CS Professional Programme Tax Notes

CS Professional Programme Tax Notes
Preparedby:CARGiridharanFCACollectedby:SanthoshThomasThaikkadan
Courtesy:CARGiridharanFCA 1
Tax Management
Tax Management is essential, Tax planning is desirable and Tax evasion is
objectionable. Elaborate.
Tax Planning Tax Management Tax Evasion
Tax planning is to avail
maximum benefit of
deductions, exemptions,
rebates etc and thereby
minimizing tax liability.
Tax management refers to
the steps taken to ensure
compliance with the
provisions of the tax laws.
Tax evasion refers to ways
and means adopted by a
tax payer to evade tax by
falsifying accounts or
concealing income,
inflating expenses etc.
Its fully within the
framework of law and it
makes use of the beneficial
provisions in law.
Its undertaken to fulfill the
requirements contained in
the provisions of the law.
Its clearly violations of law
and unethical in nature. It
includes an element of
deceit.
The judiciaries in India
accept this concept.
It is obligatory to exercise
tax management.
This is clearly prohibited,
as it is fully illegal.
It is a rewarding concept
for professionals/ experts
as it allows making use of
beneficial provisions and
thus minimizing tax
liability.
It aims at avoiding costs
arising as consequences of
non compliance of law.
Thus it helps the tax
planning to be successful.
When proved, tax evasion
invites stringent penalties
and prosecution against
the person who is found
engaged in it.
It is futuristic in approach
i.e. it aims at minimizing
the tax liability of the
future years.
Tax mgmt relates to the
past (assessment
proceedings, appeal,
revision, rectification etc),
present( filing of return)
and future (corrective
There is nothing like past,
present or future approach
in case of tax avoidance.
action)
Its benefits are substantial
particularly in the long run.
It aims at avoiding penalty,
interest, prosecution etc.
Tax evasion attracts
penalty and prosecution.

Tax Avoidance Is an arrangement if affairs so as to avoid payment of tax by the
use of devices which are sham or make-believe. It defeats the basic intent of the
legislature behind the statute.
Objectives of Tax planning
Reduction in tax liability
Minimizing litigation
Productive investment
Healthy growth of economy
Economic Stability
Definition
Company *sec 2(17) : Company means Indian company; or any body
corporate incorporated by or under the laws of a country outside India; or any
institution, association or body, declared by general or special order of the
Board to be a company for specified assessment years.
Indian company *sec2(26): Indian company means a company formed and
registered under the companies act, 1956 and includes statutory corporation;
and any institution, association or body declared by the board to be a company,
if the registered/ principal office of the company, corporation, institution,
association or body is in India.
Company in which public are substantially interested [section 2(18)]: It
means a
I. A company owned by govt. / RBI or in which 40% or more of the shares are
held by the Government or RBI or a corporation owned by the RBI; or
II. Company which is registered under section 25 of the Companies Act, 1956;
or
III. Company having no share capital, if its declared for specified years by order
of the Board to be a company in which the public are substantially interested,
or
IV. Mutual benefit finance company; or
V. Company, wherein 50% or more of the voting power was throughout the
previous year held by one or more co-operative societies; or
VI. A public listed company as on the last day of the previous year; or
VII. A public company, if its 50% or more of voting power was throughout the
previous year held by 1) Government 2) statutory corporation, or 3) any
company in which public are substantially interested; or 4) any 100%
subsidiary of a company in which public are substantially interested.
Closely held company: A Company in which public is not substantially
interested is called closely held company.
The incidence
The Incidence of income tax of a company depends upon its residential
status. The residential status may be resident or non resident depending upon
which the tax incidence is determined.
As per sec 6(3) an Indian company is always resident in India. A Foreign
company will be resident in India if during the previous year the control and
management of its affairs is wholly situated in India.
According to Sec5 (1), the incidence of income tax has been given below
Tax Incidence
Particulars Resident Non - Resident
Income received in India by him or on his
behalf( whether accrued in India or outside
India)
Yes yes
Income deemed to be received in India by
him or on his behalf (whether accrued in
India or outside India)
Yes Yes
Income accruing or arising in India(
whether received in India or outside India)
Yes Yes
Income deemed to accrue or arise in India
(whether received in India or outside India)
Yes Yes
Income which accrues or arises outside
India(other than that covered in cases(1) to
(4) above
Yes No
MINIMUM ALTERNATE TAX (MAT)
Relevance IF the income- tax payable on total income of a company is less than
18% of its book profits, then such book profits shall be deemed to be the total
income and income tax payable by such a company shall be equal to 18% of the
book profits.
Mode of computation of book profits [explanation to section 115 JB]
Net Profit as per Profit and Loss A/c
Add: ( If any of the following is debited to P&L a/c)
Amount of Income tax paid/ payable or provision thereof;
Amount carried to any reserves;
Amount of provisions made for meeting unascertained liabilities;
Amount by way of provision for losses of subsidiary companies;
Amount of paid or proposed dividends;
Expenditure relatable to any income exempt u/s 10 or 11 or 12, other than income
exempt u/s 10(38);
The amount of depreciation
Less:
Amount withdrawn from any reserve/provision, if such amount is credited to P&L
A/c.
Income exempt u/s 10 or 11 or 12, other than income exempt u/s 10(38), if any
such amount is credited to P&L A/c;
Amount of depreciated debited to the P&L a/c ( excl the depreciation on revaluation
reserves); or
Amount withdrawn from revaluation reserve and credited to the P&L a/c, to the
extent it doesnt exceed the amount of depreciation on account of revaluation of
assets; or
Amount of loss brought forward or unabsorbed depreciation, whichever is LESS as
per books of account.
Amount of profits of sick industrial company during the period of its sickness;
{ Period of sickness starts from the PY in which such company becomes sick
industrial company u/s 17(1) of the SICA and ends with the PY during which the
entire net worth of such company becomes equal to or exceeds the accumulated
losses.
Book Profits of the Company u/s 115 J-B
Levy of surcharge and educational cess:
Surcharge: The amount of income tax under this section shall be increased by
surcharge @ 10% of the amount of income tax, if the total income chargeable
under this section exceeds Rs.1crore, in case of foreign companies, the
surcharge will be imposed @ 2.5%.
Marginal relief: Incase of companies having total income chargeable under this
section exceeding Rs.1 crore, marginal relief will be provided so as to ensure
that income tax, including, surcharge, on the total income doesnt exceed
income tax on total income of Rs.1 crore plus the amount by which the total
income exceed Rs.1crore. In other words,
MR = Income tax, including surcharge on total income [income tax on total
income of Rs.1 crore + (total income Rs. 1 crore)], if such sum is positive.
Cesses: The amount of income tax including surcharge, as aforesaid, shall be
increased by Education Cess (EC) @ @% of income tax plus surcharge and also
by secondary and Higher secondary Education cess (SHEC) @ 1% of income tax
plus surcharge.
Other Provisions:
Section not to apply to SEZ units: This section shall not apply to the
income accrued or arising from any business carried on or services
rendered by an entrepreneur/ developer/unit in SEZ.
Preparation of accounts: The P&L a/c of the company should be
prepared in accordance with the provisions of parts II and III of schedule
VI to the companies Act, 1956.
Furnishing of report: Along with its return of income, every company is
required to furnish a report in prescribed form from a CA, certifying the
correctness of book profits.
Carry forward of losses and allowances: The provisions of this section do not
affectthedeterminationofamountsoflossesandallowancestobeC/F.
Corporate Restructuring - Amalgamation, Mergers & Demergers,
Conversion & Slump sale
BENEFITS
Shareholders of the amalgamating company
As per section 47(vII), transfer of shares held by a shareholder in amalgamating
company is not regarded as transfer, if such transfer is in consideration of
allotment to him of shares in the amalgamated company.
When transfer is exempt, then for computing CG on shares:
Period of holding: period, for which shares in amalgamating company were held
by assessee, will be included in computing the period of holding of shares in
amalgamated company.
Cost of acquisition of shares in amalgamated company = cost of acquisition of
shares in the amalgamating company.
However, if the above 2 conditions arent 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 doesnt attract CG tax in
the country in which the amalgamating company is incorporated.
3) Transfer of capital asset by an amalgamating banking company to the
amalgamated banking company institution, under a scheme of amalgamation
sanctioned by the central government.
Shareholders of the demerged company
When transfer is exempt,
a) Period of holding of shares in demerged company shall be included in
computing the period of holding of shares in resulting company.
b) Cost of acquisition : 1) shares in resulting company =[ cost of acquisition of
shares in demerged company X net book value of assets transferred to resulting
co. in demerger / net worth of the co. before demerger]
2) Shares in resulting co. = total cost of such shares LESS cost of shares in
resulting company as computed u/s 49(2C) above.
Demerged company the following shall be exempt from CG tax
a) Transfer of capital assets by a demerged company to the resulting company.
b) Transfer of shares held in an Indian company by demerged company foreign
company to resulting foreign company if a) shareholders holding 75% or more of
value of shares of demerged foreign company continue to remain shareholders
of resulting foreign company and b) such transfer doesnt attract CG tax in the
country in which demerged foreign company is incorporated.
Tax implications or benefits of Amalgamation or demerger
a) For expenses falling u/s 35 BB (telecommunication license), or 35D
(preliminary expenses), or 35 DDA (voluntary retirement) or 35 E/42
(prospecting for mineral oils), the expenditure remaining unallowed can be
claimed as deduction by the amalgamating company.
b) Expense on amalgamation/demerger is allowable in 5 equal annual
installments us 35DD.
c) Deemed profits u/s 41(1) are taxed in the hands of the amalgamated or
resulting company.
d) Actual cost of asset transferred or WDV of block transferred in the hands of
the transferor, is taken to be the actual cost or WDV in the hands of the
transferee company.
e) Transfer of capital assets in course of amalgamation/ demerger is exempt
from capital gains.
f) Transfer of shares held in amalgamating company/demerged company by the
shareholder for issue of shares in amalgamated / resulting company is exempt
from capital gains.
g) Unabsorbed business losses and unabsorbed depreciation is case of
transferor-company are allowed to be c/f by the transferee company u/s 72A.
h) The deductions allowable u/s 80I-A to 80-IC and 10A, 10AA or 10B continue
to remain allowed to the amalgamated/resulting company.
Reverse merger
It means that the profit making company merges into the sick company thereby
becoming eligible to carry forward of losses etc. without the aid of section 72S of
the act. The profit making or healthy company becomes extinct loosing its name
and the surviving sick company retains its name. The reverse merger is a
device, which by passes the requirements under section 72A of the act. Soon
after the merger or after a year or so, the name of the company is changed to
correspond with that of the profit making amalgamating company.
Reverse merger has 2 advantages:
a) Losses, which otherwise could not have been c/f and set off, are c/f and set
off, and
b) Goodwill consisting in the name of the profit making amalgamating company
is also retained.
Tax planning with reference to conversion of proprietorship / partnership firm into company
Basis Firm company Proprietorship company
Certain transfer exempt : If all the assets and liabilities of the
firm relating to their business
immediately before succession
become the assets and liabilities of
the company.
All its partners become shareholders
of the company in the same
proportion in which their capital
a/cts stood in the books of the firm
on the date of succession.
The partner rec. consideration only
by way of allotment of shares in the
company.
The partners shareholding in the
company in aggregate is 50% or more
of its total voting power and continue
to be as such for 5 yrs from the date
of succession.
All the assets and liabilities of sole
proprietary business immediately
before the succession become the
assets and liabilities of the
company
Sole Proprietorships shareholding
in the company is 50% or more of
the total voting power and
continues to be as such for 5 years
from the date of succession; and
Sole proprietor receives the
consideration only in form of
allotment of shares in the
company.
Depreciation The depreciation in the year of
succession shall be proportionately
shared by the successor company
and the succeeded firm.
The depreciation in the year of
succession shall be proportionately
shared by the successor company
and the prop. Firm.
Case law In CIT v. Veerbhadra Rao,
k.koteshwara and co., it has been
held that successor to a business is
entitled to deduction in respect of
debts incurred by the predecessor, as
the deduction is allowed to business
and not to assessee personally.
However, identity of business after
succession should remain the same
and it should not be dissolved.
In CIT v. Veerbhadra Rao,
k.koteshwara and co., it has been
held that successor to a business is
entitled to deduction in respect of
debts incurred by the predecessor,
as the deduction is allowed to
business and not to assessee
personally. However, identity of
business after succession should
remain the same and it should not
be dissolved.
C/F and set off of loses
and unabsorbed
depreciation in case of
reorganization of
business.
Such loss can be c/f for further 8
years in the hands of the successor
company
Such loss can be c/f for further 8
years in the hands of the successor
company

SLUMP SALE
Slump sale [sec 2(42C)] : means transfer of one or more undertakings as a
result of the sale for a lump sum consideration w/o values being assigned to
the individual assets and liabilities in such sales.
Charge and nature of CG:
P&G arising from slump sale shall be taxable as CG in PY in which slump sale
is effected. If the capital asset, being one or more undertakings, was owned and
held by the assessee for not more than 36 months, the CG will be STCG. In
any other case, it shall result into LTCG.
Method of computation of CG:
Full value of consideration
Less: expenses wholly and exclusively in connection with such transfer
Less: cost of acquisition and cost of improvement being net worth** of the
undertaking (no indexation benefit even in case of long term capital asset)
XXX
XXX

XXX
ST/LT CG XXXX
** net worth shall be computed as follows
Aggregate value of total assets of the undertaking or division ( ignoring any
change in value of assets on a/c of revaluation) i.e.
In case of depreciable assets, the WDV of the block as per sec 43(6)
In case of other assets, the BV
Less: value of liabilities of such undertaking or division as appearing in its
books

XXX

XXX

XXX
Net worth of the undertaking or division XXXX

Areas of Tax planning under Financial Management and role of Tax
Planner
The main objective of financial management is maximization of an
organizations wealth. Tax planning may be exercised n respect of following
areas of decision making
1. Designing the capital structure (financing mix decision);
2. Capital budgeting (investment decisions and growth policy);
3. Distribution of profits (dividend policy decisions);
4. Managing working capital (liquidity decisions and funds management by
their proper mobilization from short term and long term sources and their
proper utilization).
Role of tax planner
The interest on debts is tax deductible expenditure while dividend is not.
Further, dividend distributed is liable to Dividend Distribution Tax. Hence, a
tax planner may prefer debts to preference shares/ Equity shares in the capital
structure.
Lease rent on machinery, depreciation and interests relating to the machinery
purchased outright or on hire purchase are tax deductible. Hence, a tax
planner may opt for leasing the machinery rather than buying it.
Tax on distributed profits is charged only in case of distribution of profits as
dividends and not on retained profits. Therefore, an appropriate balance
between current dividend and long term capital appreciation has to be
achieved.
A tax planner should also consider factors such as risks, leverage, income,
controls, opportunities and other relevant factors.
Tax planning considerations for deductibility of interest under Income Tax Act,
1961
section 36(1)(III) of the income tax act, 1961 provides that the deduction shall
be allowed in respect of the amount if the interest paid for the borrowed capital
taken for the purposes of the business or profession. However, any interest paid
on capital borrowed for acquisition of a new asset for extension of existing
business or profession for nay period beginning from the date of borrowing till
the date on which such asset is first put to use, shall not be allowed.
Interest: As per section 2(28A) of the income tax Act, 1961 interest means
interest payable in any manner in respect of any money borrowed or debt
incurred (including a deposit, claim or other similar right or obligation) and
includes any service fee or others charge in respect of the money borrowed or
debt incurred or in respect of any credit facility which has not been utilized.
The following references are important in respect of deductibility of interest:

1. The interest on capital borrowed bonafide for business purposes of the
company is allowed as a deduction and questions like whether the interest paid
is too high, or whether there was any need to borrow because the assessee had
ample funds or the company had charged lower rates of interest on money it
has advanced earlier, are generally irrelevant from tax point of view as the tax
payer is the best person to take decisions on these matters. In this respect, the
word capital means money and not any other asset. Its 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, hasnt been deducted at source, or after deduction, hasnt been
paid during the PY, or in the subsequent year before the expiry of the time
prescribed u/s 200(1), shall not be allowed as deduction. However such amount
shall be allowed as a deduction ion computing the income of the subsequent PY
in which it has been so deducted and paid.
3. For tax purposes, borrowing should not be illusory. The interest deduction is
also subject to provisions of section 40 A, which disallow excessive expenditure
in case of specified persons or if expenditure in excess of Rs.20, 000 is paid in
cash.
4. The deduction is also subject to the provisions of section 43 B, which allow
interest on term- loans borrowed from financial institutions and scheduled
banks, only on actual payment.
5. Interest on capital borrowed but diverted to sister concern free of cost will
not, generally, be allowed as deduction. However, if the diversion of funds is on
account of commercial expediency, the interest on such capital borrowed will be
admissible as deduction.
Concept of Dividends, Deemed dividends.
When does the dividend income accrue or arise?
1. Dividend: dividend means amount paid to or received by a shareholder in
proportion to his shareholding in a company out of total sum so distributed.
2. Deemed Dividends [section 2(22)] : The following distributions by a company
to its shareholders are included in dividend
a) Any distribution of accumulated profits, whether capitalized or not, if such
distribution entails the release of all or any part of the assets of the company.
Issue of bonus shares to equity shareholders isnt 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
Pshareholders; to the extent to which the company possesses accumulated
profits, whether capitalized or not.
c) Any distribution made on liquidation, to the extent to which the distribution
is attributable to the accumulated profits of the company immediately before its
liquidation, whether capitalized or not.
Dividend excludes: Distribution in respect of any share issued for full cash
consideration, where the holder thereof is not entitled to participate in the
surplus assets in the event of liquidation.
d) Any distribution on the reduction of capital, to the extent to which the
company possesses accumulated profits, whether capitalized or not.
Dividend excludes: Distribution in respect of any share issued for full cash
consideration, where the holder thereof is not entitled to participate in the
surplus assets in the event of liquidation.
e) Any payment made by way of advance or loan made by a closely held
company i.e. a company in which the public are not substantially interested, to
the following , is treated as dividend
(A) To a shareholder: such shareholder must be beneficial owner of equity
shares holding 10% or more of the voting power. Any payment by any such
company on behalf, or for the individual benefit, of any such shareholder is also
treated as dividend.
(B) To any concern (HUF/AOP/BOI/company): The shareholder referred to in
(A) above must be a member or a partner in such concern and he must be
having substantial interest in it.(A person is deemed to have a substantial
interest in a concern, other than a company, if he is, at any time during the PY,
beneficially entitled to 20% or more of the income of such concern).
Such payment is considered as dividend to the extent the company possesses
accumulated profits.
Dividend doesnt 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 doesnt 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 theres 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 PYs immediately preceding the PY in which such acquisition
took place.
Distribution on reduction of share capital is deemed as dividend u/s 2(22) (d) to
the extent of accumulated profits and is liable for dividend tax u/s 115O.
Bond-Washing transactions and provisions to prevent them
Bond washing transaction is a transaction whereby owner of securities
transfers his securities to another person (who is under lower tax slab) such
that income of such security becomes due to such other person and the owner
avoids tax theron.
The following provisions tend to curb such avoidance of tax
1) Bond washing transactions [sec94 (1)]: Where the owner of any securities
sells or transfers them and buys back or reacquires the same (or similar
securities) with the result that any interest becoming payable in respect of the
securities is receivable by a person other than the owner, then, such interest
shall be deemed to be the income of the owner and not of any other person.
2) Avoidance of tax through sale of security on cum- interest basis [sec 94(2)]:
where any person having any beneficial interest in any securities enters into a
transaction whereby income received by him from such securities within such
year is a) NIL; or (b) less than the sum of income received accrued from day to
day, then the income from such securities for such year shall be deemed to be
income of such person.
3) Above provisions not to apply [sec 94(3)]: the provisions of (1) and (2) above
shall not apply if the said person satisfies the Assessing Officer that a) there
has been no avoidance of tax, or (b) the avoidance of tax was exceptional and
not systematic and there was no avoidance of income tax in his case in any of
the three preceding years by any transaction referred to in (1) or (2) above.
4) Profit or loss from a bond washing transaction not to be considered in case of
such another person [sec 94(4)]: in a case of falling under (1) above, if the other
person carries on a business of dealing in securities, then such transaction
shall be ignored while computing the profits arising from or loss sustained by
him in the business.
5) Loss of sale of securities of units to be ignored in case of dividend stripping
[sec 94(7)]: In case a person
a) Buys/ acquires any securities or unit within a period of 3 months prior to
record date,
b) Sells/transfers the same within a period of 3 months
c) The dividend/ income on such securities or unit received or receivable by him
is exempt, then, the loss if any, arising to him on account of such purchase and
sale, to the extent of dividend or income from securities/unit, shall be ignored
while computing his income chargeable to tax.
6) Loss arising in case of a bonus stripping of units to be ignored [sec 94 (8)]: In
case a person
a) Buys/acquires any units within a period of 3 months prior to record date;
b) He is allotted bonus units on the basis of holding such units on such date;
and
c)Hesellsortransfersoranyoftheoriginalunitsreferredtoina)withinaperiodof9
months after such date, while continuing to hold all or any of the bonus units referred
toin(b).
Then the loss, if any, arising to him on account of purchase and sale of orginal
units shall be ignored in computing his total income and the loss so ignored
shall be deemed to be the cost of purchase or acquisition of such bonus shares
units referred to in (b) as are held by him on the date of such sale or transfer.
Record date means the date fixed by a company for entitlement of dividend,
or by a mutual fund/ administration /specified company for entitlement of
dividend or bonus shares.
Tax treatment of expenditure on issue of bonus shares:
Companys point of view:
1) Dividend and bonus share arent 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 isnt of capital nature, as the
issue of bonus shares doesnt result in inflow of fresh funds or increase in the
capital employed the capital employed remains the same. Issuance of bonus
shares also doesnt 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.
Shareholders 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 isnt immediately taxable. Further, hell be entitled to
additional dividend on bonus shares. However, on sale, the tax liability would
be on account of capital gains and if they are held for more than 12 months
LTCG will arise which are taxable at a flat rate of 10%( w/o indexation) or 20%(
with indexation benefit) whichever is less.
Setting up and commencement of business
Setting up of business is different from commencement of business. A
business is set up as soon as it is ready to commence production or any
other activity of business is started and its not necessary that the actual
production should have so commenced.
In case of newly set up business or profession, PY commences on date of
its setting up.
Expenditure incurred after setting up of business but before its
commencement is deductible.
Case law : Tuticorin alkali chemicals & fertilizers ltd. V.CIT
Measures of tax planning
a) After planning its installation programme, a company should see that its
business is set up at the earliest. The commencement of the business may be
postponed till a later date. The decisions in this regard must be taken after
keeping into consideration the general tax aspects of the company viz. tax
holidays and deductions, c/f of losses and unabsorbed depreciation etc.;
b) The expenditure incurred prior to setting up may be eligible for deduction
under section 35D as preliminary expenses. The assessee company should see
to it that such preliminary expenses fulfill the requirements of section 35D and
deduction thereof is claimed under that section.
c) The date of commencement of business is crucial in case of deductions under
section 10A, 10 AA, 10B, 80I-A to 80- IE etc. Because these deductions are
available only from the date of commencement of business. Therefore, the date
of commencement of business should be fixed after keeping the availability of
deductions into mind.
Tax planning considerations while choosing and adopting a particular
method of accounting
The choice of adopting either cash or mercantile system of accounting is
available only in case of income under head 1) profits and gains of business
and profession & 2) income from other sources.
The method of accounting adopted by the assessee decides the accrual of
income and also its taxability. If mercantile system is followed, the right to
receive will amount to accrual of income, thereby leading to its taxation.
By adopting cash system, the tax becomes payable only when income is
actually received, thereby providing adequate resources for payment of tax.
Tax planning measures
a) An assessee can adopt different method of accounting for different sources of
income.
b) The companies are statutorily required to follow mercantile system of
accounting under the companies act, 1956.
c) Assessee is at freedom to follow any method regularly followed by him for
valuing stock of goods. However, As-2 issued by ICAI, which is mandatory,
suggests LIFO method or weighted average price method of valuing closing
stock.
d) Even if assessee follows mercantile system of accounting, Section 43B
permits certain discussions only on actual payment. So, while planning tax
liability, such provisions must be taken care of.
Tax planning with reference to form of business
Sole proprietorship The income earned by sole- proprietorship business
is taxed in the hands of the sole proprietor. Such income enjoys the additional
tax benefits of threshold exemption limit, tax rebates and reliefs. The income is
taxed at the maximum rate of 30%. Thus, tax liability in case of sole
proprietorship form of business tends to be the lowest. The disadvantages of
this form are unlimited liability, non availability of certain deductions, which
are admissible to companies; no deductions for interest on capital and
remuneration to sole-proprietor; etc.
Partnership firm The tax rate is 30%. A partnership firm is entitled to
deduction of interest on capital and salary and other remuneration paid to
partners subject to the limits specified u/s 40(b). As per section 40(b), in
computing income under head PGBP of a firm assessed as such, the following
amounts shall be disallowed
a) Any salary, bonus, commission or remuneration to any non-working partner;
b) Remuneration to working partner or interest to any partner which
I. Is not authorized by or is not in accordance with, he terms of partnership
deed; or
II. If so authorized, relates to a period falling prior to the date of such
partnership deed, i.e. retrospective authorization of interest or remuneration is
not permitted.
Note: working partner means an individual who is actively engaged in
conducting the affairs of the business or profession of the firm of which he is a
partner.
c) Any interest paid to any partner in excess of 12% simple interest p.a.
d) Remuneration to working partners : Remuneration paid to working partners
during the PY is disallowed to the extent it exceeds, in aggregate, the following
limits :-
remuneration as per the book profits Remuneration allowable
On first Rs.3, 00,000 of book profits
or in case of a loss.
Rs. 150,000 or 90% of book profit
whichever is higher
On the balance 60% of the book profits
By virtue of section 28(v), interest or remuneration received by a partner from a
firm is taxable as PGBP.
Any payment of remuneration to partners, not allowed as deduction u/s 40(b),
shall not be taxed in the hands of partners. However, the disallowance of
remuneration / interest under sections 36(1)(III), 37(!) or section 40A(2) will be
added back to the firms 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 arent liable to pay
tax.
c) The companies are eligible to tax at the flat rate of 30%. Despite higher net
effective rate of tax than that applicable to sole-proprietors, the tax incidence
tends to be lower due to allowability of wide variety of deductions.
d) Due to limited liability to shareholders and free transferability of shares, the
company can augment large capital resources. Such shares become long- term
capital asset in the hands of shareholders after a short period of 12 months.
The LTCG are taxable @ 20 % or 10% (in case of listed securities, without
indexation benefit).
Further, the LTCG arising from transfer of shares, which have been charged to
securities transaction tax are exempt u/s 10(38). Any such STCG are taxable @
10% u/s 111A.
Tax planning with reference to nature of business
Deduction to undertakings engaged in export in hand made articles or things
[ section 10BA]:
Conditions a) It manufactures or produces eligible articles or things w/o use
of imported raw material. Eligible articles or things mean all hand- made
articles or things which are of artistic value and which require the use of wood
as main RM.
b) The export- sales of eligible articles isnt 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
doesnt 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 PYs
unexpired at the beginning of PY transferred.
d) In case of amalgamation or demerger provisions falling in (a) & (b) above,
shall not apply to the amalgamating or demerged company.
Amortization of preliminary expenses [section 35D] :
Applicability the assessee should be an Indian company or non corporate
resident assessee.
Purpose of preliminary expenses :
Time of incurring expenses Indian company
Before commencement of business For setting up of any undertaking
or business
After commencement of business Extension of the existing
industrial undertaking or setting
up new industrial undertaking
Benefit of sec 35D not available to a non industrial undertaking incurring
expenditure in connection with extension of its business after its
commencement.

List of specified expenditure expenditure in connection with
Non corporate resident assessee Indian company
1)Preparation of feasibility report,
project report or for conducting
market survey or any other survey
or engineering services relating to
the business of the assessee.
2) Legal charges for drafting any
agreement for setting up or for
conduct of any business.
Preparation of feasibility report, project report or for
conducting market survey or any other survey or
engineering services relating to the business of the
assessee.
Legal charges for drafting any agreement for setting
up or for conduct of any business.
3) expenses incurred for
a) legal charges for drafting and printing
memorandum and articles of association;
b) fees for registering the company under companies
act;
c) Issue of shares or debentures of the company,
underwriting commission, brokerage and charges for
drafting, typing, printing and advertisement
prospectus.

Capital employed Issued share capital + debentures + long term borrowings.
Cost of the project means actual cost of fixed assets as shown in the books
of the assessee on the last day of the PY in which the assessee commences
business.
Audit report non corporate assesses, the assessee is required to furnish the
audit report in form 3AE along with the return of income for the first year.
Case law Brooke bond India ltd share issue expenses cannot be claimed
as deduction, its allowable only u/s 35D.
Amount transferred to special reserve by approved financial corp. / public
companies providing finance for agriculture development, infrastructure
facility or purchase or construction of house: Sec 36(VIII) :
1) the company /corporation should be approved by the central government.
2) Deduction shall be least of the following a) amount of reserve; or b) 20% of
profit of business.
3) Reserve should not exceed twice the paid-up capital of the company; incl.
general reserve.
Deduction in respect of business of collecting and processing of
biodegradable waste [section 80JJA]:
Applicability: all assesses.
Amount of deduction: amount of profits and gains derived from certain
business for 5 consecutive years beginning from the AYs 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 AYs only,
including the AY relevant to the PY in which employment is provided.
Audit report to be furnished in form 10DA.
Tax planning with reference to location of business
Newly established undertaking in free trade zone (section 10A) : A
deduction of 100% profits derived by undertaking located in export hardware
technology park( EHTP) or Software technology park(STP) or specific economic
zone( SEZ) from export of articles/ things/ computer software ( incl. cut and
polished precious and semi-precious stones) manufactured or produced by it, is
allowed from total income of the assessee.
Period of tax holiday: exemption is allowed in respect of any 10 consecutive AYs
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 doesnt 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 isnt furnished before the due date.
Deduction for units established in SEZ on or after 1.4.2002
First 5 AYs 100% of profits and gains from export
business (starting from AY relevant to year
of start of production/ manufacture)
Next 2 AYs 50% of profits and gains from export
business
Next 3 AYs 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 doesnt apply to undertaking, which begun or begins to manufacture or
produce articles or things or computer SW on or after 1-4-2005 in any SEZ.
New established undertaking in special economic zones (section 10AA):
Conditions
a) its not formed by splitting up or reconstruction of existing business.
b) Its not formed by transfer of plant or machinery previously used for nay
purpose.
Exceptions: condition isnt violated when a) the value of second hand plant and
machinery doesnt 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 AYs 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 AYs is allowed if
Amount transferred to SEZ reinvestment reserve a/c is used for acquiring new
plant and machinery, which is first put to sue within 3 yrs from the yr of
creation of reserve.
Until acquisition of P&M, its used for business purposes other than for
distribution by way of dividend or profits or remittance outside India for
creation of any asset therein.
Particulars of P&M are furnished along with return of income for the PY in
which such plant or machinery is first put to use.
Consequences of misutilisation / non- utilization of reserve :
If the amount is credited to the
reserve is -
Taxability
Used for purposes other than
acquisition of P&M
Amount so misutilised shall be taxable in
the year of misutilisation
Not used within three years
aforesaid
Amount not so utilized shall be taxable in
the year immediately following the period
of 3 years.
Newly established 100% Export oriented undertaking (EOU) (section 10B):
100% deduction is allowed in respect of P&G derived by 100% EOU. Deduction
is allowed for 10 consecutive AY beginning with AY relevant to PY in which
undertaking begins production/ manufacture.
However no deduction will be allowed w.e.f AY 2010-11.
Section 80 I-A deductions available to industries engaged in
infrastructure development

Section 80 I-A deductions available to industries engaged in infrastructure development
Commences During Quantum Of
deduction
Period AY
(see note 2)
Ref Nature of undertaking
From To Company others
Infrastructure facilities 1-4-95 Open ended 100% 100% For 10 years
out of first 15
years
4(I)
1-4-95 31-3-05 100%
30%
X For initial 5
years
Balance
period of 5
yrs
4(II) Telecommunication services:
a) domestic satellite services
b) other services viz., radio,
paging, basic or cellular
networking of turnking & EDI
service
1-4-95 31-3-05 100%
30%
100%
25%
For initial 5
years
Balance
period of 5
years
4(II)
Industrial park 1-4-97 31-3-09 100% 100% For 10 years
out of 15
years
4(III)
Power sector
a)engaged in generation or
generation and distribution of
power
b)engaged in transmission or
distribution of power
c)substantial renovation and
modernization of existing
transmission/distribution
lines
1-4-93
1-4-99
1-4-04
31-3-10
31-3-10
31-3-10
100%
100%
100%
100%
100%
100%
For 10 yrs
out of 15 yrs
For 10 yrs
out of 15 yrs
For 10 yrs
out of 15 yrs
4(iv)(a)
4(iv)(b)
4(iv)
Undertaking established for
reconstruction/ revival of
power generating plant
Estb.
Before
30-11-05
31-03-07 100% X For 10 out of
15 yrs
4(v)

Common conditions:
Condition : w.e.f 1-4-06, deduction u/s 80 I-A will be allowed only if the
assessee furnishes the return of income u/s 139 (a)
Period of deduction Ays :
For any 10 consecutive Ays 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 Ays.
Section 80 I-B
1) nature of undertakings - operation of ship, hotels, industrial research,
production of mineral oil, developing and building housing projects, multiplex
theatres, convention centres, oeprating and maintaining a hospital in rural
area.
2) audit report - accts must be audited by CA and report should be given by all
assessees to claim deduction u/s 80IB.
3)return of income - ROI should be submitted on or before due date of
submission of return of income.
4)No splitting up - it should not be formed by splitting up, or reconstructing an
existing business.
5) quantum of deduction - 25% to 100% of profits.
Section 80I-C deductions available to certain u/t s or enterprises in
certain special category states.
The eligible businesses are a) in case of undertaking/ enterprise located in
notified areas under specified states: it has begun manufacture during specified
period, or takes substantial expansion during that period.
b) In case of undertaking/ enterprise located in any area under specified states:
it has begun manufacture during specified period, or takes substantial
expansion (50% or more increase in book value of P&M) during that period.
Specified period and deduction:

Undertaking/
enterprise
Located in States of -- Particulars of
deduction
Sikkim Himachal Pradesh,
Uttaranchal
North eastern
state
Specified period 23-12-02 to 31-3-
07 ( finance act,
07)
From 7-1-03 to
31-3-2012
24-12-97 to
31-3-07
Deduction in
respect of profits
and gains of
eligible business
100% for 10 yrs
commencing with
the initial AY
100% for first 5
years starting with
initial AY and
thereafter, 25% (
30% in case of
company), for next
5 years.
100% for ten years
commencing with
the initial AY.
Initial Ay: It means AY relevant to PY in which undertaking/enterprise begins to
manufacture or produce articles or things or commences operation or completes
substantial expansion.
Section 80I-D: deduction in respect of P&G from business of hotels and
convention centers in specified areas: Eligible businesses are
Business of hotel located in the specified area, if such hotel is constructed and
starts functioning at any time on or after 1-4-07 but on or before 31-3-10 ; or
Business of building, owning, and operating a convention centre located in the
specified area, if such centre is constructed and starts functioning at any time
on or after 1-4-07 but on or before 31-3-10.
Specified area: it means national capital territory Delhi and the districts of
Faridabad, guragon, gautam, budh nagar and Ghaziabad.
Quantum and period of deduction: deduction = 100% of P&G derived from
such business. Period of deduction = 5 consecutive Ays beginning from the Ay
in which hotel starts functioning.
section 80 IE :
spl provision in respect of certain undertakings in north eastern states:
1) nature of undertaking : the tax payer has begun to provide eligible services
during 1-4-07 and 31-3-2017 in any of the NE states --
a) to manufacture and produce any eligible article or things
b) to undertake substantial expansion to manf. or product any eligible article or
thing.
c) to carry on any eligible business.
2) Audit report - accts must be audited by CA.
3) Return of income - ROI should be submitted on or before due date of
submission of ROI.
4) No splitting up : it should not be formed by splitting up, or reconstructing an
existing business.
5) Quantum of deduction - 100% of profit and gains derived from such business
for 10 consecutive Ay's commencing with the initial AY.
Section 80 LA: deduction available for banks and financial institutions
have an offshore banking unit:
Eligible assessee a) scheduled bank and having an offshore banking unit in a
SEZ; or
b) Foreign bank and having an offshore banking unit in a SEZ; or
c) Unit of international financial services centre.
Conditions gross total income includes
Income from the offshore banking unit in a SEZ;
Income from business referred in section 6(1) of banking regulation act, with an
undertaking
Located in SEZ;
Which develops, develops and operates or operates and maintains a SEZ;
Income from any unit of the international financial services centre from its
business for which it has been approved for setting up in such a centre in a
SEZ.
Amount of deduction
Period Quantum of deduction
For the first 5 AYs relevant to the
PY in which permission under
banking regulation act or SEBI or
under any other laws was
obtained
100% of such income
Next 5 years 50% of such income

Non resident
1) Non resident individual: An individual is regarded as non resident if he is
not resident in India during that PY. An individual is regarded as resident in
India if
He is India for a period of 182 days*** or more during the PY; OR
He is in India for a period of 60 days or more during the PY and 365 days or
more during the 4 years preceding the PY.
** Under the following circumstances, the period of 60 days are extended to 182
days
a) An Indian citizen who leaves India during PY for the purpose of employment
outside India.
b) An Indian citizen who leaves India during PY as a member of crew of an
Indian ship.
c) An Indian citizen or a person of Indian origin (who is abroad) who comes to
India on a visit during the PY.
Note: A person is deemed to be of Indian origin, if he or either of his parents or
any of his grand parents was born in Undivided India.
2) Non resident HUF: If the control and management of the affairs of HUF is
situated wholly outside India, then HUF is said to be non resident in India.
3) Non resident company: According to section 6(3) an Indian company is
always resident in India. A foreign company will be non resident in India if the
control and management of its affairs is wholly or partly situated outside India.
4) Non resident firm/AOP/other persons: If the control and management of the
affairs of Firm or AOP or other person is situated wholly outside India then
Firm or AOP or such other person is said to be Non resident in India.
Tax incidence on Non Resident: In case of non residents, only the income
received or deemed to be received in India or, income accrued or arisen or
deemed to be have accrued or arisen in India is taxable in their hands. All other
incomes arent 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
arent covered, or
Stocking agent who maintains stock of goods in India from which he regularly
delivers goods on behalf of the non resident.
Indenting agent who secures orders in India mainly/wholly for non resident
or, that non resident and other non- residents who exercise control over one
another or are under common control.
Exceptions:
a) Business activity carried out through an agent having an independent status
and acting in ordinary course of business isnt 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 arent 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 isnt a citizen of India ;
b. A firm not having a partner who is either a citizen of India or resident in
India; and
c. A company not having any shareholder who is either citizen of India or
resident in India,
Income arising through or from operations confined to shooting of any
cinematograph film in India shall not be deemed to accrue or arise in India.
levy of income tax on income pertaining to FIIs
Sec Assessee Specified
Income
Tax rate Remarks , if any
115A Any non resident
Assessee

a) Interest
from govt. or
Indian concern
on debt given
in foreign
currency **

20%
30%
20%
10%
->no deduction is
allowed in
computing such
income under any
provision of Act.
-->such agreement
must be approved
by the central
Government or
must relate to a
matter covered by
the industrial
policy of the Govt.
of India.
b) Royalty and fees for technical services received under agreement entered
Between 1-4-1976 to 31-5-1997
Between 1-6-1997 to 31-5-2005
On or after 1-6-2005
115AB Overseas financial
organization (offshore
fund)
LTCG from
transfer of
units or UTI or
a mutual fund
specified under
section
10% Indexation benefit
will not be
available in
computing LTCG
10(23D), which
were
purchased in
foreign
currency.
115AC Any non resident
Assessee**
a)interest on
notified foreign
currency
bonds of
Indian/ public
sector
company
b) LTCG from
transfer of
such bonds or
global
depository
receipts
(GDRs)
10% No deduction in
computing such
income under any
provision and no
indexation benefit
in computing
LTCG.
115 ACA Resident employee LTCG from
transfer of
foreign
currency GDRs
of an Indian
company
engaged in
specified
knowledge
based industry
or service,
issued under
10% Assessee must be
the employee of
such Indian
company.
No indexation
benefit in
computation of
LTCG.
employees
stock option
scheme
(ESOPs)
115AD Notified foreign
institutional investor
Income in
respect of
securities
other than
units referred
to in section
115AB
20% No deduction
allowable in
computing such
income under any
provision of the act
and no indexation
benefit in
computing LTCG
Capital gains on transfer of the securitiesSTCG under section 111A
Other STCG
LTCG
115BBA Non resident
sportsman being
foreign citizen**
Income from
-participation
in a
game/sport in
India ;
-
advertisement
;
- Contribution
of articles
relating to any
game or sport
in India in
newspapers,
10% No deduction
allowable in
computing such
incomes under any
provision of act
Winnings from
lottery, crossword
puzzles etc are
taxable under
section 115BB @
30% and therefore,
they do not fall
under this section.
magazines or
journals.
Non resident sports
association **
Any amount
guaranteed to
be paid or
payable to
such
association or
institution for
any game/
sport played in
India

Notes
1) **in cases falling under sections 115A, 115Ac and 115BBA, the assessee
neednt file return of income if his income consists of specified incomes only
and tax on such incomes has been deducted at source.
2) Additional provisions of section 115A: section 115A applies only to such
royalty and fees for technical income from royalty/ fees for technical services,
deduction under chapter VI-A shall be available from income from royalty/ fees
for technical services taxable under this section.
Section 160
Representative assessee of non resident includes his agent.
Section 163: Agent of a non resident
Agent in relation to a non resident includes following persons in India
a) Person employed by or on behalf of the non resident.
b) Person who has any business connection with the non resident
c) Person from or through whom the non resident is in receipt of nay income,
whether directly or indirectly,
d) Trustee of the non resident
e) Any person who has acquired a capital asset in India by means of a transfer,
whether such person is a resident or non resident.
Section 172: tax liability of shipping business
Non resident carrying on shipping business presumptive income @ 7.5% of
amount payable.
Transfer pricing
Objective with the increase in participation of the multinational groups there
has been increase in the cross border transactions. The existence of different
tax rates in different countries offers a potential incentive to multinational
enterprises to manipulate their transfer prices to recognize lower profit in
countries with higher taxes and vice versa.
In order to monitor transfer prices for goods, facilities and services, transfer
pricing regulations were introduces in the form of sections 92 and 92A to 92F.
The basic intention underlying the transfer pricing regulations is to prevent
shifting out of profits by manipulating prices charged or paid in international
transactions, thereby eroding the countrys tax base.
Provisions relating to computation of income from international
transactions sec 92
1) Income to be computed as per arms length price
2) Section not to apply when arms length prices decreases income or increases
loss.
Section 92A associated enterprises and deemed associated enterprises.
Associated enterprise means an enterprise which participates, directly or
indirectly, in management or control or capital of other enterprise. Further, if
one or more persons participate, directly or indirectly in the management or
control or capital of two enterprises those two enterprises are associated
enterprises.
Deemed associated enterprises: two enterprises are deemed to be associated
enterprises. If, at any time during the PY, -
a) One holds, directly or indirectly shares carrying 26% or more of voting power
in other enterprise.
b) Any person holds, directly or indirectly shares carrying 26% or more voting
power in both of them.
c) A loan advanced by one to the other constitutes 51% or more of BV of total
assets of other.
d) One enterprise guarantees 10% or more of the total borrowings of the other
enterprise.
e) One appoints more than half of board of directors or one or more executive
directors of the other.
f) Any person appoints more than half board of directors or one or more
executive directors of both.
g) Manufacture/ processing of goods or business carried on by one is fully
dependent on use of know how, patents, copyright, etc. owned by the other, or
in respect of which other has exclusive rights.
h) 90% or more of RM required by one are supplied by the other or by persons
specified by other, and prices and other conditions relating to the supply are
influenced by the other enterprise.
i) Goods manufactured/ processed by one are sold to the other enterprise or to
persons specified by other, and the prices and other conditions relating thereto
are influenced by such other enterprise.
j) Where one enterprise is controlled by an individual/HUF, the other enterprise
is also controlled by such individual/ HUF or his relatives or jointly by such
individual/HUF and such relative.
k) One enterprise is a firm/AOP/BOI and other enterprise holds 10% or more
interest in such firm/AOP/BOI.
l) There exists between the two enterprises, any relationship of mutual interest,
as may be prescribed.
Section 92B international transaction
It means a transaction entered into between two or more associated enterprise
(at least one is a non resident) for purchase/sale/ lease of tangible/ intangible
property or provision of services or lending/ borrowing money or any other
transaction (including sharing agreements for common costs) having bearing on
income and assets.
Deemed associated transaction: If an associated enterprise and a third person
determine the terms of a transaction between third person and another
associated enterprise, such transaction shall be regarded as having being
entered into between two associated enterprise.
Section 92C methods under which arms length price is determined
1) Arms length price (ALP) means a price applicable in a uncontrolled
transaction i.e. a transaction between non associated enterprises, in
uncontrolled conditions.
2) Methods for computation of arms length price: arms length price is
determined by the most appropriate of the following methods, selected as per
the mode prescribed by the board
a) Comparable uncontrolled price method
b) Resale price method
c) Cost plus method
d) Transaction net margin method
e) Profit split method
f) Other prescribed method.
3) When more than one price determined : by the most appropriate method, the
arms length price shall be taken to be the lower of the following
a) The arithmetical mean of such prices, or,
b) A price varying up to 5% of such arithmetical mean.
Double taxation avoidance agreement - DTAA
Double taxation means taxation of same income of a person in more than one
country i.e. both under Indian income tax act, 1961 and income tax law of
other country.
DTAA are agreements entered into by the government of India with the
government of other countries.
Effect of DTAA
a) If no liability is imposed under the Income tax Act on a particular income,
then no liability will arise on that income.
b) If the tax liability is imposed by the act on a particular and theres 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 isnt inconsistent with the provisions of the Act
or the agreement, have the same meaning assigned to it in the notification
issued by the central government in the official gazette in this behalf.
Two methods of granting relief under DTAA [bilateral relief]
Exemption method
Tax credit method
Conditions for claiming relief:
1. The income should have been taxed in both the contracting countries.
2. Proof of income having suffered double taxation has to be provided.
3. If there is no tax treaty with the country levying double tax; then relief can be
granted unilaterally u/s 91.
DTAA- Sec 90A
Between two specified associations, adopted for levy of tax. - Section 90A
Meaning
Specified association: notified institutions, associations are bodies functioning
under any law for the time being in force either in India or the specified territory
outside India.
Specified territory: Any area outside India notified for the purposes of this
section.
Adoption of agreement specified association in India may enter into an
agreement with any specified association in the specified territory outside India.
Through notification in the official gazette, the central Government may make
such provisions necessary for adopting and implementing such agreement.
Purpose of adoption
a) Granting of relief in respect of
Income which have suffered tax under both Indian tax laws and those of
specified territory outside India, or;
Income tax chargeable under this act and under the corresponding law in force
in that specified territory outside India to promote mutual economic relations,
trade and investment, or
b) Avoidance of double taxation of income under Indian law and those governing
the specified territory; or
c) Exchange of information for the prevention of evasion or avoidance of income
tax chargeable in both in India and specified territory , or investigation of cases
of such evasion or avoidance, or
d) Recovery of income tax tax under laws of both the countries/ territories.
Section 91 unilateral relief
Conditions
a) The assessee must have been resident in India in the relevant PY.
b) The income must have accrued or arisen outside India during that PY.
c) The assessee must have paid the tax either by deduction or otherwise in
respect of such income as per the law of the foreign country.
d) There should be no reciprocal agreement of relief or avoidance from double
taxation with the country where income has accrued or arisen.

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