The following are the special provisions under the Income-tax Act which are applicable to a company in which public are not substantially interested Le. a closely held company:
(A) [Section 79]- Carry Forward and Set Off of Losses in case of Certain Companies
The Finance (No. 2) Act, 2019 has substituted the existing section 79 by a new section 79 which is as under:
To facilitate ease of doing business in the case of an eligible start-up, section 79 has been amended so as to provide that loss incurred in any year prior to the previous year, in the case of closely held eligible start-up. shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the following two conditions:
(1) 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 persons 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, or
(2) The loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, if, all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and such loss has been incurred during the period of 7 years beginning from the year in which such company is incorporated.
Section 79(1) shall not apply –
(a) To a case where a change in the said voting power and shareholding takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift:
(b) To any change in the shareholding of an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger of a foreign company subject to the condition that 51% shareholders of amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company:
(c) To a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner;
(d) To a company, and its subsidiary and the subsidiary of such subsidiary, where,—
(i) The Tribunal, on an application moved by the Central Government under section 241 of the Companies Act. 2013, has suspended the Board of Directors of such company and has appointed new directors nominated by the Central Government. under section 242 of the said Act, and
(ii) A change in shareholding of such company, and its subsidiary and the subsidiary of such subsidiary, has taken place in a previous year pursuant to a resolution plan approved by the Tribunal under section 242 of the Companies Act, 2013 after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.
(B) [Section 2(22(e)]- Deemed Dividend
Any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder holding not less than 10% voting power or to a concern in which such shareholder is a member or a partner and in which he has substantial interest or any payment by an such company on behalf or for the individual benefit of any such shareholder, to the extent to which company in either case possesses accumulated profit shall be treated as Deemed Dividend.
W.e.f. 1.4.2018, the deemed dividend specified under section 2(22)(e) shall be taxed in the hands of the company 30% and not the shareholder.
W.e.f. A.Y. 2021-22 i.e. dividends declared on or after 1.4.2020 shall be taxable in the hands of the shareholders as section 115-O shall not be applicable.
(C) [Section 56(2)(viib)]- Share Issued for a Consideration more than the Fair Market Value
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 from Category II Alternative Investment Fund (AIF) (w.e.f. A.Y. 2020-21); or
(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
Where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the face value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place. [Inserted by the Finance (No. 2) Act, 2O19,]
(D) Tax on Distributed Income of Domestic Company for Buy Back of Shares of Unlisted Company
[Section 115QA(1)]- Company liable to Pay Tax on Distributed Income to Shareholders
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% plus 12% Surcharge plus 4% Health and Education Cess amounting to 23.296% on the distributed income to Shareholders 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 4% Health and Education Cess amounting to 23 .296%.
(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 14 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.
(E) 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.
(F) [Section 179]- Liability of Directors of Private Company in Liquidation
As per section 179, where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company 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 the 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.
The expression tax due includes penalty, interest or any other sum payable under the Act.