1

LESSON 1
(a) Tax planning, tax management, tax evasion and tax avoidance
(b) Types of companies, residential status of companies and tax incidence

(A) TAX PLANNING, TAX MANAGEMENT, TAX EVASION

AND TAX AVOIDANCE

1. STRUCTURE 1.1 Concept of Planning
1.2 Tax Management
1.3 Objectives of Tax Planning
1.4 Importance of Tax Planning
1.5 Essential of Tax Planning
1.6 Tax Evasion and Tax Avoidance
1.7 Difference Between Tax Planning and Tax Management
1.8 Difference Between Tax Planning and ‘Tax Evasion’
1.9 Difference Between Tax Avoidance and Tax Evasion
1.10 Definition of Company (Section 2(17)
1.11 Types of Companies
1.12 Residence of a Company (Section 6(3)
1.13 Incidence of Tax
1.14 Incomes Received or Deemed to be Received in India (Section 7)
1.15 Income Accruing or Arising in India or Deemed to be Accrued
1.1 CONCEPT OF TAX PLANNING

Tax payment has never been a pleasure for any tax payer. Though tax is defined as a contribution by
the people to the government but it is a levy and an unpleasant burden on every assessee. Tax is
defined as something which taxes your strength, your patience or your resources it uses nearly all of
them so that you have great difficulty in carrying out what you are trying to do. It is a task which
requires lot of mental and physical efforts. One tries to reduce tax burden by many means because
tax is reduction in his disposable income which he earned from his physical and mental efforts.
Therefore every tax payer tries to minimise the burden of tax by his own means.
Tax Planning is an exercise undertaken to minimise tax liability through the best use of all available
allowances, deductions, exclusions, exemptions, etc., to reduce income.
Tax planning can be defined as an arrangement of one's financial and business affairs by taking
legitimately in full benefit of all deductions, exemptions, allowances and rebates so that tax liability
reduces to minimum. In other words, all arrangements by which the tax is saved by ways and means
which comply with the legal obligations and requirements and are not colourable devices or tactics to
meet the letters of law but the spirit behind these, would constitute tax planning.
The Hon'ble Supreme Court in McDowell & Co. v. CIT (1985) 154 ITR 148 has observed that "tax
planning may be legitimate provided it is within the framework of the law. Colourable devices
cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable
to avoid payment of tax by resorting to dubious methods." Tax 2
1.2 TAX MANAGEMENT

planning should not be done with intent to defraud the revenue; though all transactions entered into
by an assessee could be legally correct, yet on the whole these transactions may be devised to
defraud the revenue. All such devices where statute is followed in strict words but actually spirit
behind the statute is marred would be termed as colourable devices and they do not form part of tax
planning. All transactions in respect of tax planning must to be in accordance with the true spirit of
statute and should be correct in form and substance.
Various judicial pronouncements have laid down that substance and form of the transactions shall be
seen in totality to determine the net effect of a particular transaction. The Hon'ble Supreme Court in
the case of CIT v. B M Kharwar (1969) 72 ITR 603 has held that, "The taxing authority is entitled
and is indeed bound to determine the true legal relation resulting from a transaction. If the parties
have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the
device and to determine the true character of relationship. But the legal effect of a transaction cannot
be displaced by a probing into substance of the transaction."
In brief tax planning may be defined as an arrangement of one's financial affairs in such a way that
without violating in any way the legal provisions of an Act, full advantages are taken of all
exemptions, deductions, rebates and reliefs permitted under the Income Tax-act, so that the burden of
the taxation on an assessee, as far as possible be the least.
Actually the exemptions, deductions, rebates and reliefs have been provided by the legislature to
achieve certain social and economic goals. For example section 80IB of the Income Tax Act, 1961
provides deduction from gross total income in respect of profits from newly established industrial
undertakings in industrially backward State or industrially backward district as may be notified in
this behalf. The object of the tax concession is clear, i.e., economic development of industrially
backward district or State. Section 80C provides deduction from gross total income, if an individual
or H.U.F. saves the amount and invests or deposits it in the prescribed schemes. The deduction has
been provided to encourage savings and investments for economic development of the country. Thus,
if a person takes .the advantages of the aforesaid deductions, he not only reduces his tax liability but
also helps in achieving the objective of the legislature, which is lawful, social and ethical. Thus, tax
planning is an act within the four corners of the Act and it is not a colourable device to avoid the tax
liability.
Tax planning is a broader term which requires management of affairs in such a way that results in the
reduction in minimisation of tax liability. Tax planning is not possible without tax management. It
refers to the compliance of statutory provisions of law. Some important areas of tax management are
as stated below.
(i) Deduction of tax at source u/s 194 to 196
(ii) Payment of tax and self assessment u/s 140A
(iii) Payment of tax an demand u/s 220
(iv) Maintenance of accounts u/s 44AA
(v) Audit of accounts u/s 44AB
(vi) Payment of cess, duty or fees, bonus and commission to employees etc v/s 43B
(vii) Furnishing return of income u/s 139
(viii) Documentation and maintenance of tax files etc.
(ix) Review of order received from tax Authorities.
3
1.3 OBJECTIVES OF TAX PLANNING
The objective of tax planning is to minimise tax liability and to avail maximum benefits of the
taxation laws within their framework. The objectives of tax planning cannot be regarded as offending
any concept of the taxation laws and subjected to reprehension of reducing the inflow of revenue to
the Government coffers, so long as the tax planning measures are in conformity with the statute laws
and the judicial expositions thereof. The Basic objectives of tax planning are:
(a) Reduction of tax liability
(b) Minimisation of litigation
(c) Productive investment
(d) Reduction in cost
(e) Healthy growth of economy
(f) Employment generation

(a) Reduction in tax liability: The basic objective of tax planning is to reduce the tax liability so
that enough surplus out of profits remains with the earner of it for his personal and social needs and
also for future investments in his business. This is only possible by planning his tax affairs properly
and availing the deductions, exemptions and reliefs, etc. which are admissible under the Acts. He can
succeed in doing so by updating his knowledge about the various concessions available in the
taxation laws and the conditions to be fulfilled to avail them.
(b) Minimisation of litigation: There is always a tug-of-war between the tax payers and the tax
administrators. The tax payers try their best to pay the least tax and the tax administrators attempt to
extract the maximum. This sometimes results in prolonged litigation. Actually the main reason of
litigation lies in tax avoidance and not in tax planning. Whenever a tax payer wants to reduce his tax
liability by finding a loophole in the Act and title tax administrator does not agree with the
interpretation of the assessee under which he is demanding exemption, deduction or relief, it results
in litigation. A good tax planning is always based on clear words of the statute or in conformity with
the provisions of the taxation laws. In such a case the chances of litigation are minimised.
(c) Productive investment: A proper tax planning brings fiscal discipline in the functioning of a tax
payer and reduces the transfer of money, from the person who has earned it by hard labour, to the
Government for waste and misuse. The amount so saved enhances the capacity of the tax payer for
expansion and growth, which in turn increases the tax revenue of the Government.
(d) Reduction in cost: Incidence of tax (direct and indirect) forms a part of cost of production. The
reduction of tax by tax planning reduces the overall cost. It results in more sale, more profit and more
tax revenue and more investment.
(e) Healthy growth of economy: The growth of a nation's economy depends upon the growth of its
peoples. Savings through tax planning devices foster the growth of economy while savings through
tax evasion lead to generation of black money, the evils of which are obvious. The tax planning plays
an important role in the development of backward districts and backward states and development of
infrastructure facilities or in other words it takes the economy in the intended direction.
(f) Employment generation: The amount saved by tax planning is generally invested in
commencement of new undertakings or expansion of the business. This creates new employment
opportunities in the society. Further, taxation laws are so complicated that by and large tax payers
cannot plan their affairs efficiently. Hence, such persons need services of 4
chartered accountants, financial advisers and lawyers. Such persons join the business concerns either
as employees or provide their services as tax experts.
1.4 IMPORTANCE OF TAX PLANNING
Though the basic objective of the planning is to minimise the tax liability of tax payer yet following
are the some considerations which are important for tax planning-
(i) When an assessee has not claimed all the deductions and relief, before the assessment is
completed, he is not allowed to claim them at the time of appeal. It was held in CIT u/s
Gurjargravures Ltd. (1972) 84 ITR 723 that if there is no tax planning and there are lapses on the part
of the assessee, the benefit would be the least.
(ii) Tax planning exercise is more reliable since the Companies Act, and other allied laws narrow
down the scope for tax evasion and tax avoidance techniques, driving a taxpayer to a situation where
he will be subjected to severe penal consequences.

(iii) Presently, companies are supposed to promote those activities and programmes, which are of
public interest and good for a civilised society. In order to encourage these, the Government has
provided them with incentives in the tax laws. Hence a planner has to be well versed with the laws
concerning incentives.
(iv) With increase in profits, the amount of corporate tax also increases and it necessitates the
devotion of adequate time on tax planning to minimise' tax burden.
(v) Tax planning enables a company to bear the burden of both direct and indirect taxation during
inflation. It enables companies to make proper expense planning, capital budgeting, sales promotion
planning etc.
(vi) Repairs, renewals, modernisation and replacement of plant and machinery are indispensable for
an industry for its continuous growth. The need for capital formation in the corporate sector cannot
be ignored and heavy taxation reduces the inflow of corporate funds. Capital formation helps in
replacing the technologically obsolete and outdated plant and machinery and enables carrying on of
manufacturing operation with a new and more sophisticated system. Any decision of this kind would
involve huge capital expenditure which is financed generally by ploughing back the profits,
utilisation of reserves and surplus along with the availing of deductions. Availability of accumulated
profits, reserves and surpluses and claiming such expenses as revenue expenditure are possible
through proper implementation of tax planning techniques.
(vii) In current days of credit squeeze and dear money conditions, even a rupee of tax decently saved
may be taken as an interest-free loan from the Government, which perhaps, an assessee need not
repay. It is rightly said that money saved is money earned.

Thus, any legitimate step taken by an assessee directed towards maximising tax benefits, keeping in
view the intention of law, will not only help it but also the society since it promotes the spirit behind
the legal provisions. All those assessees which practice tax planning may have the satisfaction that
they are contributing their best to the nation's broad objectives and goals in a welfare State like ours.
At the same time, the law makes the fulfillment of certain conditions obligatory before allowing the
benefits to be claimed by the assessees. In this way, the assessees, besides helping themselves, also
help in securing the objectives, tasks and goals set before them by the country. 5
1.5 ESSENTIALS OF TAX PLANNING
Successful tax planning techniques should have following attributes:
(a) It should be based on uptodate knowledge of tax laws. Not only is an uptodate knowledge of the
statute law necessary, assessee must also be aware of judgments made various by the courts. In
addition, one must keep track of the circulars, notifications, clarifications and Administrative
instructions issued by the CBDT from time to time.
(b) The disclosure of all material information and furnishing the same to the income-tax department
is an absolute pre-requisite of tax planning as concealment in any form would attract the penalty
clauses - the penalty often ranging from 100 to 300% of the amount of tax sought to be evaded.

(c) Whatever is planned should not simply satisfy the requirements of law by complying with legal
provisions as stated and meeting the tax obligations but also should be within the framework of law.
It means that sham transactions or make-believe transactions or colourable devices, which are
entered into just with a view to misuse the legal provisions, must be avoided.

Every citizen is obliged to honestly pay the taxes. Therefore, only colourable devices resorted to by
the tax payers for evading a tax liability will have to be ignored by the court. Accordingly, a tax
planning within the four corners of the taxation laws is not to be turned down only because it
legitimately reduces the tax inflow to the Government. A genuine tax-planning device, aimed at
carrying out the rules of law and courts' decisions and to overcome heavy burden of taxation, if fully
valid and ethical.
(d) A planning model must be capable of attainment of the desired objectives of a business and be
suitable to its possible future changes. Therefore, all the important areas of corporate planning,
whether related to strategic planning, project planning or operational planning involving tax
considerations for long-term or short-term management objectives and policies should be strictly
scrutinised in relative situations. Foresight is the essence of a business. Tax planning is one of its
important attributes.

1.6 TAX EVASION AND TAX AVOIDANCE

In the context of not paying tax, there are generally two methods which are used by the assesses.
They are (1) Tax Evasion (2) Tax Avoidance.
(1) Tax Evasion: It refers to a situation where a person tries to reduce his tax liability by deliberately
suppressing the income or by inflating the expenditure showing the income lower than the actual
income and resorting to various types of deliberate manipulations. An assessee guilty of tax evasion
is punishable under the relevant laws. Tax evasion may involve stating an untrue statement
knowingly, submitting misleading documents, suppression of facts, not maintaining proper books of
accounts of income earned (if required under the law) omission of material facts in assessments etc.
An assessee who dishonestly claims the benefit under the statute by making false statements, would
be guilty of tax evasion. 6
Thus when a person reduces his total income by making false claims or by withholding the
information regarding his real income, so that his tax liability is reduced, is known as tax evasion.
Tax evasion is not only illegal but it is also immoral, anti-social and anti-national practice. Therefore,
under the direct tax laws, provisions have been made for imposition of heavy penalty and procedure
of prosecution proceedings against tax evaders.
A tax evader reduces his taxable income by one or more of the following steps :
(a) Unrecorded sales.
(b) Claiming bogus expenses, bad debts and losses etc.
(c) Charging personal expenses as business expenses, e.g., car expenses, telephone expenses,
travelling expenses, medical expenses incurred for self or family may be shown in the account books
as business expenses.
(d) Submission of bogus receipts for charitable donations for claiming deduction u/s 80G.
(e) Non-disclosure of capital gains on sale of asset.
(f) Non-disclosure of income from 'Benami transactions'.
(2) Tax Avoidance: The line of demarcation between tax planning and tax avoidance is very thin
and blurred. There could be elements of malafide motive involved in tax avoidance also. Any
planning which, though done strictly according to legal requirements defeats the basic intention of
the Legislature behind the statute could be termed as instance of tax avoidance. It is usually done by
adjusting the affairs in such a manner that there is no infringement of taxation laws and by taking full
advantage of the loopholes therein so as to attract the least incidence of tax. Earlier tax avoidance
was considered completely legitimate, but at present it may be illegitimate in certain situations only.
In the latest judgement of the Supreme Court in McDowell's case 1985 (154 ITR 148) SC, tax
avoidance has been considered as heinous as tax evasion and a crime against society. Most of the
amendments are now aimed at plugging loopholes and curbing practice of tax avoidance.
Per Jagadisan J. [in Aruna Group of Estates vs. State of Madras (1965) 55 ITR 642 (Mad.)], observed
"Avoidance of tax is not tax evasion and it carries no ignominy with it, for it is a sound law and;
certainly, not bad morality, for anybody to so arrange his affairs as to reduce the burnt of taxation to
a minimum."
However, now the Supreme Court is of the view that the colourable devices to avoid tax should not
be encouraged and this is the duty of the court to expose the persons who avoid tax and refuse to
approve such practice because the social evils of tax avoidance are manifold, which may be
summarised as below:
(a) substantial loss of much needed public revenue, particularly in a welfare state like India;
(b) serious disturbance caused to the economy of the country by piling up of mountains of black
money directly causing inflation;
(c) large hidden loss to the community by some of the best brains in the country being involved in the
perpetual war waged between tax avoider and his expert team of advisers, lawyers and accountants
on one side, and Tax Officer and perhaps hot so skilful advisers on the other side;
(d) sense of injustice and inequality of those who are unwilling or unable to profit by it;
(e) Tactics of transferring the burden of tax liability to the shoulders of the guideless, good citizens
from those of artful dodgers.
7
1.7 DIFFERENCE BETWEEN TAX PLANNING' AND TAX MANAGEMENT'

One may not agree with the issue of generating black money by avoidance of tax. In legal tax
avoidance the money neither goes out of books nor it is spent unnecessarily but it is used for further
expansion of business.
In CWT vs. Arvind Norottam [(1988) 173 ITR 479] the Supreme Court has observed, "It is true that
tax avoidance in an undeveloped country should not be encouraged on practical as well as ideological
grounds.
Recently the legislature has inserted the provisions in direct and indirect tax laws for checking tax
avoidance. But so long there are loopholes in the laws, tax avoidance cannot be checked by the
courts. The function of judiciary in India is clearly not legislative, its role lies in interpreting the law
made by the legislature.
Tax planning primarily aims at adopting an arrangement so as to bring about the least incidence of
tax under the four corners of law. On the other hand, tax management comprises a wider field like
compliance with the statutory provisions of law, prospective planning so as to ease the financial
constraints if any, that would arise when discharging the commitments through payment of tax,
keeping close watch and monitoring the statutory requirements of other laws, claiming the due reliefs
arising on account of double taxation avoidance agreements or claiming unilateral relief, etc. Thus,
while tax planning is the pivot which enables the drawing up of the different incentives and keep the
incidence of tax law, the tax management is the revolving wheel, which translates the policy in terms
of results. The difference between tax planning and tax management are stated as under:
1. Tax planning is a wider-term. It includes tax management. Tax management is the first step
towards tax planning.
2. The primary aim of tax planning is minimising incidence of tax, whereas main aim of tax
management is compliance with legal formalities.
3. Tax planning is not essential for every assessee, while tax management is essential for every
person, otherwise he may be liable for penal interest, penalty and prosecution. For example, a person
may not be reducing his tax liability by claiming any exemption, deduction, relief, etc. in computing
his total income but if he is liable to pay advance tax or responsible for deduction of tax at source,
etc. he has to comply with all legal formalities.
4. Tax planning is a guide in decision making while tax management -is a regular feature of an
undertaking.
5. In tax planning exemptions, deductions and reliefs are claimed while in tax management the
conditions are complied with to claim the exemptions, deductions and reliefs.
6. In tax planning alternative economic activities are studied and an activity with least incidence of
tax is selected whereas tax management includes maintenance of accounts in prescribed form, getting
books audited, filing the required forms and returns, payment of taxes, etc.
7. Tax planning essentially looks at future benefits arising out of present actions. Tax management
relates to past, present and future. In respect of appeals, revision, rectification of mistakes, etc. it
deals with the past. Maintenance of records, self-
8
assessment, filing the return and other _ documents, keeping pace with the changes, etc. are present
activities. Follow-up plans, etc. are in future. 1.9 DIFFERENCE BETWEEN 'TAX
AVOIDANCE' AND 'TAX EVASION'

1.8 DIFFERENCE BETWEEN TAX PLANNING AND 'TAX EVASION'

1. Tax planning is an act within the four corners of the Act to achieve certain social and economic
objectives and it is not a colourable device to avoid the tax. Tax evasion is a deliberate attempt on the
part of tax-payer by misrepresentation of facts, falsification of accounts including downright fraud.
2. Tax planning is a legal right and a social responsibility. By tax planning certain social and
economic objectives are achieved. Tax evasion is a legal offence coupled with penalty and
prosecution.
3. Tax planning requires thorough knowledge of the relevant Acts, social, economic and political
situation of the country while tax evasion requires misadventure to infringe the law.
4. Tax planning helps in economic development of the country by providing additional funds for
investment in desired channels while tax evasion generates black money which is generally utilised
for smuggling, bribery, extravagant expenses on luxury and unlawful activities.
5. A tax planner enjoys its fruits freely and he does not suffer from high blood pressure, whereas a
tax evader remains always in anxiety of search and seizure and suffers from many abnormalities.
As our society has become 'money society', whatever the evils of black money may be, it has become
a part of the life of most of the people and in near future there is no hope of Putting a check on it.
There is depth of honest tax payers.
1. Tax avoidance is legal but tax" evasion is illegal.
2. In case of tax avoidance the objects and spirit of the law are not followed while in the case of tax
evasion the provisions of the law are flouted.
3. In case of tax avoidance no penalty can be imposed while in case of tax evasion the person is liable
to penalty and prosecution.
4. In case of tax avoidance, black money is not generated, hence, it is not very harmful to the society.
In case of tax evasion, black money is generated which is mostly used for unproductive illegal and
immoral purposes.
(B) TYPES OF COMPANIES, RESIDENTIAL STATUS OF COMPANIES

AND TAX INCIDENCE

1.10 DEFINITION OF COMPANY (SEC. 2(17)
A company means:
(i) any Indian company, or
(ii) any body corporate incorporated by or under the law of a country outside India, or 9
(iii) any institution, association or body which is or was assessable or was assessed as a company for
any assessment year under the Income Tax Act, 1922, or which is or was assessable or was assessed
under the Income Tax Act, 1961 as a company for any assessment year upto 1970-71, or
(iv) any institution, association or body, whether incorporated or not and whether Indian or non-
Indian, which is declared by general or special order of the Board to be a company provided that it
will be deemed to be a. company only for the assessment years specified in the order.
The definition of company under the Income Tax Act is much wider than the Indian Companies Act.
The Income Tax Act has empowered the Central Board of Direct Taxes to declare any association,
institution, or body to be a company for income tax purposes. Accordingly, on a few occasions
Chamber of Commerce, Club, etc., have been declared by the Board to be a company even though
these bodies do not possess the ordinary characteristics a company.
1.11 TYPES OF COMPANIES
Under the Income Tax Act companies are classified as under:
(1) Indian Company [Sec. 2(26)]
It means a company formed and registered under the Indian Companies Act, and includes :
(i) a company formed and registered under any law relating to companies formerly in force in any
part of India other than the State of Jammu and Kashmir and the places specified in (v);
(ii) a corporation established by or under a Central, State or Provincial Act;
(iii) any institution, association or body which is declared by the Board to be a company;
(iv) in the case of the State of Jammu and Kashmir, a company formed and registered under any law
for the time being in force in that state;
(v) in the case of Dadra and Nagar Haveli, Goa, Daman and Diu and Pondicherry, a company formed
and registered under any law for the time being in force in these place places.
(2) Domestic Company
It means an Indian company, or any other company which in respect of its income liable to tax under
the Income Tax Act, has made the prescribed arrangements for the declaration and payment within
India, of the dividends (including dividends on preference shares) payable out of such income.
In other words:
(i) All Indian companies are domestic companies. or
(ii) A foreign company which has made the prescribed arrangements for the declaration and payment
of dividends (out of taxable income in India) within India is also a domestic company.
(3) A company in which the public are substantially interested: (section 2(18) :
As per section 2(18) such companies include:
(i) A company owned by Government or Reserve Bank of India. or 10
(ii) A company having Govt. participation i.e. A company in which not less than 40% of its shares
are held by Government or the RBI or a corporation owned by the RBI. Or
(iii) Companies registered under section 25 of the Indian Companies Act, 1956: Companies
registered under section 25 of the Companies Act, 1956 are companies which are promoted with
special object such as to promote commerce, art, science, charity or religion or any other useful
object and these companies do not have profit motive. However, if at any time these companies
declare dividend they would loose the status of a company in which the public are substantially
interested. Or
(iv) A company declared by the CBDT i.e. a company without share capital and which having regard
to its object, nature and composition of its membership or other relevant consideration is declared by
the Board to be a company in which public are substantially interested. Or
(v) A Mutual benefit finance company, where principal business of the company is acceptance of
deposits from its members and which has been declared by the Central Government to be a Nidhi or
a Mutual Benefit Society. Or
(vi) A company having co-operative society participation i.e. a company in which at least 50% or
more equity shares have been held by one or more co-operative societies.
(vii) A public limited company i.e. company is deemed to be a public limited company if it is not a
private company as defined by the Companies Act,1956 and is fulfilling either of the following two
conditions:
(a) Its equity shares were listed on a recognised stock exchange, as on the last day of the relevant
previous year; or
(b) Its equity shares carrying at least 50% of the voting power (in the case of an industrial company
the limit is 40%) were beneficially held throughout the relevant previous year by Government, a
Statutory Corporation, a Company in which the public is substantially interested or a wholly owned
subsidiary of such a company.
(4) Widely held company
It is a company in which the public are substantially interested.
(5) Closely held company
It is a company in which the public are not substantially interested.
Burden of proof: The onus is on the department to establish that the public are not substantially
interested in a company. [Jayantilal Amritlal Ltd. v CIT (1965) 55 ITR (SC)] In other words, the
onus is on the department to establish that the company was a closely-held company. On the other
hand, the Bombay High Court had earlier held that the burden of proving that a company is one in
which the public are substantially interested is on the company. [P.M. Hutheesingh & Sons Ltd. v
CIT (1946) 14 ITR 653 (Bom)].
(6) Foreign Company [Section 2(23A)]
Foreign company means a company which is not a domestic company.
(7) Investment Company
Investment company means a company whose gross total income consists mainly of income which is
chargeable under the heads Income from house property, Capital gains and Income from other
sources.
1.12 RESIDENCE OF A COMPANY [SECTION 6(3)]
A company is said to be a resident in India during the relevant previous year if: (a) it is an Indian
Company, or (b) if it is not an Indian company then, the control and the management of its affairs is
situated wholly in India on the other hand. 11
A company is said to be non-resident in India if it is not an Indian company and the control and
management of its affain; is situated outside India fully or partially
Note :
As a rule, the direction, management and control, the head, seat and directing power of a company's
affairs is situated at the place where the directors meetings are held. Consequently a company would
be resident in the country if the meetings of directors who manage and control the business are held
there. It is not what the directors have power to do, but what they actually do, that is important in
determining the question of the place where the control is exercised. (Egyptian Hotels Ltd. v.
Mitchell 6 T.C. 542). In this case Lord Sumner observed.
Where the directors forbore to exercise their powers, the bare possession of those powers was not
equivalent to taking part in or controlling the trading. Control means de facto control and not merely
de jure control. The control and management of a company's affairs is not situated at the place where
the shareholders meetings are held, even if one shareholder, by reason of his holding an absolute
majority of shares, has a decisive voice in matters relating to the company's affairs.
1.13 INCIDENCE OF TAX
The residence of a company is important to determine total income and tax liability. As per section 5
of the Income Tax Act 1961, following are the scope of total income of a company on the basis of
residence.
I. Resident. The total income of any previous year of a person who is a "Resident' includes all
income from whatever source derived which :
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year.
It is important to note that under clause (c) only income accruing or arising outside India, is included.
Income deemed to accrue or arise outside India is not includible. Hence, net dividends received from
foreign companies is includible in income and not the gross dividends. [CIT v Shaw Wallace & Co.
Ltd, (1981) 132 ITR 466 (Cal.)]
II. Non-Resident. The total income of any previous year of a person who is a *Non-Resident'
includes all income from whatever source derived which:
(a) is received or deemed to be received in India in such year by or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Note: (i) Income accruing or arising outside India shall not be deemed to be received in India within
the meaning of section 5 by reason only of the fact that it is taken into account in a balance sheet
prepared in India.
(ii) Income which has been included in the total income of a person on basis that if has accrued or
arisen or deemed to have accrued or arisen to him shall not again be so included on the basis that it is
received or deemed to be received by him in India. 12
1.14 INCOMES RECEIVED OR DEEMED TO BE RECEIVED IN INDIA [SECTION 7]
(1) Received in India: Any income which is received in India, during the previous year by any
assessee, is liable to tax in India, irrespective of-the residential status of the assessee and the place of
accrual of such income. Receipts means the first receipt i.e. the receipt of income refers to the first
occasion when the recipient gets the money under his own control. Once an amount is received as
income, any remittance or transmission of the amount to another place does not result in receipt
within the meaning of this clause at the other place.
This principle is of importance because firstly, in determining the year of receipt, and secondly, for
ascertaining the incidence of taxation where it depends purely upon receipt of income. For example,
in the case of non-residents, their foreign income is not assessable, unless it is actually received in
India. In their case, unless, at the time the money is received in India, it is received as income from
an outside source, such receipt will not be an income receipt. If a non-resident had already received
amount outside India (in an earlier year or during the previous year) as income or exempt income and
he was transferring the funds into India in the previous year, such amount will not count as income in
the eyes of law.
(2) Income deemed to be received in India [Section 7]: The following incomes shall be deemed to
be received in India in the previous year even in the absence of actual receipt:-
(i) Contribution made by the employer to the recognized provident fund in excess of 12% of the
salary of an employee;
(ii) Interest credited to the Recognised Provident fund of an employee which is in excess of 9.5% p.a.
(iii) Transferred balance from the unrecognized fund to a Recognised Provident Fund.
(iv) The contribution made, by the Central Government or any other employer in the previous year,
to the account of an employee under a notified contributory pension scheme as referred to in section
80CCD.
1.15 INCOME ACCRUING OR ARISING IN INDIA OR DEEMEND TO BE ACCRUED
(i) Income Accruing or Arising in India (Sec. 9) Income-tax is attracted not only or receipt but also
on accrual basis. Accrual of income means a stage where the assessee has acquired a right to receive
the income. If a person has not received an income but acquired a right to receive such income, the
income is said to have accrued to him:
The words 'accrue' and 'arise' may seem to carry the same meaning but this is not so. Income accrues
when the right to receive it comes into existence whereas it is said to arise when it is actually treated
as such in the accounts. For example, when the accounts are kept on cash basis, some incomes may
accrue in one previous year but arise in the next previous year when they " are actually shown as
such in the book of accounts.
(ii) Income Deemed to be accrued or Arisen in India [Sec. 9]: Some incomes shall be deemed to
accrue or arise in India even if such incomes, in reality, have not accrued or arisen in India. They are
as follows as per section 9:
1. All incomes accruing or arising, whether directly or indirectly, through or from:
(i) any business connection in India,
(ii) any property in India,
(iii) any asset or source of income in India, and
(iv) any transfer of a capital asset situated in India. 13
Explanation:
(i) In the case of a business of which all the operations are not carried out in India, the income of the
business deemed to accrue or arise in India shall be only such part of the income as is reasonably
attributable to the operations carried out in India.
(ii) In the case of non-resident, no income shall be deemed to accrue or arise in India to him through
or from operations which are confined to the purchase of goods in India for the purposes of export,
(iii) No income will be deemed to accrue or arise in India to a non-resident engaged in the business
of running a news agency or of publishing newspapers, magazines or journals from activities
confined to collection of news or views in India for transmission outside India.
(iv) No income will be deemed to accrue or arise in India to a non-resident through or from
operations which are confined to the shooting of any cinematograph film in India, if such non-
resident is either an individual, who is not a citizen of India, or a firm which does not have any
partner who is a citizen of India or who is resident in India, or a Company which does not have any
shareholder who is a citizen of India or is a resident in India.

2 Any salary payable for services rendered in India and the salary for the rest period or leave period
which is preceded and succeeded by services rendered in India will be regarded as income earned in
India.
3. Salary payable by the Government to a citizen of India for the service rendered outside India.
4. Dividend paid by an Indian company outside India.
5. Income from interest, royalty or technical fee is deemed to accrue or arise in India if:
(a) it is received by a non-resident;
(b) it is payable by:
(i) the government,
(ii) resident in India who utilises it in India for business or profession,
(iii) non-resident in India who utilises it for business or profession carried on by him in India.
However, so much of the income by way of royalty as consists of lump-sum consideration for the
transfer outside India of, or the imparting of information outside India in respect of any data,
documentation, drawing or specification relating to any patent, invention, model, design, secret
formula or process or trademark or similar property shall not be deemed to accrue or arise in India if
such income is payable in pursuance of an agreement made before 1.4.76 and the agreement is
approved by the Central Government.
Further, so much of the income by way of royalty as consists of lump-sum payment made by a
resident for the transfer of all or any rights (including granting of a licence) in respect of Computer
software supplied by a nonresident manufacturer along with computer or computer based equipment
under any scheme approved under the Policy on Computer Software Export, Software Development
and Training, 1986 of the Government of India, shall not be deemed to accrue or arise in India.
Meaning of Business Connection in India
Business connections may be in several forms e.g. a branch office in India or an agent or an
organization of a nonresident in India. Formation of a subsidiary company in India to 14
carry on the business of the non-resident parent company would also be a business connection in
India. Any profit of the non-resident which can be reasonably attributable to such part of operations
carried out in India through business connections in India are deemed to be earned in India.
In the case of a Non-Resident the following shall not, however, be treated as business connection in
India:
(i) Operations confined to purchase of goods in India for purpose of exports;
(ii) Operations confined to collection of news and views for transmission outside India by or on
behalf of Non-Resident who is engaged in the business of running news agency or of publishing
newspapers, magazines or journals;
(iii) Operations confined to shooting of cinematograph films in India if such Non-Resident is:
(a) In the case of an individual, he should not be a citizen of India; or
(b) In the case of a firm, the firm should not have any partner who is a citizen of India or who is
resident in India; or
(c) In the case of company, the company does not have any shareholder who is a citizen of India or
who is resident in India.
Example : Samsung, a South Korean Company, a non-resident under the Income-tax Act, 1961, had
the following receipts of royalty in 2015-16. Indicate whether they will be taxable in India. Give
reasons for your answer.
a. Rs. 50,000 from the Government of India under an agreement approved by the Governments of
South Korea and India;
b. Rs. 1,00,000 from Calcutta Co. Ltd., a resident Indian Company, for import of technical know-
how for use in a business in India;
c. Rs. 75,000 from Bombay Co., a resident Indian organisation, for import of drawings for use in its
business in Singapore and Malaysia;
d. Rs. 50,000 from Keshava, a non-resident under Indian tax law for use of a formula for a business
in India; and
e. Rs. 40,000 from Rajesh, an. Indian non-resident, for use of drawings and technical know-howfor a
business in the U.K.
Solution: Under Section 5, a non-resident is taxable in India on (a) income received or deemed to be
received in India. (b) Income accruing orarising or deemed to accrueorarise in India and in this
background, the assessability of the receipts by the South Korean Company is as under
a. Any payment of royalty to a non-resident by the Government is deemed to accrue in India. Hence
Rs. 50,000 is taxable in India.
b. Payment of royalty to a non-resident by a resident for use of technical know-how in India is
taxable in India on an accrual basis. Hence Rs. 1,00,000 is taxable in India.
c. Rs. 75,000 is not taxable in India since the payment was for the user of asset outside India exempt.
d. Rs. 50,000 is taxable in India since the formula is used in India to earn an income.
e. The payment of Rs. 40,000 made by Rajesh, an Indian non-resident to the non-resident company is
not taxable in India since the user of asset was for a business outside India. 15
Questions
1. "Tax planning is a legal and moral way of tax saving" Discuss the statement and describe it
importance.

2. Explain with example tax evasion and tax avoidance.

3. Distinguish between tax planning and tax management. What are objectives of tax planning.

4. A foreign company has on Indian subsidiary company. Indian company exports its production to
its associated company at a price of Rs. 100 per unit while the same product is sold to another foreign
custome at Rs. 150 per unit Discuss the purpose of differential pricing by Indian company.

5. State with reason whether following transaction are an act of (i) Tax evasion (ii) Tax avoidence
(iii) Tax management.

(a) A ltd. maintains a regester for tax deducted at source for timely compliance
(b) Rakesh deposite Rs. 7000/- in P.P.F. account to avail deduction v/s 80C
(c) R. Ltd. purchases an expensive car for the use of the son of a director which is shown as business
assets.
(d) A transfer some debenture to his friend without any consideration to save tax on interest an
debentures.
(e) X Ltd. deducts at source tax from the payments but does not deposit the same in the government
treasury.

6. Ritu Ltd., a German company, which is non-resident in India-earned the following incomes by
way of fee for technical services. Advise about the taxability of such income in the hands of Ritu Ltd.
in India:
(a) Government of India paid Rs. 20,00,000 under an agreement, to be used for a project in India.
(b) S Ltd., an Indian company, paid Rs. 30,00,000 for the know-how to be used in India.
(c) Y Ltd. an Indian company, paid Rs. 40,00,000 for know-how acquired in Germany to be used in
China.
(d) Z Ltd. a non-resident company paid Rs. 24,00,000 for acquiring a know-how to be used in India
for carrying on certain manufacturing business.
Ans.: (a) Taxable, (b) Taxable, (c) Not taxable (d) Taxable.
7. State with reason south what will be residential status of following company for the assessment
year 2016-17.
Dalmia Company is an Indian company carrying on business in India as well as in South Africa. The
control and management of its affairs was wholly situated in India during the year ended 31 st March,
2015. Its income accruing or arising in South Africa in that year far exceeded its incomes accruing or
arising in India.
Ans. Dalmia Company is an Indian Company therefore it is a resident company. It is immaterial
whether its foreign income exceeded the Indian income or otherwise. 16
8. Define the following keeping in view the points involved while planning tax:
(a) Indian Company
(b) Domestic Company
(c) Foreign Company
(d) Company in which public is substantially interested.
(e) Closely-held Company.
9. Discuss the concept of income deemed to accrue or arise in India as per section 9 of the Income
Tax Act.
10. 25% of Shares capital of a public company are held by the life insurance Corporation of India and
remain 75% by the public. Its share are not listed in any recognised stock exchange. State whether
the company is one in which public are substantially interested. Give you answer with reasons.
11. When a company in said to be non-resident company. Discuss the tax liability of a non resident
company.
12. Distinguish between income received and income deemed to receive in India. Give suitable
examples of income deemed to be received in India. 17
LESSON 2
Corporate Tax In India
2. STRUCTURE

2.1 Computation of Gross Total Income of a Company

2.2 Deductions Available to Corporate Assessees
2.1 COMPUTATION OF GROSS TOTAL INCOME OF A COMPANY
Following steps should be followed to compute the gross total income of a company:
(a) A certain net income of the company under different heads i.e. income from House property,
profit and gains of business or profession, capital gains and income from other sources
(b) Add income of other persons includible under section 60
(c) Adjust current and brought forward losses as for section 70 to 80
The total income so computed is known as gross total income of the company.
2.2 DEDUCTIONS AVAILABLE TO CORPORATE ASSESSEES:
Before discussing deductions available under section 80 to corporate assessees, let us understand see
about the general rules for deductions.
General Principles For Deductions From Incomes Under Section 80a
1. From gross total income deductions shall be allowed under sections 80C to 80U.

2. The aggregate amount of deductions under sections 80C to 80U shall not exceed the gross total
income.
Note:- Deductions are not allowed against short-term capital gains specified in Sec. 111A and long-
term capital gains.
3. If an association of persons or a body of individuals is entitled to any of the deductions referred to
in sections 80G, 80GGA, 80GGC, 80IA, 80IB, 80IC, 80ID and 80IE a member of the association is
not again entitled to claim the same deduction in his own assessment in respect of his share in the
income of the association. This is to prevent duplication of deductions.
4. Where deductions under sections 10AA or 80IA to 80RRB have been claimed and allowed against
the income specified in these sections for any assessment 'year, the deduction in .respect of such
profits and gains shall not be allowed under any other provisions of the Act.
5. Where the assessee fails to make a claim in his return of income for any deduction in sections
mentioned above, no deduction shall be allowed to him thereafter.
Deductions under section 80: Following are the important deductions available to corporate assessees
under section 80
1. 80G Donations to certain funds / charitable institution, etc.
2. 80GGA Certain donations for scientific research or rural development.
3. 80GGB Contributions given by companies to political parties.
4. 80-IA Profits and gains of new industrial undertakings or enterprises engaged in infrastructural
development, etc.
5. 80-IAB Deductions in respects of profits and gains by an undertaking or enterprises engaged in
development of Special Economic Zone. 18
6. 80-IB Profits gains from certain industrial undertakings other than infrastructure development
undertakings.
7. 80-IC Deduction in respect of certain undertakings or enterprises in certain special category States.
8. 80-ID Deduction in respect of profits and gains from business of hotels and convention centres in
specified area
9. 80-IE Special provision in respect of certain undertakings in North-Eastern States
10. 80JJA Deduction in respect of profits and gains from business of collecting and processing of
bio-degradable waste
11. 80JJAA Deduction in respect of employment of new work men
12. 80-LA Deductions in respect of certain incomes of Offshore Banking Units and International
Financial Services Centre
1. Deduction in respect of donations to certain Funds, Charitable Institution, etc. (Sec. 80G):
This section allows deduction in respect of amounts given as charitable donations and it is allowed to
all types of assessees. Where amount of donation exceeds Rs. 10,000, it should be paid by any mode
other than cash.
The donations can be classified as under:
(A) No limit donations, i.e., the whole amount qualify for deduction.
Such donations can further be classified as :
(i) deduction allowed @ 100% of qualifying amount; and
(ii) deduction allowed® 50% of qualifying amount.
(B) With limit of donations, i.e., the qualifying amount for deduction under this section shall not
exceed 10% of gross total income after deducting the following :
(a) Exempted income included in gross total income;
(b) Short-term capital gains specified in section 111A;
(c) Long-term capital gains;
(d) Incomes assessable under sections 115A, 115AB, 115AC and 115AD;
(e) Deductions under sections 80C to 80U except u/s 80G.
Such donations are also further be classified as :
(i) deduction allowed @ 100% of qualifying amount;
(ii) deduction allowed @ 50% of qualifying amount.
[A(i)] No limit donations where deduction is allowed @ 100% are as under :
(1) the National Defence Fund set-up by the Central Government; or
(2) the Prime Minister's National Relief Fund; or
(3) the Prime Minister's Armenia Earthquake Relief Fund; or
(4) the Africa (Public Contributions—India) Fund; or
(5) the National Foundation for Communal Harmony; or
(6) a University or Educational Institution of national eminence as may be approved by the
prescribed authority in this behalf; or
(7) the Maharashtra Chief Minister's Relief Fund or Chief Minister's Earthquake Relief Fund,
Maharashtra; or
(8) Zila Saksharta Samitis constituted under the Chairmanship of District Collector for the purpose of
improvement of primary education and for literary and post-literary 19
efforts in villages and towns with population not exceeding one lakh according to the latest census;
or
(9) the National Blood Transfusion Council or any State Blood Transfusion Council; or
(10) any Fund set-up by State Govt. to provide medical relief to the poor; or
(11) the Central Welfare Fund of the Army and Air Force and the Indian Naval Benevolent Fund
established for the welfare of the past and present members of such forces or their dependents; or
(12) the Andhra Pradesh Chief Minister's Cyclone Relief Fund; or
(13) the National Illness Assistance Fund; or
(14) the Chief Minister's Relief Fund or the Lt. Governor's Relief Fund; or
(15) National Sports Fund to be set-up by the Central Govt.; or
(16) National Cultural Fund set-up by the Central Govt.; or
(17) the Fund for Technology Development and Application set-up by the Central Govern-ment; or
(18) any fund set-up by the State Government of Gujarat exclusively for providing relief to the
victims of earthquake in Gujarat; or
(19) the National Trust for welfare of persons with Autism, Cerebral Palsy, Mental Retar-dation and
Multiple Disabilities.
(20) National Children's Fund.
[A(ii)] No limit donations but deduction is allowed @ 50% of qualifying amount of are as under
:
(1) Jawahar Lal Nehru Memorial Fund;
(2) Prime Minister's Drought Relief Fund;
(3) Indira Gandhi Memorial Trust;
(4) Rajiv Gandhi Foundation.
[B(i)] With limit donations where deduction is allowed @ 100% of qualifying amount:
(1) the Government or to any such local authority, institution or association as may be approved in
this behalf by the Central Government to be utilized for the purpose of promoting family planning;
(2) sums paid by a company to the Indian Olympic Association or any other Association or
Institution established in India and as notified by the Central Government for development of
infrastructure for sports and games in India or for sponsorship of sports and games in India.
B(ii) With limit donations where deduction is allowed @ 50% of qualifying amount:
(1) the Government or any local authority to be utilized for any charitable purpose other than the
purpose of promoting family planning; or
(2) any other fund or any institution which is established in India for a charitable purpose, if it fulfils
the following conditions:
(a) its income is not included in total income under sections 11 and 12 of the Income Tax Act, or it is
Regimental Fund established by Armed Forces of the Union for the welfare of the past and present
members of the force or their dependents;
(b) under the rules governing the institution or fund no part of the income or assets of the institution
or fund can be used for non-charitable purposes;
(c) the institution or fund is not expressed to be for the benefit of any particular religious community
or caste; 20
(d) the institution or fund maintains regular books of accounts of its receipt and expenditure;
(e) the institution or fund is a public charitable trust or is registered under the Societies Registration
Act, 1860 or under section 25 of the Companies Act, 1956, or is a University established by law, or is
any other educational institution recognized by the Government or by a University established by
law, or it is an institution established in India for the control and supervision of the games of cricket,
hockey, football, tennis or any other game approved by the Central Government, or is an institution
financed wholly or in part by the Government or a local authority; and the fund or institution is
approved by the Commissioner.
(3) any authority constituted in India by or under any law enacted either for the purpose of the
dealing with and satisfying the need for housing accommodation or for the purpose of planning
development or improvement of cities, towns and villages or for both; or
(4) any corporation established by the Central Govt. or any State Govt. for promoting the interests of
the members of a minority community; or
(5) the sums paid by the assessee in the previous year as donations for the renovation or repair of any
temple, mosque, gurudwara, church or any other place which is notified by the Central Government
in the Official Gazette to be of historic, archaeological or artistic importance or to be a place of
public worship renowned throughout any State or States.
Conditions for allowing deduction under this section :
(i) Not in Kind: No deduction will be allowed under section 80G unless the donation is of a sum of
money. It should not be given in kind.
(ii) Donation should not be given for the benefit of any particular religion, class, creed, community,
etc. Donation given for the benefit of scheduled castes, scheduled tribes, backward class or women or
children are not for any particular religion or caste.
Example 1:
Mr. Vivek's G.T.I. for the P.Y. 2015-16 was Rs. 5,00,000. He made the following donations by
cheques:
(a) Maharashtra Chief Minister's Earthquake Relief Fund-Rs. 10,000.
(b) National Foundations for Communal Harmony-Rs. 15,000.
(c) Rs. 10,000 to an Educational Institution of National Eminence.
(d) Rs. 5,000 to National Children's Fund.
(e) To Municipal Corporation for promotion of family planning-Rs. 40,000.
(f) To Minority Community Corporation (Notified) - Rs. 25,000.

Compute his taxable income for the Assessment Year 2016-17

Solution:
Computation of Total Income
for the Assessment Year 2016-17
Rs. Rs.
Gross Total Income 5,00,000
Less: Deduction u/s 80G:
(1) No limit donation, deduction allowed 100%:
(a) MCMERF 10,000
(b) NF for CH 15,000 21
(c) EI of NE 10,000
(d) NCF - Rs. 5,000 5,000
(2) With limit donation Rs. 40,000 + 25,000
Qualifying amount 10% of GTI Rs. 50,000
(a) Deduction @ 100% for
family planning Rs. 40,000 40,000
(b) Deduction @ 50% for
Minority Community Rs. 10,000 5,000 85,000
Total Income 4,15,000
Deduction in respect of certain donations for scientific research or rural development [Section
80GGA]
Deduction is permissible to an assessee whose "Gross Total Income" does not include income
chargeable under the head "profits and gains of business or profession".
The deduction is available in respect of the payments made during the previous year to the following
institutions:
(i) to an approved research association, university, college or other institution to be used for scientific
research (Business assessees are allowed this deduction u/s 35);
(ii) to an approved research association which has as its objects the undertaking of research in social
sciences or statistical research or to university, college or other institution for research in social
science or statistical research (Business assessees are allowed this deduction u/s 35);
(iii) to an association or institution engaged in any approved programme for rural development, or
which is engaged in training of persons for implementation of rural development programmes, or to a
notified rural development fund or to the notified National Urban Poverty Eradication Fund
(Business assessees are allowed this deduction u/s 35CCA). In this case the assessee should furnish a
certificate as is required under section 35CCA;
(iv) to a public sector company or a local authority, or to an association or institution approved by the
National Committee, for carrying out any eligible project or scheme (Business assessees are allowed
this deduction u/s 35AC). In this case also the assessee should furnish a certificate as a required
under section 35AC.
Quantum of deduction: 100% of the sum paid to the above institutions.
Note : (A) Where a deduction under this section is claimed and allowed for any assessment year then
no deduction shall be allowed in respect of such payments under any other provision of the Act for
the same or any other assessment year.
(B) Deduction allowed to the assessee shall not be denied if subsequent to the payment of the sum by
the assessee, the approval granted to any of the above institution is withdrawn.
3. Deductions in respect of contribution given by companies to Political Parties (Section
80GGB):
A sum donated by an Indian company to any political party or an electoral trust shall be allow
however no deduction is allowed for donation in cash. 22
4. Deduction in respect of profits and gains from new industrial undertakings or enterprises
engaged in infrastructural development etc. [Section 80-IA]
The deduction under this section is available to an assessee whose Gross Total Income includes any
profits and gains derived by:
(a) any enterprise carrying on the business of (i) developing, (ii) operating and maintaining, or (iii)
developing, operating, maintaining of any infrastructure facility;
(b) an undertaking which is engaged in the business of providing telecommunication service, etc.;
(c) an undertaking which develops, maintains, etc. an industrial park or special economic zone;
(d) an undertaking which is engaged in generation, transmission, distribution of power, etc.
(a) Essential conditions for enterprises carrying on the business of infrastructure facility
[Section 80-IA(4)(i)]
(i) The enterprise should carry on the business of—
(a) developing,
(b) operating and maintaining, or
(c) developing, operating and maintaining,
any infrastructure facility.
(ii) the enterprise is owned by an Indian company or a consortium of such companies or by an
authority or a Board or a Corporation or any other body established or constituted under any Central
or State Act.
(iii) the enterprise has entered into an agreement with Central/State Government or a local authority
or any other statutory body for (i) developing, (it) operating and maintaining or (iii) developing,
operating and maintaining, a new infrastructural facility.
(iv) the enterprise has started or starts operating and maintaining the infrastructural facilities on or
after 1.4.1995. Meaning of infrastructural facility
For the purposes of this clause, "infrastructure facility" means:
(a) a road including toll road, a bridge or a rail system;
(b) a highway project including housing or other activities being an integral part of the highway
project;
(c) a water supply project, water treatment system, irrigation project, sanitation and sewerage system
or solid waste management system;
(d) a port, airport, inland waterway or inland port or navigational channel in the sea.
(b) Essential conditions for any undertaking which is engaged in providing telecommunication
services etc. [Section 80-IA(4)(ii)]
(i) The undertaking should have started or starts providing telecommunication service whether basic
or cellular, including radio paging, domestic satellite services or network of trunking, broadband
network and internet services.
(ii) Deduction is allowed to all assessees;
(iii) It should start providing telecommunication services at any time on or after 1.4.1995 but on or
before 31.3.2005.
(i) Such undertaking should not be formed by splitting up, or the reconstruction, of a business already
in existence. However, this condition shall not apply to an 23
undertaking which is formed as a result of the re-establishment or revival of an undertaking, in
circumstances specified u/s 33B. i.e. discontinued business in the circumstances specified in section
33B.
(ii) It should not be formed by the transfer to a new business of machinery or plant previously used
for any purpose. However, plant and machinery, already used for any purpose, can be transferred to
the new undertaking, provided value of such plant and machinery does not exceed 20% of the total
value of plant and machinery of the new undertaking. It may be noted that it is not essential that the
building in which the undertaking carries on the business should also be new. Deduction under
section 80-IA will be available even if the undertaking is set up in an old building.
(c) Essential conditions for undertaking which develops, maintains etc., any industrial park
[Section 80-IA(4)(iii)]
(i) The under-taking should develop, develop and operate or maintain and operate an industrial park
notified by the Central Government in accordance with a scheme framed for such purpose.
(ii) The industrial park should begin to operate, develop, etc., at any time on or after 1.4.1997 but
before 1.4.2011.
(d) Essential conditions of undertaking engaged in generation transmission, distribution of
power, etc. [Section 80-IA(4)(iv)] It is an undertaking which:—
(i) is set up in any part of India for the generation or generation and distribution of power if it begins
to generate power at any time during the period beginning on 1.4.1993 and ending on 31.3.2013;
(ii) starts transmission or distribution by laying a network of new transmission or distribution lines at
any time during the period beginning on 1.4.1,999 and ending on 31.3.2013. However, the deduction
in this case shall be allowed only in relation to the profits derived from laying of such network of
new lines for transmission or distribution;
(iii) undertakes substantial renovation and modernisation of the existing transmission or distribution
lines at any time during the period 1.4.2004 to 31.3.2013'. "Substantial renovation and
modernisation" shall mean an increase of plant and machinery by atleast 50% of the book value of
such plant and machinery as on 1.4.2004.
Other conditions
(i) Such undertaking should not be formed by splitting up, or the reconstruction, of a business already
in existence. However, this condition shall not apply to an undertaking which is formed as a result of
the re-establishment or revival of an undertaking, in circumstances specified u/s 33B.
(ii) It should not be formed by the transfer to a new business of machinery or plant previously used
for any purpose. However, plant and machinery, already used for any purpose, can be transferred to
the new industrial undertaking, provided value of such plant and machinery does not exceed 20% of
the total value of plant and machinery of the new industrial undertaking. It may be noted that it is not
essential that the building in which the undertaking carries on the business should also be new.
Deduction u/s 80-IA will be available even if the industrial undertaking is set up in an old building.
Exceptions:
1. In view of the ongoing reforms of the State Electricity Boards, in case of substantial renovation
and modernisation, the restrictions imposed on the transfer of old plant 24
and machinery and splitting up of an old business shall not apply in the case of splitting up or,
reconstruction, or re-organisation of State Electricity Boards.
2. Any machinery or plant, which was used outside India by any person other than the assessee shall
not be regarded as machinery or plant previously used for any purpose, if the following conditions
are fulfilled, namely.
(a) such machinery or plant was not at any time previous to the date of the installation by the
assessee, used in India.
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction, on account of depreciation in respect of such machinery or plant, has been allowed
or is allowable under the provisions of this Act in computing the total income of any person for any
period prior to the date of the installation of the machinery or plant by the assessee.
Conditions applicable to all undertakings/enterprises eligible under section 80IA:-
(1) Audit of accounts [Section 80-IA(7)]: The deduction under section 80-IA from profits and gains
derived from an undertaking shall not be admissible unless the accounts of the undertaking for the
previous year relevant to the assessment year for which the deduction is claimed have been audited
by a chartered accountant and the assessee furnishes, alongwith his return of income, the report of
such audit in Form No. 10CCB duly signed and verified by chartered accountant.
(2) Inter-unit transfer of goods or services [Section 80-IA(8)]: Where any goods or services held
for the purposes of the eligible business are transferred to any other business carried on by the
assessee, or where any goods or services held for the purposes of any other business carried on by the
assessee are transferred to the eligible business and, in either case, the consideration, if any, for such
transfer as recorded in the accounts of the eligible business does not correspond to the market value
of such goods or services as on the date of the transfer, then, for the purposes of the deduction under
this section, the profits and gains of such eligible business shall be computed as if the transfer, in
either case, had been made at the market value of such goods or services as on that date:
However, where in the opinion of the Assessing Officer, the computation of the profits and gains of
the eligible business presents exceptional difficulties, the Assessing Officer may compute such
profits and gains on such reasonable basis as he may deem fit.
(3) Double deduction not allowed [Section 80-IA(9)]: Where any amount of profits and gains of an
undertaking or of an enterprise in the case of an assessee is claimed and allowed under this section
for any assessment year, deduction to the extent of such profits and gains shall not be allowed under
the heading "deductions in respect of certain incomes", and shall in no case exceed the profits and
gains of such eligible business of undertaking or enterprise, as the case may be.
(4) Restriction of excessive profits [Section 80-IA(10)]: Where it appears to the Assessing Officer
that, owing to the (i) close connection between the assessee carrying on the eligible business to which
this section applies and any other person, or (ii) for any other reason, the course of business between
them is so arranged that the business transacted between them produces to the assessee more than the
ordinary profits which might be expected to arise in 'such eligible business, the Assessing Officer
shall, in computing the profits and gains of such eligible business for the purposes of the deduction
under this section, take the amount of profits as maybe reasonably deemed to have been derived
therefrom. 25
(5) Power of Central Government to declare that the section shall not apply [Section 80-
IA(11)]: The Central Govt. may, after making such inquiry as it may think fit, direct, by notification
in the Official Gazette, that the exemption conferred by this section not apply to any class of
industrial undertaking or enterprise with effect from such date as it may specify in the notification.
(6) Deduction not to be allowed in cases where return is not filed within the specified time limit
[Section 80AC]: No deduction shall be allowed to the assessee under this section unless he furnishes
a return of his income of the relevant assessment year on or before the due date specified u/s 139(1).
Quantum and period of deduction in Period and quantum of deduction
case of all above
undertakings/enterprises [Section 80-
IA] Undertaking/enterprises
(1) For all the above undertaking/ 100% of profits and gains derived from
enterprises other than the enterprise such business for 10 consecutive
engaged in the business of providing assessment years out of 15 years
telecommunication, etc. beginning with the year in which
undertaking or the enterprise develops and
begins to operate any infrastructure
facility or develops an industrial park or
special economic zone or generates power
or commences transmission or distribution
of power or undertakes substantial
renovation or modernisation.
(2) For enterprise engaged in the business For the first 5 consecutive assessment
of providing telecommunication services, years @ 100%,
etc. Subsequent 5 consecutive assessment
years @ 30%
out of 15 years beginning with the year in
which enterprise starts providing
telecommunication services.