• How-to

The total income of a company is computed in the manner in which the income of any individual is computed. The first and foremost step in this direction is to ascertain the gross total income. Income computed under four heads—income from house property, profits and gains from business or profession, capital gains, and income from other sources—is aggregated.

Also, one needs to set off the losses and adjustments for brought-forward losses of the previous year. ‘Set off’ means the adjustment of certain losses against income under other sources. This section applies to all losses, including losses that come under the capital gains head.

From the gross total income that is computed, the following deductions are allowed:

1. 80G This refers to donations to certain funds/charitable institutions
2. 80GGA This refers to donations made toward scientific research or rural development
3. 80GGB This refers to contributions that are given by the companies to political parties
4. 80-IA This refers to the profits and gains acquired from certain industrial undertakings or enterprises engaged in infrastructure development
5. 80-IB This refers to the profits and gains acquired from certain industrial undertakings other than infrastructure development undertakings
6. 80-IC This refers to the deductions with respect to certain undertakings or enterprises in special category states
7. 80JJA This refers to the deductions with respect to profits and gains acquired from the business of collecting and processing biodegradable waste
8. 80JJAA This refers to the deduction with respect to the employment of new workmen in manufacturing units

Income from Capital Gains
For the purpose of clarity, it becomes necessary to touch upon capital gains, where rates change. The transfer of capital assets results in capital gains. A capital asset is defined under section 2(14) of the IT Act, 1961, as property of any kind held by an assessee, such as real estate, equity shares, bonds, jewelry, paintings, art, etc.

However, it does not include items like any stock-in-trade for business and personal effects. Transfer has been defined under section 2(47) to include the sale, exchange or relinquishment of an asset, the extinguishment of rights in an asset, etc.

For tax purposes, there are two types of capital assets: long term and short term. Long term assets are held by a person for three years (except in the case of shares or mutual funds, which become long term after just one year of holding). The sale of such long term assets gives rise to long term capital gains. There are several different schemes of taxation for long term capital gains:

Assessment
The principal officer of the company is required to file the return of total income of the company on or before October 31 of the assessment year. A company is assessed like any other assessee. However, its liability differs in two respects:
1. No exemption limit
2. Flat rate of tax

There is no change in the tax rate for domestic companies in the Union Budget 2010. However, the surcharge on domestic companies with income above Rs.1 crore has been reduced to 7.5 percent from 10 percent.

The surcharge on the Minimum Alternate Tax (MAT) has also been reduced to 7.5 percent. However, the MAT rate has been increased from 15 percent to 18 percent.
With regards to taxation for a Limited Liability Partnership:
* Firms are taxable at 30 percent
* Surcharge is not applicable
* Education cess is applicable at 3 percent on income tax

Other taxes
1. Wealth Tax
Wealth tax is imposed at 1 percent on the value of the specified assets on the valuation date (March 31) in excess of the basic exemption of Rs.30 lakh.

2. Dividend Distribution Tax
Dividend distributed by an Indian company is exempt from income tax in the hands of many shareholders. The company is liable to pay Dividend Distribution Tax (DDT) at 16.609 percent (i.e. inclusive of surcharge and education cess) on such dividends.

What is MAT?
Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the Income Tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act.

There were a large number of companies that had booked profits as per their profit and loss account, but were not paying any tax because the income computed as per provisions of the Income Tax Act was nil, negative or insignificant. In such cases, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the IT Act net, section 115JA was introduced w.e.f. assessment year 1997-’98.

According to this section, if the taxable income of a company computed under this Act in respect of the previous year is less than 18 percent of its book profits, the total income of such a company is chargeable to tax for the relevant previous year; it shall be deemed to an amount equal to 18 percent of such book profits.

©Entrepreneur June 2010

Tags:
assess, income, tax