Taxation Of Companies – Advanced Tax Laws and Practice Important Questions
Question 1.
Apple Industries Ltd. provides the following information for the financial year 2020-21:
| Particulars | Amount (₹ in lakhs) |
| Net Profit as per Statement of Profit and Loss after debiting/ crediting the following | 120 |
| Proposed Dividend | 30 |
| Profit from unit established in SEZ | 20 |
| Provision for Income Tax | 18 |
| Provision for deferred tax | 10 |
| Provision for permanent diminution in value of investments | 3 |
| Depreciation debited to statement of Profit and Loss (includes depreciation on revaluation of assets to the tune of ₹ 1 lakh) | 10 |
Brought forward losses and unabsorbed depreciation as per books of the company are as follows: ₹ in lakhs
| Previous Year | Brought forward losses | Unabsorbed depreciation |
| 2015-16 | 1 | 4 |
| 2016-17 | 1 | 1 |
| 2017-18 | 10 | 5 |
Compute Book Profits of the company as per section 115JB for the Assessment Year 2021-22.
Answer:
Computation of Book Profits of Apple Industries Ltd. for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21) ₹ in lakhs
| Particulars | Amount | Amount |
| Net Profit as per Profit and Loss Account | 120 | |
| Add: | ||
| Proposed Dividend | 30 | |
| Provision for Income Tax | 18 | |
| Provision for Deferred Tax | 10 | |
| Provision for permanent diminution in value of investments | 3 | |
| Depreciation debited to Statement of Profit and Loss | 10 | 71 |
| Sub-Total | 191 | |
| Less: | ||
| Depreciation (Excluding depreciation on revaluation) | 9 | |
| Aggregate unabsorbed depreciation (4+1+5) | 10 | (19) |
| Book Profits u/s 115JB | 172 |
Notes:
- Since unabsorbed depreciation is less than brought forward losses, unabsorbed depreciation is considered.
- Profit from the unit established in SEZ is not deductible.
Question 2.
The profit and loss account of XYZ Ltd. for the year ended 31-3-2021 showed a net profit of ₹ 80,00,000 after making the following adjustments:
(a) Depreciation ₹ 24 lakh (including depreciation on revaluation of assets of ₹ 4 lakh).
(b) Provisions for unascertained liabilities ₹ 2 lakh.
(c) Transfer to General Reserve ₹ 9 lakh.
(d) Agricultural Income ₹ 15 lakh.
(e) Amount transferred to profit and loss account from general reserve ₹ 3 lakh. Brought forward business losses and unabsorbed depreciation as per books of account were ₹ 15 lakh and ₹ 11 lakh respectively.
Compute Book Profits and Minimum Alternate Tax (MAT) under section 115JB payable by XYZ Ltd. for A. Y. 2021 -22.
Answer:
Computation of Book Profits and Minimum Alternate Tax of XYZ Ltd. for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount (₹) | Amount (₹) |
| Net profit as per Profit and Loss Account for the year ended 31.03.2021 | 80,00,000 | |
| Add: Depreciation including depreciation on revaluation of assets | 24,00,000 | |
| Transfer to General Reserve | 9,00,000 | |
| Provision for unascertained liability | 2,00,000 | 35,00,000 |
| Sub-Total | 1,15,00,000 | |
| Less: Depreciation excluding revaluation of assets | 20,00,000 | |
| Agricultural income | 15,00,000 | |
| Transfer to P&L from General Reserve | 3,00,000 | |
| Brought forward business loss and depreciation, whichever is less. | 11,00,000 | (49,00,000) |
| BOOK PROFITS u/s 115JB | 66,00,000 |
Computation of Minimum Alternate Tax:
| Minimum Alternate Tax at 15% of book profits | 9,90,000 |
| Add: Health and Education Cess @ 4% | 39,600 |
| Tax liability u/s 115JB | 10,29,600 |
Question 3.
Define the term ‘MAT Credit’ under section 115JAA of the Income Tax Act. And also calculate the tax payable by the company in the assessment year 2021-22, if the book profits of a company in the previous year 2020-21 computed in accordance with section 115JB is ₹ 20 Lakhs. The total income computed for the same period as per the provisions of the Income Tax Act is ₹ 7.5 Lakhs. You are also required to indicate whether the company is eligible for any tax credit.
Answer:
MAT Credit under section 115JAA:
Where tax payable on books probes (15% of book probes) exceeds the tax payable as per normal provisions viz. MAT exceeds Normal tax, then, such excess tax paid is allowed as a credit under Section 115JAA to be set off in subsequent years; such credit is called MAT Credit. MAT Credit can be used only if normal tax is higher and even after allowing credit, tax payable cannot be less than MAT.
Computation of tax payable by the company for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount (₹) | |
| Tax on total income (₹ 7,50,000 × 25%) | 1,87,500 | |
| Add: Health and Education Cess @ 4% | 7,500 | 1,95,000 |
| Minimum Alternate Tax (MAT) on book profits @ 15% (₹ 20,00,000 × 15%) | 3,00,000 | |
| Add: Health and Education Cess @ 4% | 12,000 | 3,12,000 |
| Therefore, Income tax payable shall be equal to MAT, being higher of above 2 | 3,12,000 | |
| MAT Credit (₹ 3,12,000 – ₹ 1,95,000) | 1,17,000 |
Note: MAT credit can be carried forward for the subsequent 15 years from Assessment Year 2021-22.
Question 4.
Compute the Book Profits of company A Ltd. using the following summarised details of the Profit and Loss account for the year ended 31st March, 2021:
| Particulars | Debit side (₹ in lakhs) | Particulars | Credit side (₹ in lakhs) |
| Purchases | 37 | Sales | 90 |
| Depreciation
(Normal) |
6 | Withdrawal from Reserve created in 2006 by debiting Profit and Loss Account | 10 |
| Depreciation be-cause of revaluation | 4 | without debiting Profit and Loss | 9 |
| Other Expenses | 5 | Withdrawal from revaluation reserve | 4 |
| Net Profit | 61 | ||
| Total | 113 | Total | 113 |
Answer:
Computation of Book Profits of A Ltd. for the Assessment Year 2021 -22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount (₹ in lakhs) |
| Net Profit as per Profit and Loss Account | 61 |
| Add: Items as per Explanation 1 to section 115JB of Income Tax Act | |
| Total depreciation debited to Profit and Loss Account (₹ 6 lakhs + ₹ 4 lakhs) | 10 |
| Less: Items as per Explanation 1 to section 115JB of Income Tax Act | |
| Withdrawal from reserve | (10) |
| Depreciation debited | (6) |
| Withdrawal from revaluation reserve | (4) |
| Therefore, Book Profits | 51 |
Note:
1. Total depreciation debited i.e. normal as well as on account of revaluation has to be added.
2. Withdrawal from the reserve which was initially created by debiting Profit and Loss Account has to be reduced while computing Book Profits.
3. Normal depreciation (excluding depreciation because of revaluation) has to be deducted.
4. Withdrawal from revaluation reserve (not exceeding depreciation on account of revaluation) has to be deducted.
Question 5.
The net profit as per Statement of Profit and Loss of PQR Ltd., a resident company for the year ended 31st March 2021 is ₹ 280 lakh arrived at after debiting/crediting the following items:
(i) Depreciation on Assets: 1110 lakh (includes ₹ 30 lakh on revaluation)
(ii) Dividend received from Indian companies: ₹ 8 lakh
(iii) Transfer to general reserve: ₹ 5 lakh
(iv) Provision for tax: ₹ SO lakh
(v) Proposed dividend: ₹ 20 lakh
(vi) Amount is withdrawn from revaluation reserve: ₹ 40 lakh.
Following further information is also provided by the company:
(i) Provision for tax includes ₹ 15 lacs of tax payable on the distribution of profit and of ₹ 3 lacs of interest payable on income tax.
(ii) Brought forward loss and unabsorbed depreciation as per books are ₹ 13 lakh and ₹ 9 lakh respectively.
Compute Minimum Alternate Tax (MAT) under section 115JB of Income Tax Act, 1961 for the Assessment Year 2021-22.
Answer:
Computation of Book Profits and Minimum Alternate Tax for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount (₹ in lakhs) | |
| Profit as per Profit and Loss Account | 280 | |
| Add: Items as per Explanation 1 to section 115JB of Income Tax Act | ||
| Depreciation on assets including depreciation on revaluation of assets | 110 | |
| Transfer to General reserve | 5 | |
| Provision of tax including the tax on distributed profit under section 115-0 and including interest under the Income Tax Act | 50 | |
| Proposed Dividend | 20 | 185 |
| Sub-Total | 465 | |
| Less: Items as per Explanation 1 to section 115JB of Income Tax Act | ||
| Dividend from Indian companies is exempt u/s 10(34) | 8 | |
| Depreciation excluding depreciation on revaluation of assets | 80 | |
| Amount withdrawn from revaluation reserve restricted to the amount of depreciation on account of revaluation | 30 | |
| Unabsorbed depreciation or unabsorbed losses as per books of account, whichever is less | 9 | 127 |
| Book Profits as per section 11 5JB | 338 | |
| Tax @ 15% | 50.70 | |
| Add: Surcharge @ 7% | 3.55 | |
| Sub-Total | 54.25 | |
| Add: Health and Education Cess at 4% | 2.17 | |
| Total Minimum Alternate Tax (MAT) | 56.42 |
Question 6.
X Ltd. is a resident company engaged in garment manufacturing in Kolkata. The Profit & Loss Account has been prepared in accordance with Schedule III of the Companies Act, 2013. Net profit for the year ended 31st March 2021 is ₹ 99,000 arrived at after the following adjustments:
| Particulars | Amount (₹) |
| Depreciation (includes Revaluation of assets ₹ 1,000) | 4,000 |
| Provision for Income Tax | 3,000 |
| Proposed dividend | 5,000 |
| Loss of subsidiary A Ltd. | 2,000 |
| Interest on term loan from the nationalized bank (Not yet paid) | 1,20,000 |
| Income | |
| Dividend received from C Ltd. | 1,000 |
Compute the Book profit u/s 115JB and the Minimum Alternate Tax (MAT) liability.
Answer:
Computation of Book Profits under section 115JB of Income Tax Act & MAT payable for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount (₹) | |
| Net Profit for the year ended on 31st March 2021 | 99,000 | |
| Add: Items as per Explanation 1 to section 115JB of Income Tax Act | ||
| Depreciation including depreciation on revaluation of assets | 4,000 | |
| Provision for Income Tax | 3,000 | |
| Proposed Dividend | 5,000 | |
| Loss of subsidiary A Ltd. | 2,000 | 14,000 |
| Sub-Total | 1,13,000 | |
| Less: Items as per Explanation 1 to section 115JB of Income Tax Act | ||
| Dividend received from C Ltd. | 1,000 | |
| Depreciation excluding depreciation on revaluation of assets (₹ 4,000 – ₹ 1,000) | 3,000 | (4,000) |
| Therefore, Book Profits | 1,09,000 | |
| Minimum Alternate Tax @15% | 16,350 | |
| Add: Health and Education Cess | 654 | 17,004 |
| Rounded off to nearest of ₹ 10 u/s 288B | 17,000 |
Note: Delayed or non-remittance of interest to bank attracts disallowance u/s 43B only. No adjustments are required under section 115JB while computing Book Profits.
Question 7.
Shakshitha Pvt. Ltd., furnishes the following summarized position of its profit and loss account and pertinent additional information thereto, for the year ended 31-3-2021: (All amounts are ₹ in lakhs)
(i) Net profit as per books 26
(ii) Share income from an AOP 6 Expenditure debited in books for earning such income 0.8
(iii) Provision for income-tax 2
(iv) CSR expenditure debited to P &. L Account 14
(v) Royalty received relating to business (Chargeable at 10%) 6
(vi) The brought forward business loss and depreciation are as under:
| As per books | As per IT Act | |
| Business loss for AY 2017-18 | 4 | 12 |
| Depreciation | 3 | 11 |
(vii) The members as well as their shares in the AOP in which Shakshitha Pvt. Ltd. is a member, are specific and determinate.
(viii) In the current year, the depreciation charged as per books is the same as that of the one allowable as per Income-tax Act, 1961, before considering the provisions of section 32(2).
Compute the book profits of the company and the tax on book profits under section 115JB for the AY 2021-22. The company is not an Ind-AS compliant company.
Answer:
Computation of Book Profits u/s 115 JB and MAT payable for Shakshita Pvt. Ltd. for Assessment Year 2021 -22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount (₹ in lakhs) |
| Net Profit as per books | 26 |
| Add Items as per Explanation 1 to section 115JB | |
| Provision for Income tax | 2 |
| Sub-Total | 28 |
| Less: Items as per Explanation 1 to section 115JB Royalty received relating to business (to be considered separately as it is taxed at a special rate of 10%). Hence to be deducted. | (6) |
| Lower of brought forward loss or depreciation | (3) |
| Book Profits | 19 |
| MAT payable | |
| MAT @ 15% of ₹ 19 lakhs | 2.85 |
| On royalty @ 10% (₹ 6 lakhs X 10%) | 0.60 |
| Total | 3.45 |
| Add: Health and Education Cess at 4% | 0.138 |
| Total MAT payable as per section 115JB | 3.588 |
Question 8.
The net profit of Renuka Ltd., an Indian company, as per its Profit and Loss Account prepared as per the Income Tax Act, 1961 is ₹ 90,00,000 after debiting and crediting the following items:
| Particulars | Amount (₹) |
| Provision for Income Tax | 5,00,000 |
| Provision for deferred tax | 3,00,000 |
| Proposed Dividend | 7,50,000 |
| Depreciation including depreciation on revaluation of assets ₹ 20,00,000 debited to Profit and Loss Account | 60,00,000 |
| Profit from Industrial unit in SEZ area | 80,000 |
| Provision for permanent diminution in the value of an investment | 70,000 |
Compute tax liability u/s 115JB for the Assessment Year 2021-22. The turnover in the Previous Year 2018-19 was ₹ 4.5 crores.
Answer:
Computation of book profits of Renuka Ltd. under section 115 JB of Income Tax Act and MAT payable for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount (₹) | Amount (₹) |
| Net Profit as per Profit and Loss Account | 90,00,000 | |
| Add: Items as per Explanation 1 to section 115JB | ||
| Provision for Income Tax | 5,00,000 | |
| Provision for deferred tax | 3,00,000 | |
| Proposed Dividend | 7,50,000 | |
| Depreciation | 60,00,000 | |
| Provision for permanent diminution in value of an investment | 70,000 | 76,20,000 |
| Sub-Total | 1,66,20,000 | |
| Less: Items as per Explanation 1 to section 115 JB | ||
| Depreciation (Excluding depreciation on revalua¬tion of assets) i.e. ₹ 60,00,000 – ₹ 20,00,000 | (40,00,000) | |
| Book Profits as per section 115JB | 1,26,20,000 | |
| Minimum Alternate Tax (MAT) @ 15% of Book Profits (₹ 1,26,20,000 × 15%) | 18,93,000 | |
| Add: Surcharge @ 7% | 1,32,510 | |
| Sub-Total | 20,25,510 | |
| Add: Health and Education Cess @ 4% | 81,020 | 21,06,530 |
Note: Provisions of MAT are applicable to profits from units in SEZ. Therefore, no adjustment is required for profit from an industrial units in SEZ area.
Question 9.
The book profits of a company in the previous year 2020-21 computed in accordance with section 115JB is ₹ 15,00,000. If the total income computed for the same period as per the provisions of the Income Tax Act, 1961 is ₹ 3,00,000, calculate the tax payable by the company in the Assessment Year 2021-22 and also indicate whether the company is eligible for any tax credit. The turnover of the company for the financial year 2018-19 is ₹ 200 crore.
Answer:
Computation of tax payable by the company for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount (₹) | Amount (₹) |
| Total Income as per provisions of Income Tax Act | 3,00,000 | |
| Tax on total income @ 25% | 75,000 | |
| Add: Health and Education Cess @ 4% (₹ 75,000 × 4%) | 3,000 | 78,000 |
| Book Profits as per section 115JB | 15,00,000 | |
| Minimum Alternate Tax @ 15% (₹ 15,00,000 × 15%) | 2,25,000 | |
| Add: Health and Education Cess @ 4% | 9,000 | 2,34,000 |
| Tax payable, Higher of tax under step 2 & step 4 | 2,34,000 | |
| MAT Credit to be carried forward (₹ 2,34,000 – ₹ 78,000) | 1,56,000 |
Notes:
- There shall be MAT Credit as tax payable under section 115JB is higher than the normal tax payable.
- Since total turnover during P.Y. 2018-19 does not exceed ₹ 400 crores in the case of a domestic company, income tax is computed at 25%.
Question 10.
“Transfer pricing adjustments must be made while computing book profit for levy of Minimum Alternate Tax (MAT)”. In the context of provisions contained in the Income-tax Act, 1961, examine the correctness of the above statement.
Answer:
For the purpose of computing book profit for levy of minimum alternate tax, the net profit shown in the Statement of Profit and Loss account prepared in accordance with the Companies Act, 2013 must be increased/ decreased only by the additions and deductions specified in Explanation 1 to section 115JB of the Income Tax Act, 1961.
Explanation 1 to section 115JB of the Income Tax Act, 1961 does not provide for adjustments for Transfer Pricing, and therefore, transfer pricing adjustments cannot be made while computing book profit for levy of Minimum Alternate Tax. Hence, the statement that Transfer pricing adjustment must be made while computing book profit for levy of Minimum Alternate Tax (MAT) is incorrect
Question 11.
Comment on the following in the context of provisions contained in the Income-tax Act, 1961:
- The provisions of section 115JB are applicable in the case of foreign companies.
- The provisions of dividend distribution tax are applicable to an undertaking or enterprise engaged in developing, operating, and maintaining a special economic zone (SEZ).
Answer:
(1) Section 115JB of the Income Tax Act, 1961, states that all companies having book profits under the Companies Act shall have to pay MAT at the rate of 1596; there is no provision restricting its applicability to only domestic companies. Thus, MAT is applicable to all companies irrespective of it being a domestic company or a foreign company.
However, MAT is required to be computed with reference to book profits computed on the basis of profit and loss account prepared as per the Com¬panies Act, and the Companies Act requires only foreign companies, having a place of business within India, to prepare and file its financial statements with the Registrar of Companies. Hence, the MAT provisions shall not apply to foreign companies, which do not have any presence in India.
Further, the Authority for Advance Ruling has delivered the ruling in the case of the Timken Company holding that the provisions of section 115JB of the Income-tax Act, 1961 levying MAT on the book profit of a company would not apply to a foreign company not having any physical presence in India. Hence, provisions of Section 115JB are applicable only to those foreign companies which have a physical presence in India.
(2) Finance Act, 2011 inserted a proviso to sub-section (6) of Section 115-0 of Income Tax Act, 1961 by which the provisions of Section 115-0 relating to dividend distribution tax (DDT) shall also be applicable on an enterprise or undertaking engaged in developing, operating and maintaining an SEZ. Thus, the exemption from DDT in the case of SEZ Developers under the Income-tax Act for dividends declared, distributed, or paid is not available after 1st June 2011.
Question 12.
Winco Ltd. was able to arrive at the book profits in accordance with section 115JB on the finalization of its accounts. The company filed the tax return before the due date and paid the income tax amount due. The income tax department levied interest under sections 234B and 234C. Is that action correct?
Or;
Whether Minimum Alternate Tax (MAT) under section 115 JB is payable in advance and interest under sections 234B and 234C is payable on failure to pay such advance tax? Also explain whether MAT Credit admissible under section 115JAA has to be set off against the assessed tax payable before calculating the interest under sections 234A, 234B, and 234C. You may take the help of decided case law if any.
Answer:
Section 115JB is a complete code in itself. There is a specific provision in section 115JB(5) providing that all other provisions of the Income Tax Act, 1961 shall apply to every assessee, being a company, mentioned in that section. Thus, by virtue of section 115JB(5), the liability for payment of advance tax would be attracted. Therefore, if a company defaults in payment of advance tax in respect of tax payable under section 115JB, it would be liable to pay interest under sections 234B and 234C. Therefore, interest under sections 234B and 234C shall be payable on failure to pay advance tax in respect of tax payable u/s 115JB. The same view has been expressed by the Supreme Court in Joint CITv. Rolta India Ltd [2011] 330 ITR 470 (SC).
Question 13.
Discuss the provisions in respect of tax credit granted under section 115 JAA.
Answer:
Tax Credit in respect of tax paid on deemed income relating to certain companies (Section 115JAA):
1. Tax credit becomes available in the assessment year in which the assessee pays minimum alternate tax in accordance with provisions of section 115JB.
2. Tax credit to be allowed shall be a difference of tax paid for any assessment year under section 115JB and the amount of tax payable by the assessee on his total income computed in accordance with the other provisions of this Act.
3. No interest shall be payable on the tax credit allowed under this section.
4. 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 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.
5. The amount of tax credit shall be carried forward up to 15 years im-mediately succeeding the assessment year in which tax credit becomes available.
6. The tax credit shall be allowed set off in a year when tax becomes payable on total income computed in accordance with provisions of this Act exceeds Minimum Alternate Tax under section 115JB.
7. Set-off in respect of brought forward tax credit shall be allowed for any assessment year to the extent of difference between the tax on his total income and the tax which would have been payable under the provisions of section 115JB, as the case may be for that assessment year.
8. Where as a result of an order under section 143(1) or 143(3), section 144, section 147, section 154, section 155, section 245D(4), section 250, section 254, section 260, section 262, section 263 or section 264, the amount of tax payable under this Act is reduced or increased, as the case may be, the amount of tax credit allowed under this section shall also be increased or reduced accordingly.
9. In case of conversion of a private company or unlisted public company into a Limited Liability Partnership under the Limited Liability Partnership Act, 2008, the provisions of this section shall not apply to the successor Limited Liability Partnership.
Question 14.
Minimum Alternate Tax (MAT) is attracted under section 115JB, on account of tax on total income is less than 15% of net profit as per the profit and loss account for the relevant previous year. Comment.
Answer:
The statement is incorrect as, the minimum alternate tax (MAT) is attracted under section 115JB, on account of tax on total income is less than 15% of book profit. Chapter XII-B is a self-contained code for the computation of book profit. The net profit as per the profit and loss account for the relevant previous year prepared in accordance with the provisions of Companies Act, 2013, as increased/reduced by the specified adjustments provided for in Explanation 1 to section 115JB would be the book profit for levy of MAT under section 115JB.
The rate of MAT has been reduced from 18.5% to 15% vide amendment in sub-section (1) of section 115JB by the Taxation Laws (Amendment) Act applicable for FY 2019-20 onwards.
Question 15.
ABC Ltd. has invested in bonds of the National Highway Authority of India within the prescribed time and claimed exemption on the income from long-term capital gains under section 54EC. Further, it also claimed exclusion of long-term capital gains in the computation of “book profit” under section 115JB because of exemption available on it by virtue of section 54EC. The Assessing Officer, however, reckoned the book profit including long-term capital gains for the purpose of levy of minimum alternate tax payable under section 115JB. Is the action of the Assessing Officer justified? Comment.
Answer:
The issue under consideration, in this case, is whether long-term cap¬ital gain exempted by virtue of section 54EC can be included in the book profit computed under section 115JB for levy of minimum alternate tax. As long-term capital gains are part of the profits included in the profit and loss account prepared in accordance with the provisions of the Companies Act, capital gains cannot be excluded unless provided under Explanation 1 to section 115JB. Since Explanation 1 to section 115JB does not provide for deduction in respect of capital gain in course of investment in bonds of National Highways Authority of India within the prescribed time, the long-term capital gains so exempt would still be taken into account for computing book profit under section 115JB for levy of MAT. The same was so held by the Kerala High Court in N. J. Jose and Co. (P.) Ltd. v. ACIT [2010] 321 ITR 0132. Therefore, the action of the Assessing Officer is justified in law.
Question 16.
Discuss provisions under section 115BBD vs. 115BBDA with reference to the taxation of foreign dividends.
Answer:
Section 115BBD of Income Tax Act, 1961: Where the total income of an assessee, being an Indian company, includes any income by way of dividend declared, distributed, or paid by a specified foreign company, the income-tax payable shall be the aggregate of:
- The amount of income-tax calculated on the income by way of such dividends, at the rate of fifteen percent; and
- The amount of income tax with which the assessee would have been chargeable had its total income reduced by the aforesaid income by way of dividends.
Notes:
- The aforesaid amount would be increased by the applicable surcharge and cess.
- Deduction in respect of any expenditure or allowance shall not be allowed to the assessee under any provision of this Act in computing its income by way of aforesaid dividends.
- The above provisions are not applicable to deemed dividend u/s 2(22){e).
- A specified foreign company means a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital of the company.
Section 115BBD A of Income Tax Act, 1961:
Notwithstanding anything contained in this Act, where the total income of an assessee, being a Resident individual, Hindu Undivided Family or a Firm, or any person (not being a domestic company, or a fund/institution/trust/university/educational institution/hospital/other medical institution referred to in section 10(23Q, or a trust/institution registered u/s 12A/12AA), includes any income in aggregate exceeding 10 lakh rupees, by way of dividend declared, distrib¬uted or paid by a domestic company or companies, the income tax payable shall be the aggregate of:
- The amount of income-tax calculated on the income by way of such dividends in aggregate exceeding 10 lakhs rupees, at the rate of 10% and
- The amount of income tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount by way of dividends.
Notes:
- No deduction in respect of any expenditure or allowance or set-off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends referred to in clause (a) of sub-section (1).
- The aforesaid amount would be increased by the applicable surcharge and cess.
- The above provisions are not applicable to deemed dividend u/s 2(22)(e).
Author’s Note:
Applicability of the provisions of section 115BBDA has been restricted w.e.f. A.Y. 2021-22 to dividend declared, distributed, or paid by domestic companies on or before 31st March 2020. (As w.e.f. A.Y. 2021-22, every amount of dividend received will be taxable in hands of shareholders.)
Question 17.
X Ltd. an Indian Company received a dividend of ₹ 15 lakhs from a foreign company in which it holds 28% of the nominal value of the equity share capital of the company. X Ltd. and incurred an expenditure of ₹ 0.25 lakhs on earning this income. Examine the taxability of the dividend under the provisions of the Income-tax Act, 1961.
Answer:
Under section 115BBD, dividend received by an Indian company from a foreign company in which it holds 26% or more in nominal value of the equity share capital of the company, would be subject to a concessional tax rate of 15% plus surcharge and cess, as against the tax rate of 30% applicable to other income of a domestic company. This rate of 15% plus surcharge and health and education cess would be applied on gross dividend, in the sense, that no expenditure would be allowable in respect of such dividend.
Therefore, a dividend of ₹ 15 lakhs received by X Ltd. from a foreign company, in which it holds 28% in nominal value of equity share capital of the company, would be subject to tax @15% under section 115BBD. Such dividends would be taxable under the head “Income from other sources”. No deduction is allowable in respect of ₹ 0.25 lakhs spent on earning this income.
Question 18.
The business income of Raman Ltd., an Indian company computed as per the provisions of the Income Tax Act is ₹ 53,00,000. It has also received the following dividend income during the Previous Year 2020-21:
| Particulars | Amount of dividend received (₹) | Remuneration paid for realizing Dividend (₹) |
| From Geneva Inc., a Swiss company in which it holds 23% of the nominal value of equity share capital | 72,000 | 7,000 |
| From Shares held in Michigan Inc., a US company in which it holds 51% of the nominal value of equity share capital | 2,10,000
|
8,000 |
| From shares held in Ontario Inc., a Canadian company in which it holds 23% of the nominal value of equity share capital | 1,92,000 | |
| From shares held in Indian subsidiaries | 58,000 | 6,000 |
Compute the total income and tax liability of Raman Ltd. ignoring MAT. (Assume income tax rate as 30%)
Further, assuming that Raman Ltd. has distributed a dividend of ₹ 3,80,000 in March 2021 compute additional income tax payable by it under section 115-0.
Answer:
Computation of Total Income and tax liability of Raman Ltd. for the Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount (₹) | Amount (₹) |
| Profits and Gains from business or profession | 53,00,000 | |
| Income from Other Sources | ||
| Dividend from Geneva Inc. (? 72,000 – ? 7,000) | 65,000 | |
| Dividend from shares held in Michigan Inc., a US company in which it holds 51% of the nominal value of equity share capital (No deduction is allowable in respect of any expenditure incurred to earn such dividend as it will be taxed as per section 115BBD at the special rate of 15%) | 2,10,000 | |
| Dividend received from Ontario Inc., a Canadian company | 1,92,000 | |
| Dividends received from shares held in Indian subsidiaries (₹ 58,000 – ₹ 6,000) | 52,000 | 5,19,000 |
| Total Income of the Company | 58,19,000 | |
| Tax Liability | ||
| Tax at 15% under section 115BBD on ₹ 2,10,000 | 31,500 | |
| Tax on balance income at 30% (₹ 58,19,000 – 2,10,000) × 30% | 16,82,700 | |
| Sub-Total | 17,14,200 | |
| Add: Health and Education Cess @ 4% | 68,568 | |
| Total tax | 17,82,768 | |
| Rounded off to nearest of ₹ 10 under section 288B | 17,82,770 |
Notes:
1. With effect from 1st April 2020, Dividend Distribution Tax (DDT) under section 115-0 is not applicable. All dividends even from domestic companies are taxable in hands of recipient shareholders. Hence, in the given case, Raman Ltd. will be liable to pay income tax on dividends received from domestic companies. Therefore, such dividends form part of the Total income (after allowing a deduction for expenses incurred to earn them) of Raman Ltd. and are taxed at normal rates. Further, with respect to the dividend declared by Raman Ltd., it is not liable to pay DDT.
2. Any Dividend received from a foreign company is taxable.
3. As per section 115BBD of Income Tax, if a Domestic company receives a dividend from a Specified foreign company i.e. Foreign company in which such domestic company holds 26% or more of shares in shares carrying voting rights, then such dividend income is taxable at concessional rate of tax of 15% + Surcharge if applicable + Health and Education Cess. It should be noted that no deduction is allowed for any expenses incurred to earn such dividend income.
Question 19.
Parimal, Managing Director of Heavens Engg. Pvt. Ltd. holds 70% of its paid-up capital of ₹ 20 lakh. The balance as of 31st March 2021 in General Reserve was ₹ 6 lakh. Hie company on 1st July 2020 gave an interest-free loan of ₹ 5 lakh to its Supervisor having a salary of ₹ 4,000 p.m., who in turn on 15th August 2020 advanced the said amount of loan so taken from the company to Parimal. The Assessing Officer had taxed the amount of advance in the hands of Parimal. Is the action of the Assessing Officer correct in the light of the Provisions of Income Tax Act, 1961?
Answer:
The company had advanced a loan to an employee who in turn had advanced the same to the managing director of the company holding 70% of its capital. By virtue of provisions of section 2(22)(e) of the Income Tax Act, the same shall be treated as “deemed dividend” as the payment made by a company, in which the public is not substantially interested, on behalf of, or for the individual benefit of any such shareholder (who holds not less than 10% of the voting power), to the extent to which company possesses accumulated profits.
In this case, the company has a reserve of ₹ 6,00,000 on March 31st of the preceding year and the amount of loan advanced on 1st July is ₹ 5,00,000.
Therefore, the payment is to be treated as deemed dividend. The amount of interest-free loan of X 5,00,000 given by the company to the supervisor who in turn had given the same to Mr. Parimal, shall be construed as the amount given for the benefit of Mr. Parimal and is treated as deemed dividends chargeable to tax in hands of Mr. Parimal.
{Note: W.e.f. 1st April, 2020, Dividend Distribution Tax u/s 115-0 on deemed dividend of 2(22)(e) which was 30% + SC @ 12% + Health and Education Cess @ 4% is not applicable. All dividends including a deemed dividend of section 2(22) (e) will be chargeable to tax in hands of the recipient shareholder only.}
Question 20.
Explain which income received by a foreign company, be taxable in India. Also mention the basic tax rate applicable to a foreign company that is based in the US.
Answer:
A non-resident company is chargeable to tax in India in respect of the following incomes:
- Income received or deemed to be received in India.
- Income accruing or arising or deemed to accrue or arise in India. The basic tax rate applicable in respect of the above incomes for the US-based company which is a foreign company is 40% in India.
Further, a surcharge @ 2% is applicable in case the taxable income exceeds ₹ 1 crore and is up to ₹ 10 crore, and @5% if the income exceeds ₹ 10 crores in the previous year. The Health & Education cess @ 4% is also payable.
Author’s Note:
In all above cases, wherever required, income tax is computed as per normal provisions of the Income Tax Act assuming that the company did not opt for an alternate scheme of taxation under section 115BAB or section 115BBA of the Income Tax Act.
Taxation Of Companies Notes
♦ Rates of Income-tax for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21):
For domestic companies:
a. Where Total turnover or gross receipts during the Previous Year 2018-19 does not exceed ₹ 400 crores: 25%.
b. Any other domestic company: 30%
For foreign company:
a. Specified royalties and Fees for technical services received from the Government or an Indian concern in pursuance of an approved ₹ agreement made by the company with the Government or Indian concern between 1.4.1961 and 31.03.1976 (in case of royalties) f and between 1.3.1964 and 31.3.1976 (in case of FTS): 50%
b. Other income: 40%
Rates of Surcharge:
| Particulars | Total income does not exceed ₹ 1 crore | Total income is in the range of ₹ 1 crore to ₹ 10 crores | Total income exceeds ₹ 10 crores |
| Domestic company | Nil | 7% | 1296 |
| Foreign Company | Nil | 2% | 596 |
- Minimum Alternate Tax under section 115 JB of Income Tax Act
- It is on Book Profits at 15% + Surcharge, if applicable based on book profits + Health and Education Cess @ 4%.
- Consequently, the Tax payable by a company shall be taxable as per normal provisions of the Income Tax Act on Total Income OR; MAT on Book Profits, whichever is higher.
Note: If a unit is located in an international Financial Services Centre and derives its income solely in convertible foreign exchange, the Minimum Alternate Tax is 9% of Book Profit.
- Dividend Distribution Tax (DDT) under section 115-0 of Income Tax Act is NOT APPLICABLE w.e.f. 1.4.2020: With effect from A.Y. 2021 -22, dividends will be taxable in hands of shareholders. Therefore, section 115-0 has been amended to provide that dividends declared, distributed, or paid on or after 1st April 2020 shall not be covered under the provisions of DDT u/s 115-0.
- Income of an Indian company by way of dividends declared, distributed, or paid by a specified foreign company (in which the Indian company holds 26% or more of equity share capital): Taxable at 15% under section 115BBD of Income Tax Act.
Note:
Students are also expected to know the Alternative optional scheme of taxation for companies under sections 115BAB & 115BBA.