Corporate Taxation

CORPORATE TAXATION - Module I
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BASIC CONCEPTS OF INCOME TAX
A. HISTORY
In India , this tax was introduced for the first time in 1860,by Sir James Wilson in order to
meet the losses sustained by the Government on account of the Military Mutiny of
1857.Thereafter ,several amendments were made in it from time to time. At last in
1886,a separate Income tax act was passed. this act remained in force up to, with
various amendments from time to time. In 1918, a new income tax was passed and again it
was replaced by another new act which was passed in 1922.This Act remained in force up to
the assessment year 1961-62 with numerous amendments.
The Income Tax Act of 1922 had become very complicated on account of innumerable
amendments. The Government of India therefore referred it to the law commission
in1956 with a view to simplify and prevent the evasion of tax.. The law commission
submitted its report-in September 1958, but in the meantime the Government of India
had appointed the Direct Taxes Administration Enquiry Committee submitted its report in
1956.In consultation with the Ministry of Law finally the Income Tax Act,1961 was passed.
The Income Tax Act 1961 has been brought into force with 1 April 1962.It applies to the
whole of India and Sikkim(including Jammu and Kashmir).Since 1962 several amendments
of far-reaching nature have been made in the Income Tax Act by the Union Budget
every year. which also contains Finance Bill. After it is passed by both the houses of
Parliament and receives the assent of the President of India, it becomes the Finance act.
An assesses may get income from different sources, eg:- salaries-house property income-
profits and gains of business or profession - capital gains income from other sources like
interest on securities , lottery winnings, races etc.
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B. ASSESSEE SEC 2(7)
Assessee is a person, who has liability to pay tax or any other sum of money under
Income Tax act of 1961, so the afore said persons include in the category of Assessee. Every
Assessee whose taxable income in the previous year 2017-2018 exceeds the minimum
taxable limit is liable to pay income tax during the current Assessment year 2018-2019.
The above definition divides various types of assessees into three categories:-

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1. Ordinary assessee it includes
a) any person against whom some proceedings under this Act are going on. It is immaterial
whether any tax or other amount is payable by him or not;
b) any person who has sustained loss and filed return of loss u/s 139(3);
c) any person by whom some amount of interest, tax or penalty is payable under this Act; or
d) any person who is entitled to refund of tax under this Act.
2. Representative assessee or deemed assessee:-
A person may not be liable only for his own income or loss but also on the income or loss of
other persons e.g. agent of a non-resident, guardian of minor or lunatic etc. In such cases, the
person responsible for the assessment of income of such person is called representative
assesses. Such person is deemed to be an assessee.
3. Assessee-in-default:-
A person is deemed to be an assessee-in-default if he fails to fulfil his statutory obligations.
In case of an employer paying salary or a person who is paying interest it is their duty to
deduct tax at source and deposit the amount of tax so collected in Government treasury. If
he fails to deduct tax at source or deducts tax but does not deposit it in the treasury, he is
known as assessee-in-default.
C. ASSESSMENT YEAR SEC 2(9)
Assessment year means the period of 12 months commencing on the first day of April
every year and ending on 31st march of the next year. The current assessment year is 2017-
2018 (1.4.2016 to 31.03.2017).
It means the period of 12 months commencing the 1st day of April every year. In India, the
Government maintains its accounts for a period of 12 months i.e. from 1st April to 31st March
every year. As such it is known as financial year. The Income-tax department has also
elected same year for its assessment procedure.
An Assessee is liable to pay tax on the income of the previous year during the next following
assessment year. Eg: - during the Assessment year 2017-18 income earned during 2016-17 is
taxed.

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Every person who is liable to pay tax under this Act, files return of income by prescribed
dates. These returns are processed by the income tax department officials and officers. This
processing is called assessment. Under this income returned by the Assessee is checked and
verified.
D. PREVIOUS YEAR SEC 3
The term pervious year is very important because it is the income earned during previous
year which is to be assessed to tax in the assessment year. As the word ‘Previous’ means
‘coming before’ hence it can be simply said that the previous year is the financial year
preceding the assessment year e.g. for the assessment year 2017-18 the previous year should
be the financial year ending on 31st March 2017.
Previous year in case of a continuing business:- It is the financial year preceding the
assessment year. As such of the assessment year 2017-18, the previous year for a continuing
business is 2016-17 i.e. 1-4-2016 to 31-3-2017.
In case of newly set up business:- The previous year in case of a new started business shall
be the period between commencement of business and 31st March next following e.g. in case
of a newly started business commencing its operations on Diwali 2016, the previous year in
relation to assessment year 2017-18 shall be period between Diwali 2016 to 31st March 2017.
EXCEPTIONS GENERAL RULE FOR INCOME OF THE PREVIOUS YEAR
1. Shipping Business of Non Residents (Sec.172)
Exception No. 1: Shipping Business of Non Residents (NR) (Sec.172)
Conditions
a) Assessee should be NR.
b) Assessee should own a Ship or Chartered by NR.
c) Business of carrying passengers, livestock, mail or goods shipped at a port in India.
d) The NR may (may not) have an agent in India.
1) In such a case 7.5% of amount paid (or payable) to NR shall be deemed to be the
income of NR. Tax shall be paid at the rate applicable to Foreign Company (i.e. 40%).
2) The master of ship shall submit a return of income before the departure of the ship
from the Indian Port.
3) Such return may be submitted within 30 days of the departure of the ship, if the
assessing officer is satisfied that it is difficult to file return before departure & satisfactory
arrangements have been made for payment of tax.

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4) A Port clearance shall not be granted by the Collector of Customs unless the tax has
been paid or satisfactory arrangements have been made for payment of tax.
Conclusion: In the above case tax has to be paid in the same previous year in which income
is earned not in following Assessment Year.
2. Persons leaving India (Sec. 174)
Exception No. 2 Persons leaving India (Sec. 174)
Conditions
1) It appears to the Assessing Officer that an Individual may leave India during the current
Assessment Year(A.Y.) or shortly thereafter.
2) He has no present intention of returning to India.
3) The total income upto the probable date of his departure from India shall be chargeable
to tax in that A.Y.
Eg: Mr. Ram is a foreign citizen. He has been residing in India since January, 2000. At the
time of making his assessment for the assessment year 2012-13 (in January 2013), the
Assessing Officer came to know that Mr. Ram is going to leave India on 8-4-2013. In this
case, at the time of completing assessment for the previous year 2011-12 (i.e., assessment
year 2012-13), the Assessing Officer will make following three assessments :
 The assessment of the income of the previous year 2011-12.
 The assessment of the income of the previous year 2012-13.
 The assessment of the income of the period 1-4-2013 to 8-4-2013.
3. Bodies formed for Short Duration ( Sec174A)
Exception No. 3: Bodies formed for Short Duration( Sec174A)
Conditions
1) There is an Association Of Persons (AOP) or a Body Of Individuals (BOI) or an artificial
judicial person, formed or established or incorporated for a particular event or purpose.
2) It appears to the Assessing officer(A.O.) that it is likely to get dissolved in the A.Y. in
which it is formed or immediately after such A.Y.
Eg:. AB & Co. is an association of two individuals A and B. It is formed on 15th May 2008
for a specific project. It is likely to dissolved on 20th December 2009. The A.O. comes to
know on 10th August 2009 about the probable date of dissolution. In this case A.O. will
make two assessments

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i) Regular Assessment for the Previous Year 2008-09 (Tax Rate = A.Y. 2009-10)
ii) Assessment for the income of the period 1st April 2009 to 20 December 2009 (Tax Rate
= A.Y. 2010-11)
Conclusion: In the above case assessment for Previous Year 2009-10 is done in the same
year.
4. Person likely to transfer property to avoid Tax (Sec. 175)
Exception No.4:Person likely to transfer property to avoid Tax (Sec. 175)
Conditions
a) It appears to the A.O. during any current Assessment Year that a person is likely to
charge, sell, transfer, dispose of any of his asset.
b) Such asset may be movable or immovable.
c) The intention is to avoid tax liablity.
Eg: The Assessing Officer comes to know on 16th Jan 2010 that ABC Ltd. is likely to
dispose of a house property during the month of Feb. 2010 with a view to avoid payment of
income tax. A notice is issued by the Assessing Officer on 28th Jan 2010 to ABC Ltd. U/S
175 to submit return of income of the period commencing on 1st April 2010 to 28th Jan
2010.
In this case, income from 1st April 2010 to 28th Jan 2010 is Chargeable to tax in the
Assessment Year 2009-10 and tax is calculated at the rate applicable for the Assessment
Year 2010-11.
Conclusion: In the above case assessment for Previous Year 2009-10 is done in the same
year.
5. Discontinued Business (Sec.176)
Exception No.5: Discontinued Business
Conditions
a) A business or profession is discontinued in any Assessment Year.
e.g. Mr. A discontinues his business on 15 September 2009. In this case, Income will be
taxable as follows
i) Income from 1st April 2008 to 31st March 2009 is taxable in Assessment Year 2009-10.
ii) Income from 1st April 2009 to 15 September 2009 is taxable in Assessment Year 2009-

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10 or 2010-11.
Conclusion: The Assessing Officer has discretion to tax the income from 1st April 2009 to
15 September 2009 in the Same Year i.e. 2009-10 or in the normal Assessment Year
2010-11. In both the cases tax rate applicable will be as for Assessment Year 2010-11.
E. PERSONS SEC 2(34)
1. Individual
2. Hindu undivided family
3. Company
4. Firm
5. Association of persons or body of individual
6. Local authority
7. Artificial juridical person
“INCOME” IN SECTION 2(24)
The term income simply means something which comes in. It is a periodical return
with regularity or expected regularity. Income does not only refers to monetary return but
also includes non-monetary returns. It includes value of benefits and perquisites as well. All
such incomes are to taxed unless otherwise it is specifically exempted by any such
provisions of the Act.
FEATURES OF INCOME: A study of the following broad principles will be helpful for
understanding the concepts of income:
a) REGULAR AND DEFINITE SOURCE – The term “income” connotes a periodical
monetary return coming in with some sort of regularity or expected regularity from definite
sources.
b) INCOME MUST COME FROM OUTSIDE – No one can earn income from himself.
There can be no income from transactions between head office and branch office.
Contributions made by members for the mutual benefit and found surplus cannot be termed
as income of such group.

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c) RECEIPT VS. ACCRUAL – Income arises either on receipt basis or on accrual basis.
Income may accrue to a taxpayer without its actual receipt. Moreover, in some cases, income
is deemed to accrue or arise to a person without its actual accrual or receipt.
d) TAINTED INCOME – The income-tax law does not make any distinction between income
accrued or arisen from a legal source and income tainted with illegality. Assessment of illegal
income does not grant him immunity from the applicability of the provisions of other Act.
e) DISPUTED TITLE – Income-tax assessment cannot be held up or postponed merely
because of existence of a dispute regarding the title of income.
f) TEMPORARY OR PERMANENT – Whether the income is permanent or temporary, it is
immaterial from the tax point of view. Even temporary income is taxable.
g) DIVERSION OF INCOME BY OVERRIDING TITLE VS. APPLICATION OF
INCOME —
Any expenditure/ investment, after income is received, is application of income. “Income”
under the Income-tax Act, which is chargeable to tax, is income before application of income.
Any expenditure investment out of such income is deductible only if it is permitted by a
provision under the Income-tax Act or Income-tax rules.
Diversion of income means that a part of the income or whole of such income does
not reach to assessee. It is diverted to some other person due to some legal obligation.
h) LUMP SUM RECEIPT — Income, whether received in lump sum or in instalments, is
liable to tax. For instance , arrears of bonus, received in lump sum, is income and is taxable
as salary.
i) TAX-FREE INCOME – If a person receives tax—free income on which tax is paid by the
person making payment on behalf of the recipient, it has to be grossed up for inclusion in his
total income.
j) VOLUNTARY RECEIPTS – The receipts which do not arise from the exercise of a
profession or business or do not amount to remuneration and are made for reasons purely of

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personal nature are not included in the scope of total income. Receipt on account of
dharmada, gaushala, and pathshala is not income and, therefore, not liable to tax.
k) INCOME INCLUDES LOSS – Income includes loss. While income, profits and gains
represent “plus income”, losses represent “minus income”.
A) MONETARY GIFTS: Any sum of money received from any person or persons without
consideration exceeding Rs.50000 in aggregate during a previous year, then
INCOME = THE WHOLE OF SUCH SUM OF MONEY
B) GIFT OF IMMOVABLE PROPERTY: Any immovable property received from any
person without consideration having stamp duty value exceeding Rs.50000, then
INCOME = THE STAMP DUTY VALUE OF SUCH IMMOVABLE PROPERTY
C) GIFT OF PROPERTY (SPECIFIED) OTHER THAN IMMOVABLE PROPERTY
F. GROSS TOTAL INCOME
It is the aggregate taxable income under the different heads of income such as income from
salary, income from house property, income from profits or gains of business, capital gains
and income from other sources. Ie total income computed in accordance with the provision of
the act before making any deductions under Sec 80 C to 80 U
TOTAL INCOME SEC 2(45)
Total income is arrived after making various deductions from gross total income under
section 80 C to 80 U. It is computed on the basis of residential status of an Assessee
BASIS OF CHARGE (RESIDENTIAL STATUS)
1. Introduction
2. Residential Status of an Individual
3. Residential Status of H.U.F., Firm, A.O.P.
4. Residential Status of a ‘Company’
5. Residential Status of ‘Every’ other Person

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1. RESIDENTIAL STATUS
Income tax is charged on total income earned by an Assessee during the previous year, but at
the rate applicable to the assessment year. It shall be determined on the basis of the
residential status of the Assessee. Sec.6 of the act divides the Assessee into 3 categories’
*Resident
*Non resident
*Not ordinary resident
There is basic and additional condition for determining the residential status of different
assessee.
 Basic condition
(a) He has been in India for at least 182 days during the previous year.
(or)
(b) He has been in India for at least 365 days during the four years preceding the previous
year and has been in India for at least 60 days during the previous year

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 Additional conditions
(1).An individual who has been in India at least 2 out of 10 previous years preceding the
relevant previous year.
(2).The individual has been India for at least 730 days in all during the 7 previous year
preceding the relevant previous year.
182 STAYDAYS IN FINANCIALYEAR
OR
60 DAYS IN FINANCIALYEAR PLUS 365 DAYS IN
PREVIOUS 4 YEARS
One is
satisfied
Resident
Both not satisfied
Non Resident
1. Resident” in India in at least2 out of 10 financial
years preceding the relevantfinancial year; and
2. Presentin India for 730 days or more during the 7
financial year preceding the relevant financial year
Both are
satisfied
Resident and
Ordinary Resident
None or One
satisfied
Resident and Not Orinary
Resident

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RESIDENT AND ORDINARY RESIDENT
Persons who are resident in India is popularly known as ordinary resident. An individual, to
become an ordinary resident in India in any previous year should also satisfy the two
additional conditions along with basic conditions.
NOT ORDINARILY RESIDENT INDIVIDUAL- SEC.6 (6)
If an individual fulfills any one of the basic conditions (specified in the case of resident) but
doesn’t satisfy both additional conditions, he becomes a ‘not ordinary resident’
NON RESIDENT INDIVIDUAL
As per section 2(30) of the income tax act, if an Assessee doesn’t fulfill any of the two basic
conditions or tests will be treated as non resident Assessee during the relevant previous year.
Residential Status of HUF
A Hindu Undivided Family (HUF) is said to be resident in India if the control and
management of its affairs are wholly or partly situated in India.
A resident HUF is treated as Resident and ordinarily resident in India if the Karta (inclusive
successive karta) satisfies satisfies both of the following conditions-
(i) he has been resident in India in at least 2 out of 10 years immediately preceding the
relevant year
(ii) he has been in India for a period of 730 days or more during 7 years immediately
preceding the relevant year.
If karta doesn’t satisfies any of the above conditions then HUF is treated as Resident but not
ordinarily resident.
If HUF’s control and management is situated wholly outside India then it is treated as non
resident.

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Residential Status of a Firm or Association of Persons (AOP)
A partnership firm or association of persons is said to be resident in India if then control and
management of its affairs wholly or partly situated within India during the relevant previous
year. It is however treated as non resident in India if the control and management of its affairs
are situated wholly outside India.
Residential Status of Company
An Indian company is always resident in India.
Residential status of foreign company from Assessment year 2016-17.
A foreign company will be resident in India if its place of effective management (POEM)
during the relevant previous year is in India. For this purpose, the place of effective
management means a place where key management and commercial decisions that are
necessary for the conduct of the business of an entity as a whole are in substance made. For
this purpose a set of guiding principles to be followed in determination of POEM may be
issued by the Board of the benefit of the taxpayers as well as tax administration

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RATE OF INCOME TAX PAYABLE (ASSESSMENT YEAR 2008-09)
*Normal rate of tax
The Education Cess is a tax in India ordered to help cover the costs of government-
sponsored programs. The CESS was levied in 2004. Although the rate is assessed at 2
percent of income, it is collected independently of other taxes and applies to all Indian
citizens and corporations as well as anyone living in India.
CESS for Higher education
The government funds most of the universities providing higher education like to IITs, NITs
,AIIMs and other as well. Some are funded by center, some by state governments.
According to one report by a news portal:-
While it takes over Rs 3.4 lakh to educate an IITian per year, the student pays only Rs 90,000
per year. The rest is borne by the government. That is close to Rs 2.5 lakh per student per
year, which is being paid by the tax payer. If one extrapolates this to all the 39,540 students
in the Indian Institute of Technologies, the cost borne by the tax payer on educating IITians
extends to 988.5 crore annually.
So Cess paid by you are used to help out students to get education at lower expenditure.

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Education Cess
Government also do various charity work like giving Mid Day Meal,Free
uniforms,books,cycle to rural students.
This Cess fund is also used to improve infrastructure and to
modernize(CCTV,Wifi,smartboards,projectors,online fee payments) existing government
schools.

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