CHANAKYA NATIONAL LAW UNIVERSITY, PATNA

TAXATION LAW
Project on:TAXATION OF COMPANIES
Submitted To: Mr.
G.P. Pandey
Submitted By:
ABHISHEK KUMAR
Roll No.

502
Semester
: VII, 4th Year.

ACKNOWLEDGEMENT

The present project on the Taxation of Companies has been able to get its final shape with the
support and help of people from various quarters. My sincere thanks go to all the members
without whom the study could not have come to its present state. I am proud to acknowledge
gratitude to the individuals during my study and without whom the study may not be completed.
I have taken this opportunity to thank those who genuinely helped me.
With immense pleasure, I express my deepest sense of gratitude to Mr. G.P. Pandey, Faculty for
Taxation Law, Chanakya National Law University for helping me in my project. I am also
thankful to the whole Chanakya National Law University family that provided me all the
material I required for the project. Not to forget thanking to my parents without the co-operation
of which completion of this project would not had been possible.
I have made every effort to acknowledge credits, but I apologies in advance for any omission that
may have inadvertently taken place.
Last but not least I would like to thank Almighty whose blessing helped me to complete the
project.

RESEARCH METHODOLOGY

Method of Research:
The researcher has adopted a purely doctrinal method of research. The researcher
has made extensive use of the library at the Chanakya National Law University and
also the internet sources.

Aims and Objectives:

The aim of the project is to present an overview of the terms Taxation of
Companies through different cases, writings and articles

Sources of Data:
The following secondary sources of data have been used in the project1. Cases
2. Books
3. Websites

Method of Writing:
The method of writing followed in the course of this research paper is
primarily analytical.

CONTENTS

ACKNOWLEDGEMENT
RESEARCH METHODOLOGY

CHAPTERISATION
INTRODUCTION
..
TAXATION OF
CORPORATES..
COMPUTATION OF TAXABLE INCOME OF A
COMPANY..................................................................................
........
DIFFERENT KINDS OF TAXES RELATING TO A
COMPANY..................................................................................
.........
TAX REBATES FOR CORPORATE
TAX..
PROVISION RELATING TO TAXATION OF A
COMPANY..
CASE
LAWS........................................................................................
..

CONCLUSION
BIBLIOGRAPHY

INTRODUCTION
Corporate Tax relates to the taxation of companies in India. For the purpose of taxation laws, a
Company means:
-

An Indian company, or a corporate body incorporated inside or outside India

Any institution, association or body whether incorporated or not, and whether domestic
or non-resident, which is declared as a company by the Central Board of Direct Taxes
(CBDT)

Income of a company
Before we head on to talking about what the rates of taxation for companies are, lets take a look
at what makes up the income of a company. Generally, the income of a company falls under
any of the following 4 heads of income:
-

Profits or gains from the business

Income from property, whether it is housing, commercial, self occupied or let-out. If the

property is used in the companys business operations, it does not fall under this head.
Capital gains
Income from other sources including winnings from lotteries, races and interest on
securities.

The resultant figure is set off against any carried forward profits / loss which is then subject to
deductions that are available under relevant headings. This net income is liable to income tax.

Domestic Company and Corporate Tax

A domestic company is a company formed and registered under the Companies Act 1956 or any
other company which is liable to income tax. It can be either a private or public company. Here
are some of the highlights of corporate taxation for domestic companies in India.
-

Domestic companies are subject to a flat rate of 30% as corporate tax on their earnings.
If the company has a turnover of Rs. 1 crore or more, 5% surcharge is levied on the tax

paid by the company.

3% education cess is also payable.
Tax is levied on the global earnings of a domestic company, i.e. income from all sources
is taxable.

Foreign companies and Corporate Tax

For the purpose of corporate taxation, a company whose control and management lies wholly
outside India is a foreign company. It must also be noted that such companies should not have
made arrangements to pay dividends within India. The taxation of foreign companies is not as
straight-forward as that of a domestic company.
Taxation of foreign companies also depends on the taxation agreements between India and the
country of the company. The withholding tax requirements, the DTAA and other agreements
should be kept in mind.
Just a few months before the recent Union Budget, there was a lot of talk of the corporate tax rate
being reduced from the flat 30% to 25% for domestic companies? Well that did not happen,
however 30% is at par with most other countries in the world.

TAXATION OF CORPORATES

Company whether Indian or foreign is liable to taxation, under the Income Tax Act,1961.
Corporation tax is a tax which is levied on the incomes of registered companies and corporations.
A Company means:-

Any Indian company, or

Any corporate body, incorporated by or under the laws of a country outside India, or
Any institution, association or a 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 April 1, 1970,or

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 the Central Board of Direct
Taxes to be a company.

Companies in India, whether public or private are governed subject to the Companies Act, 1956
and of 2013. The registrar of companies and the company law board administers the provisions
of the Act. However, for the purpose of taxation, companies are broadly classified as:Domestic company [Section 2(22A) of 1956 Act]:- means an Indian company (i.e. a company
formed and registered under the Companies Act,1956) or any other company which, in respect of
its income liable to tax, under the Income Tax Act, has made the prescribed arrangement for
declaration and payments within India, of the dividends payable out of such income. A domestic
company may be a public company or a private company.i

Foreign company [Section 2(23A)] :- means a company whose control and management are
situated wholly outside India, and which has not made the prescribed arrangements for
declaration and payment of dividends within India.ii

COMPUTATION OF TAXABLE INCOME OF A COMPANY

Ascertain the 'total income' of the company by aggregating incomes falling under

following four heads:Income from House Property, whether residential or commercial, let-out or self-occupied.
However, house property used for purpose of company's business does not fall under this

head.
Profits and Gains of Business or Profession.
Capital Gains.
Income from other sources including interest on securities, winnings from lotteries, races,
puzzles, etc.

Also, income of other persons may be included in the income of the company. But, income under
the head 'Salary' is not included under company.

To the total income so obtained, 'current and brought forward losses' should be adjusted
for set off in subsequent assessment years to arrive at the gross total Income. Thus the
total income so computed is the 'gross total income'. The 'set off ' means, adjustment of
certain losses against the incomes under other sources/heads (Section 79). This section
applies to all losses including losses under the head 'Capital Gains'.

Unabsorbed depreciation may be carried-forward for set-off indefinitely. But carry back of losses
or depreciation is not permitted. However, business losses can be carried forward for eight
consecutive financial years and can be set off against the profits of subsequent years.

From the gross total income, prescribed 'deductions' under Chapter VI A are made to get
the 'net income'.

Generally, all expenses incurred for business purposes are deductible from taxable income, given
that the expenses must be wholly and exclusively incurred for business purposes and also that the
expenses must be incurred/paid during the previous year and supported by relevant papers and
records. But expenses of personal or of capital nature are not deductible.iii
Capital expenditure are deductible only through depreciation or as the basis of property in
determining capital gains/losses. Deductions shall also be allowed in respect of depreciation, as
per Section 32 of Income Tax Act, of tangible assets such as machinery, buildings, etc and nontangible assets such as know-how, patents, etc, which are owned by assessee and used for the
purpose of business/profession.
Depreciation is deducted from the written-down value of the block of assets mentioned under
Section 43 of the Act. However, where an asset is acquired by assessee during the previous year
and is put to use for business/profession purpose for a period of less than 180 days, the deduction
in respect of such assets shall be restricted to 50% of the normal value prescribed for all block of
assets.
But no deduction shall be allowed in respect of any expenditure incurred in relation to income
which does not form part of total income.
Tax liability is computed on the 'net income' that is chargeable to tax. It is done either on accrual
basis or on receipt basis (whichever is earlier). However if an income is taxed on accrual basis, it
shall not be taxed on receipt basis.iv
From the tax so computed, tax rebates or tax credit are deducted.

DIFFERENT KINDS OF TAXES RELATING TO A COMPANY

Direct Taxes
In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on the taxpayer.
Income tax
According to Income Tax Act 1961, every person, who is an assessee and whose total income
exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates
prescribed in the Finance Act. Such income tax shall be paid on the total income of the previous
year in the relevant assessment year.v
Assessee means a person by whom (any tax) or any other sum of money is payable under the
Income Tax Act, and includes (a) Every person in respect of whom any proceeding under the Income Tax Act has been taken
for the assessment of his income (or assessment of fringe benefits) or of the income of any other
person in respect of which he is assessable, or of the loss sustained by him or by such other
person, or of the amount of refund due to him or to such other person;
(b) Every person who is deemed to be an assessee under any provisions of the Income Tax Act;
(c) Every person who is deemed to be an assessee in default under any provision of the Income
Tax Act.vi
Where a person includes:

Individual

Hindu Undivided Family (HUF)

Association of persons (AOP)

Body of individuals (BOI)

Company

Firm

A local authority and,

Every artificial judicial person not falling within any of the preceding categories.

Income tax is an annual tax imposed separately for each assessment year (also called the tax
year). Assessment year commences from 1st April and ends on the next 31st March.
The total income of an individual is determined on the basis of his residential status in India. For
tax purposes, an individual may be resident, nonresident or not ordinarily resident.
Definition of a company
A company has been defined as a juristic person having an independent and separate legal entity
from its shareholders. Income of the company is computed and assessed separately in the hands
of the company. However the income of the company, which is distributed to its shareholders as
dividend, is assessed in their individual hands. Such distribution of income is not treated as
expenditure in the hands of company; the income so distributed is an appropriation of the profits
of the company.
Residence of a company

A company is said to be a resident in India during the relevant previous year if:
o It is an Indian company
o If it is not an Indian company but, the control and the management of its affairs is
situated wholly in India

A company is said to be non-resident in India if it is not an Indian company and some

part of the control and management of its affairs is situated outside India.vii

Corporate sector tax

The taxability of a company's income depends on its domicile. Indian companies are taxable in
India on their worldwide income. Foreign companies are taxable on income that arises out of
their Indian operations, or, in certain cases, income that is deemed to arise in India.
Royalty, interest, gains from sale of capital assets located in India (including gains from sale of
shares in an Indian company), dividends from Indian companies and fees for technical services
are all treated as income arising in India.viii
Different kinds of taxes relating to a company
Minimum Alternative Tax (MAT)
Normally, a company is liable to pay tax on the income computed in accordance with the
provisions of the income tax Act, but the profit and loss account of the company is prepared as
per provisions of the Companies Act. There were large number of companies who had book
profits as per their profit and loss account but were not paying any tax because income computed
as per provisions of the income tax act was either nil or negative or insignificant. In such case,
although the companies were showing book profits and declaring dividends to the shareholders,
they were not paying any income tax. These companies are popularly known as Zero Tax
companies. In order to bring such companies under the income tax act net, section 115JA was
introduced w.e.f assessment year 1997-98. A new tax credit scheme is introduced by which MAT
paid can be carried forward for set-off against regular tax payable during the subsequent five
year period subject to certain conditions, as under:

When a company pays tax under MAT, the tax credit earned by it shall be an amount,
which is the difference between the amount payable under MAT and the regular tax.
Regular tax in this case means the tax payable on the basis of normal computation of total
income of the company.

MAT credit will be allowed carry forward facility for a period of five assessment years
immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT
credit will be allowed to be accumulated subject to the five-year carry forward limit.

In the assessment year when regular tax becomes payable, the difference between the
regular tax and the tax computed under MAT for that year will be set off against the MAT
credit available.

The credit allowed will not bear any interest

Fringe Benefit Tax (FBT)

The Finance Act, 2005 introduced a new levy, namely Fringe Benefit Tax (FBT) contained in
Chapter XIIH (Sections 115W to 115WL) of the Income Tax Act, 1961.
Fringe Benefit Tax (FBT) is an additional income tax payable by the employers on value of
fringe benefits provided or deemed to have been provided to the employees. The FBT is payable
by an employer who is a company; a firm; an association of persons excluding trusts/a body of
individuals; a local authority; a sole trader, or an artificial juridical person. This tax is payable
even where employer does not otherwise have taxable income. Fringe Benefits are defined as
any privilege, service, facility or amenity directly or indirectly provided by an employer to his
employees (including former employees) by reason of their employment and includes expenses
or payments on certain specified heads.
The benefit does not have to be provided directly in order to attract FBT. It may still be applied if
the benefit is provided by a third party or an associate of employer or by under an agreement
with the employer.
The value of fringe benefits is computed as per provisions under Section 115WC. FBT is payable
at prescribed percentage on the taxable value of fringe benefits. Besides, surcharge in case of
both domestic and foreign companies shall be leviable on the amount of FBT. On these amounts,
education cess shall also be payable. Every company shall file return of fringe benefits to the
Assessing Officer in the prescribed form by 31st October of the assessment year as per

provisions of Section 115WD. If the employer fails to file return within specified time limit
specified under the said section, he will have to bear penalty as per Section 271FB.ix
The scope of Fringe Benefit Tax is being widened by including the employees stock option as
fringe benefit liable for tax. The fair market value of the share on the date of the vesting of the
option by the employee as reduced by the amount actually paid by him or recovered from him
shall be considered to be the fringe benefit. The fair market value shall be determined in
accordance with the method to be prescribed by the CBDT.
Dividend Distribution Tax (DDT)
Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a
domestic company by way of dividend shall be chargeable to dividend tax. Only a domestic
company (not a foreign company) is liable for the tax. Tax on distributed profit is in addition to
income tax chargeable in respect of total income. It is applicable whether the dividend is interim
or otherwise. Also, it is applicable whether such dividend is paid out of current profits or
accumulated profits. The tax shall be deposited within 14 days from the date of declaration,
distribution or payment of dividend, whichever is earliest. Failing to this deposition will require
payment of stipulated interest for every month of delay under Section115-P of the Act.
Rate of dividend distribution tax to be raised from 12.5 per cent to 15 per cent on dividends
distributed by companies; and to 25 per cent on dividends paid by money market mutual funds
and liquid mutual funds to all investors.
Banking Cash Transaction Tax (BCTT)
The Finance Act 2005 introduced the Banking Cash Transaction Tax (BCTT) w.e.f. June 1, 2005
and applies to the whole of India except in the state of Jammu and Kashmir.BCTT continues to
be an extremely useful tool to track unaccounted monies and trace their source and destination. It
has led the Income Tax Department to many money laundering and hawala transactions.
BCTT is levied at the rate of 0.1 per cent of the value of following "taxable banking
transactions" entered with any scheduled bank on any single day:

Withdrawal of cash from any bank account other than a saving bank account; and

Receipt of cash on encashment of term deposit(s).

However,Banking Cash Transaction Tax (BCTT) has been withdrawn with effect from April 1,
2009.
Securities Transaction Tax (STT)
Securities Transaction Tax or turnover tax, as is generally known, is a tax that is leviable on
taxable securities transaction. STT is leviable on the taxable securities transactions with effect
from 1st October, 2004 as per the notification issued by the Central Government. The surcharge
is not leviable on the STT.
Wealth Tax
Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the benefits
derived from property ownership. The tax is to be paid year after year on the same property on its
market value, whether or not such property yields any income.
Under the Act, the tax is charged in respect of the wealth held during the assessment year by the
following persons:

Individual

Hindu Undivided Family (HUF)

Company

Chargeability to tax also depends upon the residential status of the assessee same as the
residential status for the purpose of the Income Tax Act.
Wealth tax is not levied on productive assets, hence investments in shares, debentures, UTI,
mutual funds, etc are exempt from it. The assets chargeable to wealth tax are Guest house,
residential house, commercial building, Motor car, Jewellery, bullion, utensils of gold, silver,
Yachts, boats and aircrafts, Urban land and Cash in hand (in excess of Rs 50,000 for Individual
& HUF only).
The following will not be included in Assets: -

Assets held as Stock in trade.

A house held for business or profession.

Any property in nature of commercial complex.

A house let out for more than 300 days in a year.

Gold deposit bond.

A residential house allotted by a Company to an employee, or an Officer, or a Whole

Time Director (Gross salary i.e. excluding perquisites and before Standard Deduction of such
Employee, Officer, Director should be less than Rs 5,00,000).
The assets exempt from Wealth tax are "Property held under a trust", Interest of the assessee in
the coparcenary property of a HUF of which he is a member, "Residential building of a former
ruler", "Assets belonging to Indian repatriates", one house or a part of house or a plot of land not
exceeding 500sq.mts(for individual & HUF assessee)
Wealth tax is chargeable in respect of Net wealth corresponding to Valuation date where Net
wealth is all assets less loans taken to acquire those assets and valuation date is 31st March of
immediately preceding the assessment year. In other words, the value of the taxable assets on the
valuation date is clubbed together and is reduced by the amount of debt owed by the assessee.
The net wealth so arrived at is charged to tax at the specified rates. Wealth tax is charged @ 1 per
cent of the amount by which the net wealth exceeds Rs 15 Lakhs.x

Indirect Taxation
Sales tax
Central Sales Tax (CST)
Central Sales tax is generally payable on the sale of all goods by a dealer in the course of interstate trade or commerce or, outside a state or, in the course of import into or, export from India.
The ceiling rate on central sales tax (CST), a tax on inter-state sale of goods, has been reduced
from 4 per cent to 3 per cent in the current year.
Value Added Tax (VAT)
VAT is a multi-stage tax on goods that is levied across various stages of production and supply
with credit given for tax paid at each stage of Value addition. Introduction of state level VAT is
the most significant tax reform measure at state level. The state level VAT has replaced the
existing State Sales Tax.xi The decision to implement State level VAT was taken in the meeting of
the Empowered Committee (EC) of State Finance Ministers held on June 18, 2004, where a
broad consensus was arrived at to introduce VAT from April 1, 2005. Accordingly, all states/UTs
have implemented VAT.
The Empowered Committee, through its deliberations over the years, finalized a design of VAT
to be adopted by the States, which seeks to retain the essential features of VAT, while at the same
time, providing a measure of flexibility to the States, to enable them to meet their local

requirements. Some salient features of the VAT design finalized by the Empowered Committee
are as follows:

The rates of VAT on various commodities shall be uniform for all the States/UTs. There
are 2 basic rates of 4 per cent and 12.5 per cent, besides an exempt category and a special
rate of 1 per cent for a few selected items. The items of basic necessities have been put in
the zero rate bracket or the exempted schedule.

Gold, silver and precious stones have been put in the 1 per cent schedule. There is also a
category with 20 per cent floor rate of tax, but the commodities listed in this schedule are not
eligible for input tax rebate/set off. This category covers items like motor spirit (petrol),
diesel, aviation turbine fuel, and liquor.

There is provision for eliminating the multiplicity of taxes. In fact, all the State taxes on
purchase or sale of goods (excluding Entry Tax in lieu of Octroi) are required to be
subsumed in VAT or made VATable.

Provision has been made for allowing "Input Tax Credit (ITC)", which is the basic feature
of VAT. However, since the VAT being implemented is intra-State VAT only and does not
cover inter-State sale transactions, ITC will not be available on inter-State purchases.

Exports will be zero-rated, with credit given for all taxes on inputs/ purchases related to
such exports.

There are provisions to make the system more business-friendly. For instance, there is
provision for self-assessment by the dealers. Similarly, there is provision of a threshold
limit for registration of dealers in terms of annual turnover of Rs 5 lakh. Dealers with
turnover lower than this threshold limit are not required to obtain registration under VAT
and are exempt from payment of VAT. There is also provision for composition of tax
liability up to annual turnover limit of Rs. 50 lakh.

Regarding the industrial incentives, the States have been allowed to continue with the
existing incentives, without breaking the VAT chain. However, no fresh sales tax/VAT
based incentives are permitted.xii

Roadmap towards GST

The Empowered Committee of State Finance Ministers has been entrusted with the task of
preparing a roadmap for the introduction of national level goods and services tax with effect
from 01 April 2007.The move is towards the reduction of CST to 2 per cent in 2008, 1 per cent in
2009 and 0 per cent in 2010 to pave way for the introduction of GST (Goods and Services Tax).
Excise Duty
Central Excise duty is an indirect tax levied on goods manufactured in India. Excisable goods
have been defined as those, which have been specified in the Central Excise Tariff Act as being
subjected to the duty of excise.
There are three types of Central Excise duties collected in India namely
Basic Excise Duty
This is the duty charged under section 3 of the Central Excises and Salt Act,1944 on all excisable
goods other than salt which are produced or manufactured in India at the rates set forth in the
schedule to the Central Excise tariff Act,1985.
Additional Duty of Excise
Section 3 of the Additional duties of Excise (goods of special importance) Act, 1957 authorizes
the levy and collection in respect of the goods described in the Schedule to this Act. This is
levied in lieu of sales Tax and shared between Central and State Governments. These are levied
under different enactments like medicinal and toilet preparations, sugar etc. and other industries
development etc.
Special Excise Duty
As per the Section 37 of the Finance Act,1978 Special excise Duty was attracted on all excisable
goods on which there is a levy of Basic excise Duty under the Central Excises and Salt
Act,1944.Since then each year the relevant provisions of the Finance Act specifies that the

Special Excise Duty shall be or shall not be levied and collected during the relevant financial
year.
Customs Duty
Custom or import duties are levied by the Central Government of India on the goods imported
into India. The rate at which customs duty is leviable on the goods depends on the classification
of the goods determined under the Customs Tariff. The Customs Tariff is generally aligned with
the Harmonised System of Nomenclature (HSL).
In line with aligning the customs duty and bringing it at par with the ASEAN level, government
has reduced the peak customs duty from 12.5 per cent to 10 per cent for all goods other than
agriculture products. However, the Central Government has the power to generally exempt goods
of any specified description from the whole or any part of duties of customs leviable thereon. In
addition, preferential/concessional rates of duty are also available under the various Trade
Agreements.
Service Tax
Service tax was introduced in India way back in 1994 and started with mere 3 basic services viz.
general insurance, stock broking and telephone. Today the counter services subject to tax have
reached over 100. There has been a steady increase in the rate of service tax. From a mere 5 per
cent, service tax is now levied on specified taxable services at the rate of 12 per cent of the gross
value of taxable services. However, on account of the imposition of education cess of 3 per cent,
the effective rate of service tax is at 12.36 per cent.xiii

TAX REBATES FOR CORPORATE TAX

The classical system of corporate taxation is followed in India

Domestic companies are permitted to deduct dividends received from other domestic
companies in certain cases.

Inter Company transactions are honored if negotiated at arm's length.

Special provisions apply to venture funds and venture capital companies.

Long-term capital gains have lower tax incidence.

There is no concept of thin capitalization.

Liberal deductions are allowed for exports and the setting up on new industrial
undertakings under certain circumstances.

There are liberal deductions for setting up enterprises engaged in developing, maintaining
and operating new infrastructure facilities and power-generating units.

Business losses can be carried forward for eight years, and unabsorbed depreciation can
be carried indefinitely. No carry back is allowed.

Dividends, interest and long-term capital gain income earned by an infrastructure fund or
company from investments in shares or long-term finance in enterprises carrying on the
business of developing, monitoring and operating specified infrastructure facilities or in

units of mutual funds involved with the infrastructure of power sector is proposed to be
tax exempt.xiv
Capital Gains Tax
A capital gain is income derived from the sale of an investment. A capital investment can be a
home, a farm, a ranch, a family business, work of art etc. In most years slightly less than half of
taxable capital gains are realized on the sale of corporate stock. The capital gain is the difference
between the money received from selling the asset and the price paid for it.
Capital gain also includes gain that arises on "transfer" (includes sale, exchange) of a capital
asset and is categorized into short-term gains and long-term gains.
The capital gains tax is different from almost all other forms of taxation in that it is a voluntary
tax. Since the tax is paid only when an asset is sold, taxpayers can legally avoid payment by
holding on to their assets--a phenomenon known as the "lock-in effect."
The scope of capital asset is being widened by including certain items held as personal effects
such as archaeological collections, drawings, paintings, sculptures or any work of art. Presently
no capital gain tax is payable in respect of transfer of personal effects as it does not fall in the
definition of the capital asset. To restrict the misuse of this provision, the definition of capital
asset is being widened to include those personal effects such as archaeological collections,
drawings, paintings, sculptures or any work of art. Transfer of above items shall now attract
capital gain tax the way jewellery attracts despite being personal effect as on date.
Short Term and Long Term capital Gains
Gains arising on transfer of a capital asset held for not more than 36 months (12 months in the
case of a share held in a company or other security listed on recognised stock exchange in India
or a unit of a mutual fund) prior to its transfer are "short-term". Capital gains arising on transfer
of capital asset held for a period exceeding the aforesaid period are "long-term".
Section 112 of the Income-Tax Act, provides for the tax on long-term capital gains, at 20 per cent
of the gain computed with the benefit of indexation and 10 per cent of the gain computed (in case
of listed securities or units) without the benefit of indexation.xv

Double Taxation Relief

Double Taxation means taxation of the same income of a person in more than one country. This
results due to countries following different rules for income taxation. There are two main rules of
income taxation i.e. (a) Source of income rule and (b) residence rule.
As per source of income rule, the income may be subject to tax in the country where the source
of such income exists (i.e. where the business establishment is situated or where the asset /
property is located) whether the income earner is a resident in that country or not.
On the other hand, the income earner may be taxed on the basis of the residential status in that
country. For example, if a person is resident of a country, he may have to pay tax on any income
earned outside that country as well. Further, some countries may follow a mixture of the above
two rules. Thus, problem of double taxation arises if a person is taxed in respect of any income
on the basis of source of income rule in one country and on the basis of residence in another
country or on the basis of mixture of above two rules. In India, the liability under the Income Tax
Act arises on the basis of the residential status of the assessee during the previous year. In case
the assessee is resident in India, he also has to pay tax on the income, which accrues or arises
outside India, and also received outside India. The position in many other countries being also
broadly similar, it frequently happens that a person may be found to be a resident in more than
one country or that the same item of his income may be treated as accruing, arising or received in
more than one country with the result that the same item becomes liable to tax in more than one
country. Relief against such hardship can be provided mainly in two ways: (a) Bilateral relief, (b)
Unilateral relief.
Bilateral Relief
The Governments of two countries can enter into Double Taxation Avoidance Agreement
(DTAA) to provide relief against such Double Taxation, worked out on the basis of mutual
agreement between the two concerned sovereign states. This may be called a scheme of 'bilateral
relief' as both concerned powers agree as to the basis of the relief to be granted by either of them.
Unilateral relief

The above procedure for granting relief will not be sufficient to meet all cases. No country will
be in a position to arrive at such agreement with all the countries of the world for all time. The
hardship of the taxpayer however is a crippling one in all such cases. Some relief can be
provided even in such cases by home country irrespective of whether the other country
concerned has any agreement with India or has otherwise provided for any relief at all in respect
of such double taxation. This relief is known as unilateral relief.xvi

PROVISION RELATING TO TAXATION OF A COMPANY

Indian companies are taxable in India on their worldwide income, irrespective of its source and
origin. Foreign companies are taxed only on income which arises from operations carried out in
India or, in certain cases, on income which is deemed to have arisen in India. The later includes
royalty, fees for technical services, interest, gains from sale of capital assets situated in India
(including gains from sale of shares in an Indian company) and dividends from Indian
companies. Thus, the tax-liability on income of a company depends upon the residential status of
the company.
A Company is said to be resident in India during any relevant previous year if:-

It is an Indian Company; or
The control and management of its affairs is situated wholly in India. In case of Resident

Companies, the total income liable to tax includes [section 5(1)]:Any income which is received or is deemed to be received in India in the relevant

previous year by or on behalf of such company

Any income which accrues or arises or is deemed to accrue or arise in India during the

relevant previous year

Any income which accrues or arises outside India during the relevant previous year.

Similarly, a Company is said to be non-resident during any relevant previous year if:-

It is not an Indian company,and

The control and management of its affairs is situated wholly/partially outside India. In

case of Non-Resident Companies, the total income liable to tax includes[section 5(2)]:Any income which is received or is deemed to be received in India during the relevant
previous year by or on behalf of such company

Any income which accrues or arises or is deemed to accrue or arise to it in India during
the relevant previous year.xvii

As a result a situation may arise where the same income becomes taxable in the hands of the
same company in one or more countries, leading to 'Double Taxation'.xviii
The problem of double taxation may arise on account of any of the following reasons:-

A company (or a person) may be resident of one country but may derive income from

other country as well, thus he becomes taxable in both the countries.

A company/person may be subjected to tax on his world income in two or more countries,
which is known as concurrent full liability to tax. One country may tax on the basis of
nationality of tax-payer and another on the basis of his residence within its border. Thus,
a person domiciled in one country and residing in another may become liable to tax in

both the countries in respect of his world income.

A company/person who is non-resident in both the countries may be subjected to tax in
each one of them on income derived from one of them, for example, a non-resident
person has a Permanent establishment in one country and through it he derives income
from the other country.xix

In India the relief against double taxation has been provide under Section 90 and Section 91 of
the Income Tax Act.
Section 90 of the Income Tax Act relates to bilateral relief. Under it, the Central Government has
entered into an agreement with the Government of any country outside India. These agreements
called as "double taxation avoidance agreements (DTAA's)" , provide for the following:Granting of relief in respect of:-

Income on which income tax has been paid both in India and in that country or
Income tax chargeable in India and under the corresponding law in force in that country

to promote mutual economic relations, trade and investment, or

The type of income which shall be chargeable to tax in either country so that there is
avoidance of double taxation of income under this Act and under the corresponding law
in force in that country.

In addition the Central Government may enter into an agreement to provide:-

For exchange of information for the prevention of evasion or avoidance of income tax
chargeable under the Act or under the corresponding law in force in that country, or

investigation of cases of such evasion or avoidance, or

For recovery of income tax under the Act and under the corresponding law in force in that
country.xx

India has entered into DTAA with 65 countries including countries like U.S.A., U.K., Japan,
France, Germany, etc. In case of countries with which India has double taxation avoidance
agreements, the tax rates are determined by such agreements.
Under the section, the assessee is given relief by credit/refund in a particular manner even though
he is taxed in both the countries.
Relief may be in the form of credit for tax payable in another country or by charging tax at lower
rate. The steps involved in granting such a bilateral relief are:- (a) Compute the total income of
person liable to pay tax in India in accordance with the provisions of the Income Tax Act (b)
Allow relief as per the terms of the tax treaty entered into with the other contracting company,
where the taxation has suffered double taxation. The liabilities to tax arising under the Income
Tax Act are subject to provisions of the double taxation avoidance agreements between India and
foreign country. Thus the treaty provisions shall prevail over the income tax provisions
The types of agreements under DTAA's can be majorly categorised as:-

Comprehensive Agreements:-These are elaborated documents which puts forward in

detail that how incomes under various heads may be dealt with.
Limited Agreements :-These are entered into to avoid double taxation related to the

income derived from operation of aircrafts, ships, carriage of cargo and freight.
Other Agreements :-including double taxation relief rules.

Section 91 of the Income Tax Act relates to unilateral relief. Under it, if any person/company is
resident in India in any previous year and paid the income, which accrued to him in India, to any
country with which there is no agreement (under Section 90) for relief from double taxation, he
shall be entitled to deduction from the Indian Income-tax payable by him of a sum calculated on
such doubly taxed income at the average Indian rate of tax or the average rate of tax of said
country, whichever is lower, or at the Indian rate of tax if both the rates are equal.

The steps involved in calculating relief under this section are:- (a)Calculate tax on total
income(including foreign income) and claim relief applicable on it (b)Add surcharge and
education cess after claiming rebate under the Section 88E (c)Compute average rate of tax by
dividing the tax computed in previous step with the total income (d)calculate average rate of tax
of foreign country by dividing income-tax actually paid in the said country after deduction of all
relief due (e)Claim the relief from the tax payable in India at the rate computed in previous two
steps on the basis of whichever is less.xxi

CASE LAWS
Narottam and Parekh Ltd. v. C.I.Txxii
The question for consideration in this appeal is whether the assessee company is a resident
company.
Facts.
The company is a subsidiary company of the Scindia Steam Navigation Co. Ltd. and its business
is stevedoring in Ceylon. It is registered in Bombay and its registered office is also in Bombay.
The meetings of the Board of Directors are held in Bombay and also the meetings of the
shareholders.
Section 6 (3) (c) tells us what in the eye of the law is residence with regard to a company.
In order that a companys income should be subjected to tax as a resident, it has got to be
established that the control and management of its affairs is situated wholly in the taxable
territories in India.
Control and management is a compendious expression which has acquired a definite
significance and connotation. It is also necessary that the control and management of the affairs
of the company should be situated wholly in the taxable territories in India.
Therefore, if any part of the control and management is outside the taxable territories in India,
then the company would not be resident.
In this connection, it is pertinent to look at the converse definition of a Hindu undivided family,
firm or other association of persons.
In their case they are resident unless the control and management of its affairs is situated wholly
outside the taxable territories.
In construing the expression control and management it is necessary to bear in mind the
distinction between doing of business and the control and management of business. Business and
the whole of it may be done outside India and yet the control and management of that business
may be wholly within India.

Contention of the Appellant.

The whole of the business of the company is done in Ceylon and the whole of the income which
is liable to tax has been earned in Ceylon.
Secondly, the affairs of the company in Ceylon are managed by managers having power of
attorney to do any act. This power of attorney, effectively vests control of company in managers
residing in Ceylon.
Reasoning of the Court.
The legislative intent is not about place of business of earnings which is accruing to the
company.
It is entirely irrelevant where the business is done and where the income has been earned.
Control and management referred to in S. 6 point out on the central control and management.
The control and management contemplated by this section is not the carrying on of day to day
business by servants, employees or agents.
It is that authority to which the servants, employees and agents are subject, it is that authority
which controls and manages them, which is the central authority, and it is at the place where the
central authority functions that the company resides.
It may be in some cases that, like an individual a company may have residence in more than one
place. It may exercise control and management not only from one fixed abode, but it may have
different places.
That would again be a question dependent upon the circumstances of each case.
But the contention which is entirely unacceptable that a company controls or manages at a
particular place because its affairs are carried on at a particular place and they are carried on by
people living there appointed by the company with large powers of management.
In the present case, two managers under two powers of attorney look after all the affairs of the
assessee company in Ceylon. The widest possible power and authority has been conferred upon
these two managers under these power-of-attorney.
But it is equally clear from the minutes of the meetings of the Board of Directors which are also
before us that the central management and control has been kept in Bombay and has been
exercised by the directors in Bombay.

The minutes deal with various matters which are delegated to these two managers and yet the
directors from a proper sense of responsibility to the company have retained complete control
over these matters and have from time to time given directions to the managers as to how things
should be done and managed.
What we have to consider in this case is not the power or the capacity to manage and control, but
the actual control and management, or in other words, not the de jure control and management
but the de facto control and management, and in order to hold that the company is resident
during the years of account, it must be established that the company de facto controlled and
managed its affairs in Bombay.
Four principles which were enunciated in Swedish Central Railway Company Limited v.
Thompsonxxiii, were laid down in this case to determine residence for taxation purposes.
The four principles are:
(1) Control and management signifies in the present context, the controlling and directive power,
the head and brain as it is sometimes called, and situated implies the functioning of such power
at a particular place with some degree of permanence, while wholly would seem to recognise the
possibility of the seat of such power being divided between two distinct and separate places.
(2) Mere activity by the company in a place does not create residence.
(3) The central management and control of a company may be divided, and it may keep house
and do business in more than one place.
(4) In case of dual residence, there may be two centres of management.
But the important principle which applies to the present case is the one that has been first set out
and which emphasises the fact that what we have to consider in order to determine the residence
of a company is as to where its head and brain is, and the head and brain of the company will be
where its controlling and directive power functions.
Secondly, we take it that the word affairs must mean affairs which are relevant for the purpose
of the Income-tax Act and which have some relation to income.
It is not any business that the company does which has got to be considered.
In order to determine the head and brain of the company we are not to concern ourselves with
any other work that the company does except its business which yields profits.
In this particular case we have got to consider where the head and brain of the company is with
regard to the stevedoring business in Ceylon which has yielded the income.

Applying that test, only logical conclusion is that the head and brain of the company with regard
to this particular business or with regard to its affairs was in Bombay and not in Ceylon.
Therefore the assessee company is resident in India for the purpose of Income Tax act as its
affairs are managed by persons who are based in India and not in Ceylon. The fact that the affairs
of the company are being managed by managers independently in Ceylon is of no consequence
for determining the question of residence as effective control is situated in India.

Bhimji Naik v. Commissioner of Income-tax, Bombayxxiv

The question in this case was whether the control and management, as contemplated under
Section 6 was a de facto or a de jure control.
In that case, one Mr. Naik carried on business in South Africa.
In 1912 he returned to India leaving his business in the hands of three managers.
In 1937 he executed a partnership deed by which he admitted these three managers as partners.
Under the partnership deed he retained to himself the full control of the business and even the
right to dismiss any of the three partners.
The Income Tax Appellate Tribunal found that the firm was resident in British India as the legal
right to control and manage vested in Naik and he was resident in British India and it was not
shown that he had not exercised any control in the management of company affairs.
On appeal , the High Court drew a distinction between the case of a partner and the case of an
agent or an employee.
Since the business was being managed by the partners of Naik in South Africa, the question of
de facto management had to be considered.
It was held that the question whether the assessee is resident within the meaning of S. 6 is a
question of fact.

It was stated that :

As it is difficult to apply the test of physical residence to an association of persons or a firm, the
test is held to be: where the central control and management actually abides. The expression

control and management means where the central control and management actually abides ,
and not where the business of company is carried on by persons appointed by the company.

Talipatigala Estate v. Commr. of Income Taxxxv

In this case affairs of a rubber estate in Ceylon was managed by the assessee firm consisting of
two partners, one of whom was resident in British India, and the estate was managed by an agent
holding a power-of-attorney from the partners.
The question for consideration

was whether the assessee firm had any part of the control and

management within British India.

The Court was concerned to determine whether any part of the control and management was
within British India and notwithstanding the fact that the rubber estate was managed by an agent
holding a power-of-attorney, it was found that there was the exercise of control and management
by the partners from British India.
It was held that not only the right to exercise control and management over the firms affairs in
Ceylon vested with the partner resident in British India but some amount of control and
management of the firms affairs was actually exercised in British India and the assessee firm
was therefore resident in British India within the meaning of S. 6.

CONCLUSION
India has a well-developed tax structure with clearly demarcated authority between Central and
State Governments and local bodies.
Central Government levies taxes on income (except tax on agricultural income, which the State
Governments can levy), customs duties, central excise and service tax.
Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are levied by
the State Governments.
Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply,
drainage etc.
All companies whether Indian or foreign are liable to tax, irrespective of the quantum of income.
However, for the purpose taxation, companies are broadly classified as under:
(a) Domestic company in which public are substantially interested i.e., Public Company
(b) Domestic company in which the public are not substantial. interested, i.e., Private Company.
(c) Foreign Company which has not made prescribed arrangement : for declaration and payment
of dividends within India.
The taxable income of companies is computed in the same manner as for other non-corporate
assessees. The income is computed separately under each head and then aggregated to compute
the gross total income. A company however can have no income under the head 'Salary' for
obvious reasons.
Indian companies are taxable in India on their worldwide income, irrespective of its source and
origin. Foreign companies are taxed only on income which arises from operations carried out in
India or, in certain cases, on income which is deemed to have arisen in India. The later includes
royalty, fees for technical services, interest, gains from sale of capital assets situated in India
(including gains from sale of shares in an Indian company) and dividends from Indian
companies. Thus, the tax-liability on income of a company depends upon the residential status of
the company.

The liabilities to tax arising under the Income Tax Act are subject to provisions of the double
taxation avoidance agreements between India and foreign country. Thus the treaty provisions
shall prevail over the income tax provisions.
Indian taxation system has undergone tremendous reforms during the last decade. The tax rates
have been rationalized and tax laws have been simplified resulting in better compliance, ease of
tax payment and better enforcement. The process of rationalization of tax administration is
ongoing in India.

BIBLIOGRAPHY

BOOKS:
-

Dr. Singhania, K. Vinod and Dr. Singhania, Monica Students Guide to Income Tax,

Taxmann Publications, 49th edition. 2013.

Dr. Singhania, K. Vinod and Dr. Singhania, Kapil Taxmanns Direct Taxes Law and

Practices, Taxmann Publications, 52nd Edition, 2013.

Dr. Raj, Kailash, Taxation Laws, Allahabad Law Agency, 9th edition, Faridabad

(Haryana), 2007.
T. Padma, Dr., Principle of Law of Taxation, ALT Publication, 10th Edition.

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viii Supra Note 5.
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xv ibid

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