Assessment of Company with Computation of Tax Liability

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1. Company Taxation-Meaning and Definition

Corporate sector is the most widely used form of business Organisation particularly for medium and large-scale business. Under corporate sector, a business is carried on by floating a company duly registered with appropriate authority.

Corporate taxation refers to taxation of companies (as defined under Income Tax Act, 1961) and is a major source of revenue to the Government. Under Income Tax Act, 1961, a company is liable to pay tax on its income at a flat rate (just as partnership firm) without any basic exemption limit as applicable to an individual or HUF.

‘Corporate Tax’ or ‘Company Tax

The tax collected from companies (as defined under the Income Tax Act, 1961) is called ‘Company Tax’ or ‘Corporate tax’. It is interesting to note that the proceeds of corporate tax are retained by the Central Government and are not shared with state governments

Assessment of Company
Assessment of Company

(1). Company: As per section 2(17), Company means:

  1. any Indian company, or
  2. any body corporate incorporated by or under the laws of a country outside India, or
  3. any institution, association or body which was assessed as a company for any assessment year under the Income-tax Act, 1922 or was assessed under this Act as a company for any assessment year commencing on or before 1.4.1970, or
  4. Any institution, association or body, whether incorporated or not and whether Indian or Non-Indian, which is declared by a general or special order of CBDT to be a company.

(2). A Company in which the public are substantially interested (Section 2(18) :

Section 2(18) of the Income-tax Act, has defined “a company in which the public are substantially interested”. It includes:

  1. A company owned by Government or Reserve Bank of India.
  2. A company having Govt. participation i.e. A company in which not less than 40% of the shares are held by Government or the RBI or a corporation owned by the RBI.
  3. Companies registered under section 25 of the Indian Companies Act, 1956: Companies registered under section 25 of the Companies Act, 1956 are companies which are promoted with special object such as to promote commerce, art, science, charity or religion or any other useful object and these companies do not have profit motive. However, if at any time these companies declare dividend they would loose the status of a company in which the public are substantially interested.
  4. A company declared by the CBDT: It is a company without share capital and which having regard to its object, nature and composition of its membership or other relevant consideration is declared by the Board to be a company in which public are substantially interested.
  5. Mutual benefit finance company, where principal business of the company is acceptance of deposits from its members and which has been declared by the Central Government to be a Nidhi or a Mutual Benefit Society.
  6. A company having co-operative society participation: It is a company in which at least 50% or more equity shares have been held by one or more co-operative societies.
  7. A public limited company: A company is deemed to be a public limited company if it is not a private company as defined by the Companies Act, 1956 and is fulfilling either of the following two conditions:
    1. Its equity shares were listed on a recognised stock exchange, as on the last day of the relevant previous year; or
    2. Its equity shares carrying at least 50% of the voting power (in the case of an industrial company the limit is 40%) were beneficially held throughout the relevant previous year by Government, a statutory corporation, a company in which the public is substantially interested or a wholly owned subsidiary of such a company.

(3). Widely held company:

It is a company in which the public are substantially interested.

(4). Closely held company:

It is a company in which the public are not substantially interested.

(5). Indian company [Section 2(26)]:

‘Indian Company’ means a company formed and registered under the Companies Act, 1956 and includes—

  1. a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir and the Union Territories;
    1. a corporation established by or under a Central, State or Provincial Act;
    1. any institution, association or body which is declared by the Board to be a company;
  2. in the case of the state of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that State;
  3. in the case of any of the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that Union Territory.

Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body, in all cases is in India.

(6). Domestic company [Section 2(22A)]:

A domestic company means an Indian company or any other company which in respect of its income, liable to tax under the Income-tax Act, has made the prescribed arrangements for the declaration and payment within India, of the dividends (including dividends on preference shares) payable out of such income.

(7). Foreign company [Section 2(23A)]:

Foreign company means a company which is not a domestic company, i.e. a company registered outside India in any other foreign country.

The Foreign Company may be treated as Domestic Company if such company makes prescribed arrangement in India as per Rule 27.

(8). Investment company:

Investment company means a company whose gross total income consists mainly of income which is chargeable under the heads Income from house property, Capital gains and Income from other sources.

2. Residence of a Company [Section 6(3)]

(1) When is a company said to be Resident in India?

A company is said to be Resident in India in any previous year, if—

  1. it is an Indian company; or
  2. its place of effective management, in that year, is in India.

(2) When is a company said to be Non-Resident in India?

A Company will be a Non-Resident in any previous year if:

  1. it is not an Indian company and
  2. its place of effective management, in that year, is not in India.

(3) Special Provisions Relating to Foreign Company said to be Resident in India [Section 115JH]

(A) Certain provisions of the Act to be applied with specified exceptions, modifications and adaptations in case of foreign company said to be resident in India in any previous year [Section 115JH (1)]:

Where a foreign company is said to be resident in India in any previous year and such foreign company has not been resident in India in any of the previous years preceding the said previous year, then, notwithstanding anything contained in this Act and subject to the conditions as may be notified by the Central Government in this behalf, the provisions of this Act relating to—

— the computation of total income,

— treatment of unabsorbed depreciation,

— set off or carry forward and set off of losses,

— collection and recovery, and

— special provisions relating to avoidance of tax

shall apply with such exceptions, modifications and adaptations as may be specified in that notification for the said previous year:

However, where the determination regarding foreign company to be resident in India has been made in the assessment proceedings relevant to any previous year, then, the provisions of this subsection shall also apply in respect of any other previous year, succeeding such previous year, if the foreign company is resident in India in that previous year and the previous year ends on or before the date on which such assessment proceeding is completed.

(B) Consequences if there is a failure to comply with the conditions specified in the notification issued by the Central Government for the purpose of section 115JH (1) [Section 115JH (2)]:

Where, in a previous year, any benefit, exemption or relief has been claimed and granted to the foreign company in accordance with the provisions of section 115JH(1), and, subsequently, there is failure to comply with any of the conditions specified in the notification issued under section 115JH(1), then,—

(i)            such benefit, exemption or relief shall be deemed to have been wrongly allowed;

(ii)           the Assessing Officer may, notwithstanding anything contained in this Act, re-compute the total income of the assessee for the said previous year and make the necessary amendment as if the exceptions, modifications and adaptations referred to in section 115JH(1) did not apply; and

(iii)          the provisions of section 154 shall, so far as may be, apply thereto and the period of four years specified in section 154(7) of that section being reckoned from the end of the previous year in which the failure to comply with the condition referred to in section 115JH(1) takes place.

3. Computation of Total Income in case of a Company

The total income of a company is also computed in the manner in which income of any other assessee is computed. The first and the foremost step in this direction is to ascertain Gross Total Income. Income computed under four heads (salary head is not applicable), is aggregated. While aggregating the income, section 60 and 61 shall be applicable. Further, effect to set off of losses and adjustment for brought forward losses will also be done. From the gross total income so computed, the deductions of Chapter VIA should be allowed.

The following are the special provisions under the Income-tax Act which are applicable to a company in which public are not substantially interested i.e. a closely held company:

(A)          Carry forward and set off of losses [Section 79].

(B)          Deemed dividend under section 2(22)(e).

(C)          Receipt of any sum of money, any immovable property or any movable property without consideration/inadequate consideration [Section 56(2)(x)]

(D)          Shares issued for a consideration more than the fair market value [Section 56(2)(viib)].

(E)           Tax on distributed income of domestic company for buy back of shares by the unlisted company [Section 115QA to section 115QC].

(F)           The source of application money of the applicant to be satisfactorily explained by the applicant otherwise such amount shall be treated as deemed income of closely held company. [Proviso 1 to section 68].

(G)          Liability of directors of private company in liquidation [Section 179].

(A) Carry Forward and Set Off of Loss in case of Certain Companies [Section 79]

The existing provision s of section 79 of the Act, inter-alia provides that where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless on the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by person who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred.

The condition of section 79 relating to 51% voting power to held by the same person is not applicable in case of start-up companies. The only condition in this case is that all the shareholders of such company which held shares carrying voting power on the last day of the year or years in which the loss was incurred being the loss incurred during the period of seven years beginning from the year in which such company is incorporated should continue to hold those shares on the last day of such previous year in which the loss is set off.

(B) Loans/Advances to certain Shareholders/Concerns i.e. Deemed Dividend [Section 2(22)(e)]:

Any payment by a company, (other than a company in which the public are substantially interested), of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan, to the extent of accumulated profits (excluding capitalised profits) to: — 

(i)            an equity shareholder, who is beneficial owner of shares holding not less than 10% of the voting power; or 

(ii)           any concern in which such shareholder (holding not less than 10% voting power) is a member or a partner and in which he has a substantial interest i.e. holding 20% voting power or 20% shares in the concern; or

(iii)          any person, on behalf, or for the individual benefit, of any such shareholder. Such shareholder here means a shareholder who is beneficial owner of shareholding not less than 10% voting power. 

This provision is applicable only to companies in which the public is not substantially interested i.e. closely held companies. Further, such loan and advance given to such person shall be deemed to be dividend only to the extent to which it is shown that the company possesses accumulated profits on the date of loan, etc. (exclusive of capitalised profits).

(C) Receipt of any sum of money, any immovable property or any movable property without consideration/ inadequate consideration [Section 56(2)(x)]

Where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

(a)           any sum of money, without consideration, the aggregate value of which exceeds Rs. 50,000, the whole of the aggregate value of such sum;

(b)          any immovable property,—

  • without consideration, the stamp duty value of which exceeds Rs. 50,000, the stamp duty value of such property;
  • for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs. 50,000, the stamp duty value of such property as exceeds such consideration:

(c)           any property, other than immovable property,—

  • without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
  • for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:

 it shall be taxable under the head “income from other sources

(D) Share issued for a Consideration more than the Fair Market Value [Section 56(2)(viib)]

Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares and if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income-tax under the head “Income from other sources”.

However, the above provision shall not apply where the consideration for issue of shares is received.

(i)            by a venture capital undertaking from a venture capital company or a venture capital fund; or

(ii)           by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

(E) Tax on distributed income of domestic company for buy back of shares of unlisted company

Company liable to pay tax on distributed income to shareholders [Section 115QA(1)]

Notwithstanding any thing contained in any other provisions of this Act (which also include section 46A) the domestic company in addition to tax which it is required to pay on its total income shall be charged to additional income tax @ 20% on the distributed income subject to the following:

(1)          The domestic company buys back the shares which are not listed in a recognised stock exchange. Such shares must be bought from the shareholder.

(2)          For this purpose buy back means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies.

(3)          Distributed income shall mean the consideration paid by the company on buy-back of shares as reduced by the amount which was received by the company for issue of such shares determined in the manner as may be prescribed.

(4)          The rate of tax shall be 20% plus 12% surcharge plus 3% EC & SHEC amounting to 23.07%.

(5)          Such tax on distributed income shall be payable by the domestic company whether or not any tax is payable by such company on its total income computed in accordance with the provisions of the Act.

(6)          The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within fourteen days from the date of payment of any consideration to the shareholder on buy-back of shares referred to in section 115QA(1).

(7)          The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid.

(8)          No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon.

Income received by shareholder on buy back of share by the company to be exempt [Section 10(34A)]

Any income arising to an assessee, being a shareholder, on account of buy back of shares (not being listed on a recognised stock exchange) by the company as referred to in section 115QA shall be exempt.

(F) Source of income of Applicant of Shares not Explained [Proviso 1 to section 68]

Where the assessee is a company, (not being a company in which the public are substantially interested) and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a)           the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b)          such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory.

(G) Liability of Directors of Private Company in liquidation [Section 179]

Where any tax due from a private company in respect of any income of any previous year cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

Meaning of tax due [Explanation to section 179]:

The expression tax due includes penalty, interest or any other sum payable under the Act.

4. Tax on Certain Dividends Received from Foreign Companies [Section 115BBD]

(1). Dividend from Specified Foreign Company to be Taxed at the Special Rate of 15% [Section 115BBD (1)]:

Where the total income of an assessee, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company, the income-tax payable shall be the aggregate of—

(a)           the amount of income-tax calculated on the income by way of such dividends, at the rate of 15%; and

(b)          the amount of income-tax with which the assessee would have been chargeable had its total income been reduced by the aforesaid income by way of dividends.

(2). No Deduction is Allowed from Dividend Received from Specified Foreign Company [Section 115BBD (2)]:

Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing its income by way of dividends received from specified foreign company.

5. Rate of Tax in Case of Company

(i) In the case of a Domestic Company – 30%

Surcharge:

Where the total income of a domestic company exceeds Rs. 1 crore but does not Rs.10 crores, a surcharge of 7% of tax shall be levied.

Where the total income of the domestic company exceeds Rs.10 crores, a surcharge at the rate of 12% of tax shall be levied.

Marginal Relief:

However, the total amount payable as income-tax and surcharge on total income exceeding Rs. 1 crore but not exceeding Rs. 10 crores, shall not exceed the total amount payable as income-tax on a total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.

Further, the total amount payable as income-tax and surcharge on total income exceeding Rs. 10 crores, shall not exceed the total amount payable as income-tax and surcharge on a total income of Rs. 10 crores, by more than the amount of income that exceeds Rs. 10 crores.

Health and Education Cess : For Assessment Year 2020-21:

 ‘Health and Education Cess (H&EC) on Income Tax @ 4% on income tax (inclusive of surcharge, wherever applicable) shall be levied.

(ii) In case of Foreign Company – 40%.

Surcharge:

Where the total income of a company other than a domestic company exceeds Rs. 1 crore but does not Rs. 10 crores, a surcharge of 2% of tax shall be levied.

Where the total income of such company exceeds Rs. 10 crores, a surcharge at the rate of 5% of tax shall be levied.

Marginal relief:

However, the total amount payable as income-tax and surcharge on total income exceeding Rs. 1 crore but not exceeding Rs. 10 crores, shall not exceed the total amount payable as income-lax on a total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.

Further, the total amount payable as income-tax and surcharge on total income exceeding Rs. 10 crores, shall not exceed the total amount payable as income-tax and surcharge on a total income of Rs. 10 crores by more than the amount of income that exceeds Rs. 10 crores.

Health and Education Cess : For Assessment Year 2020-21:

 ‘Health and Education Cess (H&EC) on Income Tax @ 4% on income tax (inclusive of surcharge, wherever applicable) shall be levied.

6. Certain Domestic Companies given option to be Taxed at the Special Rate of 25% [Section 115BA (1)]:

Notwithstanding anything contained in this Act but subject to the provisions of section 111A and section 112, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after 1.4.2017, shall, at the option of such person, be computed @ 25%, if the conditions specified in section 115BA(2) are satisfied.

Specified Conditions for Opting Provisions of Section 115BA(1) [Section 115BA(2)]

(a)           the company has been set-up and registered on or after 1.3.2016;

(b)          the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and

(c)           the total income of the company has been computed, —

(i) without any deduction under the provisions of—

— section 10AA (relating to special economic zone), or

— benefit of accelerated depreciation/additional depreciation under section 32(1)(iia), or

— benefit of investment allowance under section 32AC or under section 32AD, or

— deduction under section 33AB (tea/coffee/rubber development account), or

— section 33ABA (site restoration fund), or

— section 35(1)(ii), (iia), (iii), section 35(2AA), section 35(2AB) (relating to scientific research/social research), or

— section 35AC (expenditure on eligible projects and scheme), or

— section 35AD (deduction on account of capital expenditure on specified business), or

— section 35CCC (agricultural extension project), or

— section 35CCD (skill development project), or

— any provisions of Chapter VI-A under the heading “C.—Deductions in respect of certain incomes” other than the provisions of section 80JJAA;

(ii) without set off of any loss carried forward from any earlier assessment year if such loss is attributable to any of the deductions referred to in sub-clause (i) of clause (c); and

(iii) depreciation under section 32, other than additional depreciation under section 32(1)(iia), is determined in the manner as may be prescribed.

7. Provision of MAT (Minimum Alternate Tax) for payment of Tax by certain Companies [Section 115JB]

(1) Tax payable for any Assessment year Cannot be Less than 18.5% of Book Profit:

Where in the case of a company, the income-tax payable on the total income as computed under the Income-tax Act, in respect of previous year relevant to the assessment year 2012-13 or thereafter is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income (book profit) shall be the amount of the income-tax at the rate of 18.5%.

Thus, in case of a company income tax payable shall be higher of the following two amounts:

  1. Tax on total income computed as per the normal provisions of the Act by charging applicable normal rates and special rates if any income included in the total income of the company is taxable at special rates.
  2. 18.5% of book profit

(2) MAT Rate to be 9% instead of 18.5% in case of a Unit Located in an International Financial Services Centre [Section 115JB (7)]

Notwithstanding anything contained in section 115JB(1), where the assessee referred to therein, is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign exchange, the provisions of section 115JB(1) shall have the effect as if for the words “eighteen and one-half per cent” wherever occurring in that sub-section, the words “nine per cent” had been substituted.

(3) Book Profit – How to Determine (Section 115JB)

(A). Positive Adjustment: Amount to be Added Back if Deducted to Profit and Loss Account:

  1. Income-tax paid or payable and the provisions Income-tax, interest under the Income-tax Act, dividend therefor
  2. Amounts carried to any reserves, by whatever name called
  3. Amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities
  4. Amount by way of provision for losses of subsidiary companies
  5. Amount or amounts of dividends paid or proposed
  6. Amount of expenditure relatable to certain incomes (if such income is not subject to minimum alternate tax)
  7. (From the assessment year 2007-08), the amount of Depreciation
  8. Amount of deferred tax and the provisions therefor and the amount or amounts set aside as provision for diminution in the value of any asset.
    1. Amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset
    2. Amount of income/loss in the case of units referred to in section 47(xvii)

(B). Negative Adjustments –Amount to be Deducted from Net Profit:

  1. Amount withdrawn from reserves or provisions, if any such amount is credited to the profit and loss account.
  2. Income exempt from tax :
  3. The following income, if credited to profit and loss account, shall be deducted—
    • income exempt under section 10(23G) up to the assessment year 2004-05;
    • income exempt under other clauses of section 10;
    • income exempt under sections 10A and 10B up to the assessment year 2007-08;
    • income exempt under sections 11 and 12;
    • share of profit from an AOP on which no income-tax is payable in accordance with the provisions of section 86 (applicable from the assessment year 2016-17);
    • (in the case of a foreign company) interest, royalty or technical fees chargeable to tax under sections 115A to 115BBE, or capital gain arising on transactions in securities, if income-tax payable in respect of these incomes under normal provisions (other than provisions governing MAT) is less than the rate of MAT (applicable from the assessment year 2016-17); and
    • royalty in respect of patent chargeable to tax under section 115BBF.
  4. Depreciation (other than because of revaluation of assets) debited to profit and loss account (applicable from the assessment year 2007-08 onwards)
  5. Amount withdrawn from revaluation reserve credited to profit and loss account to the extent it does not exceed the amount of depreciation on account of revaluation of assets [applicable from the assessment year 2007-08].
  6. Aggregate amount of unabsorbed depreciation and loss brought forward in case of a company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7/9/10 of the Insolvency and Bankruptcy Code (applicable from the assessment year 2018-19)
  7. Amount of loss (before depreciation) brought forward or unabsorbed depreciation, whichever is less, as per books of account [not being a company which is covered by Item 12A (supra)]
  8. Amount of profit eligible for deduction under sections 80HHC, 80HHE and 80HHF
  9. Profit of sick industrial unit
  10. The amount of deferred tax, if any such amount is credited to the profit and loss account.
  11. Amount of income/loss in the case of units referred to in section 47(xvii)

(4) Provisions of Section-115JB not to apply in certain cases.

The provisions of section 115JB shall not apply in case of the following:

  1. Any income accruing or arising to a company from life insurance business referred to in section 115B [Section 115JB(5A)].
  2. A foreign company, if—
    1. the assessee is a resident of a country or a specified territory with which India has an agreement referred to in section 90(1) or the Central Government has adopted any agreement under section 90A(1) and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or
    2. the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.

8. Tax Credit in respect of Tax paid on Deemed Income under MAT Provisions (Section 115JAA)

It provides that where tax is paid in any assessment year in relation to the deemed income under MAT Provisions against Tax Liability under section 115JB, a Tax Credit shall be allowed in subsequent years.

Section 115JAA provides that where any amount of tax is paid under section 115JB(1) by a company for any assessment year beginning on or after 1.4.2006, credit in respect of the taxes so paid for such assessment year shall be allowed on the difference of the tax paid under section 115JB and the amount of tax payable by the company on its total income computed in accordance with the other provisions of the Act. In other words, MAT credit shall be computed as under:

MAT credit available = Tax paid under section 115JB – Tax payable on the total income under normal provisions of the Act.

However, no interest shall be allowed on the amount of tax credit available under section 115JAA. [First proviso to section 115JAA]

MAT credit will be allowed only in that previous year in which tax payable on the total income as per normal provisions of the income tax Act is more than tax payable under section 115JB and it shall be allowed to the extent of the following:

Tax Payable on total income under the normal provisions of the Act – Tax Payable under section 115JB = MAT credit to be allowed.

9. Special Provisions relating to Tax on Distributed Profits of Domestic Companies

(1) Tax on distributed profits of domestic companies [Section 115-O(1)]:

The Domestic Company shall, in addition to the income-tax chargeable in respect of its total income, be liable to pay additional income-tax on any amount declared, distributed or paid by such company by way of dividend (whether interim or otherwise), whether out of current or accumulated profits. Such additional income-tax shall be payable @ 15% plus surcharge @ 12% plus education cess @ 2% plus SHEC @ 1% of the amount so declared, distributed or paid.

(2) Dividend received from subsidiary company to be reduced from the above dividend to be distributed [Section 115-O(1A)]

For the purpose of computation of tax on distributed profits, the amount of dividend distributed by the domestic company during the financial year shall be reduced by the following:

(i) The amount of dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and,—

  • where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or
  • where such subsidiary is a foreign company, the tax is payable by the domestic company under section 115BBD on such dividend: However, the same amount of dividend shall not be taken into account for reduction more than once;

(ii) the amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in section 10(44).

(3)  Dividend and Income Distribution Tax to be grossed up [Section 115-O(1B)]

For the purposes of determining the tax on distributed profits payable in accordance with the section 115-O, any amount by way of dividends referred to in section 115-O(1), as reduced by the amount referred to in section 115-O(1A) [referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in section 115-O(1), be equal to the net distributed profits.

(4) Time limit for Deposit of Additional Income-Tax [Section 115-O(3)]:

Such additional tax will have to be paid by the principal officer of the domestic company and the company within 14 days from the date of:

(a) Declaration of any dividend; or

(b) Distribution of any dividend; or

(c) Payment of any dividend, whichever is earliest.

(5) Tax on Distributed Profits Not Allowed as Deduction [Section 115O(4)]:

The company or the shareholder shall not be allowed any deduction in respect of the amount which has been charged to tax or the tax thereon under any provisions of the Income-tax Act.

(6) Interest payable for Non-Payment of Tax by the Domestic Companies [Section 115P]:

Where the principal officer of a domestic company and the company fail to pay the whole or any part of the tax on distributed profits referred to in section 115-O(1) within the time, he or it shall be liable to pay simple interest @ 1% for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.

(7) When companies deemed to be in default [Section 115Q]:

If the principal officer of a domestic company and the company does not pay tax on distributed profits in accordance with the provisions of section 115-O, then he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of the Income-tax Act for the collection and recovery of income-tax shall apply.

(8) Penalty under section 271C:

If any person fails to pay the whole or any part of the tax as required under section 115-O(2), then such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to pay as aforesaid. The penalty is, however, not applicable, if the assessee proves that there was reasonable cause for failure.

(9)  Prosecution under section 276B:

If a person fails to pay to the credit of the Central Government the tax payable by him under section 115-O(2), he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.

However, no person will be punishable if he proves that there was a reasonable cause for the default/failure.

(10) Exemption of dividend in the hands of shareholders [Section 10(34)]:

In view of the income-tax now payable by the domestic company, any dividends declared, distributed or paid by such company, shall be exempt in the hands of the shareholders under section 10(34), unless the same is taxable under section 115BBDA.

10.  Special Provisions relating to Tax on Distributed Income of Domestic Company for Buy Back of Shares [Section 115QA to section 115QC]

(1) Tax on distributed income to shareholders [Section 115QA]

(A) Additional income tax on buy back of shares [Section 115QA (1)]

(i) In addition to the income tax payable by the company on its total income as per the provisions of the Act, the domestic company shall be liable to pay additional income tax @ 20% on any amount of distributed income paid by the company on buy back of shares not being shares listed on a recognised stock exchange.

(ii) Rate of Additional Income Tax : 20% + 12% SC + 4% Cess

(B) Additional income tax payable even if the total income of domestic company is exempt [Section 115QA(2)]

Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on the distributed income under section 115QA(1) shall be payable by such company.

(C) Time limit for deposit of additional income tax [Section 115QA(3)]

The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within 14 days from the date of payment of any consideration to the shareholder on buy-back of shares referred to in section 115QA(1).

(D) Additional income tax paid to be treated as final payment [Section 115QA(4)]

The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefore shall be claimed by the company or by any other person in respect of the amount of tax so paid.

(E) Income charged to tax not allowed as deduction to the company or the shareholder [Section 115QA(5)]

No deduction under any other provision of this Act shall be allowed to—

(a) the company; or

(b) a shareholder

in respect of the income which has been charged to tax under section 115QA(1) or the tax thereon.

(2) Interest payable for Delayed Payment of Tax [Section 115QB]

Where the principal officer of the domestic company and the company fails to pay the whole or any part of the tax on the distributed income referred to in section 115QA(1), within the time allowed under section 115QA(3) of that section, he or it shall be liable to pay simple interest @ 1% for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.

(3) When Company is Deemed to be Assessee in Default [Section 115QC]

If any principal officer of a domestic company and the company does not pay tax on distributed income in accordance with the provisions of section 115QA, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery of income-tax shall apply.

11. Special Provisions relating to Tax on Distributed Income to Unit Holders [Sections 115R to 115T]

(1) Tax on Income Distributed to Unit Holders by the Specified Company or a Mutual Fund [Section 115R (2)]:

Any amount of income distributed by:

(i) a specified company, or

(ii) a Mutual Fund to its unit holders

shall be chargeable to tax and such specified company or Mutual Fund shall be liable to pay additional income-tax on such distributed income at the following rate:

1.(a) Where the income is distributed to any person being an individual or a HUF by a money market mutual fund or a liquid fund25% + SC + H&EC
 (b) Where the income is distributed to any other person by a money market mutual fund or liquid fund.30% + SC + H&EC
2.Where the income is distributed by a fund other than a money market mutual fund or a liquid fund and such income is distributed to— 
 (a) Individual or HUF25% + SC + H&EC
 (b) Any person other than individual or HUF30% + SC + H&EC

Further in case of an Infrastructure debt fund (IDF) set up as a Non-Banking Finance Company (NBFC) the interest payment made by the fund to a non-resident (not being a company) or a foreign company is taxable at a concessional rate of 5% under section 115A.

However, in case of distribution of income by an IDF set up as a Mutual Fund, the distribution tax is levied at the rates described above in the case of a Mutual Fund.

In order to bring parity in taxation of income from investment made by a non-resident (not being a company) or a foreign company in an IDF whether set up as a IDF-NBFC or IDF-MF, the Act has amended section 115R to provide that tax @ 5% on income distributed shall be payable in respect of income distributed by a Mutual Fund under an IDF scheme to a non-resident Investor.

(2) Provisions of section 115R shall not apply in respect of any Income Distributed [Second proviso to section 115R(2)]

No tax shall be payable in respect of any income distributed—

(a) by the Administrator of the specified undertaking, to the unit holders; or

(b) to a unit holder of an equity oriented fund (whether open ended or closes ended) in respect of any distribution made from such fund.

(3) Time Limit for Deposit of Additional Income-Tax [Section 115R(3)]:

The person responsible for making payment of the income distributed by the specified company or a Mutual Fund and the specified company or the Mutual Fund, as the case may be, shall be liable to pay tax to the credit of the Central Government within fourteen days from the date of distribution or payment of such income, whichever is earlier.

(4) Income charged to Tax not Allowed as Deduction [Section 115R(4)]:

No deduction under any other provision of this Act shall be allowed to the specified company or to a Mutual Fund in respect of the income which has been charged to tax under sub-section (1) or sub-section (2).

(5)  Interest payable for Non-payment of Tax [Section 115S]:

Where the person responsible for making payment of the income distributed by the specified company or a Mutual Fund and the specified company or the Mutual Fund, as the case may be, fails to pay the whole or any part of the tax referred to above within 14 days mentioned above he or it shall be liable to pay simple interest at the rate of 1% every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.

(6)  When Specified Company or Mutual Fund shall be Deemed to be Assessee in Default [Section 115T]:

If any person responsible for making payment of the income distributed by the specified company or a Mutual Fund and the specified company or the Mutual Fund, as the case may be, does not pay such additional income-tax, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery of income-tax shall apply.

(7) Exemption of income in the hands of Unit Holder [Section 10(35)]:

The following income shall be exempt in the hands of unit-holders.

  • income received in respect of the units of a Mutual Fund specified under section 10(23D); or
  • income received in respect of units from the Administrator of the specified undertaking; or
  • income received in respect of units from the specified company.

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