Thursday, 2 January 2020

Unit 5: Computation of Taxable Income of Companies

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Unit 5: Computation of Taxable Income of Companies


Company whether Indian or foreign is liable to taxation, under the Income Tax Act, 1961.

Corporation tax is a tax which is levied on the incomes of registered companies and corporation.

However, for the purpose of taxation, companies are broadly classified as domestic company or a foreign company.

Indian companies are taxable in India on their worldwide income, irrespective of its source and origin.

Foreign companies are taxed only on income which arises from operations carried out in India or, in certain cases, on income which is deemed to have arisen in India.


A Company is said to be resident in India during any relevant previous year if it is an Indian Company; or if the control and management of its affairs is situated wholly in India.

In case of Resident Companies, the total income liable to tax includes any income which is received or is deemed to be received in India in the relevant previous year by or on behalf of such company, any income which accrues or arises or is deemed to accrue or arise in India during the relevant previous year and any income which accrues or arises outside India during the relevant previous year.


The main source of income of a company is generally from “business”.

A company would also earn income from under the following heads: income from house property, income from capital gains and income from other sources Taxable income is calculated according to the rules for each class of income and then aggregated to determine total taxable income.


Business losses incurred in a tax year can be set off against any other income earned during that year, except capital gains.

Unabsorbed business losses can be carried forward and set off against business profits of subsequent years for a period of eight years; the unabsorbed depreciation element in the loss can however, be carried forward indefinitely.

However, this carry forward benefit is not available to closely-held (private) companies in which there has been no continuity of business or shareholding pattern.


For companies, income is taxed at a flat rate of 30% for Indian companies.

Foreign companies pay 40%.

An education cess of 3% (on the tax) is payable, yielding effective tax rates of 33.

99% for domestic companies and 41.

2% for foreign companies.

From the tax year 2005-06, electronic fi ling of company returns is mandatory.


In India, in the case of companies, if the tax payable on their taxable income for any assessment year is less than 18.

54% of their ‘book profit’ (if book profit does not exceed ` 10 m), or 19.

9305% of book profit (if book profit exceeds ` 10 m), an amount equal to 18.

54% of the book profit (if book profit does not exceed ` 10 m) or 19.

9305% of book profit (if book profit exceeds ` 10 m) is regarded as their tax liability.


The tax so paid could be carried forward and set off against normal tax (in excess of MAT for that year) of future years up to ten years but from the financial year 2010-11 said carry forward shall not apply to a limited liability partnership which has been converted from a private company or unlisted public company.


It must be noted that in India the treatment of tax on distributed profits of domestic companies is dealt in by Chapter XIID which contains a special provision relating to tax on distributed profits of domestic companies.

This has only three sections, namely section 115 O, which is a charging section and also prescribes the period, the rate of additional tax, which is payable, and time and manner of payment etc. by company on dividend distributed.

Section 115-P provides for interest payable for non-payment or delayed payment of additional tax by domestic companies.

Section 115-Q is about when company is deemed to be in default.


Any amount of income distributed by a venture capital company or venture capital fund to the investors shall be chargeable to tax and such company or fund shall be liable to pay income-tax on such distributed income at the rate of twenty per cent.

A venture capital company or venture capital fund shall be liable to pay income-tax at the rate of twenty per cent on any income which is not distributed to the investors within such time as may be specified, with the approval of the Central Government, by the Securities and Exchange Board of India, by notification in the Official Gazette, in this behalf.

The venture capital company, the venture capital fund or the person responsible for making payment of the income on behalf of such company or fund shall furnish, within such time as may be prescribed, to the person receiving such income and to the prescribed income-tax authority, a statement in the prescribed form and manner, giving details of the nature of the income paid during the financial year and such other relevant details as may be prescribed.


Dividend Distribution Tax (DDT): It is the tax levied by the Indian Government on companies according to the dividend paid to a company’s investors.

Domestic company: Its is a company formed and registered under the Companies Act, 1956 or any other company which, in respect of its income liable to tax, under the Income Tax Act, has made the prescribed arrangement for declaration and payments within India, of the dividends payable out of such income.

Employees Stock Option Plan (ESOP): It is a plan through which a company awards Stock Options to the employees based on their performance.

Foreign company: It is a company whose control and management are situated wholly outside India, and which has not made the prescribed arrangements for declaration and payment of dividends within India.

Fringe Benefit Tax (FBT): It is a tax payable by companies against benefits that are seen by employees but cannot be attributed to them individually.

Limited Liability Partnership (LLP): It is a partnership in which some or all partners depending on the jurisdiction have limited liability.

Venture Capital Undertaking (VCU): It means a domestic unlisted company which is engaged in the business for providing services, production or manufacture of article or things.

Venture Capital: It is a term coined for the capital required by an entrepreneur to venture into something new, promising and unconventional.

Wealth tax: It is a tax based on the market value of assets that are owned.

These assets include, but are not limited to, cash, bank deposits, shares, fixed assets, private cars, assessed value of real property, pension plans, money funds, owner occupied housing and trusts.

Zero tax company: It is a business that shows a book profit and pays dividends to investors but does not pay taxes.

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