Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Taxation In Companies – Company Taxation

Taxation In Companies – Company Taxation
Taxation In Companies – Company Taxation

Table of Contents

1.   [Section 6(3)]- Definitions & Types of Companies with Residential Status

(1).  Definition and Types of Companies

1. Company:

As per section 2(17), company means:

(i)            Any Indian company, or

(ii)           Anybody corporate incorporated by or under the laws of a country outside India, or

(iii)          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

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

(i)      A company owned by Government or Reserve Bank of India.
(ii)     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.

(iii)    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 lose the status of a company in which the public are substantially interested.

(iv)    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.

(v) 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.

(vi) 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.

(vii) 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:

(a)           Its equity shares were listed on a recognised stock exchange, as on the last day of the relevant previous year; or

(b)          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.

An industrial company means a company whose business consists mainly of the construction of ships or the manufacturing or processing of goods or in mining or in the generation or distribution of electricity or any other form of power.

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—

(i)            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;

(ia)         A corporation established by or under a Central, State or Provincial Act;

(ib)         Any institution, association or body which is declared by the Board to be a company;

(ii)           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;

(iii)          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.

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).  [Section 6(3)]- Residential Status of a Company

(i)      When is a Company said to be Resident in India?

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

(i)            It is an Indian company: or

(ii)           Its place of effective management (POEM). in that year, is in India.

(ii)     When is a Company said to be Non-Resident in India?

A Company will be a non-resident in any previous year if:

(a)           It is not an Indian company

and

(b)          Its place of effective management, in that year, is not in India.

As POEM based rule of residence has been introduced in the case of a company, in order to provide a transition mechanism for a company which is incorporated outside India and has not earlier been assessed to tax in India.

2.   Special Provisions applicable to Closely-held Company (in which Public are Not Substantially Interested)

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, were, —

(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 anything 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%.

See also  [Section 7(1)(a)]- All Forms of Supply of Goods or Services or both under GST

(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.

3.   Tax on Total Income of a Company

(1).  Rates of Income Tax of a Company other than covered U/s 115BA

A company is assessed like any other Assessee. however, its liability differs in two respects:

1.   No exemption limit: A company does not enjoy any exemption limit.

2.   Flat Rate of Tax: A company pays income-tax at a flat rate instead of slab rate.

Rates of Income-Tax for the Assessment years 2019-20 and 2020-21 are as under:

1. Short-term capital gain on equity shares in a company or units of an equity
oriented fund where the transaction is chargeable to securities transaction tax
15%
2. Tax on Long-Term Capital Gains

 

(Where the long-term capital gain is covered by section 115AB, 115AC or 115AD or there is a long-term capital gain to non-resident from unlisted securities subject to certain conditions, it is taxable at 10%)

20%
3. Tax on Long-Term Capital Gains arising from transfer of Long-Term Capital Assets,
being equity shares of a company or a unit of equity-oriented fund or a unit of
business trusts (Applicable w.e.f. A.Y. 2019-20)
10%
4. Tax on Winnings from Lotteries, Cross Word Puzzles, Races including Horse Races. etc. 30%
5. Tax on income by way of Dividends Declared, Distributed or paid by a Specified
Foreign Company [Section 115BBD]
15%
6. Tax on income from transfer of Carbon Credits 10%
7. Tax on any other income

(a)    Domestic company

(i)                  Where the total turnover or gross receipts in the previous year does not exceed Rs. 400 Crore – Tax Rate @ 25%

(ii)                In all other Cases – Tax Rate @ 30%

(b)    Certain Domestic Companies referred to in Section 115BA – Tax Rate @ 25%.

(c)     Foreign Company

(i)                  For all income other than given under (ii) below – Tax Rate @ 40%

(ii)                Royalty received from Government or an Indian concern in pursuance of an agreement made by it with the Indian concern after March 31, 1961 but before April 1, 1976 or fees for rendering technical services in pursuance of an agreement made by it after February 29, 1964 but before 1st April, 1976 and where such agreement has in either case been approved by the Central Government – Tax Rate @ 50%

(2).  [Section 115BA]- Tax on Income of certain Manufacturing Domestic Companies

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

Notwithstanding anything contained in this Act but subject to the other provisions of this Chapter (i.e., Chapter XII relating to determination of tax in certain special cases), other than those mentioned under section 115BAA and section 115BAB 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.

(ii)     [Section 115BA (2)]- Specified Conditions for opting Provisions of Section 115BA (1)

(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 (1) 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.

(iii)   [Section 115BA(4)]- Section not to apply unless the option is exercised in the prescribed manner on or before Due Date Specified U/s 139(1):

Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed manner (See rule 21AD and Form No. 10-IB) on or before the due date specified U/s 139(1) for furnishing the first of the returns of income which the person is required to furnish under the provisions of this Act:
Provided that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

Provided further where the person exercises option U/s 115BAA, the option under this section may be withdrawn (Second proviso inserted by The Taxation Law (Amendment) Act, 2019, w.e.f. A.Y. 2020-21).

(3).  Special Provisions of Tax on Income of Certain Domestic Companies referred to in Section 115BAA

(i)      [Section 115BAA (1)]- Rate of Income Tax in case the Domestic Company opts for Section 115BAA

Notwithstanding anything contained in this Act but subject to the provisions of this Chapter (i.e. Chapter XII, other than those mentioned under section 115BA and section 115BAB), 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 the 1.4.2020, shall, at the option of such person, be computed at the rate of 22%, if the conditions contained in section 115BAA(2) are satisfied as stated below.

Where the person fails to satisfy the conditions contained in section 115BAA (2) in any previous year, the option shall become invalid in respect of the assessment year relevant to that previous year and subsequent assessment years and other provisions of the Act shall apply, as if the option had not been exercised for the assessment year relevant to that previous year and subsequent assessment years.

(ii)     [Section 115BAA (2)]- Conditions to be Satisfied for Paying Tax U/s 115BAA (1)

The total income of the company will be 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 32AD. or

—           Deduction under section 33AB (relating to tea/coffee/robber development account), or

—           Section 33ABA (relating to site restoration fund), or

—           Section 35(1)(ii) (relating to any sum paid to certain research associations or to a university, college or other institution to be used for scientific research),

—           Section 35(1) (iia) (relating to any sum paid to a company to be used by it for scientific research),

—           Section 35(1)(iii) (relating to any sum paid to certain research associations or to a university, college or other institution to be used for research in social science or statistical research),

—           Section 35(2AA) (relating to any sum paid to a National Laboratory or a University or an Indian Institute of Technology or a specified person to be used for scientific research undertaken under an approved programme.

—           Section 35(2AB) (relating to any expenditure incurred on in-house scientific research and development facility (not being expenditure in the nature of cost of any land or building) by a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule

—           Section 35AD (relating to deduction on account of capital expenditure on specified business), or

—           Section 35CCC (relating to agricultural extension project), or

—           Section 35CCD (relating to skill development project), or

—           W.e.f. 1.4.2021 deduction under any provisions of Chapter VI-A under the heading “C—Deductions in respect of certain incomes” (i.e., 80-IA to 80Q whichever is applicable to a company other than the provisions of section 80JJAA or section 80M).

In other words, for previous year 2019-20 i.e., A.Y. 2020-21 deduction u/s 80G and 80GGB will also be available. However, w.e.f. A.Y. 2021-22 no other deduction except deduction U/s 80JJAA and 80M will be allowed.

(ii)           Without set off of any loss carried forward or depreciation from any earlier assessment year if such loss or depreciation is attributable to any of the deductions referred to in sub-clause (i) above.

(iii)          Without set off of any loss or allowance for unabsorbed depreciation deemed so under Section 72A. if such loss or depreciation is attributable to any of the deductions referred to in clause (i) above; and

(iv)          By claiming the depreciation, if any, under any provisions of section 32, (other than additional depreciation under section 32(1) (iia)), determined in such manner as may be prescribed.

(iii)   [Section 115BAA (3)]- Loss and Depreciation shall be deemed to have been already given full effect to

The loss and depreciation referred to clause (ii) and clause (iii) above shall be deemed to have been already given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year.

Where there is a depreciation allowance in respect of a block of asset which has not been given full effect to prior to the assessment year 2020-21, corresponding adjustment shall be made to the written down value of such block of assets as on 1.4.2019 in the prescribed manner, if the option under section 115BAA (5) is exercised for a previous year relevant to the assessment year beginning on 1.4.2020.

(iv)   [Section 115BAA (4)]- Conditions contained in section 115BAA (2) above to be modified to the extent the deduction under section 80LA is available to such Unit

In case of a person, having a Unit in the International Financial Services Centre, as referred to in of section 80LA (1A), which has exercised option U/s 115BAA (5), the conditions contained in Section 115BAA (2) shall be modified to the extent that the deduction under section 80LA shall be available to such Unit subject to fulfilment of the conditions contained in the said section.

(v)     [Section 115BAA (4)]- Assessee to opt for section 115BAA in the prescribed manner before the specified date

Nothing contained in section 115BAA shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under section 139(1) for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after 1.4.2020 and such option once exercised shall apply to subsequent assessment years.

In case of a person, where the option exercised by it U/s 115BAB has been rendered invalid due to violation of conditions contained in

—     Sub-clause (ii) (relating to machinery or plant previously used for any purpose) or sub-clause (iii) (relating to building previously used as a hotel or convention centre) of clause (a) of section 1 I5BAB (2) or

—     Clause (b) (relating to company engaged in any business other than the business of manufacture of production, etc.) of section 1 15BAB (2),

such person may exercise option under this section (i.e., Section 115 BAA):

Manner of exercising the option under section 115BAA [Rule 21AE]

(1)          The option to be exercised in accordance with the provisions of section 115 BAA (5) by a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after 1.4.2020, shall be in Form No. 10-IC.

(2)          The option in Form No. 10-IC shall be furnished electronically either under digital signature or electronic verification code.

(3)          The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be, shall—

(i)            Specify the procedure for filing of Form No. 10-IC;

(ii)           Specify the data structure, standards and manner of generation of electronic verification code, referred to in sub-rule (2), for verification of the person furnishing the said Form; and

(iii)          Be responsible for formulating and implementing appropriate security, archival and retrieval policies in relation to the Form so furnished.

Once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

(vi) Surcharge on Income Tax on Total Income computed U/s 115BAA

Provided that in respect of any income chargeable to tax under section 115BAA of the Income-tax Act, the tax computed shall be increased by a surcharge calculated at the rate of 10%.

Health and Education Cess (H&EC):

Further H&EC @ 4% shall be levied on the total tax (including surcharge) payable by the Assessee.

Hence, the Tax Payable by such company shall be 25.168% (i.e., 22% + 10% + 4%)

(4). Special Provisions relating to Tax on Income of Certain New Manufacturing Domestic Companies referred to in section 115BAB

(i)      [Section 115BAB (1)]- Income derived from Manufacturing or Production by a New Manufacturing Domestic Company to be Taxed @ 22%

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 1.4.2020, shall, at the option of such person, be computed at the rate of 15%, if the conditions contained in section 115BAB (2) are satisfied (see below).

(iA) First Proviso to Section 115BAB (1):

Where the total income of the person, includes any income,

—     which has neither been derived from nor is incidental to manufacturing or production of an article or thing, and

—     in respect of which no specific rate of tax has been provided separately under this Chapter (i.e., Chapter XII relating to determination of tax in certain special cases),

such income shall be taxed @ 22% and No Deduction or Allowance in respect of any expenditure or allowance shall be allowed in computing such income:

(iB) Second Proviso to Section 115BAB (1)

The income-tax payable in respect of the income of the person deemed so under second proviso to section 115BAB (6) (see below) shall be computed @ 30%.

(iC) Third Proviso to Section 115BAB (1)

The income-tax payable in respect of income being short term capital gains derived from transfer of a capital asset on which no depreciation is allowable under the Act shall be computed @ 22%.

(iD) Fourth Proviso to Section 115BAB (1)

Where the person fails to satisfy the conditions contained in section 115BAB (2) (see below) in any previous year, the option shall become invalid in respect of the assessment year relevant to that previous year and subsequent assessment years and other provisions of the Act shall apply to the person as if the option had not been exercised for the assessment year relevant to that previous

year and subsequent assessment years.

(ii)     [Section 115BAB (2)]- Conditions to be satisfied for paying Tax U/s 115BAB (1)

(a)           The company has been set-up and registered on or after 1.10.2019, and has commenced manufacturing or production of an article or thing on or before 31.3.2023 and—

(i)            The business is not formed by splitting up or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of a company, business of which is formed as a result of the re-establishment, reconstruction or revival by the person of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in the said section,

(ii)           Does not use any machinery or plant previously used for any purpose.

(iii)          Does not use any building previously used as a hotel or a convention centre, as the case may be, in respect of which deduction under section 80-ID has been claimed and allowed.

(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 32AD, or

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

—     section 33ABA (relating to site restoration find), or

—      section 35(1)(ii) (relating to any sum paid to certain research associations or to auniversity, college or other institution to be used for scientific research),

—      section 35(1) (iia) (relating to any sum paid to a company to be used by it for scientific research),

—    section 35(1)(iii) (relating to any sum paid to certain research associations or to auniversity, college or other institution to be used for research in social science or statistical research),

—    section 35(2AA) (relating to any sum paid to a National Laboratory or a University or an Indian Institute of Technology or a specified person to be used for scientific research undertaken under an approved programme

—     section 35(2AB) (relating to any expenditure incurred on in-house scientific research and development facility (not being expenditure in the nature of cost of any land or building) by a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule

—     section 35AD (relating to deduction on account of capital expenditure on specifiedbusiness), or

—     section 35CCC (relating to agricultural extension project), or

—     section 35CCD (relating to skill development project), or

—     W.e.f. 1.4.2021 deduction under any provisions of Chapter VI-A under the heading “C.—Deductions in respect of certain incomes” (i.e., 80-IA to 80Q whichever is applicable to a company other than the provisions of section 80JJAA or section 80M).

In other words, for previous year 2019-20 i.e., A.Y. 2020-21 deduction u/s 80G and 80GGB will also be available.

However, w.e.f. A.Y. 2021-22 no other deduction except deduction U/s 80JJAA and 80M will be allowed.

(ii)           Without set off of any loss or allowance for unabsorbed depreciation deemed so under section 72A where such loss or depreciation is attributable to any of the deductions referred to in sub-clause (i) above;

(iii)          By Claiming the depreciation under the provision of section 32, except clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.

(iii) [Section 115BAB (3)]- Loss referred to Clause (ii) of Section 115BAB(2)(c) above to be deemed to have been already given full effect to:

The loss referred to in clause (ii) of section 115BAB (2) above, shall be deemed to have been given full effect to and no further deduction for such loss shall be allowed for any subsequent year.

(iv) [Section 115BAB (4)]- Board with the Approval of Central Government empowered to issue guidelines for the purpose of any difficulty:

If any difficulty arises regarding fulfilment of the conditions contained in sub-clause (ii) or sub-clause (iii) of clause (a) of section 115BAB (2) or clause (b) of said section, as the case may be, the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty and to promote manufacturing or production of article or thing using new plant and machinery.

(v)     [Section 115BAB (5)]- Guidelines issued by the Board under section 115BAB (4) to be laid before each house of Parliament and shall be binding on the person and department:

Every guideline issued by the Board under section 115BAB (4) shall be laid before each House of Parliament and shall be binding on the person, and the income-tax authorities subordinate to it.

(vi) [Section 115BAB (6)]- How to Compute Profit where there is close connection between the company and any other person:

Where it appears to the Assessing Officer that, owing to the close connection between the person to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the person more than the ordinary profits which might be expected to arise in such business, the Assessing Officer shall, in computing the profits and gains of such business for the purposes of this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:

Provided that in case the aforesaid arrangement involves a specified domestic transact ion referred to in section 92 BA, the amount of profits from such transaction shall be determined having regard to arm’s length price as defined in clause (ii) of section 92F:

Provided further that the amount, being profits in excess of the amount of the profits determined by the Assessing Officer, shall be deemed to be the income of the person.

(vii) [Section 115BAB (7)]- Assessee to opt for Section 115BAB in the prescribed manner and before the specified date:

Nothing contained in section 1 1SBAB shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under section 139(1) for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after 1.4.2020 and such option once exercised shall apply to subsequent assessment years.

Provided that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

Manner of exercising the option under section 115BAB [Rule 21AF]

(1)          The option to be exercised in accordance with the provisions of section 115BAB (7) by a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after 1.4.2020 shall be in Form No. 10-ID.

(2)          The option in Form No. 10-ID shall be furnished electronically either under digital signature or electronic verification code.

(3)          The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be, shall—

(i)            specify the procedure for filing of Form No. 10-ID;

(ii)           specify the data structure, standards and manner of generation of electronic verification code, referred to in sub-rule (2), for verification of the person furnishing the said Form; and

(iii)          be responsible for formulating and implementing appropriate security, archival and retrieval policies in relation to the Form so furnished.

(viii) Rate of Income Tax and Surcharge on Total Income if the New Manufacturing Domestic Company opts Section 115BAB

S. No. Nature of Income Rate of income
tax
Surcharge on income
tax
1. Income derived from manufacturing or production of an article or thing [Section 115BAB (1)] 15% 10%
2. Income taxable at special rates as per
Chapter XII i.e.,
(i) Short-term capital gain referred to in Section 111A
15% 10%
(ii) Long-term capital gain other than referred to in Section 112A 10% / 20%, as the case may be 10%
(iii) Long-term capital gain referred to in Section 112A 10 % on the LTCG
exceeding
Rs. 1,00,000
10%
3. Income computed by the AO by applying the specific domestic provisions i.e., where there is close connection between the company and any other person [Second Proviso to Section 115BAB (1)] 30% 10%
4. Short-term capital gain derived from transfer of a capital asset on which no depreciation is allowable under the Act [Third Proviso to Section 115BAB (1)] 22% 10%
5. Any other income of the company from which no deduction or allowance in respect of any expenditure or allowance shall be allowed in computing such income [First Proviso to Section 115BAB (1)] 22% 10%

(ix) Health and Education Cess (H&EC)

Further H&EC @ 4% shall be levied on the total tax (including surcharge) payable by the Assessee.

4.   Rate of Income Tax in case of a Domestic Company

(A) For Assessment Year 2020-21 and onwards, all Domestic Companies can pay Tax under any of the following two options:

Option -1

(i)                  Normal Rate of Tax as per newly inserted section 115BAA, 22% — Effective Rate of Tax including Surcharge @ 10% and H&EC @ 4% = 25.168%

(ii)                MAT provisions not applicable
Option once exercised cannot be withdrawn

All conditions prescribed under section 115BAA (2) should be satisfied. i.e., deductions and incentives are not to be allowed

Option -2

(i)            Where the Total Turnover or Gross Receipts of the previous year 2017-18 does not exceed Rs. 400 Crore.

Effective rate of tax including surcharge as applicable and H&EC 26% if total income does not exceed Rs. 1 Crore, 27.82% if the total income exceeds Rs. 1 Crore or 29.12% if the total income exceeds Rs. 10 Crore.

(ii)           In any other case

Effective rate of tax including surcharge as applicable and H&EC 31.2% if total income does not exceed Rs. 1 Crore. 33.38% if the total income exceeds Rs.1 Crore or 34.944% if the total income
exceeds Rs. 10 Crore.

MAT as per the provisions of section 115JB shall be applicable 15% + Surcharge @ 7% or 12%, as the case may be.

All the deductions and incentives which are hitherto available shall be allowed.

(B) A manufacturing Domestic Company Set-Up and Registered on or after 1.10.2019, and has commenced manufacturing or production of an article or a thing on or before the 31.3.2023 can pay tax under any of the following two options:

Option -1

Normal rate of tax as per newly inserted section 115BAB (1) on income on account of manufacturing or production of an article or a thing — 15%

(i)                  Effective Rate of Tax including Surcharge @ 10% and H&EC @ 4% = 17.16%

(ii)                MAT provisions not applicable.

Option once exercised cannot be withdrawn

All conditions prescribed under section 115BAB (2) should be satisfied i.e., deductions and incentives are not to be allowed.

Option -2

Rate of Tax as per existing normal provisions:

(i) Where the total turnover or gross receipts of the previous year 2017-18 does not exceed Rs. 400 Crore –

Effective rate of tax including surcharge as applicable and H&EC 26% if total income does not exceed Rs. 1 Crore, 27.82% if the total income exceeds Rs. 1 Crore or 29.12% if the total income exceeds Rs. 10 Crore.

(ii)  In any other case
Effective rate of tax including surcharge as applicable and H&EC 31.2% if total income does not exceed Rs. 1 Crore, 33.38% if the total income exceeds Rs. 1 Crore or 34.944% if the total income exceeds Rs. 10 Crore

Note. —MAT as per the provisions of section 115JB shall be applicable @ 15% + Surcharge, @ 7% or 12%, as the case may be.

All the deductions and incentives which are hitherto available shall be allowed.

Option -3

Pay income tax as the provisions of Section 115BAA (see Option 1 of para (A) above)

5.   [Section 115JB (1)]- Provisions of MAT (Minimum Alternate Tax) for payment of Tax by Certain Companies

(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-lax 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

The following proviso has been inserted under Section 115JB (1) – Amendment by the Taxation Law Act, 2019.

“Provided that for the previous year relevant to the assessment year commencing on or after the 1St. day of April, 2020, the provisions of section 115JB (1) shall have effect as if for the words “18.5%”, the words “15%” had been substituted.”

(2).  [Section 115JB (7)]- MAT Rate to be 9% instead of 15% in case of a Unit Located in an International Financial Services Center

Notwithstanding anything contained in section 115JB (1), where the Assessee referred to therein, is a unit located in an International Financial Services Center and derives its income solely in convertible foreign exchange, the provisions of section 115JB (1) shall have the effect as if for the words “15%” wherever occurring in that sub-section, the words “9%” had been substituted.

(3).  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)].

Section 115JB (5A) Amended:

The above sub-section (5A) has been substituted by the following:

“(5A) The provisions of this section shall not apply to —

(i)            Any income accruing or arising to a company from life insurance business referred to in section 115B;

(ii)           A person who has exercised the option referred to under section 115BAA or Section 115BAB”

2.    A foreign company, if—

(i)            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 90(1) and

the Assessee does not have a permanent establishment in India in accordance with the provisions of such agreement: or

(ii)           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.

3.   MAT provisions not to apply to certain foreign companies [Explanation 4A]

For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an Assessee, being a foreign company, where its total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in those sections.

(4).  [Section 115JAA]- Allowing MAT Credit in respect of Tax paid on deemed income under MAT provisions against Tax Liability 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]

Further, where the amount of tax credit in respect of any income-tax paid in any country or specified territory outside India, under Section 90 or Section 90A or Section 91, allowed against the tax payable under the provisions of sub-section (1) of section 115JB exceeds the amount of such tax credit admissible against the tax payable by the Assessee on its income in accordance with the other provisions of this Act, then, while computing the amount of credit under this sub-section, such excess amount shall be ignored. [ Second proviso to section 115JAA]

The amount of tax credit so determined shall be allowed to be carried forward and set off in a year when the tax becomes payable on the total income computed under the regular provisions.

However, no carry forward shall be allowed beyond the 15th assessment year immediately succeeding the assessment year in which the tax credit becomes allowable. The set off in respect of the brought forward tax credit shall be allowed for any assessment year to the extent of the difference between the tax on the total income and the tax which would have been payable under section 115JB for that assessment year. No credit will be allowed in respect of MAT paid in any assessment year prior to 2006-07.

In other words. 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.

Amendment of Section 115JAA relating to allowability of brought forward MAT Credit [w.e.f. A.Y. 2020-21]

The provisions of section 115JAA (relating to allowability of brought forward MAT credit) shall not apply to a person who has exercised the option U/s 115BAA.

Where a Private Company or Unlisted Public Company is converted into Limited Liability Partnership in any previous year, the MAT Credit which was available to the company shall lapse. In other words, the Tax Credit U/s 115JAA shall not be allowed to the successor LLP.

6.   [Section 115JB (2)]- Statement of Profit and Loss of the Company to be prepared as per provisions of the Companies Act. with Computation of Book Profit

Every Assessee, —

(a)           being a company shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013; or

(b)          being a company, to which the second proviso to Section 129(1) of the Companies Act. 2013 is applicable, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company.

[First and Second Provisos to Section 115JB (2)]:

While preparing the annual accounts including statement of profit and loss:

(i)            the accounting policies of the company;

(ii)           the accounting standards followed by the company for preparing such accounts including statement of profit and loss;

(iii)          the method and rates adopted for calculating the depreciation by the company.

shall be the same as have been adopted for the purpose of preparing such accounts including statement of profit and loss as laid before the company at its annual general meeting in accordance with on the provisions of Section 129 of the Companies Act, 2013

Further, where the company has adopted or adopts the financial year under the Companies Act, 2013, which is different from the previous year under the Income-tax Act, the above three (i.e. accounting policies, accounting standards and method of calculating depreciation) shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including statement of profit and loss for such financial year or part of such financial year falling within the relevant previous year.
When an Assessing Officer has power to Alter the Profit:

In the following cases, the Assessing Officer shall have power to rework or rewrite the statement of profit and loss:

(1)          Where the statement of profit and loss submitted is not as per Schedule III of the Companies Act.

(2)          Where the accounting policies or accounting standards or rate of depreciation adopted are different from those adopted for the statement of profit and loss prepared for the annual general meeting.

Assessing Officer has No Power to Scrutinize the Statement of Profit and Loss:

Where the statement of profit and loss has been prepared in accordance with Schedule III to the Companies Act and which has been scrutinised and certified by the statutory auditors and relevant authorities, the Assessing Officer has no power to scrutinise net profit in profit and loss account.

How to Compute Book Profit under Section 115JB

‘Book profit’ is arrived at after making specified adjustments to the profit as shown in the statement of profit and loss so prepared. This adjustment can be made as per the following steps: —

Step 1:

The Profit as shown in the statement of profit and loss shall be Increased by the following amounts:

(a)           the amount of income-tax paid or payable, and the provision therefor: or

(b)          the amounts carried to any reserves by whatever name called: or

(c)           the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d)          the amount by way of provision for losses of subsidiary companies: or

(e)           the amount or amounts of dividends paid or proposed; or

(f)           the amount or amounts of expenditure relatable to any income to which section 10, 11’ or 12 apply (i.e., incomes which are exempt from tax); or

(fa)        the amount or amounts of expenditure relatable to, income, being share of the Assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86;

(fb)        the amount or amounts of expenditure relatable to income accruing or arising to an Assessee, being a foreign company, from, —

(A)          the capital gains arising on transactions in securities; or

(B)          the interest, royalty or fees for technical services chargeable to tax at the rate or rates (i.e., special rate(s)) specified in Chapter XII,

(fc)         the amount representing notional loss on transfer of a capital asset.

(fd)         the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF; or

(g)           the amount of depreciation; or

(h)          the amount of deferred tax and provisions therefor; or

(i)            the amount or amounts set aside as provision for diminution in the value of any asset

(j)            the amount standing in revaluation reserve relating to revalued assets on the retirement or disposal of such asset if such amount is not credited to the statement of profit and loss.

(k)          the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred, as the case may be.

Step 2:

The profit as per the Statement of Profit and Loss shall be Reduced by the following:

(i)            The amount withdrawn from any reserves or provisions, if any, such amount is credited to the statement of profit and loss:

In other words, the amount withdrawn from any reserve, credited before 1.4.1997, shall not be reduced from the profit unless the same was debited to the statement of profit and loss at the time when such reserve was created.

Similarly, the amount withdrawn from the reserve created on or after 1.4.1997 and credited to the statement of profit and loss shall not be deducted while computing book profit unless the book profit in the year of creation of such reserve was increased by such reserve at that time.

For purpose of computing book profit under section 115JB, amount withdrawn from revaluation reserve created after 1.4.1997. and credited to profit and loss account, is not to be reduced from net profit as per profit and loss account unless book profit had been increased by amount of reserve in year of creation of such reserve.

(ii)           The book profit under section 115JB shall be reduced by the amount of income to which provision of section 10 applies.

(iia)        the amount of depreciation debited to the statement of profit and loss (excluding the depreciation on account of revaluation of assets); or

(iib)        the amount withdrawn from revaluation reserve and credited to the statement of profit and loss, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia) above; or

(iic)         the amount of income, being the share of the Assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any such amount is credited to the statement of profit and loss; or

(iid)        the amount of income accruing or arising to an Assessee, being a foreign company, from, —

(A)          the capital gains arising on transactions in securities; or

(B)          the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII,

(iie)        the amount representing, —

(A)          notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or

(B)          notional gain resulting from any change in carrying amount of said units; or

(C)          gain on transfer of units referred to in clause (xvii) of section 47,

if any, credited to the statement of profit and loss; or

(iif)         the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time o exchange where such shares are carried at a value other than the cost through profit or loss account, as the case may be; or

(iig)        the amount of income by way of royalty in respect of patent chargeable to tax under section
115BBF;

(iih)        the 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.

(iii)          the amount of loss brought forward or unabsorbed depreciation, whichever is less

(vii)        the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

(viii)       the amount of deferred tax, if any such amount is credited to the statement of profit and loss:

(ix)        the amount of profit derived from the activities of a tonnage tax company [Section 115VO].

The amount computed after increasing or decreasing the above in Step 1 and Step 2, respectively, is known as Book-profit.

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

(1). [Section 115-O (1)]- Tax on Distributed Profits of Domestic Companies

Shall not be applicable w.e.f. 1.4.2020 as Dividend shall now be Taxable in the hands of the recipient.

(2). [Section 115-O (1A)]- Dividend received from Subsidiary Company to be reduced from the above Dividend to be Distributed

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, –

(a)           where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or

(b)          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). [Section 115-O(1B)]- Dividend and Income Distribution Tax to be Grossed Up

For the purposes of determining the tax on distributed profits payable in accordance with the section 115-0, any amount by way of dividends referred to in section 115-0 (1), as reduced by the amount referred to in section 115-0 (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 115-0(1), be equal to the net distributed profits.

(4). [Section 115-0 (6)]- No tax on Distributed Profits by an Undertaking or Enterprise engaged in Developing Operating and Maintaining a Special Economic Zone (SEZ):

Notwithstanding anything contained in this section, no tax on distributed profits shall be chargeable in respect of the total income of an undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone for any assessment year on any amount declared, distributed or paid by such Developer or Enterprise, by way of dividends (whether interim or otherwise) on or after 1.4.2005 out of its current income of the recipient.

Such dividend declared or distributed or paid out of its current income shall neither be taxable in the hands of such undertaking or enterprise nor it will be taxable in the hands of the recipient shareholders.

Section 115-0(6) has ceased to have effect from 1.6.2011. In other words, dividend distributed paid or declared by the undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone on or after 1.6.2011 shall be liable for dividend distribution tax @ 20.35765 %.

(5). [Section 115-0 (7)]- Exemption from Dividend Distribution Tax (DDT) on Distribution made by a SPY to Business Trust

No tax on distributed profits shall be chargeable under this section in respect of any amount declared, distributed or paid by the specified domestic company by way of dividends (whether interim or otherwise) to a business trust out of its current income on or after the specified date:

Provided that nothing contained in section 115-0(7) shall apply in respect of any amount declared, distributed or paid, at any time, by the specified domestic company by way of dividends (whether interim or otherwise) out of its accumulated profits and current profits up to the specified date.

(6). [Section 115-0 (8)]- No Dividend Distribution Tax (DDT) in case of a company being a unit of an International Financial Services Centre (IFSC) deriving income solely in convertible foreign exchange

Section 115-0(8) has been amended to provide that any dividend paid out of accumulated income derived from operations in IFSC, after 1.4.2017 shall also not be liable for tax on distributed profits.

This will facilitate distribution of dividend by companies operating in IFSC.

(7). [Section 115-0 (3)]- Time Limit for Deposit of Additional Income-Tax:

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.

(8). [Section 115-0 (4)]- Tax on Distributed Profits Not Allowed as Deduction:

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.

(9). [Section 115P]- Interest payable for Non-payment of Tax by the Domestic Companies:

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 115-0(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.

(10). [Section 115Q]- When Companies Deemed to be in Default:

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 115-0, 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.

(11). Penalty Under Section 271C:

If any person fails to pay the whole or any part of the tax as required under section 115-0(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.

(12). Prosecution Under Section 276B:

If a person fails to pay to the credit of the Central Government the tax payable by him under section 115-0(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.

(13). [Section 10(34)]- Exemption of Dividend in the hands of Shareholders:

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.

Hence, section 10(34) shall not apply to any income by way of dividend received by the shareholder on or after 1.4.2020.

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

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

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 rates:

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 fund 25% + 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 HUF 25% + SC + H&EC
(b)  Any person other than individual or HUF 30% + SC + H&EC
3. Where the income is distributed by an equity-oriented fund to any person 10% + SC + H&EC

Provided that where any income is distributed by a mutual fund under an infrastructure debt fund scheme to a non-resident (not being a company) or a foreign company, the mutual fund shall be liable to pay additional income-tax at the rate of 5% on income so distributed (first proviso):

Provided further that] nothing contained in this sub-section shall apply in respect of any income distributed, by the Administrator of the specified undertaking, to the unit holders; (second proviso)

Amendment made by the Finance (No.2) Act, 2019 [W.e.f. 1.9.2019]

Third proviso to section 115-R (2) has been inserted so as to provide that no additional income-tax shall be chargeable in respect of any amount of income distributed, on or after 1.9.2019, by a Specified Mutual Fund out of its income derived from transactions made on a recognised stock exchange located in any International Financial Services Centre (IFSC) and where the consideration for such transaction is paid or payable in convertible foreign exchange:

‘Specified Mutual Fund” means a Mutual Fund specified under section 10(23D)—

(a)           located in any International Financial Services Centre;

(b)          of which all the units are held by non-residents.

Income Distribution Tax to be Grossed Up [Section 115R (2A)]

For the purposes of determining the tax on distributed income payable in accordance with the section 115R, any amount by way of income referred to in section 115R, as reduced by the amount referred to in section 115-R (2A) [referred to as net distributed income], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in section 115-R, be equal to the net distributed income.

The effective rate of additional tax, shall be as under:

1. (a)  Where the income is distributed to any person being an individual or a HLJF by a money market mutual fund or a liquid fund 33.33% + 12% SC + 4% H&EC = 38.82%
(b)  Where the income is distributed to any other person by a money market mutual fund or liquid fund. 42.857% + 12% SC + 4% H&EC = 49.92%
(c)  Income distributed to any person by an equity-oriented fund 11.111 % + 12% SC + 4% H&EC = 12.942%
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 HUF 33.33% + 12% SC + 4% H&EC = 38.82%
(b) Any person other than individual or HUF 42.857% + 12% SC + 4% H&EC = 49.92%
(c) if recipient is non-resident/foreign company (under infrastructure debt fund) 5.26% + 12% SC + 4% H&EC = 6.127%

(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. (Omitted by the Finance Act, 2018, w.e.f. 1.4.2018)

(3). [Section 10(35)]- Exemption of Income in the hands of Unit Holder:

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

(a)           income received in respect of the units of a Mutual Fund specified under section 10(23D); or

(b)          income received in respect of units from the Administrator of the specified undertaking; or

(c)           income received in respect of units from the specified company.

Amendment made by the Finance Act, 2020

The provisions of section 115R shall not be applicable w.e.f. 1.4.2020, as income from unit shall now be taxable in the hands of the recipient.

Hence, section 10(35) shall also not apply to any income distributed by way of profit received by the unit holder on or after 1.4.2020.

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