company secretary stude material - advance tax

Direct Tax - Final

CA R Giridharan FCA 1

Contents

Tax Management .................................................................................................................................... 3

Objectives of Tax planning ....................................................................................................................... 4

Definition ........................................................................................................................................... 4

The incidence ...................................................................................................................................... 5

MINIMUM ALTERNATE TAX (MAT) ........................................................................................................... 6

Corporate Restructuring - Amalgamation, Mergers & Demergers, Conversion & Slumpsale ..................... 8

Areas of Tax planning under Financial Management and role of Tax Planner ......................................... 13

Concept of Dividends, Deemed dividends. ............................................................................................. 15

General Exclusion: Dividend doesn’t include – ................................................................................... 16

Bond-Washing transactions and provisions to prevent them ............................................................. 17

Tax treatment of expenditure on issue of bonus shares: .................................................................... 18

Setting up and commencement of business ........................................................................................... 19

Tax planning considerations while choosing and adopting a particular method of accounting............ 19

Tax planning with reference to form of business ................................................................................ 20

Company .......................................................................................................................................... 21

Tax planning with reference to nature of business ................................................................................. 22

Tax planning with reference to location of business............................................................................... 25

Non resident ......................................................................................................................................... 32

Business connection .......................................................................................................................... 32

levy of income tax on income pertaining to FIIs ................................................................................. 33

Section 160 ........................................................................................................................................ 35

Section 163: Agent of a non resident ................................................................................................. 35

Section 172: tax liability of shipping business ..................................................................................... 35

Transfer pricing ..................................................................................................................................... 36

Provisions relating to computation of income from international transactions – sec 92 ..................... 36

Section 92A associated enterprises and deemed associated enterprises. ........................................... 36

Deemed associated enterprises ..................................................................................................... 36

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Section 92B international transaction ............................................................................................... 37

Section 92C methods under which arm’s length price is determined.................................................. 37

Double taxation avoidance agreement - DTAA ................................................................................... 38

DTAA- Sec 90A ................................................................................................................................... 38

Section 91 unilateral relief ................................................................................................................ 39

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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 action)

There is nothing like past, present

or future approach in case of tax

avoidance.

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.

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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.

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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 –

Particulars Tax Incidence

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

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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

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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:

o 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.

o 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.

o 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.

o 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.

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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.

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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.

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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.

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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

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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

Certificate of Chartered accountant: in case of a slump sale, every assessee shall furnish along

with return of income a report of an accountant in prescribed form indicating the computation

of net worth and certifying that the net worth of the undertaking or division has been correctly

arrived at.

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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

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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.

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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).

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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.

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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).

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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.

Direct Tax - Final


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.

Direct Tax - Final


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

Note: only that interest will be disallowed under the provisions above, which relates to the

person who is actually the partner in the firm.

Computation of book profits: book profits are computed as follows –

PGBP of firm computed as per sec 28 to 44D

Add: interest to partners disallowed as per above ( if not already considered)

Add: Remuneration to partners, if debited to P&L A/c

XXX

XXX

XXX

Book profits XXXX

Direct Tax - Final


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.

Direct Tax - Final


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.

Direct Tax - Final


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.

Maximum permissible expenditure a) In case of company, 5% of cost of project or

capital employed, at the option of the company.

b) In case of any other assessee, 5% of cost of project.

Amount of deduction: actual expenditure is 5 equal installments.

Direct Tax - Final


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.

Direct Tax - Final


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.

Direct Tax - Final


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.

Direct Tax - Final


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

Direct Tax - Final


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

Nature of undertaking Commences During Quantum Of dedn Period – AY (see note 2) Ref

From To Comp others

Infrastructure facilities 1-4-95 Open

ended

100% 100% For 10 years out of first 15

years

4(I)

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%

X For initial 5 years

Balance period of 5 yrs

4(II)

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



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)

Direct Tax - Final


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:

Direct Tax - Final


Particulars of

deduction

Undertaking/ enterprise Located in States of --

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.

Direct Tax - Final


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

Direct Tax - Final


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:

Direct Tax - Final


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 LTCG from transfer of units or UTI or a 10% Indexation benefit will

Direct Tax - Final


financial

organization

(offshore fund)

mutual fund specified under section

10(23D), which were purchased in

foreign currency.

not be available in

computing LTCG.

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 employees stock

option scheme (ESOPs)

10% Assessee must be the

employee of such

Indian company.

No indexation benefit

in computation of

LTCG.

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,

magazines or journals.

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.

Non resident

sports

association **

Any amount guaranteed to be paid or

payable to such association or

institution for any game/ sport played in

India

10%

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.

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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.

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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.

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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.

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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.

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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.