Company Secretary Stude Material - Advance tax

Direct Tax - Final
CA R Giridharan FCA 1
Contents
Tax Management ....................................................................................................................................3
Objectives of Tax planning.......................................................................................................................4
Definition ...........................................................................................................................................4
The incidence ......................................................................................................................................5
MINIMUM ALTERNATE TAX (MAT)...........................................................................................................6
Corporate Restructuring - Amalgamation, Mergers & Demergers, Conversion & Slumpsale.....................8
Areas of Tax planning under Financial Management and role of Tax Planner .........................................13
Concept of Dividends, Deemed dividends..............................................................................................15
General Exclusion: Dividend doesn’t include – ...................................................................................16
Bond-Washing transactions and provisions to prevent them .............................................................17
Tax treatment of expenditure on issue of bonus shares:....................................................................18
Setting up and commencement of business...........................................................................................19
Tax planning considerations while choosing and adopting a particular method of accounting............19
Tax planning with reference to form of business................................................................................20
Company ..........................................................................................................................................21
Tax planning with reference to nature of business.................................................................................22
Tax planning with reference to location of business...............................................................................25
Non resident .........................................................................................................................................32
Business connection ..........................................................................................................................32
levy of income tax on income pertaining to FIIs .................................................................................33
Section 160........................................................................................................................................35
Section 163: Agent of a non resident .................................................................................................35
Section 172: tax liability of shipping business.....................................................................................35
Transfer pricing .....................................................................................................................................36
Provisions relating to computation of income from international transactions – sec 92 .....................36
Section 92Aassociated enterprises and deemed associated enterprises............................................36
Deemed associated enterprises .....................................................................................................36

Direct Tax - Final
Section 92B international transaction ...............................................................................................37
Section 92Cmethods under which arm’s length price is determined..................................................37
Double taxation avoidance agreement - DTAA...................................................................................38
DTAA- Sec 90A...................................................................................................................................38
Section 91 unilateral relief................................................................................................................39

Direct Tax - Final
Tax Management
 Tax Management is essential, Tax planning is desirable and Tax evasion is objectionable.
Elaborate.
Tax Planning Tax Management Tax Evasion
Tax planning is to avail
maximum benefit of
deductions, exemptions,
rebates etc and thereby
minimizing tax liability.
Tax management refers to the
steps taken to ensure compliance
with the provisions of the tax
laws.
Tax evasion refers to ways and
means adopted by a tax payer to
evade tax by falsifying accounts
or concealing income, inflating
expenses etc.
It’s fully within the
framework of law and it
makes use of the beneficial
provisions in law.
It’s undertaken to fulfill the
requirements contained in the
provisions of the law.
It’s clearly violations of law and
unethical in nature. It includes an
element of deceit.
The judiciaries in India accept
this concept.
It is obligatory to exercise tax
management.
This is clearly prohibited, as it is
fully illegal.
It is a rewarding concept for
professionals/ experts as it
allows making use of
beneficial provisions and thus
minimizing tax liability.
It aims at avoiding costs arising as
consequences of non –
compliance of law. Thus it helps
the tax planning to be successful.
When proved, tax evasion invites
stringent penalties and
prosecution against the person
who is found engaged in it.
It is futuristic in approach i.e.
it aims at minimizing the tax
liability of the future years.
Tax mgmt relates to the past
(assessment proceedings, appeal,
revision, rectification etc),
present( filing of return) and
future (corrective action)
There is nothing like past, present
or future approach in case of tax
avoidance.
Its benefits are substantial
particularly in the long run.
It aims at avoiding penalty,
interest, prosecution etc.
Tax evasion attracts penalty and
prosecution.
Tax Avoidance Is an arrangement if affairs so as to avoid payment of tax by the use of devices which are
sham or make-believe. It defeats the basic intent of the legislature behind the statute.

Direct Tax - Final
Objectives of Tax planning
Reduction in tax liability
Minimizing litigation
Productive investment
Healthy growth of economy
Economic Stability
Definition 
 Company *sec 2(17)+ : “Company” means Indian company; or any body corporate incorporated
by or under the laws of a country outside India; or any institution, association or body, declared
by general or special order of the Board to be a company for specified assessment years.
 Indian company *sec2(26)+: “Indian company” means a company formed and registered under
the companies act, 1956 and includes statutory corporation; and any institution, association or
body declared by the board to be a company, if the registered/ principal office of the company,
corporation, institution, association or body is in India.
 Company in which public are substantially interested [section 2(18)]: It means a –
I. A company owned by govt. / RBI or in which 40% or more of the shares are held by the
Government or RBI or a corporation owned by the RBI; or
II. Company which is registered under section 25 of the Companies Act, 1956; or
III. Company having no share capital, if its declared for specified years by order of the Board
to be a company in which the public are substantially interested, or
IV. Mutual benefit finance company; or
V. Company, wherein 50% or more of the voting power was throughout the previous year
held by one or more co-operative societies; or
VI. A public listed company as on the last day of the previous year; or
VII. A public company, if its 50% or more of voting power was throughout the previous year
held by – 1) Government 2) statutory corporation, or 3) any company in which public
are substantially interested; or 4) any 100% subsidiary of a company in which public are
substantially interested.
 Closely held company: A Company in which public is not substantially interested is called closely
held company.

Direct Tax - Final
The incidence
 The Incidence of income tax of a company depends upon its residential status. The residential
status may be resident or non resident depending upon which the tax incidence is determined.
As per sec 6(3) an Indian company is always resident in India. A Foreign company will be
resident in India if during the previous year the control and management of its affairs is wholly
situated in India.
According to Sec5 (1), the incidence of income tax has been given below –
Particulars Tax Incidence
Resident Non - Resident
Income received in India by him or on his behalf(
whether accrued in India or outside India)
Yes yes
Income deemed to be received in India by him or on his
behalf (whether accrued in India or outside India)
Yes Yes
Income accruing or arising in India( whether received in
India or outside India)
Yes Yes
Income deemed to accrue or arise in India (whether
received in India or outside India)
Yes Yes
Income which accrues or arises outside India(other than
that covered in cases(1) to (4) above
Yes No

Direct Tax - Final
MINIMUM ALTERNATE TAX (MAT)
Relevance IF the income- tax payable on total income of a company is less than 18% of its book profits,
then such book profits shall be deemed to be the total income and income tax payable by such a
company shall be equal to 18% of the book profits.
Mode of computation of book profits [explanation to section 115 –JB]
Net Profit as per Profit and Loss A/c
Add: ( If any of the following is debited to P&L a/c)
Amount of Income tax paid/ payable or provision thereof;
Amount carried to any reserves;
Amount of provisions made for meeting unascertained liabilities;
Amount by way of provision for losses of subsidiary companies;
Amount of paid or proposed dividends;
Expenditure relatable to any income exempt u/s 10 or 11 or 12, other than income exempt u/s 10(38);
The amount of depreciation
Less:
Amount withdrawn from any reserve/provision, if such amount is credited to P&L A/c.
Income exempt u/s 10 or 11 or 12, other than income exempt u/s 10(38), if any such amount is credited
to P&L A/c;
Amount of depreciated debited to the P&L a/c ( excl the depreciation on revaluation reserves); or
Amount withdrawn from revaluation reserve and credited to the P&L a/c, to the extent it doesn’t
exceed the amount of depreciation on account of revaluation of assets; or
Amount of loss brought forward or unabsorbed depreciation, whichever is LESS as per books of account.
Amount of profits of sick industrial company during the period of its sickness;
{ Period of sickness starts from the PY in which such company becomes sick industrial company u/s 17(1)
of the SICA and ends with the PY during which the entire net worth of such company becomes equal to
or exceeds the accumulated losses.
Book Profits of the Company u/s 115 J-B

Direct Tax - Final
Levy of surcharge and educational cess:
Surcharge: The amount of income tax under this section shall be increased by surcharge @ 10% of the
amount of income tax, if the total income chargeable under this section exceeds Rs.1crore, in case of
foreign companies, the surcharge will be imposed @ 2.5%.
Marginal relief: Incase of companies having total income chargeable under this section exceeding Rs.1
crore, marginal relief will be provided so as to ensure that “income tax, including, surcharge, on the total
income” doesn’t exceed income tax on total income of Rs.1 crore plus the amount by which the total
income exceed Rs.1crore. In other words,
MR = Income tax, including surcharge on total income – [income tax on total income of Rs.1 crore +
(total income – Rs. 1 crore)], if such sum is positive.
Cesses: The amount of income tax including surcharge, as aforesaid, shall be increased by Education
Cess (EC) @ @% of income tax plus surcharge and also by secondary and Higher secondary Education
cess (SHEC) @ 1% of income tax plus surcharge.
Other Provisions:
o Section not to apply to SEZ units: This section shall not apply to the income accrued or arising from
any business carried on or services rendered by an entrepreneur/ developer/unit in SEZ.
o Preparation of accounts: The P&L a/c of the company should be prepared in accordance with the
provisions of parts II and III of schedule VI to the companies Act, 1956.
o Furnishing of report: Along with its return of income, every company is required to furnish a report
in prescribed form from a CA, certifying the correctness of book profits.
o Carry forward of losses and allowances: The provisions of this section do not affect the
determination of amounts of losses and allowances to be C/F.

Direct Tax - Final
Corporate Restructuring - Amalgamation, Mergers & Demergers, Conversion & Slump sale
BENEFITS 
Shareholders of the amalgamating company
As per section 47(vII), transfer of shares held by a shareholder in amalgamating company is not regarded
as “transfer”, if such transfer is in consideration of allotment to him of shares in the amalgamated
company.
When transfer is exempt, then for computing CG on shares:
Period of holding: period, for which shares in amalgamating company were held by assessee, will be
included in computing the period of holding of shares in amalgamated company.
Cost of acquisition of shares in amalgamated company = cost of acquisition of shares in the
amalgamating company.
However, if the above 2 conditions aren’t satisfied, the transfer shall not be exempt and the shareholder
shall be liable to CG tax, further if besides shares, bonds or debentures in consideration of such transfer
is issued, the transfer will not be exempt.
Amalgamating company the following will be exempt from CG tax.
1) Transfer of capital asset by an amalgamating company to Indian amalgamated company.
2) Transfer of shares held in an Indian company by amalgamating foreign company to
amalgamated foreign company if – a) at least 25% of shareholders of the amalgamating foreign
company to remain shareholders of the amalgamated foreign company and b) such transfer
doesn’t attract CG tax in the country in which the amalgamating company is incorporated.
3) Transfer of capital asset by an amalgamating banking company to the amalgamated banking
company institution, under a scheme of amalgamation sanctioned by the central government.
Shareholders of the demerged company 
When transfer is exempt,
a) Period of holding of shares in demerged company shall be included in computing the period
of holding of shares in resulting company.
b) Cost of acquisition : 1) shares in resulting company =[ cost of acquisition of shares in
demerged company X net book value of assets transferred to resulting co. in demerger / net
worth of the co. before demerger]
2) Shares in resulting co. = total cost of such shares LESS cost of shares in resulting company
as computed u/s 49(2C) above.

Direct Tax - Final
Demerged company the following shall be exempt from CG tax –
a) Transfer of capital assets by a demerged company to the resulting company.
b) Transfer of shares held in an Indian company by demerged company foreign company to
resulting foreign company if a) shareholders holding 75% or more of value of shares of
demerged foreign company continue to remain shareholders of resulting foreign company and
b) such transfer doesn’t attract CG tax in the country in which demerged foreign company is
incorporated.
Tax implications or benefits of Amalgamation or demerger 
a) For expenses falling u/s 35 BB (telecommunication license), or 35D (preliminary expenses), or 35
DDA (voluntary retirement) or 35 E/42 (prospecting for mineral oils), the expenditure remaining
unallowed can be claimed as deduction by the amalgamating company.
b) Expense on amalgamation/demerger is allowable in 5 equal annual installments us 35DD.
c) Deemed profits u/s 41(1) are taxed in the hands of the amalgamated or resulting company.
d) Actual cost of asset transferred or WDV of block transferred in the hands of the transferor, is
taken to be the actual cost or WDV in the hands of the transferee company.
e) Transfer of capital assets in course of amalgamation/ demerger is exempt from capital gains.
f) Transfer of shares held in amalgamating company/demerged company by the shareholder for
issue of shares in amalgamated / resulting company is exempt from capital gains.
g) Unabsorbed business losses and unabsorbed depreciation is case of transferor-company are
allowed to be c/f by the transferee company u/s 72A.
h) The deductions allowable u/s 80I-A to 80-IC and 10A, 10AA or 10B continue to remain allowed
to the amalgamated/resulting company.
Reverse merger 
It means that the profit making company merges into the sick company thereby becoming
eligible to carry forward of losses etc. without the aid of section 72S of the act. The profit
making or healthy company becomes extinct loosing its name and the surviving sick company
retains its name. The reverse merger is a device, which by passes the requirements under
section 72A of the act. Soon after the merger or after a year or so, the name of the company is
changed to correspond with that of the profit making amalgamating company.
Reverse merger has 2 advantages:
a) Losses, which otherwise could not have been c/f and set off, are c/f and set off, and
b) Goodwill consisting in the name of the profit making amalgamating company is also
retained.

Direct Tax - Final
Tax planning with reference to conversion of proprietorship / partnership firm into company
Basis Firm company Proprietorship company
Certain transfer exempt : If all the assets and liabilities of the firm
relating to their business immediately
before succession become the assets and
liabilities of the company.
All its partners become shareholders of the
company in the same proportion in which
their capital a/cts stood in the books of the
firm on the date of succession.
The partner rec. consideration only by way
of allotment of shares in the company.
The partners shareholding in the company
in aggregate is 50% or more of its total
voting power and continue to be as such
for 5 yrs from the date of succession.
All the assets and liabilities of sole proprietary
business immediately before the succession
become the assets and liabilities of the company
Sole Proprietorship’s shareholding in the company
is 50% or more of the total voting power and
continues to be as such for 5 years from the date of
succession; and
Sole proprietor receives the consideration only in
form of allotment of shares in the company.
Depreciation The depreciation in the year of succession
shall be proportionately shared by the
successor company and the succeeded
firm.
The depreciation in the year of succession shall be
proportionately shared by the successor company
and the prop. Firm.

Direct Tax - Final
Case law In CIT v. Veerbhadra Rao, k.koteshwara and
co., it has been held that successor to a
business is entitled to deduction in respect
of debts incurred by the predecessor, as
the deduction is allowed to business and
not to assessee personally. However,
identity of business after succession should
remain the same and it should not be
dissolved.
In CIT v. Veerbhadra Rao, k.koteshwara and co., it
has been held that successor to a business is
entitled to deduction in respect of debts incurred
by the predecessor, as the deduction is allowed to
business and not to assessee personally. However,
identity of business after succession should remain
the same and it should not be dissolved.
C/F and set off of loses
and unabsorbed
depreciation in case of
reorganization of business.
Such loss can be c/f for further 8 years in
the hands of the successor company
Such loss can be c/f for further 8 years in the hands
of the successor company

Direct Tax - Final
SLUMP SALE 
Slump sale [sec 2(42C)] : means transfer of one or more undertakings as a result of the sale for a
lump sum consideration w/o values being assigned to the individual assets and liabilities in such
sales.
Charge and nature of CG:
P&G arising from slump sale shall be taxable as “CG” in PY in which slump sale is effected. If the
capital asset, being one or more undertakings, was owned and held by the assessee for not
more than 36 months, the CG will be “STCG”. In any other case, it shall result into LTCG.
Method of computation of CG:
Full value of consideration
Less: expenses wholly and exclusively in connection with such transfer
Less: cost of acquisition and cost of improvement being net worth** of
the undertaking (no indexation benefit even in case of long term capital
asset)
XXX
XXX
XXX
ST/LT CG XXXX
** net worth shall be computed as follows 
Aggregate value of total assets of the undertaking or division ( ignoring
any change in value of assets on a/c of revaluation) i.e. –
In case of depreciable assets, the WDV of the block as per sec 43(6)
In case of other assets, the BV
Less: value of liabilities of such undertaking or division as appearing in its
books
XXX
XXX
XXX
Net worth of the undertaking or division
XXXX
Certificate of Chartered accountant: in case of a slump sale, every assessee shall furnish along
with return of income a report of an accountant in prescribed form indicating the computation
of net worth and certifying that the net worth of the undertaking or division has been correctly
arrived at.

Direct Tax - Final
Areas of Tax planning under Financial Management and role of Tax Planner
 The main objective of financial management is maximization of an organization’s wealth. Tax
planning may be exercised n respect of following areas of decision making 
1. Designing the capital structure (financing mix decision);
2. Capital budgeting (investment decisions and growth policy);
3. Distribution of profits (dividend policy decisions);
4. Managing working capital (liquidity decisions and funds management by their proper mobilization
from short –term and long –term sources and their proper utilization).
Role of tax planner
The interest on debts is tax deductible expenditure while dividend is not. Further, dividend distributed is
liable to Dividend Distribution Tax. Hence, a tax planner may prefer debts to preference shares/ Equity
shares in the capital structure.
Lease rent on machinery, depreciation and interests relating to the machinery purchased outright or on
hire purchase are tax deductible. Hence, a tax planner may opt for leasing the machinery rather than
buying it.
Tax on distributed profits is charged only in case of distribution of profits as dividends and not on
retained profits. Therefore, an appropriate balance between current dividend and long term capital
appreciation has to be achieved.
A tax planner should also consider factors such as risks, leverage, income, controls, opportunities
and other relevant factors.
Tax planning considerations for deductibility of interest under Income Tax Act, 1961
section 36(1)(III) of the income tax act, 1961 provides that the deduction shall be allowed in respect of
the amount if the interest paid for the borrowed capital taken for the purposes of the business or
profession. However, any interest paid on capital borrowed for acquisition of a new asset for extension
of existing business or profession for nay period beginning from the date of borrowing till the date on
which such asset is first put to use, shall not be allowed.
Interest: As per section 2(28A) of the income tax Act, 1961 “interest” means interest payable in any
manner in respect of any money borrowed or debt incurred (including a deposit, claim or other similar
right or obligation) and includes any service fee or others charge in respect of the money borrowed or
debt incurred or in respect of any credit facility which has not been utilized.
The following references are important in respect of deductibility of interest:
1. The interest on capital borrowed bonafide for business purposes of the company is allowed
as a deduction and questions like whether the interest paid is too high, or whether there
was any need to borrow because the assessee had ample funds or the company had

Direct Tax - Final
charged lower rates of interest on money it has advanced earlier, are generally irrelevant
from tax point of view as the tax payer is the best person to take decisions on these matters.
In this respect, the word “capital” means “money” and not any other asset. It’s also
immaterial whether use of capital actually yielded profits or not.
2. However, the deduction is subject to the provisions of section 40(a) which states that –
a. Any interest payable outside India or in India is a non –resident (not being a
company) or to a foreign company; or
b. Any interest payable to a resident,
On which tax, hasn’t been deducted at source, or after deduction, hasn’t been paid during
the PY, or in the subsequent year before the expiry of the time prescribed u/s 200(1), shall
not be allowed as deduction. However such amount shall be allowed as a deduction ion
computing the income of the subsequent PY in which it has been so deducted and paid.
3. For tax purposes, borrowing should not be illusory. The interest deduction is also subject to
provisions of section 40 A, which disallow excessive expenditure in case of specified persons
or if expenditure in excess of Rs.20, 000 is paid in cash.
4. The deduction is also subject to the provisions of section 43 B, which allow interest on term-
loans borrowed from financial institutions and scheduled banks, only on actual payment.
5. Interest on capital borrowed but diverted to sister concern free of cost will not, generally,
be allowed as deduction. However, if the diversion of funds is on account of commercial
expediency, the interest on such capital borrowed will be admissible as deduction.

Direct Tax - Final
Concept of Dividends, Deemed dividends.
When does the dividend income accrue or arise?
1. Dividend: dividend means amount paid to or received by a shareholder in proportion to his
shareholding in a company out of total sum so distributed.
2. Deemed Dividends [section 2(22)] : The following distributions by a company to its shareholders are
included in “dividend” –
a) Any distribution of accumulated profits, whether capitalized or not, if such distribution
entails the release of all or any part of the assets of the company.
Issue of bonus shares to equity shareholders isn’t dividend, as there is no release of assets. But if the
bonus shares are redeemed (in case such bonus shares are preference shares), there will be release
of assets and therefore, it would constitute dividend at the time of redemption.
b) Any distribution of – 1) Debentures, debenture – stock, or deposit certificates in any form,
whether with or without interest and 2) bonus shares to its P’shareholders; to the extent to
which the company possesses accumulated profits, whether capitalized or not.
c) Any distribution made on liquidation, to the extent to which the distribution is attributable
to the accumulated profits of the company immediately before its liquidation, whether
capitalized or not.
Dividend excludes: Distribution in respect of any share issued for full cash consideration,
where the holder thereof is not entitled to participate in the surplus assets in the event of
liquidation.
d) Any distribution on the reduction of capital, to the extent to which the company possesses
accumulated profits, whether capitalized or not.
Dividend excludes: Distribution in respect of any share issued for full cash consideration,
where the holder thereof is not entitled to participate in the surplus assets in the event of
liquidation.
e) Any payment made by way of advance or loan made by a closely held company i.e. a
company in which the public are not substantially interested, to the following , is treated as
dividend –
(A) To a shareholder: such shareholder must be beneficial owner of equity shares holding
10% or more of the voting power. Any payment by any such company on behalf, or for
the individual benefit, of any such shareholder is also treated as dividend.
(B) To any concern (HUF/AOP/BOI/company): The shareholder referred to in (A) above
must be a member or a partner in such concern and he must be having substantial
interest in it.(A person is deemed to have a substantial interest in a concern, other than
a company, if he is, at any time during the PY, beneficially entitled to 20% or more of the
income of such concern).

Direct Tax - Final
Such payment is considered as dividend to the extent the company possesses
accumulated profits.
Dividend doesn’t include: Any advance or loan made to shareholder or the said concern
by a company in ordinary course of its business, where lending of money is substantial
part of business of company.
General Exclusion: Dividend doesn’t include –
Any payment made by a company on a buy-back of its own shares from a shareholder in accordance
with the provisions of section 77A of the Companies Act, 1956.
Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the
demerged company (whether or not there’s a reduction of capital in the demerged company)
Any dividend paid by a company which is set off by its against whole or any part of any sum previously
paid by it and deemed as dividend under section 2(22)(e), to the extent it is so set off.
Accumulated profits:
a) In case of dividends u/s 2(22) (a)/ (b)/(c)/ (d)/ (e): Accumulated profits shall include all profits of the
company up to the date of distribution or payment referred therein.
b) In case of dividend u/s 2(22)(c): Accumulated profits shall include all profits of the company up to the
date of liquidation. However, where the liquidation is consequent on the compulsory acquisition of the
undertaking by the Government or a corporation owned or controlled by the Government under any
law, Accumulated profits shall not include any profits of the company prior to three successive PY’s
immediately preceding the PY in which such acquisition took place.
Distribution on reduction of share capital is deemed as dividend u/s 2(22) (d) to the extent of
accumulated profits and is liable for dividend tax u/s 115O.

Direct Tax - Final
Bond-Washing transactions and provisions to prevent them
Bond washing transaction is a transaction whereby owner of securities transfers his securities to another
person (who is under lower tax slab) such that income of such security becomes due to such other
person and the owner avoids tax theron.
The following provisions tend to curb such avoidance of tax –
1) Bond washing transactions [sec94 (1)]: Where the owner of any securities sells or transfers them
and buys back or reacquires the same (or similar securities) with the result that any interest
becoming payable in respect of the securities is receivable by a person other than the owner,
then, such interest shall be deemed to be the income of the owner and not of any other person.
2) Avoidance of tax through sale of security on cum- interest basis [sec 94(2)]: where any person
having any beneficial interest in any securities enters into a transaction whereby income
received by him from such securities within such year is – a) NIL; or (b) less than the sum of
income received accrued from day to day, then the income from such securities for such year
shall be deemed to be income of such person.
3) Above provisions not to apply [sec 94(3)]: the provisions of (1) and (2) above shall not apply if
the said person satisfies the Assessing Officer that – a) there has been no avoidance of tax, or (b)
the avoidance of tax was exceptional and not systematic and there was no avoidance of income
tax in his case in any of the three preceding years by any transaction referred to in (1) or (2)
above.
4) Profit or loss from a bond washing transaction not to be considered in case of such another
person [sec 94(4)]: in a case of falling under (1) above, if the other person carries on a business
of dealing in securities, then such transaction shall be ignored while computing the profits
arising from or loss sustained by him in the business.
5) Loss of sale of securities of units to be ignored in case of dividend stripping [sec 94(7)]: In case a
person –
a) Buys/ acquires any securities or unit within a period of 3 months prior to record date,
b) Sells/transfers the same within a period of 3 months
c) The dividend/ income on such securities or unit received or receivable by him is exempt,
then, the loss if any, arising to him on account of such purchase and sale, to the extent of
dividend or income from securities/unit, shall be ignored while computing his income
chargeable to tax.
6) Loss arising in case of a bonus stripping of units to be ignored [sec 94 (8)]: In case a person –
a) Buys/acquires any units within a period of 3 months prior to record date;
b) He is allotted bonus units on the basis of holding such units on such date; and
c) He sells or transfers or any of the original units referred to in a) within a period of 9 months
after such date, while continuing to hold all or any of the bonus units referred to in (b).

Direct Tax - Final
Then the loss, if any, arising to him on account of purchase and sale of orginal units shall be
ignored in computing his total income and the loss so ignored shall be deemed to be the
cost of purchase or acquisition of such bonus shares units referred to in (b) as are held by
him on the date of such sale or transfer.
Record date means the date fixed by a company for entitlement of dividend, or by a mutual
fund/ administration /specified company for entitlement of dividend or bonus shares.
Tax treatment of expenditure on issue of bonus shares:
Company’s point of view:
1) Dividend and bonus share aren’t tax deductible. However, while payment of dividend is liable to
dividend tax u/s 115-O, issue of bonus shares to equity shareholder is not so liable.
2) It was held in Cit v. General insurance corporation [2006]286ITR 232(SC) that expenses incurred
by a company, on account of stamp duty and registration fees for the issue of bonus shares isn’t
of capital nature, as the issue of bonus shares doesn’t result in inflow of fresh funds or increase
in the capital employed the capital employed remains the same. Issuance of bonus shares also
doesn’t result in benefit or advantage of enduring nature. Hence, its revenue expenditure
allowable as deduction.
3) A bonus issue enhances the image of the company. However, it widens the capital base for
future years and the dividend will have to be paid on increased capital base, including bonus
shares. Thus, the company should keep into its consideration the following factors before
arriving at a conclusion with regards to bonus issue or dividend policy: -
 Size of present authorized capital;
 Size of the present paid up capital;
 Price of the shares of the company.
 Quantum of free reserves built out of genuine profits;
 Equity base in relation to the earnings of the company;
 Quantum of earnings in last 2 or 3 years ;
 Projected earnings of the company in next 2 or 3 years.
Shareholder’s point of view:
1) Dividends from domestic companies are exempt u/s 10(34). However, dividends u/s 2(22)(e)
or dividends from foreign companies are taxable in the hands of shareholders.
2) Value of bonus shares isn’t immediately taxable. Further, he’ll be entitled to additional
dividend on bonus shares. However, on sale, the tax liability would be on account of capital
gains and if they are held for more than 12 months LTCG will arise which are taxable at a flat
rate of 10%( w/o indexation) or 20%( with indexation benefit) whichever is less.

Direct Tax - Final
Setting up and commencement of business
 Setting up of business is different from commencement of business. A business is set up as soon
as it is ready to commence production or any other activity of business is started and its not
necessary that the actual production should have so commenced.
 In case of newly set up business or profession, PY commences on date of its setting up.
 Expenditure incurred after setting up of business but before its commencement is deductible.
 Case law : Tuticorin alkali chemicals & fertilizers ltd. V.CIT
 Measures of tax planning 
a) After planning its installation programme, a company should see that its business is set
up at the earliest. The commencement of the business may be postponed till a later
date. The decisions in this regard must be taken after keeping into consideration the
general tax aspects of the company viz. tax holidays and deductions, c/f of losses and
unabsorbed depreciation etc.;
b) The expenditure incurred prior to setting up may be eligible for deduction under section
35D as preliminary expenses. The assessee company should see to it that such
preliminary expenses fulfill the requirements of section 35D and deduction thereof is
claimed under that section.
c) The date of commencement of business is crucial in case of deductions under section
10A, 10 AA, 10B, 80I-A to 80- IE etc. Because these deductions are available only from
the date of commencement of business. Therefore, the date of commencement of
business should be fixed after keeping the availability of deductions into mind.
Tax planning considerations while choosing and adopting a particular method of accounting
 The choice of adopting either cash or mercantile system of accounting is available only in case of
income under head – 1) profits and gains of business and profession & 2) income from other
sources.
 The method of accounting adopted by the assessee decides the accrual of income and also its
taxability. If mercantile system is followed, the right to receive will amount to accrual of income,
thereby leading to its taxation.
 By adopting cash system, the tax becomes payable only when income is actually received,
thereby providing adequate resources for payment of tax.
 Tax planning measures
a) An assessee can adopt different method of accounting for different sources of income.
b) The companies are statutorily required to follow mercantile system of accounting under
the companies act, 1956.
c) Assessee is at freedom to follow any method regularly followed by him for valuing stock
of goods. However, As-2 issued by ICAI, which is mandatory, suggests LIFO method or
weighted average price method of valuing closing stock.

Direct Tax - Final
d) Even if assessee follows mercantile system of accounting, Section 43B permits certain
discussions only on actual payment. So, while planning tax liability, such provisions must
be taken care of.
Tax planning with reference to form of business
 Sole – proprietorship The income earned by sole- proprietorship business is taxed in the hands of
the sole – proprietor. Such income enjoys the additional tax benefits of threshold exemption limit,
tax rebates and reliefs. The income is taxed at the maximum rate of 30%. Thus, tax liability in case of
sole proprietorship form of business tends to be the lowest. The disadvantages of this form are
unlimited liability, non availability of certain deductions, which are admissible to companies; no
deductions for interest on capital and remuneration to sole-proprietor; etc.
 Partnership firmThe tax rate is 30%. A partnership firm is entitled to deduction of interest on
capital and salary and other remuneration paid to partners subject to the limits specified u/s 40(b).
As per section 40(b), in computing income under head PGBP of a firm assessed as such, the
following amounts shall be disallowed –
a) Any salary, bonus, commission or remuneration to any non-working partner;
b) Remuneration to working partner or interest to any partner which –
I. Is not authorized by or is not in accordance with, he terms of partnership deed; or
II. If so authorized, relates to a period falling prior to the date of such partnership
deed, i.e. retrospective authorization of interest or remuneration is not permitted.
Note: working partner means an individual who is actively engaged in conducting
the affairs of the business or profession of the firm of which he is a partner.
c) Any interest paid to any partner in excess of 12% simple interest p.a.
d) Remuneration to working partners : Remuneration paid to working partners during the PY is
disallowed to the extent it exceeds, in aggregate, the following limits :-
remuneration as per the book profits Remuneration allowable
On first Rs.3, 00,000 of book profits or in
case of a loss.
Rs. 150,000 or 90% of book profit whichever is
higher
On the balance
60% of the book profits
Note: only that interest will be disallowed under the provisions above, which relates to the
person who is actually the partner in the firm.
Computation of book profits: book profits are computed as follows –
PGBP of firm computed as per sec 28 to 44D
Add: interest to partners disallowed as per above ( if not already considered)
Add: Remuneration to partners, if debited to P&L A/c
XXX
XXX
XXX
Book profits
XXXX

Direct Tax - Final
By virtue of section 28(v), interest or remuneration received by a partner from a firm is taxable as PGBP.
Any payment of remuneration to partners, not allowed as deduction u/s 40(b), shall not be taxed in the
hands of partners. However, the disallowance of remuneration / interest under sections 36(1)(III), 37(!)
or section 40A(2) will be added back to the firm’s income and will be taxed in the hands of both the firm
and its partners. To avoid such a situation, the partnership deed should contain a clause to the effect
that no remuneration / interest inadmissible under section 36(1)(III), 37(1) or 40A(2) be allowed to the
partners.
If the firm is eligible for exemption us 10 A to 10B or deduction us 80I-A to 80I-E or 80 – JJA,
remuneration and interest paid to partners will be allowed as deduction to the firm will be taxed in the
hands of partners, while on the other hand the same will reduce the income of the firm, thereby
reducing the quantum of deduction. Thus, the determination of remuneration to partners should be
made keeping into mind overall tax effects.
The major disadvantages of this form of business are unlimited liability, non- admissibility of certain
deductions, limited items of expenditure, higher taxation, etc.
Company 
the major tax benefits and privileges available to company over the other forms of organization are :-
a) Remuneration to persons managing the affairs of the company and also owning its shares is
fully allowable w/o any sort of limit.
b) Dividends received from the company are exempt in the hands of the shareholders under
section 10(34). Therefore, the investors aren’t liable to pay tax.
c) The companies are eligible to tax at the flat rate of 30%. Despite higher net effective rate of
tax than that applicable to sole-proprietors, the tax incidence tends to be lower due to
allowability of wide variety of deductions.
d) Due to limited liability to shareholders and free transferability of shares, the company can
augment large capital resources. Such shares become long- term capital asset in the hands
of shareholders after a short period of 12 months. The LTCG are taxable @ 20 % or 10% (in
case of listed securities, without indexation benefit).
Further, the LTCG arising from transfer of shares, which have been charged to securities
transaction tax are exempt u/s 10(38). Any such STCG are taxable @ 10% u/s 111A.

Direct Tax - Final
Tax planning with reference to nature of business
 Deduction to undertakings engaged in export in hand made articles or things [ section 10BA]:
Conditionsa) It manufactures or produces eligible articles or things w/o use of imported raw
material. Eligible articles or things mean all hand- made articles or things which are of artistic value
and which require the use of wood as main RM.
b) The export- sales of eligible articles isn’t less than 90% of total sales during that PY.
c) The sale proceeds of export are received in, or bought into, India in convertible foreign exchange
within six months from the end of PY or within such extended period as may be allowed by the RBI
or any other competent authority.
d) It employs 20 or more workers in its manufacture or production during the PY.
Quantum of deduction deduction is allowed to the extent of 100% of profits or gains from the
export of eligible articles. No deduction will be allowed w.e.f AY 2010- 2011.
Note: export shall not include any transactions by way of sale or otherwise, in a shop, emporium,
etc. not involving customs clearance.
 Deduction in relation to expenditure on obtaining license to operate telecommunication services
[section 35ABB]: tax treatment 
a) If whole or part of the license is transferred and sale proceeds ( only capital sum) exceeds the
expenditure remaining unallowed: deduction is NIL.
The following deemed profits will be taxable in year of transfer even if business doesn’t exist – a)
sale proceeds less expenditure remaining unallowed; or b) expenditure incurred less expenditure
remaining unallowed, w.el.
b) If whole of the license is transferred and sale proceeds are less than expenditure remains
unallowed: Deduction is expenditure remaining unallowed - sale proceeds.
c) If part of the license is transferred and sale proceeds do not exceed expenditure remaining
unallowed –
[Expenditure remaining unallowed less sale proceeds]/ No. of relevant PY’s unexpired at the
beginning of PY transferred.
d) In case of amalgamation or demerger – provisions falling in (a) & (b) above, shall not apply to the
amalgamating or demerged company.
 Amortization of preliminary expenses [section 35D] :
 Applicability – the assessee should be an Indian company or non corporate resident
assessee.

Direct Tax - Final
 Purpose of preliminary expenses :
Time of incurring expenses Indian company
Before commencement of business For setting up of any undertaking or business
After commencement of business Extension of the existing industrial undertaking
or setting up new industrial undertaking
Benefit of sec 35D not available to a non –industrial undertaking incurring
expenditure in connection with extension of its business after its
commencement.
 List of specified expenditure – expenditure in connection with
Non corporate resident assessee Indian company
1)Preparation of feasibility report, project report or
for conducting market survey or any other survey or
engineering services relating to the business of the
assessee.
2) Legal charges for drafting any agreement for
setting up or for conduct of any business.
Preparation of feasibility report, project report
or for conducting market survey or any other
survey or engineering services relating to the
business of the assessee.
Legal charges for drafting any agreement for
setting up or for conduct of any business.
3) expenses incurred for 
a) legal charges for drafting and printing
memorandum and articles of association;
b) fees for registering the company under
companies act;
c) Issue of shares or debentures of the
company, underwriting commission, brokerage
and charges for drafting, typing, printing and
advertisement prospectus.
 Maximum permissible expenditure a) In case of company, 5% of cost of project or
capital employed, at the option of the company.
b) In case of any other assessee, 5% of cost of project.
 Amount of deduction: actual expenditure is 5 equal installments.

Direct Tax - Final
 Capital employedIssued share capital + debentures + long term borrowings.
 Cost of the projectmeans actual cost of fixed assets as shown in the books of the
assessee on the last day of the PY in which the assessee commences business.
 Audit report – non corporate assesses, the assessee is required to furnish the audit
report in form 3AE along with the return of income for the first year.
 Case law Brooke bond India ltd share issue expenses cannot be claimed as
deduction, its allowable only u/s 35D.

Amount transferred to special reserve by approved financial corp. / public companies providing
finance for agriculture development, infrastructure facility or purchase or construction of house: Sec
36(VIII) :
1) the company /corporation should be approved by the central government.
2) Deduction shall be least of the following – a) amount of reserve; or b) 20% of profit of business.
3) Reserve should not exceed twice the paid-up capital of the company; incl. general reserve.
Deduction in respect of business of collecting and processing of biodegradable waste [section 80JJA]:
Applicability: all assesses.
Amount of deduction: amount of profits and gains derived from certain business for 5 consecutive
years beginning from the AY’s in which such business commences.
Business should consist of collecting, processing /treating bio –degradable waste for –
a) Generation of power;
b) producing bio –gas
c) Making pellets/briquettes for fuel or organic manure.
Deduction available for assesses providing additional employment sec 80 JJAA :
Applicability – Indian company
Condition – company derives profit from any industrial undertaking engaged in the manufacture or
production of article or thing not formed by splitting up, reconstruction or amalgamation.
Period of deduction – deduction u/s 80 JJAA is applicable for 3 AY’s only, including the AY relevant to
the PY in which employment is provided.
Audit report – to be furnished in form 10DA.

Direct Tax - Final
Tax planning with reference to location of business
Newly established undertaking in free trade zone (section 10A) : A deduction of 100% profits derived
by undertaking located in export hardware technology park( EHTP) or Software technology park(STP) or
specific economic zone( SEZ) from export of articles/ things/ computer software ( incl. cut and polished
precious and semi-precious stones) manufactured or produced by it, is allowed from total income of the
assessee.
Period of tax holiday: exemption is allowed in respect of any 10 consecutive AY’s
beginning from the AY relevant to the PY in which it begins to manufacture or produce
articles etc. No exemption from 2010 -11 onwards.
 Computation of profits and gains of export :
= Export turnover X PGBP
Total turnover of undertaking
Export turnover means consideration in respect of export articles or things or computer
software received or brought into India in convertible foreign exchange within said time
but doesn’t include 
Freight, telecommunication charges or insurance attributable to the delivery of such
articles etc, outside India or
Expenses incurred in foreign exchange in providing the technical services outside India;
No deduction if return isn’t furnished before the due date.
Deduction for units established in SEZ on or after 1.4.2002 –
First 5 AY’s 100% of profits and gains from export business (starting from AY
relevant to year of start of production/ manufacture)
Next 2 AY’s 50% of profits and gains from export business
Next 3 AY’s Lower of – a) 50% of profits from export business or b) amount
transferred from P&L A/c to “specific economic zone reinvestment
allowance reserve A/c”
Section doesn’t apply to undertaking, which begun or begins to manufacture or produce articles or
things or computer SW on or after 1-4-2005 in any SEZ.

Direct Tax - Final
New established undertaking in special economic zones (section 10AA):
Conditions –
a) its not formed by splitting up or reconstruction of existing business.
b) Its not formed by transfer of plant or machinery previously used for nay purpose.
Exceptions: condition isn’t violated when a) the value of second hand plant and machinery doesn’t
exceed 20% of total value of plant or machinery used in that business; or B)P&M used outside Indian by
any person other than assessee is imported and no depreciation has been allowed on it under this act.
Note: Above two conditions are common for section 10A, 10B and 80 I-A to 80I-E.
Quantum of deduction :
First 5 consecutive years 100% of profits and gains from export business (starting
from AY relevant to year of start of production/
manufacture)
Next 5 consecutive
assessment years
50% of profits and gains from export business
Further next 5 consecutive
AY’s
Lower of – a) 50% of profits from export business or b)
amount transferred from P&L A/c to “specific economic
zone reinvestment allowance reserve A/c”
Tax deduction for last AY’s is allowed if –
Amount transferred to “SEZ reinvestment reserve a/c” is used for acquiring new plant and
machinery, which is first put to sue within 3 yrs from the yr of creation of reserve.
Until acquisition of P&M, its used for business purposes other than for distribution by way of
dividend or profits or remittance outside India for creation of any asset therein.
Particulars of P&M are furnished along with return of income for the PY in which such plant or
machinery is first put to use.
Consequences of misutilisation / non- utilization of reserve :
If the amount is credited to the reserve is - Taxability
Used for purposes other than acquisition of
P&M
Amount so misutilised shall be taxable in the
year of misutilisation
Not used within three years aforesaid Amount not so utilized shall be taxable in the
year immediately following the period of 3
years.

Direct Tax - Final
Newly established 100% Export oriented undertaking (EOU) (section 10B):
100% deduction is allowed in respect of P&G derived by 100% EOU. Deduction is allowed for 10
consecutive AY beginning with AY relevant to PY in which undertaking begins production/ manufacture.
However no deduction will be allowed w.e.f AY 2010-11.
Section 80 I-A – deductions available to industries engaged in infrastructure development

Direct Tax - Final
Section 80 I-A – deductions available to industries engaged in infrastructure development
Nature of undertaking Commences During Quantum Of dedn Period – AY (see note 2) Ref
From To Comp others
Infrastructure facilities 1-4-95 Open
ended
100% 100% For 10 years out of first 15
years
4(I)
Telecommunication services: a) domestic
satellite services
b) other services viz., radio, paging, basic or
cellular networking of turnking & EDI
service
1-4-95 31-3-05 100%
30%
X For initial 5 years
Balance period of 5 yrs 4(II)
1-4-95 31-3-05 100%
30%
100%
25%
For initial 5 years
Balance period of 5 years
4(II)
Industrial park 1-4-97 31-3-09 100% 100% For 10 years out of 15
years
4(III)
Power sector
a)engaged in generation or generation and
distribution of power
b)engaged in transmission or distribution of
power
c)substantial renovation and modernization
of existing transmission/distribution lines
1-4-93
1-4-99
1-4-04
31-3-10
31-3-10
31-3-10
100%
100%
100%
100%
100%
100%
For 10 yrs out of 15 yrs
4(iv)(a)
4(iv)(b)
4(iv)©
Undertaking established for
reconstruction/ revival of power generating
plant
Estb. Before
30-11-05
31-03-
07
100% X For 10 out of 15 yrs 4(v)

Direct Tax - Final
Common conditions:
Condition : w.e.f 1-4-06, deduction u/s 80 I-A will be allowed only if the assessee furnishes the
return of income u/s 139 (a)
Period of deduction Ay’s :
For any 10 consecutive Ay’s out of 15 yrs beginning from the year in which the undertaking or the
enterprise –
Develops and begins to operate any infrastructure facility; or
Starts providing telecommunication services; or
Develops an industrial park; or
Generates power or commences transmission or distribution of power.
For operation and maintenance of the infrastructure facilities referred in Para 1(c) above subject to
fulfillment of conditions, the period of 15 years is substituted by 20 years.
Transfer of industrial park/ SEZ: the transferee undertaking is entitled for deduction u/s 80 IAB for
the remaining period in the 10 consecutive Ay’s.
Section 80 I-B
1) nature of undertakings - operation of ship, hotels, industrial research, production of mineral oil,
developing and building housing projects, multiplex theatres, convention centres, oeprating and
maintaining a hospital in rural area.
2) audit report - accts must be audited by CA and report should be given by all assessees to claim
deduction u/s 80IB.
3)return of income - ROI should be submitted on or before due date of submission of return of income.
4)No splitting up - it should not be formed by splitting up, or reconstructing an existing business.
5) quantum of deduction - 25% to 100% of profits.
Section 80I-C deductions available to certain u/t s or enterprises in certain special category states.
The eligible businesses are a) in case of undertaking/ enterprise located in notified areas under
specified states: it has begun manufacture during specified period, or takes substantial expansion during
that period.
b) In case of undertaking/ enterprise located in any area under specified states: it has begun
manufacture during specified period, or takes substantial expansion (50% or more increase in book
value of P&M) during that period. Specified period and deduction:

Direct Tax - Final
Particulars of
deduction
Undertaking/ enterprise Located in States of --
Sikkim Himachal Pradesh,
Uttaranchal
North eastern
state
Specified period 23-12-02 to 31-3-07 (
finance act, 07)
From 7-1-03 to 31-3-2012 24-12-97 to
31-3-07
Deduction in
respect of profits
and gains of eligible
business
100% for 10 yrs
commencing with the
initial AY
100% for first 5 years starting
with initial AY and thereafter,
25% ( 30% in case of
company), for next 5 years.
100% for ten
years
commencing with
the initial AY.
Initial Ay: It means AY relevant to PY in which undertaking/enterprise begins to manufacture or
produce articles or things or commences operation or completes substantial expansion.
Section 80I-D: deduction in respect of P&G from business of hotels and convention centers in specified
areas: Eligible businesses are –
Business of hotel located in the specified area, if such hotel is constructed and starts functioning at any
time on or after 1-4-07 but on or before 31-3-10 ; or
Business of building, owning, and operating a convention centre located in the specified area, if such
centre is constructed and starts functioning at any time on or after 1-4-07 but on or before 31-3-10.
Specified area: it means national capital territory Delhi and the districts of Faridabad, guragon,
gautam, budh nagar and Ghaziabad.
Quantum and period of deduction: deduction = 100% of P&G derived from such business. Period of
deduction = 5 consecutive Ay’s beginning from the Ay in which hotel starts functioning.
section 80 IE :
spl provision in respect of certain undertakings in north eastern states:
1) nature of undertaking : the tax payer has begun to provide eligible services during 1-4-07 and 31-3-
2017 in any of the NE states --
a) to manufacture and produce any eligible article or things
b) to undertake substantial expansion to manf. or product any eligible article or thing.
c) to carry on any eligible business.
2) Audit report - accts must be audited by CA.
3) Return of income - ROI should be submitted on or before due date of submission of ROI.
4) No splitting up : it should not be formed by splitting up, or reconstructing an existing business.
5) Quantum of deduction - 100% of profit and gains derived from such business for 10 consecutive Ay's
commencing with the initial AY.

Direct Tax - Final
Section 80 LA: deduction available for banks and financial institutions have an offshore banking unit:
Eligible assesseea) scheduled bank and having an offshore banking unit in a SEZ; or
b) Foreign bank and having an offshore banking unit in a SEZ; or
c) Unit of international financial services centre.
Conditionsgross total income includes –
Income from the offshore banking unit in a SEZ;
Income from business referred in section 6(1) of banking regulation act, with an undertaking
Located in SEZ;
Which develops, develops and operates or operates and maintains a SEZ;
Income from any unit of the international financial services centre from its business for which it has
been approved for setting up in such a centre in a SEZ.
Amount of deduction 
Period Quantum of deduction
For the first 5 AY’s relevant to the PY in which
permission under banking regulation act or SEBI
or under any other laws was obtained
100% of such income
Next 5 years 50% of such income

Direct Tax - Final
Non resident
1) Non resident individual: An individual is regarded as non –resident if he is not resident in India
during that PY. An individual is regarded as resident in India if –
 He is India for a period of 182 days*** or more during the PY; OR
 He is in India for a period of 60 days or more during the PY and 365 days or more during the
4 years preceding the PY.
** Under the following circumstances, the period of 60 days are extended to 182 days –
a) An Indian citizen who leaves India during PY for the purpose of employment outside India.
b) An Indian citizen who leaves India during PY as a member of crew of an Indian ship.
c) An Indian citizen or a person of Indian origin (who is abroad) who comes to India on a visit
during the PY.
Note: A person is deemed to be of Indian origin, if he or either of his parents or any of his
grand parents was born in Undivided India.
2) Non resident HUF: If the control and management of the affairs of HUF is situated wholly
outside India, then HUF is said to be non resident in India.
3) Non resident company: According to section 6(3) an Indian company is always resident in India.
A foreign company will be non resident in India if the control and management of its affairs is
wholly or partly situated outside India.
4) Non resident firm/AOP/other persons: If the control and management of the affairs of Firm or
AOP or other person is situated wholly outside India then Firm or AOP or such other person is
said to be Non resident in India.
Tax incidence on Non –Resident: In case of non residents, only the income received or deemed
to be received in India or, income accrued or arisen or deemed to be have accrued or arisen in
India is taxable in their hands. All other incomes aren’t taxable.
Business connection
 Business connection involves relation between a business carried on by a non – resident, which
yields profits and some activity in India, which contributes directly or indirectly to the earning of
those profits. It predicates an element of continuity between business of the non- resident and the
activity in India. It includes professional connection e.g. when foreign lawyer is called upon in India
to plead the case in Indian courts.
 Definition Business activity carried through following agents of non resident is covered –
 Concluding agent who concludes contracts on behalf of the non resident. However, agents who
only purchase goods/ merchandise for the non resident aren’t covered, or
 Stocking agent who maintains stock of goods in India from which he regularly delivers goods on
behalf of the non resident.
 Indenting agent who secures orders in India mainly/wholly for non resident or, that non –
resident and other non- residents who exercise control over one –another or are under
common control.
Exceptions:

Direct Tax - Final
a) Business activity carried out through an agent having an independent status and acting in
ordinary course of business isn’t regarded as business connection. However, an agent
working mainly/ wholly for non resident or, that non resident and other non –residents who
exercise control over one another or are under common control is not regarded as having
an independent status.
b) In cases falling under the above three, only the income attributable to the operations
carried out in India shall be deemed to accrue or arise in India.
 Income not to be treated as arising from or through business connection
A. In case all the operations of a business aren’t carried out in India, only the income
reasonably attributable to the operations carried out in India will be deemed to accrue
or arise in India.
B. In case of a non resident, income in respect of operations confined to purchase of goods
in India for the purpose of export shall not be deemed to accrue or arise in India.
C. In case of non resident, engaged in business of running a news agency/ publishing
newspapers, magazines, journals, income arising through and from activities confined
to collection of news and views in India for transmission out of India shall not be
deemed to accrue or arise in India.
D. In case of a non resident being –
a. An individual who isn’t a citizen of India ;
b. A firm not having a partner who is either a citizen of India or resident in India; and
c. A company not having any shareholder who is either citizen of India or resident in
India,
Income arising through or from operations confined to shooting of any
cinematograph film in India shall not be deemed to accrue or arise in India.
levy of income tax on income pertaining to FIIs
Sec
Assessee Specified Income Tax
rate
Remarks , if any
115A
Any non resident
Assessee
a) Interest from govt. or Indian
concern on debt given in foreign
currency **
20%
30%
20%
10%
->no deduction is
allowed in computing
such income under
any provision of Act.
-->such agreement
must be approved by
the central
Government or must
relate to a matter
covered by the
industrial policy of the
Govt. of India.
b) Royalty and fees for technical
services received under
agreement entered –
 Between 1-4-1976 to 31-5-
1997
 Between 1-6-1997 to 31-5-
2005
 On or after 1-6-2005
115AB
Overseas LTCG from transfer of units or UTI or a 10% Indexation benefit will

Direct Tax - Final
financial
organization
(offshore fund)
mutual fund specified under section
10(23D), which were purchased in
foreign currency.
not be available in
computing LTCG.
115AC
Any non resident
Assessee**
a)interest on notified foreign currency
bonds of Indian/ public sector company
b) LTCG from transfer of such bonds or
global depository receipts (GDRs)
10% No deduction in
computing such
income under any
provision and no
indexation benefit in
computing LTCG.
115
ACA
Resident
employee
LTCG from transfer of foreign currency
GDRs of an Indian company engaged in
specified knowledge based industry or
service, issued under employees stock
option scheme (ESOPs)
10% Assessee must be the
employee of such
Indian company.
No indexation benefit
in computation of
LTCG.
115AD
Notified foreign
institutional
investor
Income in respect of securities other
than units referred to in section 115AB
20% No deduction
allowable in
computing such
income under any
provision of the act
and no indexation
benefit in computing
LTCG
Capital gains on transfer of the
securities—STCG under section 111A
Other STCG
LTCG
115BBA
Non resident
sportsman being
foreign citizen**
Income from –
-participation in a game/sport in India ;
- advertisement ;
- Contribution of articles relating to any
game or sport in India in newspapers,
magazines or journals.
10% No deduction
allowable in
computing such
incomes under any
provision of act
Winnings from lottery,
crossword puzzles etc
are taxable under
section 115BB @ 30%
and therefore, they do
not fall under this
section.
Non resident
sports
association **
Any amount guaranteed to be paid or
payable to such association or
institution for any game/ sport played in
India
10%
Notes –
1) **in cases falling under sections 115A, 115Ac and 115BBA, the assessee needn’t file return of
income if his income consists of specified incomes only and tax on such incomes has been
deducted at source.

Direct Tax - Final
2) Additional provisions of section 115A: section 115A applies only to such royalty and fees for
technical income from royalty/ fees for technical services, deduction under chapter VI-A shall be
available from income from royalty/ fees for technical services taxable under this section.
Section 160
Representative assessee of non resident includes his agent.
Section 163: Agent of a non resident
Agent in relation to a non resident includes following persons in India –
a) Person employed by or on behalf of the non resident.
b) Person who has any business connection with the non resident
c) Person from or through whom the non resident is in receipt of nay income, whether directly
or indirectly,
d) Trustee of the non resident
e) Any person who has acquired a capital asset in India by means of a transfer, whether such
person is a resident or non resident.
Section 172: tax liability of shipping business
Non resident carrying on shipping business presumptive income @ 7.5% of amount payable.

Direct Tax - Final
Transfer pricing
Objectivewith the increase in participation of the multinational groups there has been
increase in the cross border transactions. The existence of different tax rates in different
countries offers a potential incentive to multinational enterprises to manipulate their
transfer prices to recognize lower profit in countries with higher taxes and vice versa.
In order to monitor transfer prices for goods, facilities and services, transfer pricing
regulations were introduces in the form of sections 92 and 92A to 92F.
The basic intention underlying the transfer pricing regulations is to prevent shifting out of
profits by manipulating prices charged or paid in international transactions, thereby eroding
the country’s tax base.
Provisions relating to computation of income from international transactions – sec 92
1) Income to be computed as per arms length price
2) Section not to apply when arms length prices decreases income or increases loss.
Section 92Aassociated enterprises and deemed associated enterprises.
Associated enterprise means an enterprise which participates, directly or indirectly, in management or
control or capital of other enterprise. Further, if one or more persons participate, directly or indirectly in
the management or control or capital of two enterprises those two enterprises are associated
enterprises.
Deemed associated enterprises: two enterprises are deemed to be associated enterprises. If, at any
time during the PY, -
a) One holds, directly or indirectly shares carrying 26% or more of voting power in other
enterprise.
b) Any person holds, directly or indirectly shares carrying 26% or more voting power in both of
them.
c) A loan advanced by one to the other constitutes 51% or more of BV of total assets of other.
d) One enterprise guarantees 10% or more of the total borrowings of the other enterprise.
e) One appoints more than half of board of directors or one or more executive directors of the
other.
f) Any person appoints more than half board of directors or one or more executive directors of
both.

Direct Tax - Final
g) Manufacture/ processing of goods or business carried on by one is fully dependent on use of
know how, patents, copyright, etc. owned by the other, or in respect of which other has
exclusive rights.
h) 90% or more of RM required by one are supplied by the other or by persons specified by other,
and prices and other conditions relating to the supply are influenced by the other enterprise.
i) Goods manufactured/ processed by one are sold to the other enterprise or to persons specified
by other, and the prices and other conditions relating thereto are influenced by such other
enterprise.
j) Where one enterprise is controlled by an individual/HUF, the other enterprise is also controlled
by such individual/ HUF or his relatives or jointly by such individual/HUF and such relative.
k) One enterprise is a firm/AOP/BOI and other enterprise holds 10% or more interest in such
firm/AOP/BOI.
l) There exists between the two enterprises, any relationship of mutual interest, as may be
prescribed.
Section 92B international transaction
It means a transaction entered into between two or more associated enterprise (at least one is a
non resident) for purchase/sale/ lease of tangible/ intangible property or provision of services or
lending/ borrowing money or any other transaction (including sharing agreements for common
costs) having bearing on income and assets.
Deemed associated transaction: If an associated enterprise and a third person determine the
terms of a transaction between third person and another associated enterprise, such
transaction shall be regarded as having being entered into between two associated enterprise.
Section 92Cmethods under which arm’s length price is determined
1) Arms length price (ALP) means a price applicable in a uncontrolled transaction i.e. a
transaction between non associated enterprises, in uncontrolled conditions.
2) Methods for computation of arms length price: arms length price is determined by the most
appropriate of the following methods, selected as per the mode prescribed by the board –
a) Comparable uncontrolled price method
b) Resale price method
c) Cost plus method
d) Transaction net margin method
e) Profit split method
f) Other prescribed method.

Direct Tax - Final
3) When more than one price determined : by the most appropriate method, the arms length
price shall be taken to be the lower of the following –
a) The arithmetical mean of such prices, or,
b) A price varying up to 5% of such arithmetical mean.
Double taxation avoidance agreement - DTAA
Double taxation means taxation of same income of a person in more than one country i.e. both under
Indian income tax act, 1961 and income tax law of other country.
DTAAare agreements entered into by the government of India with the government of other countries.
Effect of DTAA
a) If no liability is imposed under the Income tax Act on a particular income, then no liability will
arise on that income.
b) If the tax liability is imposed by the act on a particular and there’s a difference between the
provision of the act and the agreement then the provision or the conditions of agreement which
is more beneficial to the assessee can be enforced.
c) Any term used but not defined in the Act or in the DTAA shall, unless the context otherwise
requires, and isn’t inconsistent with the provisions of the Act or the agreement, have the same
meaning assigned to it in the notification issued by the central government in the official gazette
in this behalf.
Two methods of granting relief under DTAA [bilateral relief]
 Exemption method
 Tax credit method
Conditions for claiming relief:
1. The income should have been taxed in both the contracting countries.
2. Proof of income having suffered double taxation has to be provided.
3. If there is no tax treaty with the country levying double tax; then relief can be granted
unilaterally u/s 91.
DTAA- Sec 90A
Between two specified associations, adopted for levy of tax. - Section 90A
Meaning 
Specified association: notified institutions, associations are bodies functioning under any law for the
time being in force either in India or the specified territory outside India.

Direct Tax - Final
Specified territory: Any area outside India notified for the purposes of this section.
Adoption of agreementspecified association in India may enter into an agreement with any specified
association in the specified territory outside India. Through notification in the official gazette, the central
Government may make such provisions necessary for adopting and implementing such agreement.
Purpose of adoption 
a) Granting of relief in respect of –
Income which have suffered tax under both Indian tax laws and those of specified territory outside
India, or;
Income tax chargeable under this act and under the corresponding law in force in that specified
territory outside India to promote mutual economic relations, trade and investment, or
b) Avoidance of double taxation of income under Indian law and those governing the specified
territory; or
c) Exchange of information for the prevention of evasion or avoidance of income tax chargeable in
both in India and specified territory , or investigation of cases of such evasion or avoidance, or
d) Recovery of income –tax – tax under laws of both the countries/ territories.
Section 91 unilateral relief
Conditions 
a) The assessee must have been resident in India in the relevant PY.
b) The income must have accrued or arisen outside India during that PY.
c) The assessee must have paid the tax either by deduction or otherwise in respect of such income as
per the law of the foreign country.
d) There should be no reciprocal agreement of relief or avoidance from double taxation with the country
where income has accrued or arisen.

Company Secretary Stude Material - Advance tax

Empfohlen

Empfohlen

Weitere ähnliche Inhalte

Was ist angesagt?

Was ist angesagt? (20)

Ähnlich wie Company Secretary Stude Material - Advance tax

Ähnlich wie Company Secretary Stude Material - Advance tax (20)

Mehr von Ramanareddy Anathapur

Mehr von Ramanareddy Anathapur (7)

Kürzlich hochgeladen

Kürzlich hochgeladen (20)

Company Secretary Stude Material - Advance tax