the undertaking or division ( ignoring any

change in value of assets on a/c of revaluation) i.e. –

In case of depreciable assets, the WDV of the block as per sec 43(6)

In case of other assets, the BV

Less: value of liabilities of such undertaking or division as appearing in its

books

XXX

XXX

XXX

Net worth of the undertaking or division XXXX

Areas of Tax planning under Financial Management and role of Tax

Planner

The main objective of financial management is maximization of an

organization’s wealth. Tax planning may be exercised n respect of following

areas of decision making

1. Designing the capital structure (financing mix decision);

2. Capital budgeting (investment decisions and growth policy);

3. Distribution of profits (dividend policy decisions);



4. Managing working capital (liquidity decisions and funds management by

their proper mobilization from short –term and long –term sources and their

proper utilization).

Role of tax planner

The interest on debts is tax deductible expenditure while dividend is not.

Further, dividend distributed is liable to Dividend Distribution Tax. Hence, a

tax planner may prefer debts to preference shares/ Equity shares in the capital

structure.

Lease rent on machinery, depreciation and interests relating to the machinery

purchased outright or on hire purchase are tax deductible. Hence, a tax

planner may opt for leasing the machinery rather than buying it.

Tax on distributed profits is charged only in case of distribution of profits as

dividends and not on retained profits. Therefore, an appropriate balance

between current dividend and long term capital appreciation has to be

achieved.

A tax planner should also consider factors such as risks, leverage, income,

controls, opportunities and other relevant factors.

Tax planning considerations for deductibility of interest under Income Tax Act,

1961

section 36(1)(III) of the income tax act, 1961 provides that the deduction shall

be allowed in respect of the amount if the interest paid for the borrowed capital

taken for the purposes of the business or profession. However, any interest paid

on capital borrowed for acquisition of a new asset for extension of existing

business or profession for nay period beginning from the date of borrowing till

the date on which such asset is first put to use, shall not be allowed.

Interest: As per section 2(28A) of the income tax Act, 1961 “interest” means

interest payable in any manner in respect of any money borrowed or debt

incurred (including a deposit, claim or other similar right or obligation) and

includes any service fee or others charge in respect of the money borrowed or

debt incurred or in respect of any credit facility which has not been utilized.

The following references are important in respect of deductibility of interest:



1. The interest on capital borrowed bonafide for business purposes of the

company is allowed as a deduction and questions like whether the interest paid

is too high, or whether there was any need to borrow because the assessee had

ample funds or the company had charged lower rates of interest on money it

has advanced earlier, are generally irrelevant from tax point of view as the tax

payer is the best person to take decisions on these matters. In this respect, the

word “capital” means “money” and not any other asset. It’s also immaterial

whether use of capital actually yielded profits or not.

2. However, the deduction is subject to the provisions of section 40(a) which

states that –

a. Any interest payable outside India or in India is a non –resident (not being a

company) or to a foreign company; or

b. Any interest payable to a resident,

On which tax, hasn’t been deducted at source, or after deduction, hasn’t been

paid during the PY, or in the subsequent year before the expiry of the time

prescribed u/s 200(1), shall not be allowed as deduction. However such amount

shall be allowed as a deduction ion computing the income of the subsequent PY

in which it has been so deducted and paid.

3. For tax purposes, borrowing should not be illusory. The interest deduction is

also subject to provisions of section 40 A, which disallow excessive expenditure

in case of specified persons or if expenditure in excess of Rs.20, 000 is paid in

cash.

4. The deduction is also subject to the provisions of section 43 B, which allow

interest on term- loans borrowed from financial institutions and scheduled

banks, only on actual payment.

5. Interest on capital borrowed but diverted to sister concern free of cost will

not, generally, be allowed as deduction. However, if the diversion of funds is on

account of commercial expediency, the interest on such capital borrowed will be

admissible as deduction.

Concept of Dividends, Deemed dividends.



When does the dividend income accrue or arise?

1. Dividend: dividend means amount paid to or received by a shareholder in

proportion to his shareholding in a company out of total sum so distributed.

2. Deemed Dividends [section 2(22)] : The following distributions by a company

to its shareholders are included in “dividend” –

a) Any distribution of accumulated profits, whether capitalized or not, if such

distribution entails the release of all or any part of the assets of the company.

Issue of bonus shares to equity shareholders isn’t dividend, as there is no release

of assets. But if the bonus shares are redeemed (in case such bonus shares are

preference shares), there will be release of assets and therefore, it would

constitute dividend at the time of redemption.

b) Any distribution of – 1) Debentures, debenture – stock, or deposit certificates

in any form, whether with or without interest and 2) bonus shares to its

P’shareholders; to the extent to which the company possesses accumulated

profits, whether capitalized or not.

c) Any distribution made on liquidation, to the extent to which the distribution

is attributable to the accumulated profits of the company immediately before its

liquidation, whether capitalized or not.

Dividend excludes: Distribution in respect of any share issued for full cash

consideration, where the holder thereof is not entitled to participate in the

surplus assets in the event of liquidation.

d) Any distribution on the reduction of capital, to the extent to which the

company possesses accumulated profits, whether capitalized or not.

Dividend excludes: Distribution in respect of any share issued for full cash

consideration, where the holder thereof is not entitled to participate in the

surplus assets in the event of liquidation.

e) Any payment made by way of advance or loan made by a closely held

company i.e. a company in which the public are not substantially interested, to

the following , is treated as dividend –



(A) To a shareholder: such shareholder must be beneficial owner of equity

shares holding 10% or more of the voting power. Any payment by any such

company on behalf, or for the individual benefit, of any such shareholder is also

treated as dividend.

(B) To any concern (HUF/AOP/BOI/company): The shareholder referred to in

(A) above must be a member or a partner in such concern and he must be

having substantial interest in it.(A person is deemed to have a substantial

interest in a concern, other than a company, if he is, at any time during the PY,

beneficially entitled to 20% or more of the income of such concern).

Such payment is considered as dividend to the extent the company possesses

accumulated profits.

Dividend doesn’t include: Any advance or loan made to shareholder or the said

concern by a company in ordinary course of its business, where lending of

money is substantial part of business of company.

General Exclusion: Dividend doesn’t include –

Any payment made by a company on a buy-back of its own shares from a

shareholder in accordance with the provisions of section 77A of the Companies

Act, 1956.

Any distribution of shares pursuant to a demerger by the resulting company to

the shareholders of the demerged company (whether or not there’s a reduction

of capital in the demerged company)

Any dividend paid by a company which is set off by its against whole or any

part of any sum previously paid by it and deemed as dividend under section

2(22)(e), to the extent it is so set off.

Accumulated profits:

a) In case of dividends u/s 2(22) (a)/ (b)/(c)/ (d)/ (e): Accumulated profits shall

include all profits of the company up to the date of distribution or payment

referred therein.

b) In case of dividend u/s 2(22)(c): Accumulated profits shall include all profits

of the company up to the date of liquidation. However, where the liquidation is



consequent on the compulsory acquisition of the undertaking by the

Government or a corporation owned or controlled by the Government under any

law, Accumulated profits shall not include any profits of the company prior to

three successive PY’s immediately preceding the PY in which such acquisition

took place.

Distribution on reduction of share capital is deemed as dividend u/s 2(22) (d) to

the extent of accumulated profits and is liable for dividend tax u/s 115O.

Bond-Washing transactions and provisions to prevent them

Bond washing transaction is a transaction whereby owner of securities

transfers his securities to another person (who is under lower tax slab) such

that income of such security becomes due to such other person and the owner

avoids tax theron.

The following provisions tend to curb such avoidance of tax –

1) Bond washing transactions [sec94 (1)]: Where the owner of any securities

sells or transfers them and buys back or reacquires the same (or similar

securities) with the result that any interest becoming payable in respect of the

securities is receivable by a person other than the owner, then, such interest

shall be deemed to be the income of the owner and not of any other person.

2) Avoidance of tax through sale of security on cum- interest basis [sec 94(2)]:

where any person having any beneficial interest in any securities enters into a

transaction whereby income received by him from such securities within such

year is – a) NIL; or (b) less than the sum of income received accrued from day to

day, then the income from such securities for such year shall be deemed to be

income of such person.

3) Above provisions not to apply [sec 94(3)]: the provisions of (1) and (2) above

shall not apply if the said person satisfies the Assessing Officer that – a) there

has been no avoidance of tax, or (b) the avoidance of tax was exceptional and

not systematic and there was no avoidance of income tax in his case in any of

the three preceding years by any transaction referred to in (1) or (2) above.

4) Profit or loss from a bond washing transaction not to be considered in case of

such another person [sec 94(4)]: in a case of falling under (1) above, if the other



person carries on a business of dealing in securities, then such transaction

shall be ignored while computing the profits arising from or loss sustained by

him in the business.

5) Loss of sale of securities of units to be ignored in case of dividend stripping

[sec 94(7)]: In case a person –

a) Buys/ acquires any securities or unit within a period of 3 months prior to

record date,

b) Sells/transfers the same within a period of 3 months

c) The dividend/ income on such securities or unit received or receivable by him

is exempt, then, the loss if any, arising to him on account of such purchase and

sale, to the extent of dividend or income from securities/unit, shall be ignored

while computing his income chargeable to tax.

6) Loss arising in case of a bonus stripping of units to be ignored [sec 94 (8)]: In

case a person –

a) Buys/acquires any units within a period of 3 months prior to record date;

b) He is allotted bonus units on the basis of holding such units on such date;

and

c) He sells or transfers or any of the original units referred to in a) within a period of 9

months after such date, while continuing to hold all or any of the bonus units referred

to in (b).

Then the loss, if any, arising to him on account of purchase and sale of orginal

units shall be ignored in computing his total income and the loss so ignored

shall be deemed to be the cost of purchase or acquisition of such bonus shares

units referred to in (b) as are held by him on the date of such sale or transfer.

Record date � means the date fixed by a company for entitlement of dividend,

or by a mutual fund/ administration /specified company for entitlement of

dividend or bonus shares.

Tax treatment of expenditure on issue of bonus shares:

Company’s point of view:



1) Dividend and bonus share aren’t tax deductible. However, while payment of

dividend is liable to dividend tax u/s 115-O, issue of bonus shares to equity

shareholder is not so liable.

2) It was held in Cit v. General insurance corporation [2006]286ITR 232(SC)

that expenses incurred by a company, on account of stamp duty and

registration fees for the issue of bonus shares isn’t of capital nature, as the

issue of bonus shares doesn’t result in inflow of fresh funds or increase in the

capital employed the capital employed remains the same. Issuance of bonus

shares also doesn’t result in benefit or advantage of enduring nature. Hence, its

revenue expenditure allowable as deduction.

3) A bonus issue enhances the image of the company. However, it widens the

capital base for future years and the dividend will have to be paid on increased

capital base, including bonus shares. Thus, the company should keep into its

consideration the following factors before arriving at a conclusion with regards

to bonus issue or dividend policy: -

Size of present authorized capital;

Size of the present paid up capital;

Price of the shares of the company.

Quantum of free reserves built out of genuine profits;

Equity base in relation to the earnings of the company;

Quantum of earnings in last 2 or 3 years ;

Projected earnings of the company in next 2 or 3 years.

Shareholder’s point of view:

1) Dividends from domestic companies are exempt u/s 10(34). However,

dividends u/s 2(22)(e) or dividends from foreign companies are taxable in the

hands of shareholders.

2) Value of bonus shares isn’t immediately taxable. Further, he’ll be entitled to

additional dividend on bonus shares. However, on sale, the tax liability would

be on account of capital gains and if they are held for more than 12 months



LTCG will arise which are taxable at a flat rate of 10%( w/o indexation) or 20%(

with indexation benefit) whichever is less.

Setting up and commencement of business

Setting up of business is different from commencement of business. A

business is set up as soon as it is ready to commence production or any

other activity of business is started and its not necessary that the actual

production should have so commenced.

In case of newly set up business or profession, PY commences on date of

its setting up.

Expenditure incurred after setting up of business but before its

commencement is deductible.

Case law : Tuticorin alkali chemicals & fertilizers ltd. V.CIT

Measures of tax planning �

a) After planning its installation programme, a company should see that its

business is set up at the earliest. The commencement of the business may be

postponed till a later date. The decisions in this regard must be taken after

keeping into consideration the general tax aspects of the company viz. tax

holidays and deductions, c/f of losses and unabsorbed depreciation etc.;

b) The expenditure incurred prior to setting up may be eligible for deduction

under section 35D as preliminary expenses. The assessee company should see

to it that such preliminary expenses fulfill the requirements of section 35D and

deduction thereof is claimed under that section.

c) The date of commencement of business is crucial in case of deductions under

section 10A, 10 AA, 10B, 80I-A to 80- IE etc. Because these deductions are

available only from the date of commencement of business. Therefore, the date

of commencement of business should be fixed after keeping the availability of

deductions into mind.

Tax planning considerations while choosing and adopting a particular

method of accounting



� The choice of adopting either cash or mercantile system of accounting is

available only in case of income under head – 1) profits and gains of business

and profession & 2) income from other sources.

� The method of accounting adopted by the assessee decides the accrual of

income and also its taxability. If mercantile system is followed, the right to

receive will amount to accrual of income, thereby leading to its taxation.

� By adopting cash system, the tax becomes payable only when income is

actually received, thereby providing adequate resources for payment of tax.

� Tax planning measures�

a) An assessee can adopt different method of accounting for different sources of

income.

b) The companies are statutorily required to follow mercantile system of

accounting under the companies act, 1956.

c) Assessee is at freedom to follow any method regularly followed by him for

valuing stock of goods. However, As-2 issued by ICAI, which is mandatory,

suggests LIFO method or weighted average price method of valuing closing

stock.

d) Even if assessee follows mercantile system of accounting, Section 43B

permits certain discussions only on actual payment. So, while planning tax

liability, such provisions must be taken care of.

Tax planning with reference to form of business

� Sole – proprietorship � The income earned by sole- proprietorship business

is taxed in the hands of the sole – proprietor. Such income enjoys the additional

tax benefits of threshold exemption limit, tax rebates and reliefs. The income is

taxed at the maximum rate of 30%. Thus, tax liability in case of sole

proprietorship form of business tends to be the lowest. The disadvantages of

this form are unlimited liability, non availability of certain deductions, which

are admissible to companies; no deductions for interest on capital and

remuneration to sole-proprietor; etc.



� Partnership firm� The tax rate is 30%. A partnership firm is entitled to

deduction of interest on capital and salary and other remuneration paid to

partners subject to the limits specified u/s 40(b). As per section 40(b), in

computing income under head PGBP of a firm assessed as such, the following

amounts shall be disallowed –

a) Any salary, bonus, commission or remuneration to any non-working partner;

b) Remuneration to working partner or interest to any partner which –

I. Is not authorized by or is not in accordance with, he terms of partnership

deed; or

II. If so authorized, relates to a period falling prior to the date of such

partnership deed, i.e. retrospective authorization of interest or remuneration is

not permitted.

Note: working partner means an individual who is actively engaged in

conducting the affairs of the business or profession of the firm of which he is a

partner.

c) Any interest paid to any partner in excess of 12% simple interest p.a.

d) Remuneration to working partners : Remuneration paid to working partners

during the PY is disallowed to the extent it exceeds, in aggregate, the following

limits :-

remuneration as per the book profits Remuneration allowable

On first Rs.3, 00,000 of book profits

or in case of a loss.

Rs. 150,000 or 90% of book profit

whichever is higher

On the balance 60% of the book profits

By virtue of section 28(v), interest or remuneration received by a partner from a

firm is taxable as PGBP.

Any payment of remuneration to partners, not allowed as deduction u/s 40(b),

shall not be taxed in the hands of partners. However, the disallowance of

remuneration / interest under sections 36(1)(III), 37(!) or section 40A(2) will be



added back to the firm’s income and will be taxed in the hands of both the firm

and its partners. To avoid such a situation, the partnership deed should

contain a clause to the effect that no remuneration / interest inadmissible

under section 36(1)(III), 37(1) or 40A(2) be allowed to the partners.

If the firm is eligible for exemption us 10 A to 10B or deduction us 80I-A to 80I-

E or 80 – JJA, remuneration and interest paid to partners will be allowed as

deduction to the firm will be taxed in the hands of partners, while on the other

hand the same will reduce the income of the firm, thereby reducing the

quantum of deduction. Thus, the determination of remuneration to partners

should be made keeping into mind overall tax effects.

The major disadvantages of this form of business are unlimited liability, non-

admissibility of certain deductions, limited items of expenditure, higher

taxation, etc.

Company �

the major tax benefits and privileges available to company over the other forms

of organization are :-

a) Remuneration to persons managing the affairs of the company and also

owning its shares is fully allowable w/o any sort of limit.

b) Dividends received from the company are exempt in the hands of the

shareholders under section 10(34). Therefore, the investors aren’t liable to pay

tax.

c) The companies are eligible to tax at the flat rate of 30%. Despite higher net

effective rate of tax than that applicable to sole-proprietors, the tax incidence

tends to be lower due to allowability of wide variety of deductions.

d) Due to limited liability to shareholders and free transferability of shares, the

company can augment large capital resources. Such shares become long- term

capital asset in the hands of shareholders after a short period of 12 months.

The LTCG are taxable @ 20 % or 10% (in case of listed securities, without

indexation benefit).



Further, the LTCG arising from transfer of shares, which have been charged to

securities transaction tax are exempt u/s 10(38). Any such STCG are taxable @

10% u/s 111A.

Tax planning with reference to nature of business

� Deduction to undertakings engaged in export in hand made articles or things

[ section 10BA]:

Conditions� a) It manufactures or produces eligible articles or things w/o use

of imported raw material. Eligible articles or things mean all hand- made

articles or things which are of artistic value and which require the use of wood

as main RM.

b) The export- sales of eligible articles isn’t less than 90% of total sales during

that PY.

c) The sale proceeds of export are received in, or bought into, India in

convertible foreign exchange within six months from the end of PY or within

such extended period as may be allowed by the RBI or any other competent

authority.

d) It employs 20 or more workers in its manufacture or production during the

PY.

Quantum of deduction � deduction is allowed to the extent of 100% of profits or

gains from the export of eligible articles. No deduction will be allowed w.e.f AY

2010- 2011.

Note: export shall not include any transactions by way of sale or otherwise, in a

shop, emporium, etc. not involving customs clearance.

� Deduction in relation to expenditure on obtaining license to operate

telecommunication services [section 35ABB]: tax treatment �

a) If whole or part of the license is transferred and sale proceeds ( only capital

sum) exceeds the expenditure remaining unallowed: deduction is NIL.

The following deemed profits will be taxable in year of transfer even if business

doesn’t exist – a) sale proceeds less expenditure remaining unallowed; or b)

expenditure incurred less expenditure remaining unallowed, w.el.



b) If whole of the license is transferred and sale proceeds are less than

expenditure remains unallowed: Deduction is expenditure remaining unallowed

- sale proceeds.

c) If part of the license is transferred and sale proceeds do not exceed

expenditure remaining unallowed –

[Expenditure remaining unallowed less sale proceeds]/ No. of relevant PY’s

unexpired at the beginning of PY transferred.

d) In case of amalgamation or demerger – provisions falling in (a) & (b) above,

shall not apply to the amalgamating or demerged company.

� Amortization of preliminary expenses [section 35D] :

� Applicability – the assessee should be an Indian company or non corporate

resident assessee.

� Purpose of preliminary expenses :

Time of incurring expenses Indian company

Before commencement of business For setting up of any undertaking

or business

After commencement of business Extension of the existing

industrial undertaking or setting

up new industrial undertaking

Benefit of sec 35D not available to a non –industrial undertaking incurring

expenditure in connection with extension of its business after its

commencement.



� List of specified expenditure – expenditure in connection with

Non corporate resident assessee Indian company

1)Preparation of feasibility report,

project report or for conducting

market survey or any other survey

or engineering services relating to

the business of the assessee.

2) Legal charges for drafting any

agreement for setting up or for

conduct of any business.

Preparation of feasibility report, project report or for

conducting market survey or any other survey or

engineering services relating to the business of the

assessee.

Legal charges for drafting any agreement for setting

up or for conduct of any business.

3) expenses incurred for �

a) legal charges for drafting and printing

memorandum and articles of association;

b) fees for registering the company under companies

act;

c) Issue of shares or debentures of the company,

underwriting commission, brokerage and charges for

drafting, typing, printing and advertisement

prospectus.

� Capital employed� Issued share capital + debentures + long term borrowings.

� Cost of the project� means actual cost of fixed assets as shown in the books

of the assessee on the last day of the PY in which the assessee commences

business.

� Audit report – non corporate assesses, the assessee is required to furnish the

audit report in form 3AE along with the return of income for the first year.

� Case law � Brooke bond India ltd �share issue expenses cannot be claimed

as deduction, its allowable only u/s 35D.



Amount transferred to special reserve by approved financial corp. / public

companies providing finance for agriculture development, infrastructure

facility or purchase or construction of house: Sec 36(VIII) :

1) the company /corporation should be approved by the central government.

2) Deduction shall be least of the following – a) amount of reserve; or b) 20% of

profit of business.

3) Reserve should not exceed twice the paid-up capital of the company; incl.

general reserve.

Deduction in respect of business of collecting and processing of

biodegradable waste [section 80JJA]:

Applicability: all assesses.

Amount of deduction: amount of profits and gains derived from certain

business for 5 consecutive years beginning from the AY’s in which such

business commences.

Business should consist of collecting, processing /treating bio –degradable

waste for –

a) Generation of power;

b) producing bio –gas

c) Making pellets/briquettes for fuel or organic manure.

Deduction available for assesses providing additional employment sec 80

JJAA :

Applicability – Indian company

Condition – company derives profit from any industrial undertaking engaged in

the manufacture or production of article or thing not formed by splitting up,

reconstruction or amalgamation.

Period of deduction – deduction u/s 80 JJAA is applicable for 3 AY’s only,

including the AY relevant to the PY in which employment is provided.

Audit report – to be furnished in form 10DA.



Tax planning with reference to location of business

Newly established undertaking in free trade zone (section 10A) : A

deduction of 100% profits derived by undertaking located in export hardware

technology park( EHTP) or Software technology park(STP) or specific economic

zone( SEZ) from export of articles/ things/ computer software ( incl. cut and

polished precious and semi-precious stones) manufactured or produced by it, is

allowed from total income of the assessee.

Period of tax holiday: exemption is allowed in respect of any 10 consecutive AY’s

beginning from the AY relevant to the PY in which it begins to manufacture or

produce articles etc. No exemption from 2010 -11 onwards.

� Computation of profits and gains of export :

= Export turnover X PGBP

Total turnover of undertaking

Export turnover means consideration in respect of export articles or things or

computer software received or brought into India in convertible foreign

exchange within said time but doesn’t include �

Freight, telecommunication charges or insurance attributable to the delivery of

such articles etc, outside India or

Expenses incurred in foreign exchange in providing the technical services

outside India;

No deduction if return isn’t furnished before the due date.

Deduction for units established in SEZ on or after 1.4.2002 –

First 5 AY’s 100% of profits and gains from export

business (starting from AY relevant to year

of start of production/ manufacture)

Next 2 AY’s 50% of profits and gains from export

business



Next 3 AY’s Lower of – a) 50% of profits from export

business or b) amount transferred from

P&L A/c to “specific economic zone

reinvestment allowance reserve A/c”

Section doesn’t apply to undertaking, which begun or begins to manufacture or

produce articles or things or computer SW on or after 1-4-2005 in any SEZ.

New established undertaking in special economic zones (section 10AA):

Conditions –

a) its not formed by splitting up or reconstruction of existing business.

b) Its not formed by transfer of plant or machinery previously used for nay

purpose.

Exceptions: condition isn’t violated when a) the value of second hand plant and

machinery doesn’t exceed 20% of total value of plant or machinery used in that

business; or B)P&M used outside Indian by any person other than assessee is

imported and no depreciation has been allowed on it under this act.

Note: Above two conditions are common for section 10A, 10B and 80 I-A to 80I-

E.

Quantum of deduction :

First 5 consecutive years 100% of profits and gains from export

business (starting from AY relevant to year

of start of production/ manufacture)

Next 5 consecutive assessment

years

50% of profits and gains from export

business

Further next 5 consecutive AY’s Lower of – a) 50% of profits from export

business or b) amount transferred from



P&L A/c to “specific economic zone

reinvestment allowance reserve A/c”

Tax deduction for last AY’s is allowed if –

Amount transferred to “SEZ reinvestment reserve a/c” is used for acquiring new

plant and machinery, which is first put to sue within 3 yrs from the yr of

creation of reserve.

Until acquisition of P&M, its used for business purposes other than for

distribution by way of dividend or profits or remittance outside India for

creation of any asset therein.

Particulars of P&M are furnished along with return of income for the PY in

which such plant or machinery is first put to use.

Consequences of misutilisation / non- utilization of reserve :

If the amount is credited to the

reserve is -

Taxability

Used for purposes other than

acquisition of P&M

Amount so misutilised shall be taxable in

the year of misutilisation

Not used within three years

aforesaid

Amount not so utilized shall be taxable in

the year immediately following the period

of 3 years.

Newly established 100% Export oriented undertaking (EOU) (section 10B):

100% deduction is allowed in respect of P&G derived by 100% EOU. Deduction

is allowed for 10 consecutive AY beginning with AY relevant to PY in which

undertaking begins production/ manufacture.

However no deduction will be allowed w.e.f AY 2010-11.

Section 80 I-A – deductions available to industries engaged in

infrastructure development



Section 80 I-A – deductions available to industries engaged in infrastructure development

Commences During Quantum Of

deduction

Period – AY

(see note 2)

Ref Nature of undertaking

From To Company others

Infrastructure facilities 1-4-95 Open ended 100% 100% For 10 years

out of first 15

years

4(I)

1-4-95 31-3-05 100%

30%

X For initial 5

years

Balance

period of 5

yrs

4(II) Telecommunication services:

a) domestic satellite services

b) other services viz., radio,

paging, basic or cellular

networking of turnking & EDI

service 1-4-95 31-3-05 100%

30%

100%

25%

For initial 5

years

Balance

period of 5

years

4(II)

Industrial park 1-4-97 31-3-09 100% 100% For 10 years

out of 15

years

4(III)



Power sector

a)engaged in generation or

generation and distribution of

power

b)engaged in transmission or

distribution of power

c)substantial renovation and

modernization of existing

transmission/distribution

lines

1-4-93

1-4-99

1-4-04

31-3-10

31-3-10

31-3-10

100%

100%

100%

100%

100%

100%

For 10 yrs

out of 15 yrs

For 10 yrs

out of 15 yrs

For 10 yrs

out of 15 yrs

4(iv)(a)

4(iv)(b)

4(iv)©

Undertaking established for

reconstruction/ revival of

power generating plant

Estb.

Before

30-11-05

31-03-07 100% X For 10 out of

15 yrs

4(v)

Common conditions:

Condition : w.e.f 1-4-06, deduction u/s 80 I-A will be allowed only if the

assessee furnishes the return of income u/s 139 (a)

Period of deduction � Ay’s :

For any 10 consecutive Ay’s out of 15 yrs beginning from the year in which the

undertaking or the enterprise –

Develops and begins to operate any infrastructure facility; or

Starts providing telecommunication services; or

Develops an industrial park; or

Generates power or commences transmission or distribution of power.

For operation and maintenance of the infrastructure facilities referred in Para

1(c) above subject to fulfillment of conditions, the period of 15 years is

substituted by 20 years.



Transfer of industrial park/ SEZ: the transferee undertaking is entitled for

deduction u/s 80 IAB for the remaining period in the 10 consecutive Ay’s.

Section 80 I-B

1) nature of undertakings - operation of ship, hotels, industrial research,

production of mineral oil, developing and building housing projects, multiplex

theatres, convention centres, oeprating and maintaining a hospital in rural

area.

2) audit report - accts must be audited by CA and report should be given by all

assessees to claim deduction u/s 80IB.

3)return of income - ROI should be submitted on or before due date of

submission of return of income.

4)No splitting up - it should not be formed by splitting up, or reconstructing an

existing business.

5) quantum of deduction - 25% to 100% of profits.

Section 80I-C � deductions available to certain u/t s or enterprises in

certain special category states.

The eligible businesses are � a) in case of undertaking/ enterprise located in

notified areas under specified states: it has begun manufacture during specified

period, or takes substantial expansion during that period.

b) In case of undertaking/ enterprise located in any area under specified states:

it has begun manufacture during specified period, or takes substantial

expansion (50% or more increase in book value of P&M) during that period.

Specified period and deduction:



Undertaking/

enterprise

Located in States of -- Particulars of

deduction

Sikkim Himachal Pradesh,

Uttaranchal

North eastern

state

Specified period 23-12-02 to 31-3-

07 ( finance act,

07)

From 7-1-03 to

31-3-2012

24-12-97 to

31-3-07

Deduction in

respect of profits

and gains of

eligible business

100% for 10 yrs

commencing with

the initial AY

100% for first 5

years starting with

initial AY and

thereafter, 25% (

30% in case of

company), for next

5 years.

100% for ten years

commencing with

the initial AY.

Initial Ay: It means AY relevant to PY in which undertaking/enterprise begins to

manufacture or produce articles or things or commences operation or completes

substantial expansion.

Section 80I-D: deduction in respect of P&G from business of hotels and

convention centers in specified areas: Eligible businesses are –

Business of hotel located in the specified area, if such hotel is constructed and

starts functioning at any time on or after 1-4-07 but on or before 31-3-10 ; or

Business of building, owning, and operating a convention centre located in the

specified area, if such centre is constructed and starts functioning at any time

on or after 1-4-07 but on or before 31-3-10.

Specified area: it means national capital territory Delhi and the districts of

Faridabad, guragon, gautam, budh nagar and Ghaziabad.



Quantum and period of deduction: deduction = 100% of P&G derived from

such business. Period of deduction = 5 consecutive Ay’s beginning from the Ay

in which hotel starts functioning.

section 80 IE :

spl provision in respect of certain undertakings in north eastern states:

1) nature of undertaking : the tax payer has begun to provide eligible services

during 1-4-07 and 31-3-2017 in any of the NE states --

a) to manufacture and produce any eligible article or things

b) to undertake substantial expansion to manf. or product any eligible article or

thing.

c) to carry on any eligible business.

2) Audit report - accts must be audited by CA.

3) Return of income - ROI should be submitted on or before due date of

submission of ROI.

4) No splitting up : it should not be formed by splitting up, or reconstructing an

existing business.

5) Quantum of deduction - 100% of profit and gains derived from such business

for 10 consecutive Ay's commencing with the initial AY.

Section 80 LA: deduction available for banks and financial institutions

have an offshore banking unit:

Eligible assessee� a) scheduled bank and having an offshore banking unit in a

SEZ; or

b) Foreign bank and having an offshore banking unit in a SEZ; or

c) Unit of international financial services centre.

Conditions� gross total income includes –

Income from the offshore banking unit in a SEZ;

Income from business referred in section 6(1) of banking regulation act, with an

undertaking



Located in SEZ;

Which develops, develops and operates or operates and maintains a SEZ;

Income from any unit of the international financial services centre from its

business for which it has been approved for setting up in such a centre in a

SEZ.

Amount of deduction

Period Quantum of deduction

For the first 5 AY’s relevant to the

PY in which permission under

banking regulation act or SEBI or

under any other laws was

obtained

100% of such income

Next 5 years 50% of such income

Non resident

1) Non resident individual: An individual is regarded as non –resident if he is

not resident in India during that PY. An individual is regarded as resident in

India if –

� He is India for a period of 182 days*** or more during the PY; OR

� He is in India for a period of 60 days or more during the PY and 365 days or

more during the 4 years preceding the PY.

** Under the following circumstances, the period of 60 days are extended to 182

days –

a) An Indian citizen who leaves India during PY for the purpose of employment

outside India.

b) An Indian citizen who leaves India during PY as a member of crew of an

Indian ship.



c) An Indian citizen or a person of Indian origin (who is abroad) who comes to

India on a visit during the PY.

Note: A person is deemed to be of Indian origin, if he or either of his parents or

any of his grand parents was born in Undivided India.

2) Non resident HUF: If the control and management of the affairs of HUF is

situated wholly outside India, then HUF is said to be non resident in India.

3) Non resident company: According to section 6(3) an Indian company is

always resident in India. A foreign company will be non resident in India if the

control and management of its affairs is wholly or partly situated outside India.

4) Non resident firm/AOP/other persons: If the control and management of the

affairs of Firm or AOP or other person is situated wholly outside India then

Firm or AOP or such other person is said to be Non resident in India.

Tax incidence on Non –Resident: In case of non residents, only the income

received or deemed to be received in India or, income accrued or arisen or

deemed to be have accrued or arisen in India is taxable in their hands. All other

incomes aren’t taxable.

Business connection

� Business connection involves relation between a business carried on by a non

– resident, which yields profits and some activity in India, which contributes

directly or indirectly to the earning of those profits. It predicates an element of

continuity between business of the non- resident and the activity in India. It

includes professional connection e.g. when foreign lawyer is called upon in

India to plead the case in Indian courts.

� Definition � Business activity carried through following agents of non

resident is covered –

� Concluding agent who concludes contracts on behalf of the non resident.

However, agents who only purchase goods/ merchandise for the non resident

aren’t covered, or

� Stocking agent who maintains stock of goods in India from which he regularly

delivers goods on behalf of the non resident.



� Indenting agent who secures orders in India mainly/wholly for non resident

or, that non –resident and other non- residents who exercise control over one –

another or are under common control.

Exceptions:

a) Business activity carried out through an agent having an independent status

and acting in ordinary course of business isn’t regarded as business

connection. However, an agent working mainly/ wholly for non resident or, that

non resident and other non –residents who exercise control over one another or

are under common control is not regarded as having an independent status.

b) In cases falling under the above three, only the income attributable to the

operations carried out in India shall be deemed to accrue or arise in India.

� Income not to be treated as arising from or through business connection

A. In case all the operations of a business aren’t carried out in India, only the

income reasonably attributable to the operations carried out in India will be

deemed to accrue or arise in India.

B. In case of a non resident, income in respect of operations confined to

purchase of goods in India for the purpose of export shall not be deemed to

accrue or arise in India.

C. In case of non resident, engaged in business of running a news agency/

publishing newspapers, magazines, journals, income arising through and from

activities confined to collection of news and views in India for transmission out

of India shall not be deemed to accrue or arise in India.

D. In case of a non resident being –

a. An individual who isn’t a citizen of India ;

b. A firm not having a partner who is either a citizen of India or resident in

India; and

c. A company not having any shareholder who is either citizen of India or

resident in India,



Income arising through or from operations confined to shooting of any

cinematograph film in India shall not be deemed to accrue or arise in India.

levy of income tax on income pertaining to FIIs

Sec Assessee Specified

Income

Tax rate Remarks , if any

115A Any non resident

Assessee

a) Interest

from govt. or

Indian concern

on debt given

in foreign

currency **

20%

30%

20%

10%

->no deduction is

allowed in

computing such

income under any

provision of Act.

-->such agreement

must be approved

by the central

Government or

must relate to a

matter covered by

the industrial

policy of the Govt.

of India.

b) Royalty and fees for technical services received under agreement entered –

� Between 1-4-1976 to 31-5-1997

� Between 1-6-1997 to 31-5-2005

� On or after 1-6-2005

115AB Overseas financial

organization (offshore

fund)

LTCG from

transfer of

units or UTI or

a mutual fund

specified under

section

10% Indexation benefit

will not be

available in

computing LTCG



10(23D), which

were

purchased in

foreign

currency.

115AC Any non resident

Assessee**

a)interest on

notified foreign

currency

bonds of

Indian/ public

sector

company

b) LTCG from

transfer of

such bonds or

global

depository

receipts

(GDRs)

10% No deduction in

computing such

income under any

provision and no

indexation benefit

in computing

LTCG.

115 ACA Resident employee LTCG from

transfer of

foreign

currency GDRs

of an Indian

company

engaged in

specified

knowledge

based industry

or service,

issued under

10% Assessee must be

the employee of

such Indian

company.

No indexation

benefit in

computation of

LTCG.



employees

stock option

scheme

(ESOPs)

115AD Notified foreign

institutional investor

Income in

respect of

securities

other than

units referred

to in section

115AB

20% No deduction

allowable in

computing such

income under any

provision of the act

and no indexation

benefit in

computing LTCG

Capital gains on transfer of the securities—STCG under section 111A

Other STCG

LTCG

115BBA Non resident

sportsman being

foreign citizen**

Income from –

-participation

in a

game/sport in

India ;

-

advertisement

;

- Contribution

of articles

relating to any

game or sport

in India in

newspapers,

10% No deduction

allowable in

computing such

incomes under any

provision of act

Winnings from

lottery, crossword

puzzles etc are

taxable under

section 115BB @

30% and therefore,

they do not fall

under this section.



magazines or

journals.

Non resident sports

association **

Any amount

guaranteed to

be paid or

payable to

such

association or

institution for

any game/

sport played in

India

Notes –

1) **in cases falling under sections 115A, 115Ac and 115BBA, the assessee

needn’t file return of income if his income consists of specified incomes only

and tax on such incomes has been deducted at source.

2) Additional provisions of section 115A: section 115A applies only to such

royalty and fees for technical income from royalty/ fees for technical services,

deduction under chapter VI-A shall be available from income from royalty/ fees

for technical services taxable under this section.

Section 160

Representative assessee of non resident includes his agent.

Section 163: Agent of a non resident

Agent in relation to a non resident includes following persons in India –

a) Person employed by or on behalf of the non resident.

b) Person who has any business connection with the non resident

c) Person from or through whom the non resident is in receipt of nay income,

whether directly or indirectly,

d) Trustee of the non resident



e) Any person who has acquired a capital asset in India by means of a transfer,

whether such person is a resident or non resident.

Section 172: tax liability of shipping business

Non resident carrying on shipping business presumptive income @ 7.5% of

amount payable.

Transfer pricing

Objective� with the increase in participation of the multinational groups there

has been increase in the cross border transactions. The existence of different

tax rates in different countries offers a potential incentive to multinational

enterprises to manipulate their transfer prices to recognize lower profit in

countries with higher taxes and vice versa.

In order to monitor transfer prices for goods, facilities and services, transfer

pricing regulations were introduces in the form of sections 92 and 92A to 92F.

The basic intention underlying the transfer pricing regulations is to prevent

shifting out of profits by manipulating prices charged or paid in international

transactions, thereby eroding the country’s tax base.

Provisions relating to computation of income from international

transactions – sec 92

1) Income to be computed as per arms length price

2) Section not to apply when arms length prices decreases income or increases

loss.

Section 92A� associated enterprises and deemed associated enterprises.

Associated enterprise means an enterprise which participates, directly or

indirectly, in management or control or capital of other enterprise. Further, if

one or more persons participate, directly or indirectly in the management or

control or capital of two enterprises those two enterprises are associated

enterprises.

Deemed associated enterprises: two enterprises are deemed to be associated

enterprises. If, at any time during the PY, -



a) One holds, directly or indirectly shares carrying 26% or more of voting power

in other enterprise.

b) Any person holds, directly or indirectly shares carrying 26% or more voting

power in both of them.

c) A loan advanced by one to the other constitutes 51% or more of BV of total

assets of other.

d) One enterprise guarantees 10% or more of the total borrowings of the other

enterprise.

e) One appoints more than half of board of directors or one or more executive

directors of the other.

f) Any person appoints more than half board of directors or one or more

executive directors of both.

g) Manufacture/ processing of goods or business carried on by one is fully

dependent on use of know how, patents, copyright, etc. owned by the other, or

in respect of which other has exclusive rights.

h) 90% or more of RM required by one are supplied by the other or by persons

specified by other, and prices and other conditions relating to the supply are

influenced by the other enterprise.

i) Goods manufactured/ processed by one are sold to the other enterprise or to

persons specified by other, and the prices and other conditions relating thereto

are influenced by such other enterprise.

j) Where one enterprise is controlled by an individual/HUF, the other enterprise

is also controlled by such individual/ HUF or his relatives or jointly by such

individual/HUF and such relative.

k) One enterprise is a firm/AOP/BOI and other enterprise holds 10% or more

interest in such firm/AOP/BOI.

l) There exists between the two enterprises, any relationship of mutual interest,

as may be prescribed.

Section 92B international transaction



It means a transaction entered into between two or more associated enterprise

(at least one is a non resident) for purchase/sale/ lease of tangible/ intangible

property or provision of services or lending/ borrowing money or any other

transaction (including sharing agreements for common costs) having bearing on

income and assets.

Deemed associated transaction: If an associated enterprise and a third person

determine the terms of a transaction between third person and another

associated enterprise, such transaction shall be regarded as having being

entered into between two associated enterprise.

Section 92C methods under which arm’s length price is determined

1) Arms length price (ALP) means a price applicable in a uncontrolled

transaction i.e. a transaction between non associated enterprises, in

uncontrolled conditions.

2) Methods for computation of arms length price: arms length price is

determined by the most appropriate of the following methods, selected as per

the mode prescribed by the board –

a) Comparable uncontrolled price method

b) Resale price method

c) Cost plus method

d) Transaction net margin method

e) Profit split method

f) Other prescribed method.

3) When more than one price determined : by the most appropriate method, the

arms length price shall be taken to be the lower of the following –

a) The arithmetical mean of such prices, or,

b) A price varying up to 5% of such arithmetical mean.

Double taxation avoidance agreement - DTAA



Double taxation � means taxation of same income of a person in more than one

country i.e. both under Indian income tax act, 1961 and income tax law of

other country.

DTAA are agreements entered into by the government of India with the

government of other countries.

Effect of DTAA

a) If no liability is imposed under the Income tax Act on a particular income,

then no liability will arise on that income.

b) If the tax liability is imposed by the act on a particular and there’s a

difference between the provision of the act and the agreement then the

provision or the conditions of agreement which is more beneficial to the

assessee can be enforced.

c) Any term used but not defined in the Act or in the DTAA shall, unless the

context otherwise requires, and isn’t inconsistent with the provisions of the Act

or the agreement, have the same meaning assigned to it in the notification

issued by the central government in the official gazette in this behalf.

Two methods of granting relief under DTAA [bilateral relief]�

� Exemption method

� Tax credit method

Conditions for claiming relief:

1. The income should have been taxed in both the contracting countries.

2. Proof of income having suffered double taxation has to be provided.

3. If there is no tax treaty with the country levying double tax; then relief can be

granted unilaterally u/s 91.

DTAA- Sec 90A

Between two specified associations, adopted for levy of tax. - Section 90A

Meaning �



Specified association: notified institutions, associations are bodies functioning

under any law for the time being in force either in India or the specified territory

outside India.

Specified territory: Any area outside India notified for the purposes of this

section.

Adoption of agreement� specified association in India may enter into an

agreement with any specified association in the specified territory outside India.

Through notification in the official gazette, the central Government may make

such provisions necessary for adopting and implementing such agreement.

Purpose of adoption �

a) Granting of relief in respect of –

Income which have suffered tax under both Indian tax laws and those of

specified territory outside India, or;

Income tax chargeable under this act and under the corresponding law in force

in that specified territory outside India to promote mutual economic relations,

trade and investment, or

b) Avoidance of double taxation of income under Indian law and those governing

the specified territory; or

c) Exchange of information for the prevention of evasion or avoidance of income

tax chargeable in both in India and specified territory , or investigation of cases

of such evasion or avoidance, or

d) Recovery of income –tax – tax under laws of both the countries/ territories.

Section 91 � unilateral relief

Conditions �

a) The assessee must have been resident in India in the relevant PY.

b) The income must have accrued or arisen outside India during that PY.

c) The assessee must have paid the tax either by deduction or otherwise in

respect of such income as per the law of the foreign country.



d) There should be no reciprocal agreement of relief or avoidance from double

taxation with the country where income has accrued or arisen.

Documents

CS Professional Programme Tax Notes