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Computation of taxable income and tax liability

Special provisions relating to Total income of certain companies

Deemed income relating to certain companies.

115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where
in the case of an assessee, being a company, the total income, as computed under this Act in
respect of any previous year relevant to the assessment year commencing on or after the1st day
of April, 1997 (hereafter in this section referred to as the relevant previous year) is less than
thirty per cent of its book profit, the total income of such assessee chargeable to tax for the
relevant previous year shall be deemed to be an amount equal to thirty per cent of such book
profit.

(2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and
loss account for the relevant previous year in accordance with the provisions of Parts II and III of
Schedule VI 24 to the Companies Act, 1956(1 of 1956):

Provided that while preparing profit and loss account, the depreciation shall be calculated on the
same method and rates which have been adopted for calculating the depreciation for the pur pose
of preparing the profit and loss account laid before the company at its annual general meeting in
accordance with the provisions of section-210 of the Companies Act, 1956 (1 of 1956):

Provided further that where a company has adopted or adopts the financial year under the
Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the
method and rates for calculation of depreciation shall correspond to the method and rates which
have been adopted for calculating the depreciation for such financial year or part of such
financial year falling within the relevant previous year.

Explanation.—For the purposes of this section, "book profit" means the net profit as shown in
the profit and loss account for the relevant previous year prepared under sub-section (2), as
increased by—

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

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

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

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

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

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( f) the amount or amounts of expenditure relatable to any income to which any of

the provisions of Chapter III applies;

if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as
reduced by,—

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

Provided that, where this section is applicable to an assessee in any previous year
(including the relevant previous year), the amount withdrawn from reserves created or provisions
made in a previous year relevant to the assessment year commencing on or after the 1st day of
April, 1997 shall not be reduced from the book profit unless the book profit of such year has
been increased by those reserves or provisions (out of which the said amount was withdrawn)
under this Explanation; or

( ii) the amount of income to which any of the provisions of Chapter III applies, if any
such amount is credited to the profit and loss account; or

( iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less
as per books of account.

Explanation.—For the purposes of this clause, the loss shall not include
depreciation; or

( iv) the amount of profits derived by an industrial undertaking from the business of
generation or generation and distribution of power; or

( v) the amount of profits derived by an industrial undertaking located in an

industrially backward State or district as referred to in sub-clause (b) or sub-clause (c) of clause
(iv) of sub-section (2) of section-80-IA, for the assessment years such industrial undertaking is
eligible to claim a deduction of hundred per cent of the profits and gains under sub-section (5)
of section-80-IA; or

( vi) the amount of profits derived by an industrial undertaking from the business of
developing, maintaining and operating any infrastructure facility as defined under sub-section
(12) of section-80-IA, and subject to fulfilling the conditions laid down in sub-section (4A)
of section-80-IA; or

( vii) the amount of profits of sick industrial company for the assessment year
commencing from the assessment year relevant to the previous year in which the said company
has become a sick industrial company under sub-section (1) of section-17 of the Sick Industrial
Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year
during which the entire net worth of such company becomes equal to or exceeds the accumulated
losses.

(viii ) the amount of profits eligible for deduction under section-80HHC, computed
under clause (a), (b) or (c ) of sub-section (3) or sub-section (3A), as the case may be, of that
section, and subject to the conditions specified in sub-sections (4) and (4A) of that section;

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(ix ) the amount of profits eligible for deduction under section-80HHE, computed
under sub-section (3) of that section.

(3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation
to the relevant previous year to be carried forward to the subsequent year or years under the
provisions of sub-section (2) of section-32 or sub-section (3) of section-32A or clause (ii ) of
sub-section (1) of section-72 or section-73 or section-74 or sub-section (3) of section-74A.

(4) Save as otherwise provided in this section, all other provisions of this Act shall apply to every
assessee, being a company, mentioned in this section.

Computation Of Taxable Income Of A Company

Ascertain the ‘total income’ of the company by aggregating incomes falling under following four
heads:-

1. 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.

2. Profits and Gains of Business or Profession.

3. Capital Gains.

4. Income from other sources including interest on securities, winnings from lotteries, races,
puzzles, etc.

Also, the income of other persons may be included in the income of the company. But, income
under the head ‘Salary’ is not included under the 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 carryback 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]

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Capital expenditure is 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 non-
tangible assets such as know-how, patents, etc, which are owned by the assessee and used for the
purpose of the 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 the assessee during the previous
year and is put to use for business/profession purpose for a period of fewer 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 an
accrual basis or on receipt basis (whichever is earlier). However, if an income is taxed on an
accrual basis, it shall not be taxed on receipt basis.[iv]

From the tax so computed, tax rebates or tax credit are deducted.

Book profit & Minimum Alternative Tax

Book profit” for the purposes of Section 115JB means net profit as shown in the
statement of profit and loss prepared in accordance with Schedule III to the Companies
Act, 2013 as increased and decreased by certain items prescribed in this regard. The
items to be increased and decreased. The company shall have to pay a minimum
alternate tax at 15% on book profit (plus surcharge and prescribed cess rate)

Corporations take advantage of various provisions of the Income Tax Act by claiming
exemptions, deductions, depreciation, etc. to reduce their tax liability. One such
provision available to companies for deducting their corporate tax burden is
their Minimum Alternate Tax (MAT). MAT was introduced by Finance Act, 1996 to
ensure that companies pay a minimum amount of tax to the government. The following
are details of various aspects of MAT.

MAT or Minimum Alternate Tax is a provision in Direct tax laws to limit tax exemptions availed
by companies, so that they mandatorily pay a minimum amount of tax to the government. As per
Section 115JB, all companies are required to pay corporate tax at least equal to the higher of the
following:

 Normal Tax Liability: Calculated as per the normal provisions of the Income Tax Act,
i.e. by applying the relevant tax rate to the taxable income of the company. Please note
that the Ministry of Finance has revised the corporate tax rates in September, 2019.
Click here to know the revised rates.

 Minimum Alternate Tax (MAT): For FY 2019-20, tax payable is computed at 15%
(previously 18.5%) on book profit plus applicable cess and surcharge.

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Tax on distributed profits of domestic companies.

(1) Notwithstanding anything contained in any other provision of this Act and subject to the
provisions of this section, in addition to the income-tax chargeable in respect of the total income
of a domestic company for any assessment year, any amount declared, distributed or paid by
such company by way of dividends (whether interim or otherwise) on or after the 1-4-2003,
whether out of current or accumulated profits shall be charged to additional income-tax

(2) Notwithstanding that no income-tax is payable by a domestic company on its total income
computed in accordance with the provisions of this Act, the tax on distributed profits shall be
payable by such company.

(3) The principal officer of the domestic company and the company shall be liable to pay the tax
on distributed profits to the credit of the Central Government within 14 days from the date of—

(a)declaration of any dividend; or

(b) distribution of any dividend; or

(c) payment of any dividend,

whichever is earliest.

(4) The tax on distributed profits so paid by the company shall be treated as the final payment of
tax in respect of the amount declared, distributed or paid as dividends and no further credit
therefore shall be claimed by the company or by any other person in respect of the amount of tax
so paid.

(5) No deduction under any other provision of this Act shall be allowed to the company or a
shareholder in respect of the amount which has been charged to tax or the tax thereon.

(6) Notwithstanding anything contained in this section, no tax on distributed profits shall be
chargeable in respect of the total income of an undertaking or enterprise

Securities Transaction Tax

Securities Transaction Tax (STT) is a type of turnover tax where the investor is obliged to pay a
tax on the total sum received or paid in a transaction done through an exchange. STT is not
applicable for commodities and currency transactions and on transactions outside of the
exchange. It is applicable to securities like shares, debentures, bonds, mutual funds, government
equity securities, derivatives, etc. The STT rates are different for delivery-based equity
transactions and intra-day transactions. The rates are also different when buying security and
when selling one. It was announced in 2004 by the then finance minister P Chidambaram with a
view to decrease evasion of capital gains tax

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Scope of the STT

According to the Securities Contracts (Regulation) Act, 1956, STT would be applicable to the
following securities:

 Shares, bonds, debentures, debenture stock or other marketable securities of a like nature
in or of any incorporated company or other body corporates

 Derivatives

 Units or any other instrument issued by any collective investment scheme to the investors
in such schemes

 Security receipt as defined in section 2 of the Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002

 Government securities of equity nature

 Rights or interest in securities

 Equity-oriented mutual funds

Computation of Securities Transaction Tax

Sr.No Taxable securities transaction New rate as of March Payable by

2020

1 Sale of an option in securities 0.017 per cent Seller

2 Sale of an option in securities, where the option is 0.125 per cent Purchaser
exercised

3 Sale of a future in securities 0.01 per cent Seller

Tax Holiday

A tax holiday is a temporary reduction or elimination of a tax. It is synonymous with tax

abatement, tax subsidy or tax reduction. Governments usually create tax holidays as

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incentives for business. Tax holidays have been granted by governments at national, sub-
national, and local levels, and have included income, property, sales and other taxes.
Some tax holidays are extra-statutory concessions.

Tax holidays forms (examples)- In developing countries governments

sometimes reduce or eliminate corporate taxes for the purpose of

– Attracting foreign direct investment or

– stimulating growth in selected industries.

– A tax holiday may be granted to particular activities or In particular to

develop a given area of business to particular taxpayers

– A tax holiday offers a period of exemption from income tax for

industries in order to develop or diversify domestic industries.

– Tax holiday As per IT Act (80-IA, 80-IAB, 80-IB)

COMPUTATION OF TAX LIABILITY

• Step 1: Total Income-Compute total income of the company

as per the provisions of Income Tax Act, 1961

• Step2: Regular Tax Liability

• Step 3: Book Profit-as per Section 115JB

• Step4: MAT Liability-tax @ 15% on Book Profit + (Surcharge) +

(Education Cess)

• Step 5: Tax Payable-Tax Liability shall be higher of the step 2 or step

Examples -1

Compute the tax payable by a company for the AY 2019-20

(a) Its total income is Rs 4,00,000 and book profit (sec 115JB) is Rs 15,00,000 or

(b) its total income is Rs 6,20,000 and book profit is Rs 10,00,000

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(c) Both case company turnover exceeds Rs 250 cr. During the Previous Year
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Examples -2 Compute the tax payable by a company for the AY 2019-20 if

(a) Its total income of XYZ co. is Rs 2,50,000 and book profit (sec 115JB) is Rs 8,15,000 .
Company turnover did not exceeds Rs 250 cr. In the Previous year

Example-3 Rao limited a domestic Ltd, provides you following statement of profit and loss showing a
net profit of Rs 18,88,000 for computation of tax liability for Assessment year 2019-20

Expenses charged Rs Items included Rs

Purchases 1875000 Sales 7525000

Direct wages 845000 Closing stock 110000

Freight 12500

Salaries 850000 Dividends for Indian 17500

co,
General Expenses 435000

Sales expenses 215000

Directors remuneration 832000

Income tax 180000

Penalty 10000

Proposed dividend 320000

Provision for loss of subsidiary co. 200000

Additional information

1. Purchases include one bill of Rs 60000 which payment was made in cash

2. Gen.exp. include Rs 15000 as interest on loan taken from . This interest not paid so far

3. As per IT As per Book

(i) Brought forward losses 280000 140000

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(ii) Un absorbed depreciation 170000 50000

Example-4-Kwality Electronics ltd is a domestic company in which public are substantially interested. The
following are the particulars of income in respect of the previous 2018-19. compute company total income
and its net tax liability

Particular RS

Interest on Government securities (gross) 20,000

income from business 5,00,000

Short-term capital gains 15,000

Long-term capital gains 33,000

Dividend from Indian co. (gross) 10,000

Dividend from foreign company 10,000

Book profit u/s 115JB 9,00,000

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