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WORKBOOK ON CORPORATE TAX

Vijaya Batth, FCA, ACS, LLB Email: vijayaiyer4@yahoo.com

CONTENTS

Chapt er. No 1. 2. 3. 4. 5. 6.

Chapter Heading Objective of the Course and other information Session Plan Introduction Taxation of Companies Tax Planning Tax Management

Page No.

pg.

Chapter 1: Objective of the Course and other information

Objective of the Course: The course aims in providing the students with the necessary tools to understand the dynamics of taxation, particularly, direct tax applicable to corporates. By the end of the course, students are expected to get familiarized with the concepts of income tax and the essentials of tax planning and managerial decision making and how tax management is useful in corporate world. Learning Devices: 1. Handouts will be given to each student along with case studies which shall be worked out in the class. 2. Use of Power Point Presentation for better understanding of summarized data, graphs and diagrammatic representation of important concepts Pedagogy: 1. Case Studies 2. Interactive session 3. Class room assignment Evaluation parameter: The following shall constitute the evaluation of the course work. Quiz = 20% Assignment = 10% Presentation = 10% Term examination = 60% Prescribed Syllabus COURSE DURATION: 2 HRS PER WEEK FOR 10 WEEKS COURSE CREDITS: 2 1. INTRODUCTION (2 HRS) Definitions, residential status, heads of income, computation of taxable income 2. TAXATION OF COMPANIES (7 HRS) Special provisions in computation of profit from business Deduction from gross total income Amalgamation of companies and fiscal incentives Minimum alternative tax on companies Special provisions relating to tax on distributed profits of domestic companies 3. TAX PLANNING (7 HRS) Concept relating to tax avoidance and tax evasion Tax planning with reference to; location of undertaking, types of activity, ownership pattern, dividend policy, Issue of bonus shares, Inter corporate dividends and transfer Tax planning relating to amalgamation and mergers of companies Tax considerations in respect of specific managerial decision like make or buy, own or lease, close or continue, sales in domestic markets or exports,

capital budgeting decisions, managerial remuneration, foreign collaboration and joint ventures. 4. TAX MANAGEMENT (4 HRS) Filing of returns and assessments Penalties and prosecutions Appeals and revisions Advance tax, TDS, advance rulings Avoidance of double taxation agreements BASIC TEXTS Students Guide to Income Tax (by) Vinod Singhania & Monica Singhania (Taxmann) Corporate Tax Planning and Management (by) Girish Ahuja & Ravi Gupta (Bharats) References: Students are expected to read the newspapers especially, The Economic Times and Business Standard religiously and on a daily basis.

Chapter 2 : Session Plan


Session Topic for discussion No. 1 Definitions Heads of income, Computation of taxable income 2 Residential status and incidence of tax 3 Special provisions in computation of profit from business 4 Deduction from gross total income 5 Internal Test followed by discussion ( 10 marks ) Topic : Session 1 to 4 6 Amalgamation of companies and fiscal incentives 7 Minimum alternative tax on companies 8 Special provisions relating to tax on distributed profits of domestic companies 9 Internal Test followed by discussion ( 10 marks) Topic : Session 6 to 8 10 Concept relating to tax avoidance and tax evasion 11 Tax planning with reference to; location of undertaking, types of activity, ownership pattern 12 Tax planning with reference to dividend policy, Issue of bonus shares, Inter corporate dividends and transfer 13 Tax considerations in respect of specific managerial decision like make or buy, own or lease 14 Tax considerations in respect to close or continue, sales in domestic markets or exports, capital budgeting decisions 15 Tax consideration in respect to managerial remuneration, foreign collaboration and joint ventures. 16 Tax planning relating to amalgamation and mergers of companies 17 Internal Test followed by discussion ( 10 marks) Topic : Session 10 to 16

18 19 20 21 22 23 24
NOTE :

Filing of returns and assessments Penalties and prosecutions Appeals and revisions Advance tax, TDS, Advance rulings Avoidance of double taxation agreements Internal Test followed by discussion ( 10 marks) Topic : Session 18 to21 Doubt clearing session Complete Revision

While every attempt will be made to stick to the lesson plan as stated above, changes may be made depending upon the level of understanding of students.

Chapter 3 : Introduction
BASIC CONCEPTS: 1. Assessment year means the period starting from 1st April and ending on 31st March of the next year. Income of the previous year of an assessee is taxed during the next following assessment year at the rates prescribed by the relevant Finance Act. 2. Previous Year is the year in which income is earned. 3. The term person includes an individual, HUF, a company, a firm, an AOP or BOI, a local authority and every artificial judicial person. 4. Assessee means a person by whom income tax or any other sum is payable under the Act. It also includes any person on whom any proceeding under the Act has been initiated. 5. Income of a person can be computed under five heads namely : (a) Salaries (b) Income from house property (c) Profits and gains of business or profession (d) Capital gains ( Long term and Short term ) (e) Income from other sources 6. Residential Status of a Company : Control and Management of the Affairs Wholly in India Wholly outside Partly in India India and partly outside India Indian Company Resident Resident Resident Non Indian Resident Non Resident Non Resident Company 7. Incidence of tax on a company Type of income Resident in India Non resident in India Indian Income Taxable in India Taxable in India Foreign Income Taxable in India Not Taxable in India

Example based on Residential Status of a Company Question ABC Limited is registered in Sri Lanka and is a subsidiary of an Indian Company. The business of the company is stevedoring in Sri Lanka. The meetings of the Board and general meeting of the shareholders are held in Mumbai. The affairs of the assessee-company are looked after by two managers under two powers of attorney which confer upon them the widest power and authority. The directors retain complete control over the matter delegated to the managers and from time to time give directions as to how things should be done and managed. Discuss. Sl. No 1 Issue What are the various parameters for deciding residential status of a Company? Analysis & Legal Provision

What is the residential status of the company in this case? How is control & management established in this case?

What is the incidence of tax in this case?

What is the relevance of the fact that the company is registered outside India ? What is Indian income ?

What is foreign income?

What is the difference between receipt and remittance?

Legal Reference

Narottam & Pereira Ltd. vs. CIT ( 1953)

Chapter 4 : Taxation of Companies


TAX PLANNING, TAX AVOIDANCE AND TAX EVASION Example : Pritish is an individual. For the assessment year 2011-12, his gross total income is Rs. 12,40,000 on which tax payable is Rs.2,32,780. To reduce this tax liability, he deposits Rs.70,000 in public provident fund account. Consequently, his taxable income and tax liability will be reduced to Rs. 11,70,000 and Rs. 2,11,150 respectively. This is an example of tax planning, as he has reduced his tax liability within the legal framework. Example 2 : A Company has its manufacturing unit actually taking place in Haryana. However to get the benefit of deduction under Section 80IB, the company takes a factory building on rent in a village in Jammu and only on paper it is shown that the new manufacturing unit is situated in a village in Jammu. This is an example of tax evasion, as the company has tried to reduce its tax liability by making incorrect statement about the location of the manufacturing process. The line of demarcation between tax planning and tax avoidance is very thin. Tax avoidance is reducing or negating tax liability in legally permissible ways and has legal sanction. Essential features are: Legitimate arrangement of affairs in such a way so as to minimise tax liability. There is no element of mala fide motive. It actually takes into account the loopholes of law. Example : If Rs. 90,000 is gifted by a husband to his wife, income generated therefrom is taxable in the hands of the husband under the clubbing provision.

However, if gift is made by the same person out of the funds of his HUF in the capacity as Karta of the family , then it is not taxable. This is an example of tax avoidance. Computation of Tax liability ( under normal provisions ) Steps 1 2 3 4 5 6 7 Find out taxable income Find out rate of income tax ( 30% or 40% ) depending on type of company Add surcharge ( if applicable) Find out total of Step 2 & 3 Add Education and Secondary Education Cess ( 3 % ) Deduct tax rebate or tax credit ( if applicable ) Step 4 plus 5 less 6 is the tax payable

Computation of Tax liability ( under minimum alternate tax (MAT) provisions ) Steps 8 9 10 11 12 13 Important Find out book profit Find out rate of income tax ( 18% presently ) of book profit Add surcharge ( if applicable) Find out total of Step 9 & 10 Add Education and Secondary Education Cess ( 3 % ) Tax liability = step 11 plus 12 Tax liability of a company is step 7 or 13 , whichever is higher

Book Profit = Net Profit as per profit and loss account after specified adjustments DEDUCTIONS AVAILABLE TO A COMPANY Section 80G 80GGA 80GGB 80IA 80IAB 80IB 80IC 80ID 80IE 80JJA 80JJAA 80LA Nature of Deduction Donations to charitable Institutions and funds Donation for scientific research or rural development Contribution to political parties Profits and gains from industrial undertakings engaged in infrastructure, etc Profits and gains by an undertaking or enterprise engaged in development of SEZ Profits and gains from certain industrial undertakings other than infrastructure development undertakings Profits and gains of certain undertakings in certain States Profits of hotels and convention centres Profits of undertakings in North Eastern States Profits from the business of collecting and processing of biogradable waste Employment of new workmen Income of offshore banking units

EXAMPLE : UNDERSTANDING DEDUCTIONS UNDER CHAPTER VI 1. IF the financial year of a Company is 200910 , then state the Previous year Assessment year Under Section 80IA relating to deduction with respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development etc., if an assessee chooses initial assessment year as 2014-2015 , then , state the year upto which the assessee will get 100% deduction Name the type of company who can avail benefit u/s 80IB Explain the criteria for understanding this type of Company 2009-10 2010-11 2014-15 to 2022-23

2.

3. 4.

Industrial Undertaking

5.

6.

X Ltd has constructed a hotel on Delhi Agra highway. Profits from the hotel construction for the previous year 2007-08 is Rs. 80 Lakhs, which is transferred to a special reserve account and consequently , it is not chargeable to tax. The special reserve account shall be utilised upto 31.03.2011 for highway projects only. How much is taxable and how much is allowed as a deduction if Rs.70 lakhs is utilised for highway project upto 31.03.2011 A company is eligible to claim deduction u/s 80IA and also eligible as per provision to claim u/s 80IB Can the company claim deduction under both ? State YES or NO Reason

Taxable Rs. 10 Lakhs Not taxable Rs. 70 lakhs

NO No double deduction permissible

7.

X Ltd has 2 undertakings , Unit A ( which is eligible for deduction @ 100% u/s 80IB and Unit B ( which is not eligible for a similar deduction ). Goods are transferred from Unit A to Unit B and for accounting purposes , the

transactions are recorded at a price higher than the market value. Due to this pricing , what is the impact of profitability of Unit A.

As Profit will go up No tax liability as the unit is in any case getting 100% deduction. Bs Profit will come down

Impact on Tax liability

Impact of Profitability of Unit B Impact on Tax Liability Is this tax planning or tax evasion

Tax liability will reduce Tax Planning if done in the true accounting sense The Assessing Office has power to re calculate profit.

What is the stand of the Income Tax Department in this matter which is purely accounting?

Chapter 5 : Tax Planning


TAX PLANNING WITH REFERENCE TO SPECIFIC BUSINESS DECISIONS
Sr. No 1 Business Decision Tax Planning with reference to New Business Tax Planning Location 1. Newly established industrial undertaking in Trade Free Zones 2. Special Economic Zone 3. 100% EOU 4. North Eastern Sates Nature 1. Artistic made hand wooden articles 2. Telecommunication Services 3. Tea Development Account 4. Infrastructure Development

undertakings 5. Prospecting for mineral oil Form of Business Organisation 1. Firm 2. Sole proprietorship 3. Company 4. Co-operative Society 1. Capital Structure Decision ( Combination of Debt and Equity ) 2. Dividend Policy ( Tax treatment Div distribution tax , TDS) 3. Issue of Bonus Shares 1. Purchase of an asset or Hire ( rate of depreciation is an important factor , interest on borrowed funds) 2. Make or buy ( check for location advantages, establishment of new unit ) 3. Repairs , Renewals, replace or renovation ( revenue vs. Capital expenditure ) 1. Allowances ( HRA , Conveyance ) 2. Perquisites ( rent free accommodation , medical reimbursement , Motor Car ) 1. Sec 35D Whole of Deduction 2. Sale Proceeds less Discount allowed = Capital gains 3. Long Term Capital Loss can also be claimed when capital asset is transferred for lesser value than indexed cost of acquisition but asset should not be used for any other purpose. Amalgamation ( Carry forward of loss and unabsorbed depreciation )

Tax Planning with reference to financial management Decisions

Tax Planning with reference to managerial decisions

Tax Planning with reference to employees Remuneration

Tax Planning with reference to sale of scientific research assets

Tax Planning with reference to business restructuring

PROBLEM FOR PRACTICE: 1. A Company is in the process of Tax Planning for its units in different locations, both India and Outside India. What would you advise the company with reference to the following aspects involving income tax. (a) Setting up a newly established industrial undertaking or carrying on business under existing undertaking and deciding upon the nature of the product to be manufactured

(b) Form of Business Organisation ( Partnership firm or Company ) (c) Issue of Bonus Shares or pay equivalent amount as dividend (d) Purchase of an asset ( by taking a term loan ) or go for a hire purchase (e) Restructuring of Business (f) Restructuring of capital structure by issue of convertible debentures (g) Setting up a branch outside India or incorporating a subsidiary company in the foreign country (h) Availing a foreign Currency loan or INR loan (i) Raising capital by going for a GDR ( Global Depository Receipts ) (j) Sale of assets used in Scientific Research PROBLEM FOR PRACTICE: ( Financial Leverage) When tax rates are falling, it is better to increase the financial leverage. Explain the truth of this statement using the following models which has three alternatives: 1.1 Equity ( 20% dividend ) : 60% or 50% or 40% 1.2 Tax rates are likely to be 35% , 30% and 25% in the next three years 1.3 Average cost of debt is 12%

Chapter 6 : Tax Management


Sl.No 1 Areas Returns Tax Management Original Return: 30th September Loss Return : Due Date ( no carry forward permitted for business loss, capital loss and loss from the activity of owning and maintaining race horses Belated Return : Due date or time allowed before end of one year from the end of relevant Asst year ( before completion of Assessment ) Revised Return : Within one year from end of

the Asst year or before completion of Assessment Defective Return : Time given by AO ( 15 days , before completion of the Assessment ( provided AO condones the delay ) 2 Assessment Self Assessment Inquiry before Assessment Summary Assessment Scrutiny Assessment Best Judgement Assessment 4 Exemptions/Escape Failure to pay tax or interest Default in making payment of tax Failure to maintain books as prescribed Undisclosed income in case of search Failure to get accounts audited (Tax Audit) or submit timely report Failure to deduct tax (TDS) Taking or accepting any loan or deposit in contravention to provisions Failure to furnish IT return

Penalties & Prosecution

Income exempt from tax Agricultural income Payments received from family income by a member of a HUF Share of profit from a firm Remuneration received from a foreign diplomat Gratuity, LTC, Leave Salary, PF Dividend from domestic companies Avoidance of Double Taxation Agreement Presently with 57 Countries Modes of granting relief : Exemption Method and Tax Credit Method ( credit in the country of residence ) If a tax liability is imposed , then DTA may be resorted for negating or reducing the impact In case of difference in the provisions of the Act and DTA , the latter would prevail The authority for Advance Rulings consist of a Chairman who is a retired Judge of the Supreme court and two other members drawn from the Indian Revenue Service and Indian Legal Service. Authority will have powers of a civil court. Opportunity of being heard. Matters - Determination of a transaction or decision of an authority

Advance Ruling

Either applicant is a non resident or the transaction concerned is with a non resident. The scheme of advance rulings was introduced by the Finance Act, 1993. Under the scheme, the power of giving advance rulings has been entrusted to an independent adjudicatory body. The procedure prescribed is simple, inexpensive, expeditious and authoritative. Advance Ruling, means written opinion or authoritative decision by an Authority empowered to render it with regard to the tax consequences of a transaction or proposed transaction or an assessment in regard thereto. A ruling can be obtained by an applicant (who may be either a non-resident or a resident having a transaction with a nonresident) in respect of any question of law or fact in relation to the tax liability of the nonresident arising out of a transaction undertaken or proposed to be undertaken. Questions on which ruling can be sought: The question may be on points of law as well as on fact; therefore, mixed questions of law and fact can also be included in the application. Binding nature of advance ruling: The effect of the ruling is stated to be limited to the parties appear before the authority and the transaction in relation to which the ruling was given.

Appeal

Complaint to a superior Court for an injustice done by an inferior court. Appellant : Party complaining Respondent : Other Party Appeal : First Appeal : CIT ( Appeals ) Against order of the AO By Tax payer Second Appeal : Income tax Appellate Tribunal Against order of CIT(A) By taxpayer or CIT Appeal to High Court : Substantial question of law arising out of ITAT order Taxpayer or CIT

Appeal to Supreme court : Judgement of high Court By taxpayer or CIT Revision ( S 263 ) : Order of the Assessing Officer if it is prejudicial to the interest of revenue Action can be taken CIT himself First Appeal to ITAT : Appeal against the revision u/s263 By Taxpayer Appeal to High Court/Supreme Court Revision ( S 264 ) Order of Assessing Officer Either to CIT or suo motu by CIT No further action is generally required as no order can be passed u/s 264 which is prejudicial to the assessee. However, writ petition under article 226 is maintainable. 7 8 Tax Deducted at Source Advance Tax Depends on nature of Payment, type of assessee and prevailing rates FY 10-11 min tax liability Rs. 10,000 Due Dates Corporates Others th 15 June 15% Nil 15th Sept 45% 30% 15th Dec 75% 60% th 15 Mar 100% 100%

Understanding Advance Tax Mr. Rudra, an individual, 29 years of age, estimates his current income for the financial year 2101-11 as follows: Particulars Amount(Rs.) Profits and Gains of business or Profession 6,87,000 Capital Gains ( Short Term ) 3,000 Capital Gains ( Long Term ) Nil Income from other Sources 26,000 Gross Total Income 7,16,000 Less Deduction u/s 80C and 80D ( PPF Rs.30,000 and 30,500 Insurance Premium Paid Rs.500 ) Net Income 6,85,500 Tax 71,100 Add : Surcharge Nil Total 71,100 Add: Education Cess 1,422 Add: Secondary and Higher Education Cess 711 Total 73,233 Less : Tax Deduction at Source 590 Balance to be paid as Advance Tax 72,643 First Instalment ( on or before 15th September 2010 - 30% of 21,793 72,643 ) Second Instalment ( on or before 15th December 2010 60% of 21,793

Third Instalment ( on or before 15th March 2011 100% of On 10th October 2010 he takes an endowment insurance policy of Rs. 1,00,000 by paying quarterly instalment of premium Rs. 940. Second quarterly instalment policy is paid on 10th January, 2011 Revised Computation of Advance Tax Payable Gross Total Income Less Less Deduction u/s 80C and 80D ( PPF Rs.30,000+ Rs. 940 And + Rs. 940 and Insurance Premium Paid Rs.500 ) Net Income Tax Add : Surcharge Total Add: Education Cess Add: Secondary and Higher Education Cess Total Less : Tax Deduction at Source Balance to be paid as Advance Tax First Instalment Paid Second Instalment Payable on or before 15th December, 2010 ( 60% of Rs. 72,255 Less 21,800=21,553 ) On 20th January, 2011 , Rudra sells gold ( owned by him since 1982-83 ) for Rs. 7,50,000 ( indexed cost of acquisition : Rs. 32,881). He also gets a lottery prize of Rs. 6,00,000 ( TDS Rs.1,80,000) on March 1,2011 Revised Computation of Advance Tax Payable Profits and Gains of business or Profession Capital Gains ( Short Term ) Capital Gains ( Long Term )(7,50,000-32,881) Income from other Sources 26,000 Winning from Lottery 6,00,000 Gross Total Income Less Deduction u/s 80C and 80D ( PPF Rs.30,000 and Insurance Premium Paid Rs.500 ) Net Income Tax On Rs. 6,00,000 @ 30% ( Lottery ) On Rs. 7,17,119 @ 20% ( LTCG ) On Rs. 6,83,620 @ usual rates( Balance) Total Add : Surcharge Total Add: Education Cess Add: Secondary and Higher Education Cess Total Less : Tax Deduction at Source ( Rs.590 + Rs. 1,80,000 ) Balance to be paid as Advance Tax First Instalment Paid Second Instalment Paid Third Instalment Payable

29,057

7,16,000 32,380 6,83,620 70,724 Nil 70,724 1,414 707 72,846 590 72,255 21,800 21,553

6,87,000 3,000 7,17,119 6,26,000 20,33,119 32,380 20,00,740 1,80,000 1,43,424 70,724 3,94,148 Nil 3,94,148 7,883 3,941 4,05,972 1,80,590 2,25,382 21,800 21,560 1,82,020

PROBLEM FOR PRACTICE The following are the particulars submitted by different tax payers for the assessment year 2010-11 Determine in a tabular format, the amount of advance tax payable in each case Particulars Punyakalpa ( Individual ) Pallav & Jyoti & Anshuman ( HUF ) Kharvela & Kalinga Associates ( Partnership Firm ) 36,000 2,98,840 24,000 43,000 2,92,000 4,500 3,000 2,84,500 12,450 249 125 12,823 4,244 8,580 4,01,840 2,000 3,99,840 1,19,952 2399 1200 123,551 27,853 95,697 Munmun & Sidharth Private Limited ( Company ) (14,000) 5,50,000 67,000 38,000 6,41,000 3,000 6,38,000 1,91,400 3,828 1,914 1,97,142 51,192 1,45,950

Salaries Income from House property Profits & Gains from business & Profession Capital Gains ( Short Term ) Income from other sources Gross Total Income Less : Deduction under Chapter VI A U/s 80C U/s 80G Net Income Tax Liability Add : Education Cess Add: Secondary and higher Education Cess Total Less TDS Balance

3,80,000 3,000 16,000 13,000 4,12,000 26,000 2,000 3,84,000 30,800 616 308 32,724 21,725 9,999

37,000 (13,000) 2,68,000