12

ASSESSMENT OF VARIOUS
ENTITIES

LEARNING OUTCOMES

After studying this chapter, you would be able to:

 compute the book profit of a company and Minimum Alternate Tax (MAT) payable;
 determine the MAT credit to be carried forward;
 examine the applicability of MAT provisions in the case of a foreign company;
 compute the tax payable by a company and mutual fund on dividend/income
distributed;
 examine the special provisions relating to taxation of business trusts, securitisation
trusts and investment fund and compute the tax liability in the hands of such
trusts/fund and the unit holders;
 examine whether alternate minimum tax (AMT) would be applied in the case of
persons other than companies;
 compute AMT and determine AMT credit to be carried forward;
 compute the total income of a firm, AOPs/BOIs and its partners/members applying
the general and special provisions under the Act;
 identify and address the issues arising in respect of transactions relating to
determination of total income of a HUF, firm, AOPs and company;
 determine the liability of partners of a firm and LLP on dissolution;
 examine the incidence of taxation on mutual concerns.

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 12.2 DIRECT TAX LAWS

12.1 ASSESSMENT OF COMPANIES

(1) Meaning of ‘Company’ for purposes of income-tax
Under the Income-tax Act, 1961, the term “Company” has a much wider meaning than what has
been given to it under the Companies Act. The company is considered as a ‘person’ for all
purposes of assessment proceedings [Section 2(31)(iii)].
Section 2(17) of the Income-tax Act, 1961 defines a company for income-tax purposes. Accordingly,
‘company’ means –
(i) any Indian company as defined in section 2(26); or
(ii) any body corporate incorporated by or under the laws of a country outside India, i.e., any
foreign company; or
(iii) any institution, association or body which is assessable or was assessed as a company for
any assessment year under the Indian Income-tax Act, 1922 or for any assessment year
commencing on or before 1.4.1970 under the present Act; or
(iv) any institution, association, or body, whether incorporated or not and whether Indian or non-
Indian, which is declared by a general or special order of the CBDT to be a company.
Such institution, association etc. shall be deemed to be a company for such assessment
year(s) as may be specified in the CBDT’s order.

(2) Classes of Companies

♦ Domestic and Foreign Company: Companies can be classified into two groups, viz. (i) Domestic
company and (ii) Foreign company.
(i) Domestic company means
- an Indian company or
- any other company, which, in respect of its income liable to tax, has made
the prescribed arrangements for the declaration and payment of the dividends
(including dividends on preferential shares) within India, payable out of such
income [Section 2(22A)].
Indian Company [Section 2(26)] - A company has to satisfy the following two
conditions so that it can be regarded as an Indian company –

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 ASSESSMENT OF VARIOUS ENTITIES 12.3

(a) the company should have been formed and registered under Companies Act, 19561
(b) the registered office or the principal office of the company should be in India.
The expression ‘Indian Company’ also includes the following provided their
registered or principal office is in India:
(i) a company formed and registered under any law relating to companies formerly
in force in any part of India [except Jammu and Kashmir, Goa 2, Dadra and
Nagar Haveli, Daman and Diu and Pondicherry, wherein companies formed
and registered under any law for the time being in force in the respective union
territories are included in the definition];
(ii) a corporation established by or under a Central, State or Provincial Act (like
Financial Corporation or a State Road Transport Corporation);
(iii) an institution or association or body which is declared by the Board (CBDT) to
be a company under section 2(17)(iv);
Prescribed arrangements for the declaration and payment of dividends within
India [Rule 27]: The arrangements referred to in sections 194 and 236 to be made
by a company for declaration and payment of dividends (including dividends on
preference shares) within India are as follows:
(i) The share register of the company concerned for all its shareholders shall be
maintained regularly at its principal place of business within India in respect of
any assessment year from a date not later than 1st April of such year.
(ii) The general meeting for passing the accounts of the previous year relevant to
the assessment year and for declaring any dividends in respect thereof shall be
held only at a place within India.
(iii) The dividends declared, if any, shall be payable only within India to all the
shareholders.
It is obligatory for Indian companies to make the prescribed arrangements stated above;
non-Indian companies will be treated as domestic companies only if they make the
prescribed arrangements for the declaration and payment of dividends in India.
(ii) Foreign Company: A company that is not a domestic company is a foreign company
[Section 2(23A)].

1The Companies Act, 2013

2 Now State of Goa

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 12.4 DIRECT TAX LAWS

Classes of companies

Domestic Company Foreign company

Company which made arrangement for A company which is not

Indian company declaring & paying dividend out of the income a domestic company
chargeable to tax in India.

♦ Closely held and widely held Company: Domestic companies are again divided into
broad groups, viz
(1) companies in which public are substantially interested - ‘Widely-held companies’
(2) companies in which public are not substantially interested -‘Closely held companies’
To determine whether a company is one in which the public are substantially interested,
one has to apply the tests laid down in section 2(18). Briefly, the following companies fall
under this category:
(i) A company owned by the Government (either Central or State but not Foreign) or
the Reserve Bank of India (RBI) or in which not less than 40% of the shares are held
by the Government or the RBI or corporation owned by that bank.
(ii) A company which is registered under section 25 of the Companies Act, 1956 3
(formed for promoting commerce, arts, science, religion, charity, or any other useful
object and which prohibits payment of dividends to its members).
(iii) A company having no share capital which is declared by the CBDT for the specified
assessment years to be a company in which the public are substantially interested.
(iv) A mutual benefit finance company which carries on its principal business of
accepting deposits from its members and which is declared by the Central
Government under section 620A of the Companies Act, 1956 4 to be Nidhi or a Mutual
Benefit Society.
(v) A company whose equity shares (not being shares entitled to a fixed rate of dividend)
carrying at least 50% of the voting power have been allotted unconditionally to or
acquired unconditionally by and were beneficially held throughout the relevant
previous year by one or more co-operative societies.
(vi) A company which is not a private company as defined in the Companies Act, 1956 5

3Section 8 of Companies Act, 2013

4Section 406 of Companies Act, 2013
5 Section 2(68) of Companies Act, 2013

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 ASSESSMENT OF VARIOUS ENTITIES 12.5

and which fulfills any of the following conditions:

- its equity shares should have, as on the last day of the relevant previous year,
been listed in a recognized stock exchange in India; or
- its equity shares carrying at least 50% (40% in case of an Indian company in
ship construction business or in the manufacture or processing of goods or in
mining or in generation or distribution of electricity or any other form of power)
voting power should have been unconditionally allotted to or acquired by and
should have been beneficially held throughout the relevant previous year by
(a) Government or
(b) a Statutory Corporation or
(c) a company in which public are substantially interested or
(d) any wholly owned subsidiary of company mentioned in (c).
Thus, it should be noted that all public limited companies must automatically be
treated as companies in which public are substantially interested, whereas all
private limited companies will be treated as companies in which public are not
substantially interested.
♦ Relevance of the above classification:
(1) The distinction between domestic and foreign companies is significant owing to, inter
alia, the rates of tax.
Domestic companies are taxed at
- 25% - where total turnover or gross receipt in the previous year 2019-20 does
not exceed ` 400 crore
- 30% - in any other case
Foreign companies are be taxed at 40%. However, in respect of specified royalties
and fees for technical services received from Government or an Indian concern in
pursuance of an agreement, approved by the Central Government, made by the
foreign company with the Government or Indian concern between 1.4.1961 and
31.3.1976 (in case of royalties) and between 1.3.1964 and 31.3.1976 (in case of
FTS), the rate of tax is 50%.
Surcharge
Surcharge@7% of the tax payable is leviable in the case of domestic companies and @
2% of tax payable in the case of foreign companies if the total income exceeds ` 1 crore
but does not exceed ` 10 crore.

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 12.6 DIRECT TAX LAWS

Surcharge@ 12% of the tax payable is leviable in the case of domestic companies
and @ 5% of tax payable in the case of foreign companies if the total income
exceeds ` 10 crore.
Option available with domestic companies to opt for concessional rates of tax
specified under section 115BAA or 115BAD
Section 115BAA provides for concessional rate of tax @22% (plus surcharge@10%
and HEC@4%) for domestic companies, subject to certain conditions, like non-
availability of profit-linked deductions and investment-linked tax deduction under the
Act, non-availability of deduction for contribution to research and development,
additional depreciation etc.
Section 115BAB provides for concessional rate of tax @15% (plus surcharge@10%
plus HEC@4%) to new manufacturing or electricity generating domestic
companies set up and registered on or after 1.10.2019, and commences
manufacturing or generating electricity on or before 31.3.2023, subject to certain
conditions, like non-availability of profit-linked deductions and investment-linked tax
deduction under the Act, non-availability of deduction for contribution to research and
development, additional depreciation etc.
Domestic Companies have to exercise the option to be governed by these special
provisions of the Act. The option for section 115BAB has to be exercised in the very
first year in which the eligible company is set up, failing which it cannot exercise
such option in the future years. However, a company eligible to exercise option u/s
115BAA can defer exercise of such option to a future year, if it is availing sizable profit-
linked or investment-linked deductions or additional depreciation in the relevant
previous year. However, once the company exercises such option under section
115BAA or 115BAB, as the case may be, in a year, it would continue to be governed
by the special provisions u/s 115BAA or 115BAB, as the case may be, thereafter and
cannot opt for regular provisions in any subsequent year.
It may be noted that companies exercising option under section 115BAA or section
115BAB are not liable to minimum alternate tax under section 115JB.
These two sections, namely sections 115BAA and 115BAB have been detailed in the
upcoming paragraphs.
(2) The question as to whether a company is one in which public are substantially
interested or not is relevant for application of certain provisions which are applicable
only to closely held company.
There are certain special provisions which are applicable only to companies in which
public are not substantially interested. Examples of such special provisions are as
follows:

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 ASSESSMENT OF VARIOUS ENTITIES 12.7

S. No. Section Provision

1 2(22)(e) Advance or loan by a closely held company - deemed
dividend
2 56(2)(viib) Consideration received in excess of FMV of shares issued
by a closely held company to be treated as income of such
company, where shares are issued at a premium
3 68 Taxation of sum received by closely held company as share
application money, share capital, share premium and the
explanation offered by company is not satisfactory
4 79 Carry forward and set-off of losses in case of closely held
companies
5 179 Liability of directors of private company in liquidation

(3) 115BAB and 115BAA providing for concessional rate of tax in respect of certain
domestic companies
Sections 115BAB and 115BAA provides for concessional rates of tax and exemption from minimum
alternate tax (MAT) in respect of certain domestic companies. The provisions of these two new
sections are tabulated hereunder -
(1) (2) (3) (4)
Particulars Section 115BAB Section 115BAA
(1) Applicability Domestic manufacturing Any domestic
company/Electricity generation company
company
(2) Rate of tax 15% 22%
(3) Rate of surcharge 10% 10%
(4) Effective rate of tax (including 17.16% 25.168%
surcharge & HEC) [Tax@15% (+) [Tax@22% (+)
Surcharge@10% (+) Surcharge@10%
HEC@4%] (+)
HEC@4%]
(5) Applicability of MAT Not applicable Not applicable
(6) Manner of computation of tax liability
Particulars Section 115BAB Section 115BAA
Income on which The rate of tax (i.e., 17.16%) is The rate of tax (i.e.,
concessional rate of tax is applicable in respect of income 25.168%) is
applicable derived from or incidental to notwithstanding
manufacturing or production of anything contained
in the Income-tax

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 12.8 DIRECT TAX LAWS

an article or thing or generation Act, 1961, but

of electricity. subject to the
[Read with point no.11 below, provisions of
wherein the rate of 34.32% Chapter XII, other
(i.e., Tax@30% + than section
surcharge@10% + HEC@4%) 115BA and
would be applicable in 115BAB.
specified circumstance]
Rate of tax on income Such income would be subject Such income would
covered under Chapter XII to tax at the rates mentioned in be subject to tax at
[for example, long-term capital the said sections in Chapter XII. the rates
gains chargeable to tax u/s 112 Surcharge@10% would be mentioned in the
and 112A, short-term capital levied on tax computed on such said sections in
gains chargeable to tax u/s income. HEC@4% would be Chapter XII.
111A] levied on the income-tax plus Surcharge@10%
surcharge. is leviable on tax
computed on such
income. HEC@4%
would be levied on
the income-tax
plus surcharge.
Rate of tax on other income The applicable tax rate is The applicable tax
in respect of which no 25.168% (i.e., tax@22%, plus rate is 25.168%
specific rate of tax is surcharge @10% plus (i.e., tax@22%
provided in Chapter XII HEC@4%), if such income has plus
neither been derived from nor is surcharge@10%
incidental to manufacturing or plus HEC@4%).
production of an article or thing There is, however,
or generating electricity (For no restriction
example, income from house regarding claim
property and income from other of any deduction
sources). or allowance
In respect of such income, no permissible under
deduction or allowance in the relevant
respect of any expenditure or provisions of the
allowance shall be allowed in Act.
computing such income.
Rate of tax on STCG derived The applicable rate of tax is The applicable rate
from transfer of a capital 25.168% (i.e., tax@22%, plus of tax is 25.168%
asset on which no surcharge@10% plus i.e., tax @22%,
depreciation is allowable HEC@4%). plus surcharge
under the Act @10% plus
cess@4%.

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 ASSESSMENT OF VARIOUS ENTITIES 12.9

There is, however, no restriction There is no

regarding claiming of deduction restriction
or allowance in this regard. regarding claiming
of deduction or
allowance in this
regard.
7. Conditions to be fulfilled for availing concessional rate of tax and exemption from
MAT
Particulars Section 115BAB Section 115BAA
Conditions to be fulfilled for (i) The company should be No time limit
availing concessional rate of set-up and registered specified. Both
tax and exemption from MAT on or after 1.10.2019. existing companies
and new companies
can avail benefit.
(ii) It should commence Need not be a
manufacturing or manufacturing or a
production of an article production
or thing or business of company
generating electricity
on or before 31.3.2023.
(iii) It should not be formed No similar condition
by splitting up or the has been
reconstruction of a prescribed
business already in
existence (except in case
of a company, business of
which is formed as a
result of the re-
establishment,
reconstruction or revival
by the person of the
business of any
undertaking referred to in
section 33B in the
circumstances and within
the period specified
therein)
(iv) It does not use any No similar condition
machinery or plant has been
previously used for any prescribed
purpose [Refer Note at
the end]

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 12.10 DIRECT TAX LAWS

(v) It does not use any No similar condition

building previously used has been
as a hotel or a convention prescribed
centre [meanings
assigned in section 80-
ID(6)] in respect of which
deduction u/s 80-ID has
been claimed and
allowed.
(vi) It should not be engaged No similar condition
in any business other has been
than the business of prescribed
manufacture or
production of any article
or thing and research in
relation to, or distribution
of, such article or thing
manufactured or
produced by it.
Note – Business of
manufacture or
production of any article
or thing does not include
business of –
(1) Development of
computer software
in any form or in
any media
(2) Mining
(3) Conversion of
marble blocks or
similar items into
slabs
(4) Bottling of gas into
cylinder
(5) Printing of books
or production of
cinematograph
films
(6) Any other business
as may be notified
by the Central

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 ASSESSMENT OF VARIOUS ENTITIES 12.11

Govt. in this
behalf.
Note - If difficulty arises
regarding fulfilment of
conditions listed in (iv) to (vi)
above, the CBDT may, with the
approval of the Central
Government, issue guidelines
for the purpose of removing
difficulty and to promote
manufacturing or production of
article or thing using new plant
and machinery.
Every guideline issued by the
CBDT has to be laid before each
House of Parliament, and shall
be binding on the person, and
the income-tax authorities
subordinate to it.
(8) Common In case of a company opting for either section 115BAA or 115BAB, the
conditions total income should be computed -
for both (i) without providing for deduction under any of the following
sections for sections:
availing the
concessional Section Provision
rate of tax 10AA Exemption of profits and gains derived from export of
and articles or things or from services by an assessee,
exemption being an entrepreneur from his Unit in SEZ.
from MAT
32(1)(iia) Additional depreciation @20% , as the case may be,
of actual cost of new plant and machinery acquired
and installed by manufacturing undertakings.
33AB Deduction@40% of profits and gains of business of
growing and manufacturing tea, coffee or rubber in
India, to the extent deposited with NABARD in
accordance with scheme approved by the Tea/Coffee/
Rubber Board.
33ABA Deduction@20% of the profits of a business of prospecting
for, or extraction or production of, petroleum or natural gas
or both in India, to the extent deposited with SBI in an
approved scheme or deposited in Site Restoration Account.
35(1)(ii)/ Deduction for payment to any research association,
(iia)/(iii) company, university etc. for undertaking scientific
research or social science or statistical research.

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 12.12 DIRECT TAX LAWS

35(2AA) Deduction of payment to a National Laboratory or

University or IIT or approved specified person for
scientific research
35(2AB) Deduction of in-house scientific research expenditure
incurred by a company engaged in the business of bio-
technology or in the business of manufacture or production
of an article or thing.
35AD Investment-linked tax deduction for specified
businesses.
35CCC Deduction of expenditure incurred on notified
agricultural extension project
35CCD Deduction of expenditure incurred by a company on
notified skill development project.
80C to Deductions from gross total income under Chapter VI-
80U A other than the provisions of section 80JJAA or
section 80M.
(ii) without set-off of any loss or allowance for unabsorbed
depreciation deemed so u/s 72A, where such loss or depreciation
is attributable to any of the deductions listed in (i) above [Such
loss and depreciation would be deemed to have been already
given effect to and no further deduction for such loss shall be
allowed for any subsequent year]
(iii) by claiming depreciation u/s 32 determined in the prescribed
manner (i.e., in respect of depreciation of any block of assets
entitled to more than 40% shall be restricted to 40% on the written
down value of such block of assets). However, additional
depreciation u/s 32(1)(iia) cannot be claimed.
Note – Additional points relevant in the context of section 115BAA:
(1) In case of a company opting for section 115BAA, total income
should be computed without set-off of any loss carried forward or
depreciation from any earlier assessment year, where such loss or
depreciation is attributable to any of the deductions listed in (i) above
[Such loss and depreciation would be deemed to have been already
given effect to and no further deduction for such loss or depreciation
shall be allowed for any subsequent year]
(2) In the case of a person having a Unit in the IFSC, referred to in
section 80LA(1A), which has exercised option for section 115BAA,
deduction u/s 80LA would be allowed subject to fulfilment of the
conditions specified in that section.

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 ASSESSMENT OF VARIOUS ENTITIES 12.13

(3) Since there is no time line within which option under section
115BAA can be exercised, a domestic company having brought forward
losses and depreciation on account of deductions listed in (i) above may,
if it so desires, postpone exercise the option under section 115BAA to a
later assessment year, after set off of the losses and depreciation so
accumulated.
Particulars Section 115BAB Section 115BAA
(9) Failure to On failure to satisfy the conditions On failure to satisfy the
satisfy mentioned in point no. (7) and (8) above conditions mentioned in point no.
conditions in any P.Y., the option exercised would (8) above in any P.Y., the option
be invalid in respect of the assessment exercised would be invalid in
year relevant to that previous year and respect of the assessment year
subsequent assessment years; relevant to that previous year
Consequently, the other provisions of and subsequent assessment
the Act would apply to the person as if years;
the option had not been exercised for Consequently, the other
the assessment year relevant to that provisions of the Act would apply
previous year and subsequent to the person as if the option had
assessment years. not been exercised for the
Note – Where option exercised under assessment year relevant to that
section 115BAB is rendered invalid due previous year and subsequent
to violation of conditions stipulated in assessment years.
point no.7 [(iv) to (vi)] above, such
person may exercise option under
section 115BAA.
Particulars Section 115BAB Section 115BAA
(10) Availability Since it is a new company, there Brought forward MAT credit
of set-off of would be no brought forward MAT cannot be set-off against
MAT credit credit income u/s 115BAA.
brought Note - If a company has b/f
forward from MAT credit, it can first exhaust
earlier years the MAT credit, and thereafter
opt for section 115BAA in a
subsequent previous year.
Particulars Section 115BAB Section 115BAA
(11) Adjustments If the Assessing Officer opines that the No such requirement to make
for course of business between the any adjustment
transactions company and any other person having
with persons close connection therewith is so
having close arranged that the business transacted
connection between them produces more than the
ordinary profits to the company, he is

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 12.14 DIRECT TAX LAWS

empowered to take into account the

amount of profits as may be
reasonably deemed to have been
derived therefrom, while computing
profits and gains of such company.
In case the arrangement referred
above involves a specified domestic
transaction referred to in section
92BA, then, the amount of profits from
such transaction would be determined
by considering the arm’s length price
(ALP).
The amount, being profits in excess
of the amount of the profits
determined by the Assessing
Officer, shall be deemed to be the
income of the person.
The income-tax on the income so
deemed shall be subject to tax
@ 34.32% (i.e., tax @ 30% +
surcharge @10% +HEC @ 4%).
Note – The scope of “specified
domestic transaction” referred to in
section 92BA has been expanded to
include within its ambit, any business
transacted between such persons with
close connection, where one such
person is a company claiming benefit
under section 115BAB.
Particulars Section 115BAB Section 115BAA
(12) Exercise of The beneficial provisions of this The beneficial provisions of this
option by the section would apply only if option is section would apply if option is
company exercised in the prescribed manner on exercised in the prescribed
within the or before the due date u/s 139(1) for manner on or before the due
prescribed furnishing the first of the returns of date u/s 139(1) for furnishing
time income for any previous year the return of income for any
relevant to assessment year or any previous year relevant to
subsequent assessment year. assessment year or any
Such option, once exercised, would subsequent A.Y.
apply to subsequent assessment years. Such option, once exercised,
Further, once the option has been would apply to subsequent
exercised for any previous year, it assessment years.

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 ASSESSMENT OF VARIOUS ENTITIES 12.15

cannot be subsequently withdrawn Further, once the option has

for the same or any other previous year. been exercised for any
Notes – (1) The option has to be previous year, it cannot be
exercised at the time of furnishing the subsequently withdrawn for
first of the returns of income for any the same or any other previous
previous year. If a person fails to so year.
exercise such option, it cannot be Note – The option can be
exercised thereafter for any exercised even in a later year,
subsequent previous year. but once exercised, cannot be
(2) In case of amalgamation, the withdrawn subsequently.
option exercised u/s 115BAB shall Further, where the person
remain valid in the case of the exercises option under section
amalgamated company only and if the 115BAA, the option under
conditions mentioned in point no. (7) section 115BA may be
and (8) are continued to be satisfied withdrawn.
by such company.
Note - For the purpose of point no.7(iv) in column (3) of the above table in relation to a company
exercising option under section 115BAB, any machinery or plant which was used outside India by
any other person shall not be regarded as machinery or plant previously used for any purpose, if all
the following conditions are fulfilled, namely:—

(a) such machinery or plant was not, at any time previous to the date of the installation, used in
India;
(b) such machinery or plant is imported into India from any country outside India;
(c) no deduction on account of depreciation in respect of such machinery or plant has been
allowed or is allowable under the provisions of the Income-tax Act, 1961 in computing the
total income of any person for any period prior to the date of installation of the machinery or
plant by the person.
Further, where in the case of a person, any machinery or plant or any part thereof previously used
for any purpose is put to use by the company and the total value of the machinery or plant or part
so transferred does not exceed 20% of the total value of the machinery or plant used by the company,
then, the condition specified that the company does not use any machinery or plant previously used
for any purpose would be deemed to have been complied with.
(4) Concessional rate of tax on dividends received by Indian companies from
specified foreign companies [Section 115BBD]
(i) Concessional rate - Dividends received by Indian companies from specified foreign
companies to be subject to a concessional rate of 15% (plus surcharge, if applicable, and
health and education cess) (as against the general rate of 30% applicable to Indian
companies).

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 12.16 DIRECT TAX LAWS

(ii) No expenditure is allowed - This rate of 15% would be applied on gross dividend, in the
sense, that no expenditure would be allowable in respect of such dividend.
(iii) Meaning of specified foreign company - Specified foreign company means a foreign
company in which the Indian company holds 26% or more in nominal value of the equity share
capital of the company. Therefore, this concessional rate would not be applicable in respect
of dividend received from a foreign company in which the holding of the Indian company is
less than 26% of the nominal value of the equity share capital.
(5) Minimum Alternate Tax on companies [Section 115JB]
(i) Applicability of MAT
As per section 115JB(1), in case of company (domestic or foreign), if the income-tax payable
on the total income computed under the Income-tax Act, 1961 is less than, 15% of its book
profit, such book profit shall be deemed to be the total income of the assessee and the tax
payable by the assessee on such total income shall be the amount of income-tax at the rate
of 15% (add surcharge, if applicable, i.e., 7% for domestic companies and 2% for foreign
companies, where the total income exceeds ` 1 crore but does not exceed ` 10 crore, and
12% for domestic companies and 5% for foreign companies where the total income exceeds
` 10 crore). Further, health and education cess @ 4% shall be added on the aggregate of
income-tax and surcharge.
(ii) Maintenance of statement of profit and loss [Section 115JB(2)]
(a) Every company other than a company referred to in section 115JB(2)(b) shall for the
purpose of this section, prepare its statement of profit and loss for the relevant
previous year in accordance with the provisions of Schedule III to the Companies
Act, 2013 [Section 115JB(2)(a)].
(b) Insurance companies, banking companies, companies engaged in generation or
supply of electricity or any other class of company for which a form of financial
statement has been specified in or under the Act governing such class of company,
shall for the purposes of this section, prepare its statement of profit and loss for the
relevant previous year in accordance with the provisions of the Act governing such
company [Section 115JB(2)(b)].
(c) The section also specifies that the statement of profit and loss for the relevant
previous year has to be drawn in accordance with Schedule III to the Companies
Act, 2013. Further, while preparing the annual accounts-
(i) the accounting policies,
(ii) the accounting standards followed for preparing such accounts, including
statement of profit and loss
(iii) the method and rates for calculating depreciation

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 ASSESSMENT OF VARIOUS ENTITIES 12.17

shall be the same as have been adopted for the purpose of preparing such accounts
including statement of profit and loss and laid before the company at its annual
general meeting.
(d) Where the financial year adopted by the company under the Companies Act, 2013
is different from the previous year under the Income-tax Act, 1961, the accounting
policies, accounting standards and methods and rates adopted for calculating
depreciation shall correspond to the accounting policies followed for preparing such
accounts including statement of profit and loss for the financial year.
(iii) Computation of book profit [Explanation 1 below section 115JB(2)]
For computing the book profit, the profit shall be increased by the following amounts, if the
amount referred in (a) to (i) is debited to the statement of profit and loss
(a) Income-tax: Income-tax paid or payable, and the provision therefor;
[It may be noted that income-tax includes –
(1) interest;
(2) surcharge;
(3) health and education cess (Explanation 2 to section 115JB)].
(b) Amount carried to Reserves: Amount carried to any reserves, by whatever name called;
(c) Provisions: Amounts set aside to provisions for meeting liabilities other than
ascertained liabilities;
(d) Provisions for losses of subsidiary companies: Amount of provision for losses of
subsidiary companies;
(e) Dividends: Amount of dividends paid or proposed; or
(f) Expenditure relatable to exempt income: Amount of expenditure relatable to any
income to which section 10 or sections 11 or 12 apply;
(fa) Expenditure relatable to share of an assessee in the income of an AOP or BOI:
Amount of expenditure relatable to income, being share of the assessee in the
income of an AOPs or BOIs, on which no income-tax is payable in accordance with
the provisions of section 86;
(fb) Expenditure relatable to income accruing to foreign company: The amount or
amounts of expenditure relatable to income accruing or arising to an assessee, being
a foreign company, from –
(A) the capital gains arising on transactions in securities; or
(B) the interest, dividend, royalty, or fees for technical services chargeable to tax
at the rate or rates specified in Chapter XII i.e., section 115A

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 12.18 DIRECT TAX LAWS

if the income-tax payable thereon in accordance with the provisions of the Act, other
than the provisions of this Chapter, is at a rate less than 15%;
(fc) Notional loss on the units of business trust: The amount representing-
- notional loss on transfer of a capital asset, being share of a special purpose
vehicle to a business trust in exchange of units allotted by that trust; or
- notional loss resulting from any change in carrying amount of said units or
- loss on transfer of such units
(fd) Amount of expenditure relatable to income referred under section 115BBF: The
amount or amounts of expenditure relatable to income by way of royalty in respect
of patent chargeable to tax under section 115BBF;
(g) Depreciation: The amount of depreciation;
(h) Deferred tax: The amount of deferred tax and provision therefore;
(i) Provision for diminution in the value of any asset: The amount set aside as
provision for diminution in the value of any asset.
(j) Amount standing in the revaluation reserve: The profit shall also be increased by
the amount standing in revaluation reserve relating to the revalued asset on the
retirement or disposal of such asset, in case the same is not credited to the profit
and loss account.
(k) Amount of gain arise on transfer units of business trust: When units of business
trust are actually transferred, the amount of gain on such transfer has to be added to
compute the book profit, since notional gains on transfer of share of a special purpose
vehicle to a business trust in exchange for the units of the business trust and notional
gains resulting from change in carrying amount of such units would have been
deducted to compute book profit. The amount of gain on such transfer, if any, credited
to statement of profit and loss in the year of transfer will also be reduced.
In a case where the shares are carried at cost: The amount of gain has to be
computed by taking into consideration the cost of shares exchanged with the units of
the business trust.
In a case where the shares are carried at a value other than the cost through
statement of profit and loss: The carrying amount of shares at the time of exchange
would be taken into consideration for computing the amount of gain.
The profit shall be reduced by the following amounts:
(i) Amount withdrawn from any reserve: The amount withdrawn from any reserve or
provision, if any such amount is credited to the statement of profit and loss.

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 ASSESSMENT OF VARIOUS ENTITIES 12.19

However, the amount withdrawn from reserves/provisions shall not be reduced from
the book profit unless the book profit of that year has been increased by those
reserves/ provisions;
(ii) Exempt income: Amount of income to which section 10 or sections 11 or 12 apply,
if such amount is credited to the statement of profit and loss;
(iia) Depreciation: The amount of depreciation debited to the statement of profit and loss
(excluding the claim of depreciation on account of revaluation of assets);
(iib) Amount withdrawn from the revaluation reserve: The amount withdrawn from the
revaluation reserve and credited to the statement of profit and loss, to the extent it
does not exceed the amount of depreciation on revaluation of assets;
(iic) Share of the assessee in the income of an AOPs or BOIs: The amount of income,
being the share of the assessee in the income of an AOPs or BOIs, on which no
income-tax is payable in accordance with the provisions of section 86, if any such
amount is credited to the statement of profit and loss;
(iid) Income accruing to foreign company: The amount of income accruing or arising to
an assessee, being a foreign company, from, -
(A) the capital gains arising on transactions in securities; or
(B) the interest, dividend, royalty, or fees for technical services chargeable to tax
at the rate or rates specified in Chapter XII i.e., section 115A,
if such income is credited to the statement of profit and loss and the income-tax
payable thereon in accordance with the provisions of the Income-tax Act, 1961
(including DTAAs), other than the provisions of Chapter XII-B, is at a rate less than
15%.
For example, in case of foreign companies, dividend is taxable @20% as per
section 115A. The adjustment in respect of dividend received by a foreign
company on its investment in India and expenditure relatable thereto is
required to be made for the purposes of calculation of book profit in case the
tax payable on such dividend income is less than 15% on account of
concessional tax rate provided in the applicable Double Taxation Avoidance
Agreement (DTAA).
(iie) Notional gain on the units of business trust: The amount representing –
(A) the notional gain on transfer of a capital asset, being a share of a SPV to a
business trust in exchange of units allotted by the business trust;
(B) notional gain resulting from any change in carrying amount of said units;

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 12.20 DIRECT TAX LAWS

(C) gain on transfer of such units,

if any, credited to statement of profit and loss;
(iif) Loss on transfer of units: The amount of loss on transfer of units acquired in
exchange of shares of SPV computed by taking into account the cost of the shares
exchanged with the units, where the shares are carried at cost. In case shares are
carried at a value other than cost through statement of profit and loss, the amount
of loss on transfer of such units has to be computed by taking into account the
carrying amount of the shares at the time of exchange;
(iig) Income by way of royalty taxable under section 115BBF: The amount of income
by way of royalty in respect of patent chargeable to tax under section 115BBF;
(iih) Brought forward loss and unabsorbed depreciation: Aggregate amount of
unabsorbed depreciation and loss brought forward in case of a –
(A) company, and its subsidiary and the subsidiary of such subsidiary, where, the
Tribunal, on an application moved by the Central Government under section
241 of the Companies Act, 2013 has suspended the Board of Directors of such
company and has appointed new directors who are nominated by the Central
Government under section 242 of the said Act;
(B) company against whom an application for corporate insolvency resolution
process has been admitted by the Adjudicating Authority under section 7 or
section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016.
It may be noted that loss does not include depreciation.
A company would be a subsidiary of another company if such other company holds
more than half in the nominal value of equity share capital of the company.
(iii) Brought forward loss or unabsorbed depreciation in case of other companies:
Amount of brought forward loss or unabsorbed depreciation, whichever is less, in
case of other companies as per books of account.
The loss shall not include depreciation; if either the figure of brought forward loss or
unabsorbed depreciation is “NIL”, no deduction will be allowed from the book profit
of the relevant year;
(vii) Profits of sick industrial company: The amount of profits of a sick industrial
company (BIFR company) commencing from the previous year in which the company
became sick and ending with the assessment year during which the entire net worth
of such company becomes equal to or exceeds the accumulated losses. For this
purpose, “net worth” shall have the same meaning as assigned under section 3(1)(ga)

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 ASSESSMENT OF VARIOUS ENTITIES 12.21

of the Sick Industrial Companies (Special Provisions) Act, 1985.

(viii) Deferred tax: The amount of deferred tax, if any such amount is credited to the
statement of profit and loss.
(iv) Computation of Book Profit for Ind AS compliant companies:
The Central Government has notified the Indian Accounting Standards (Ind AS) which are
converged with International Financial Reporting Standards (IFRS) and prescribed the
Companies (Indian Accounting Standards) Rules, 2015 which lay down the roadmap for
implementation of these Ind AS.
As the book profit based on Ind AS compliant financial statements is likely to be different from
the book profit based on existing Indian GAAP, sub-sections (2A), (2B) and (2C) of section
115JB provides the framework for computation of book profit for Ind AS compliant companies
in the year of adoption and thereafter.

Adjustment in the book profit due to adoption of Ind AS

Annual Adjustment [Section Transitional adjustments at the

115JB(2A) & (2B)] convergence date [Section 115JB(2C)]

I MAT on Ind AS compliant financial statement [Section 115JB(2A)]

In case of a company whose financial statements are drawn up in compliance with
the Indian Accounting Standards (Ind ASs) specified in Annexure to the Companies
(Indian Accounting Standards) Rules, 2015, the following additional adjustments
shall be done to the book profit as computed above in point no. (iv) as per section
115JB(2) read with Explanation 1-
(a) increased by all amounts credited to other comprehensive income in the
statement of profit and loss under the head "Items that will not be re-classified
to profit or loss";
(b) decreased by all amounts debited to other comprehensive income in the
statement of profit and loss under the head "Items that will not be re-classified
to profit or loss";
However, no adjustment shall be made where the amount credited or debited to
other comprehensive income under the head "Items that will not be re-classified to
profit or loss", in respect of —
(i) Revaluation surplus for assets in accordance with the Indian Accounting
Standards 16 and Indian Accounting Standards 38; or

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 12.22 DIRECT TAX LAWS

(ii) Gains or losses from investments in equity instruments designated at fair value
through other comprehensive income in accordance with the Indian Accounting
Standards 109. [First proviso to section 115JB(2A)]
However, the book profit of the previous year, in which such asset or investment is
retired, disposed, realised or otherwise transferred, shall be increased or decreased,
as the case may be, by the amount or the aggregate of the amounts as referred to
in the first proviso for the previous year or any of the preceding previous years and
relatable to such asset or investment [Second proviso to section 115JB(2A)]
The other comprehensive income (OCI) includes certain items that will permanently
be recorded in reserves and hence, never be reclassified to the statement of profit
and loss included in the computation of book profits. These items shall be included
in book profit for MAT purposes at the point of time as specified below-

Sl. No Items Point of time

1 Changes in revaluation surplus To be included in book profits at the
of Property, Plant or Equipment time of realization/ disposal/
(PPE) and Intangible assets retirement or otherwise transferred
(Ind AS 16 and Ind AS 38)
2 Gains and losses from To be included in book profits at the
investments in equity time of realization/ disposal/
instruments designated at fair retirement or otherwise transferred
value through other
comprehensive income (Ind AS
109)
3 Remeasurements of defined To be included in book profits every
benefit plans (Ind AS 19) year as the re-measurements gains
and losses arise
4 Any other item To be included in book profits every
year as the gains and losses arise

(c) Increased by amounts or aggregate of the amounts debited to the statement of profit and
loss on distribution of non-cash assets to shareholders in a demerger in accordance with
Appendix A of the Indian Accounting Standards 10;
(d) Decreased by all amounts or aggregate of the amounts credited to the statement
of profit and loss on distribution of non-cash assets to shareholders in a demerger
in accordance with Appendix A of the Indian Accounting Standards 10;
Appendix A of Ind AS 10 provides that any distributions of non-cash assets to
shareholders in a demerger shall be accounted for at fair value. The difference
between the carrying value of the assets and the fair value is recorded in the
statement of profit and loss.

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 ASSESSMENT OF VARIOUS ENTITIES 12.23

Correspondingly, the reserves are debited at fair value to record the distribution
as a 'deemed dividend' to the shareholders. As there is a corresponding adjustment
in retained earnings, this difference arising on demerger shall be excluded from
the book profits.
II Sub-section (2B) states that in demerger, in the case of a resulting company, the
property and the liabilities of the undertaking or undertakings being received by it
are recorded at values different from values appearing in the books of account of
the demerged company immediately before the demerger, any change in such value
shall be ignored for the purpose of computation of book profit of the resulting
company under this section.
III MAT on first time adoption [Section 115JB(2C)]:
In case of Ind AS compliant company, the book profit of the year of convergence and
each of the following four previous years, shall be further increased or decreased,
as the case may be, by one fifth of the transition amount.
In the first year of adoption of Ind AS, the companies would prepare Ind AS financial
statement for reporting year with a comparative financial statement for immediately
preceding year. As per Ind AS 101, a company would make all Ind AS adjustments on
the opening date of the comparative financial year. The entity is also required to
present an equity reconciliation between previous Indian GAAP and Ind AS amounts,
both on the opening date of preceding year as well as on the closing date of the
preceding year.
For the purposes of computation of book profits of the year of adoption and for
adjustments, the amounts adjusted as on the opening date of the first year of adoption
shall be considered.
Example 1: Companies which adopt IndAS with effect from 1 April 2021 are required
to prepare their financial statements for the year 2021-22 as per the requirements of
Ind AS. Such companies are also required to prepare an opening balance sheet as of
1st April 2020 and restate the financial statements for the comparative period 2020-21.
In such a case, the first- time adoption adjustments as of 31 March 2021 shall be
considered for computation of MAT liability for previous year 2021-22 (Assessment
year 2022-23) and thereafter.
Further, in this case, the five years period shall be previous years 2021-22, 2022-23,
2023-24, 2024-25 and 2025-26.
However, the book profit of the previous year in which the asset or investment
referred to in sub clauses (B) to (E) of clause (iii) of the Explanation is retired,
disposed, realised or otherwise transferred shall be increased or decreased, as the
case may be, by the amount of the aggregate of the amounts referred to in the said

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 12.24 DIRECT TAX LAWS

sub-clause relatable to such asset or investment: [First proviso to section

115JB(2C)]
Further, the book profit of the previous year in which the foreign operation referred
to in sub clause (F) of clause (iii) of the Explanation is disposed or otherwise
transferred, shall be increased or decreased, as the case may be, by the amount of
the aggregate of the amounts referred to in the said sub-clause relatable to such
foreign operations. [Second proviso to sub-section (2C)]
Meaning of certain terms [Explanation to Section 115JB(2C)]
Clause Term Meaning
(i) Year of the previous year within which the convergence date
convergence falls.
(ii) Convergence the first day of the first Indian Accounting Standards
date reporting period as defined in the Ind AS 101.
(iii) Transition the amount or aggregate of the amounts adjusted in
amount other equity (excluding capital reserve and securities
premium reserve) on convergence date but not
including the following:
(A) Amount or aggregate of the amounts adjusted in
the other comprehensive income on the
convergence date which shall be subsequently
re-classified to the profit and loss;
(B) Revaluation surplus for assets in accordance with
the Indian Accounting Standards 16 and Indian
Accounting Standards 38 adjusted on the
convergence date;
(C) Gains or losses from investments in equity
instruments designated at fair value through other
comprehensive income in accordance with the
Indian Accounting Standards 109 adjusted on the
convergence date;
(D) Adjustments relating to items of property, plant
and equipment and intangible assets recorded at
fair value as deemed cost in accordance with
paragraphs D5 and D7 of the Indian Accounting
Standards 101 on the convergence date;
(E) Adjustments relating to investments in
subsidiaries, joint ventures and associates
recorded at fair value as deemed cost in
accordance with paragraph D15 of the Indian
Accounting Standards 101 on the convergence
date; and

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 ASSESSMENT OF VARIOUS ENTITIES 12.25

(F) Adjustments relating to cumulative translation

differences of a foreign operation in accordance
with paragraph D13 of the Indian Accounting
Standards 101 on the convergence date. [clause
(iii)]

Transitional adjustments: Analysis

(i) The adjustments arising on account of transition to Ind AS from existing Indian
GAAP is required to be recorded directly in Other Equity at the date of transition
to Ind AS. These adjustments have to be made in the following manner:
(a) The book profit of the year of convergence and the following four previous
years shall be increased or decreased with the transitional adjustments
recorded directly in Other Equity excluding capital reserve and securities
premium reserve and excluding the amounts referred in (A) to (F) (in the
definition of Transition Amount), on the convergence date.
(b) Those adjustments recorded in other comprehensive income referred in
(A) above (in the definition of Transition Amount) and which would
subsequently be reclassified to the profit and loss, shall be included in
book profits in the year in which these are reclassified to the profit and
loss, therefore these amounts are excluded from the transition amount.
(c) Those adjustments recorded in other comprehensive income referred in
(B) and (C) (in the definition of Transition Amount) above and which
would never be subsequently reclassified to the profit and loss shall be
included in book profits as specified hereunder:
Sl. Items Point of time
No
1 Changes in revaluation surplus To be included in book profits at
of Property, Plant or the time of realisation/ disposal/
Equipment (PPE) and retirement or otherwise transferred
Intangible assets (Ind AS 16
and Ind AS38)
2 Gains and losses from To be included in book profits at
investments in equity the time of realisation/ disposal/
instruments designated at fair retirement or otherwise transferred
value through other
comprehensive income (Ind
AS 109)
3 Remeasurements of defined To be included in book profits
benefit plans (Ind AS 19) every year as the re-
measurements gains and losses
arise

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 12.26 DIRECT TAX LAWS

4 Any other item To be included in book profits

every year as the gains and losses
arise
(d) The other adjustments referred in (D), (E) and (F) (in the definition of
Transition Amount) above shall be made in the following manner:
(I) Property, Plant and Equipment (PPE) and intangible assets at
fair value as deemed cost [referred in (D)(in the definition of
Transition Amount) above]
An entity may use fair value in its opening Ind AS Balance Sheet
as deemed cost for an item of PPE or an intangible asset as
mentioned in paragraphs D5 and D7 of Ind AS 101. In such cases
the treatment shall be as under—
• The existing provisions for computation of book profits under
section 115JB of the Act provide that in case of revaluation of
assets, any impact on account of such revaluation shall be
ignored for the purposes of computation of book profits.
Further, the adjustments in retained earnings on first time
adoption with respect to items of PPE and Intangible assets
shall be ignored for the purposes of computation of book
profits.
• Depreciation shall be computed ignoring the amount of
aforesaid retained earnings adjustment.
Similarly, gain/loss on realization/ disposal/ retirement of such
assets shall be computed ignoring the aforesaid retained earnings
adjustment.
II. Investments in subsidiaries, joint ventures and associates at
fair value as deemed cost [referred in (E)(in the definition of
Transition Amount) above]
An entity may use fair value in its opening Ind AS Balance Sheet
as deemed cost for investment in a subsidiary, joint venture or
associate in its separate financial statements as mentioned in
paragraph D15 of Ind AS 101. In such cases retained earnings
adjustment shall be included in the book profit at the time of
realisation of such investment.
III. Cumulative translation differences [referred in (F) (in the
definition of Transition Amount) above]
• An entity may elect a choice whereby the cumulative
translation differences for all foreign operations are deemed to
be zero at the date of transition to Ind AS. Further, the gain or
loss on a subsequent disposal of any foreign operation shall
exclude translation differences that arose before the date of
transition to Ind AS and shall include only the translation

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 ASSESSMENT OF VARIOUS ENTITIES 12.27

differences after the date of transition.

• In such cases, to ensure that such Cumulative translation
differences on the date of transition which have been
transferred to retained earnings, are taken into account, these
shall be included in the book profits at the time of disposal of
foreign operations as mentioned in paragraph 48 of Ind AS 21.
(ii) All other adjustments to retained earnings (recorded as other equity) at the
time of transition (including for example, Decommissioning Liability, Asset
retirement obligations, Foreign exchange capitalisation/decapitalization,
Borrowing costs adjustments etc.) shall be included in book profits, equally
over a period of five years starting from the year of first time adoption of
Ind AS.
(iii) Section 115JB of the Act already provides for adjustments on account of
deferred tax and its provision. Any deferred tax adjustments recorded in
Reserves and Surplus on account of transition to Ind AS shall also be ignored.

(vi) Clarifications on computation of book profit for the purposes of levy of Minimum
Alternate Tax (MAT) under section 115JB of the Income-tax Act, 1961 for Ind AS
compliant companies [Circular No. 24/2017 6 dated 25.07.2017]
After amendment in section 115JB for computation of book profit for the purposes of levy of
Minimum Alternate Tax (MAT) for Indian Accounting Standards (Ind AS) compliant
companies, CBDT received representations from various stakeholders seeking clarifications
on certain issues arising therefrom.
Accordingly, the CBDT has vide this circular, clarified these issues by way of the following
FAQs:
Question 1: The profit for the period may include Marked to market (MTM) gains/ losses on
account of fair value adjustments on various financial instruments recognised through profit
or loss (FVTPL). A situation may arise where the losses on account of fair value adjustments
could be added back in view of clause (i) of Explanation 1 to section 115JB(2) of the Act.
Whether the losses on such instruments require any adjustment for computing book profits
for the purposes of MAT?
Answer: Since MTM gains recognised through profit or loss on FVTPL classified financial
instruments are included in book profits for MAT computation, it is clarified that MTM losses
on such instruments recognised through profit or loss shall not require any adjustments as
provided under clause (i) of Explanation 1 to section 115JB(2) of the Act. However, in case
of provision for diminution/ impairment in value of assets other than FVTPL financial

6 The year in the FAQs have been modified considering that the transition to Ind AS is taking place
in the P.Y. 2021-22.

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instruments, the existing adjustment of clause (i) of Explanation 1 to section 115JB (2) of the
Act shall apply.
It is further clarified that for financial instruments where gains and losses are recognised
through Other Comprehensive income (OCI), the amended provisions of MAT shall continue
to apply.
Question 2: For the purposes of section 115JB of the Act, what shall be the starting point for
computing Book profits for Ind AS compliant companies? Whether Profit before other
comprehensive income [Item number XIII in Part 2 (Statement of Profit and Loss) of Division
II of Schedule III to the Companies Act 2013] or Total Comprehensive Income (including other
comprehensive income) [Item number XV in Part 2 (Statement of Profit and Loss) of Division
II of Schedule III to the Companies Act 2013] shall be the starting point?
Answer: Starting point for computing Book profits for Ind AS compliant companies shall be
Profit before other comprehensive income [Item number XIII in Part 2 (Statement of Profit
and Loss) of Division II of Schedule III to the Companies Act 2013].
Question 3: As per Explanation to Section 115JB(2C) of the Act, the convergence date is
defined as the first day of the first Indian Accounting standards reporting period as defined in
Ind AS 101. The Memorandum explaining the provisions of the Finance Bill 2017 mentions
that the adjustment as on the last day of the comparative period is to be considered. It may
be clarified as to what would be the appropriate manner for computation of transition amount
on convergence date, 1st April i.e., at the start of the day or at the end of the day?
Answer: In the first year of adoption of Ind AS, the companies would prepare Ind AS financial
statement for reporting year with a comparative financial statement for immediately preceding
year. As per Ind AS 101, a company would make all Ind AS adjustments on the opening date
of the comparative financial year. The entity is also required to present an equity
reconciliation between previous Indian GAAP and Ind AS amounts, both on the opening date
of preceding year as well as on the closing date of the preceding year. The amounts as on
start of the opening date of the first year of adoption should be considered for the purposes
of computation of transition amount.
For example, companies which adopt Ind AS with effect from 1st day of April 2021 are
required to prepare their financial statements for the year 2021-22 as per requirements of Ind
AS. Such companies are also required to prepare an opening balance sheet as of 1st day of
April 2020 and restate the financial statements for the comparative period 2020-21. In such
a case, the first time adoption adjustments as of 31st day of March 2021 should be considered
[i.e. the start of business on 1st day of April 2021 (or, equivalently, close of business on 31st
day of March 2021)] for computation of MAT liability for previous year 2021-22 (Assessment
year 2022-23) and thereafter.
Question 4: As per Indian GAAP, proposed dividend was required to be recognized in the
financial statements for the year for which it pertained to even though these were declared in

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 ASSESSMENT OF VARIOUS ENTITIES 12.29

the subsequent year. Section 115JB of the Act already provides for adjustments for dividend
for computation of book profit. As per Ind AS, the amount of proposed dividend is required to
be recognized in the year in which it has been declared rather than the year for which it
pertains to. Accordingly, on transition to Ind AS, the amount of proposed dividend for FY
2020-21 which was recognized in profit and loss account in FY 2020-21 is required to be
reversed and credited to Retained Earnings. For the computation of MAT, whether these
balances would form part of the transition amount and thus be adjusted over a period of 5
years?
Answer: Adjustment of proposed dividend shall not form part of the transition amount.
Question 5: Under Ind AS, adjustments on the transition date may have a corresponding
impact on deferred taxes. Should the deferred taxes on such amounts be considered for the
purpose of transition amount?
Answer: Any deferred taxes adjustments recorded on the transition date shall be ignored for
the purpose of computing Transition Amount.
Question 6: As mentioned in Question No.1, clause (i) of Explanation 1 to Section 115JB(2)
of the Act provides for adjustments for computation of book profit for the amount or amounts
set aside as provision for diminution in the value of any asset. Convergence date adjustments
may include adjustment for Provision for Bad and Doubtful Debts (Expected Credit Loss
adjustment) at the time of transition. Whether these adjustments would form part of the
transition amount referred to in section 115JB(2C) of the Act?
Answer: Adjustments relating to provision for diminution in the value of any assets other than
the ones mentioned in Question Number 1 above, shall not be considered for the purpose of
computation of the Transition Amount. Therefore, adjustments relating to provision for
doubtful debts shall not be considered for the purpose of computation of the transition
amount.
Question 7: Under Section 115JB of the Act, transition amount has been defined as the
amount or the aggregate of the amounts adjusted in the ‘Other Equity’ (excluding capital
reserve and securities premium reserve) on the convergence date. Whether changes in
share application money on reclassification to ‘Other Equity’ would form part of the
Transition Amount?
Answer: Share application money pending allotment which is reclassified to Other Equity
on transition date shall not be considered for the purpose of computing Transition Amount.
Question 8: Under Ind AS, Investments in preference share is considered to be a liability
and the corresponding dividend expense is debited to Profit and loss account as interest
cost. Should such interest expenses on preference shares be deducted for the purpose of
MAT computation?

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Answer: For the purpose of computation of MAT, profit/Transition Amount shall be

increased by dividend/interest on preference share (including dividend distribution taxes)
whether presented as dividend or interest.
Question 9: How do we account for items such as equity component, if any, of financial
instruments like Non-Convertible debentures (NCDs), Interest free loan etc. included in
other equity as per Ind AS for the computation of transition amount under MAT?
Answer: Items such as equity component of financial instruments like NCD’s, Interest free
loan etc. would be included in the Transition Amount.
Question 10: Where revaluation/fair value adjustments have been made to items of
Property, Plant & Equipment (PPE) under Ind AS, as per section 115JB of the Act, the book
profit of the previous year in which the items of PPE are retired, disposed or realised shall
be increased or decreased, as the case may be, by the revaluation amount relatable to
such items of PPE. Whether the revaluation amount to be considered for adjustment should
be the gross amount of the revaluation or the amount after adjustment of the depreciation
on the revaluation amount?
Answer: The book profit of the previous year in which the items of PPE are retired,
disposed, realised or otherwise transferred shall be increased or decreased, as the case
may be, by the revaluation amount after adjustment of the depreciation on the revaluation
amount relatable to such asset. This has been explained by an illustration as under:
Particulars Erstwhile Ind-AS Fair Value/
Indian (considering Revaluation
GAAP fair Adjustments and
value/revaluati corresponding
on adjustment depreciation
on PPE)
WDV/Deemed Cost as on 1 April 2020 100 1000 900
Depreciation @10% for F.Y. 2020-21 10 100 90
WDV as on 1 April 2021 90 900 810
Depreciation @10% for F.Y. 2021-22 9 90 81
WDV as on 1 April 2022 81 810 729*
Sale value as on 1 April 2022 900 900
Profit on sale credited to P&L 819 90
Adjustment for MAT - revaluation amount 0 729*
after adjustment of the depreciation
Profit on sale to be considered for MAT 819 819

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 ASSESSMENT OF VARIOUS ENTITIES 12.31

Question 11: How should adjustments for service concession arrangements be treated for
the purpose of computation of book profit under MAT?
Answer: Adjustments on account of Service Concession arrangements would be included in
the Transition Amount and also on an ongoing basis.
Question 12: Existing clause (iii) of explanation to section 115JB(2) of the Act provides for
deduction of lower of the amount of loss brought forward or unabsorbed depreciation as per
books of account for computation of book profits. In case where, on adjustment of transition
amount, the losses as per books of account gets wiped off, whether deduction for the said
amount would be available for assessment year 2022-23 onwards?
Answer: For assessment year 2022-23, the deduction of lower of depreciation or losses shall
be allowed based on the position as on 31 March 2021. For the subsequent periods, the
position as per books of account drawn as per Ind AS shall be considered for computing lower
of loss brought forward or unabsorbed depreciation.
Question 13: How Capital Reserves or Securities Premium existing as per old Indian GAAP
reclassified to Retained Earnings/ Other Reserves on Convergence date be treated for MAT
purpose.
Answer: The Capital Reserves or Securities Premium existing as on the convergence date as per
the erstwhile Indian GAAP which are reclassified to Retained Earnings/ Other Reserves under Ind
AS and vice versa, shall not be considered for the purposes of Transition Amount.
It is further clarified, that even after such reclassifications, the amount of revaluation reserve shall
continue to be considered as revaluation reserve for the purposes of computation of book profit
and shall also include transfer to any other reserves by whatever name called or capitalised.
Question 14: Companies which follow accounting year other than March 2022 ending for
Companies Act purposes and are required to transition to Ind AS will have to prepare financial
statements for MAT purposes for FY 2021-22 partly under Indian GAAP and partly under Ind
AS. How should such companies compute MAT on transition to Ind AS?
Answer: In view of second proviso to section 115JB(2) of the Act, companies will be required
to follow Indian GAAP for the pre-convergence period and Ind AS for the balance period.
For example, a Company following December ending will be required to prepare, accounts for
MAT purposes under Indian GAAP for 9 months upto December 2021 and under Ind AS for 3
months thereafter. The transition amount will be calculated with reference to 1st January 2022.
(vii) Adjustment in tax payable on book profit u/s 115JB(1) on account of Advance Pricing
Agreement (APA) under section 92CC or secondary adjustment under section 92CE
[Section 115JB(2D)]: Where there is an increase in book profit of the previous year due to
inclusion of past year(s) income in books of account on account of
(1) an APA entered into by the assessee under section 92CC; or

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(2) secondary adjustment, required to be made under section 92CE, and

the assessee makes an application to the Assessing Officer in this behalf, the Assessing
Officer shall recompute
- the book profit of the past year or years and
- tax payable, if any, by the assessee during the previous year under section 115JB(1),
in such manner as may be prescribed.
In such case, the provisions of section 154 [i.e., rectification of mistake apparent from record]
would apply; and the period of four years would be reckoned from the end of the financial
year in which the said application is received by the Assessing Officer.
Accordingly, Rule 10RB(1) has been inserted to provide that the tax payable by the assessee
company under section 115JB(1), for the previous year, shall be reduced by the following
amount:

(A-B) – (D-C)
A tax payable by the assessee company under section 115JB(1) on the book profit of
the previous year including the past income. However, where no tax is payable under
section 115JB(1) on book profit of that previous year including past income, the value
of A would be deemed to be zero.
B tax payable by the assessee company under section 115JB(1) on the book profit of
the previous year after reducing the book profit with the past income. However,
where no tax is payable under section 115JB(1) on the resultant figure, the value of
B would be deemed to be zero.
C Aggregate of tax payable by the assessee company under section 115JB(1) on the
book profit of those past year or years to which the past income belongs. However,
where no tax is payable under section 115JB(1) on the book profit of that year or
years, the tax payable for that year or years would be deemed to be zero.
D Aggregate of tax payable by the assessee company under section 115JB(1) on the
book profit of past year or years, referred to in item C, after increasing the book profit
with the relevant past income of such year or years. However, where no tax is
payable under section 115JB(1) on the amount so increased, the tax payable for that
year or years would be deemed to be zero.
It may be noted that if the value of (A-B)-(D-C) in the formula is negative, its value would
be deemed to be zero.
Meaning of Past income means the amount of income of past year or years included
past income in the book profit of the previous year on account of an APA entered into
[Rule by the assessee under section 92CC or on account of secondary
10RB(2)] adjustment required to be made under section 92CE.

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 ASSESSMENT OF VARIOUS ENTITIES 12.33

MAT credit to The tax credit allowed to the assessee under section 115JAA would be
be reduced reduced by the amount which is equal to the amount of reduction that
[Rule has been allowed under Rule 10RB(1).
10RB(3)]

The adjustment in the book profit shall be made only if the assessee has not utilised the credit
of tax paid in any subsequent assessment year under section 115JAA.
The provisions of this sub-section have been inserted w.e.f. A.Y. 2021-22. However, these
provisions would also be applicable for the A.Y. 2020-21 or any earlier assessment year.
However, no interest shall be payable to such assessee on the refund arising on account of
re-computation of book profits of the previous year.
(viii) Compulsory filing of return of income and furnishing of report from Chartered
Accountant
The section also provides that every company to which this section applies shall furnish, a
report from a chartered accountant certifying that the book profit has been computed in
accordance with the provisions of this section, on or before the specified date referred to in
section 44AB (i.e., one month prior to the due date for filing return of income) or in response
to a notice under section 142(1)(i), [Section 115JB(4)].
(ix) Allowability of carry forward of losses
In respect of the relevant previous year, the amounts determined under the provisions of
section 32(2) or section 72(1)(ii) or section 73 or section 74 or section 74A(3), shall be allowed
to be carried forward [Section 115JB(3)].
(x) Applicability of other provisions of the Act
All other provisions of the Act shall apply to every assessee, being a company mentioned in
this section [Section 115JB(5)].
(xi) Non-applicability of MAT [Section 115JB(5A)].
The provisions of MAT u/s 115JB shall not apply
- to any income accruing or arising to a company from life insurance business referred
to in section 115B.
- a company who has exercised the option under section 115BAA or section 115BAB.
(xii) Non-applicability of MAT in respect of certain foreign companies
Explanation 4 to section 115JB with retrospective effect from 01.04.2001 provides for non-
applicability of levy of MAT under section 115JB in the following cases:

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Existence of DTAA with the country of Additional condition to be satisfied

residence of the foreign company for non-applicability of MAT
(i) The foreign company is a resident of a It should not have a permanent
country or a specified territory with which establishment in India in accordance
India has a DTAA under section 90(1) or with the provisions of such Agreement
the Central Government has adopted any
agreement between specified associations
for double taxation relief under section
90A(1)
(ii) The foreign company is a resident of a It is not required to seek registration
country with which India does not have an under any law for the time being in force
agreement of the nature referred to in relating to companies.
clause (i) above

Explanation 4A to section 115JB has been inserted with retrospective effect from 01.04.2001
to clarify that MAT provisions shall not be applicable to an assessee, being a foreign
company, where its total income comprises solely of profits and gains from business referred
to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has
been offered to tax at the presumptive rates specified in these sections.
(xiii) Concessional rate of MAT for unit located in IFSC
In case of a company, being a unit located in International Financial Services Centre and
deriving its income solely in convertible foreign exchange, the minimum alternate tax shall be
chargeable at the rate of 9% instead of 15%. [Section 115JB(7)]
ILLUSTRATION 1
A domestic company, ABC Ltd., furnishes the following particulars in respect of Assessment
Year 2022-23 and seeks your opinion on the application of section 115JB. You are also
required to compute the total income and tax payable.
(1) Profits as per Statement of profit and loss as per the Companies ` 215 Lakhs
Act, 2013
(2) Statement of Profit and Loss includes:
(a) Credits: Dividend income from Indian companies ` 20 Lakhs
Excess realized on sale of land held as investment ` 30 Lakhs
(b) Debits: Depreciation on straight line method basis ` 100 Lakhs
Provision for loss of subsidiary company ` 60 Lakhs
(3) Depreciation allowable as per the Income-tax Rules, 1962 ` 150 Lakhs
(4) Short term capital gains on sale of land mentioned above as ` 40 Lakhs
computed under Income-tax Act, 1961

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 ASSESSMENT OF VARIOUS ENTITIES 12.35

(5) Losses brought forward as per books of account and as per Income-tax Act, 1961:
Business loss ` 50 Lakhs
Unabsorbed depreciation ` 60 Lakhs
You will have to deal with this issue assuming that ABC Ltd. is not required to comply with
the Indian Accounting Standards. Ignore the provisions of section 115BAA.
Note - The turnover of ABC Ltd. for the P.Y. 2019-20 was ` 390 crore.
SOLUTION
In the case of a company, it has been provided that where tax @ 15% of book profit exceeds
tax on total income computed as per normal provisions, the book profit shall be deemed to
be the total income for tax purposes.
It is therefore necessary to compute total income as per Income-tax Act, 1961 as well as book
profits.
I. Computation of Total Income as per the normal provisions of the Income-tax Act,
1961
Particulars ` (in Lakhs)
Net profit as per statement of profit and loss 215
Add:
Depreciation debited to statement of profit and loss 100
Provision for losses of subsidiary company 60 160
375
Less:
Dividend income from Indian companies 20
Excess realized on sale of land (considered separately) 30
Depreciation allowable as per Income-tax Rules, 1962 150 200
Business Income 175
Less: Set-off of brought forward business loss 50
125
Capital gains (Short term capital gains) 40
Income from other sources (Dividend income chargeable to tax 20
in the hands of shareholders)
185
Less: Set-off of unabsorbed depreciation 60
Total Income as per Income-tax Act, 1961 125

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 12.36 DIRECT TAX LAWS

II. Computation of book profit under section 115JB

Particulars (` in Lakhs)
Net profit as per statement of profit and loss 215
Add: Provision for loss of subsidiary 60
Depreciation as per books of account 100
375
Less:
Depreciation as per books of account 100
Business loss which is less than unabsorbed 50 150
depreciation
“Book Profit” 225

III. Computation of Tax liability under the normal provisions of the Income-tax
Act, 1961
Total income as per the Income-tax Act, 1961 is ` 125 lakhs,
Particulars `
Tax payable ` 125 lakhs @25% since the turnover of the company 31,25,000
for the previous year 2019-20 does not exceed ` 400 crore.
Add: Surcharge @ 7% 2,18,750
33,43,750
Add: Health and education cess @4% 1,33,750
Total Tax payable 34,77,500

IV. Computation of Minimum Alternate Tax

Particulars `
Tax @ 15% of book profit of ` 225 lakhs 33,75,000
Add: Surcharge @ 7% 2,36,250
36,11,250
Add: Health and education cess@4% 1,44,450
Minimum Alternate Tax payable 37,55,700

Since 15% of book profit exceeds the tax payable as per normal provisions of the
Income-tax Act, 1961, the book profit of ` 225 lakhs would be deemed to be the total
income and the tax payable on such total income shall be 15% thereof i.e. ` 33,75,000
plus surcharge @7% being ` 2,36,250 plus health and education cess @4% (of tax
and surcharge) being ` 1,44,450. Total tax liability would be ` 37,55,700.

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 ASSESSMENT OF VARIOUS ENTITIES 12.37

ILLUSTRATION 2
Maitri Jeans (P) Ltd. is in the business of manufacturing jeans. For the assessment year
2022-23, it paid tax@15% on its book profit computed under section 115JB. The Assessing
Officer though satisfied that it is liable to pay book profit tax under section 115JB, wants to
charge interest under sections 234B and 234C as no advance tax was paid during the
financial year 2021-22. The company seeks your opinion on the proposed levy of interest.
SOLUTION
The issue under consideration is whether interest under sections 234B and 234C can be
levied where a company is assessed on the basis of its book profit under section 115JB.
The Supreme Court, in Joint CIT v. Rolta India Ltd. (2011) 330 ITR 470, observed that there
is a specific provision in section 115JB(5) providing that all other provisions of the Income-
tax Act, 1961 shall apply to every assessee, being a company, mentioned in that section.
Section 115JB is a self-contained code pertaining to MAT, and by virtue of sub-section (5)
thereof, the liability for payment of advance tax would be attracted.
According to section 207, tax shall be payable in advance during any financial year, in
accordance with the provisions of sections 208 to 219 (both inclusive), in respect of the total
income of the assessee which would be chargeable to tax for the assessment year
immediately following that financial year.
Under section 115JB(1), where the tax payable on total income is less than 15% of “book profit”
of a company, the “book profit” would be deemed to be the total income and tax would be payable
at the rate of 15%.
Since in such cases, the book profit is deemed to be the total income, therefore, as per the
provisions of section 207, tax shall be payable in advance in respect of such book profit
(which is deemed to be the total income) also.
Therefore, if a company defaults in payment of advance tax in respect of tax payable under
section 115JB, it would be liable to pay interest under sections 234B and 234C.
Therefore, even though Maitri Jeans (P) Ltd. is assessed on the basis of its book profit under
section 115JB for A.Y.2022-23, it is liable to pay advance tax. Since Maitri Jeans (P) Ltd. has
not paid any advance tax during the financial year 2021-22, the levy of interest under section
234B and 234C is valid.
ILLUSTRATION 3
Sona Ltd., a resident company, earned a profit of ` 15 lakhs after debit/credit of the following
items to its Statement of Profit and Loss for the year ended on 31/03/2022.
(i) Items debited to Statement of Profit and Loss:
No. Particulars `
1. Provision for the loss of subsidiary 70,000
2. Provision for doubtful debts 75,000

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3. Provision for income-tax 1,05,000

4. Provision for gratuity based on actuarial valuation 2,00,000
5. Depreciation 3,60,000
6. Interest to financial institution (unpaid before filing of return) 1,00,000
7. Penalty for infraction of law 50,000

(ii) Items credited to Statement of Profit and Loss:

No. Particulars `
1. Profit from unit established in special economic zone 5,00,000
2. Share in income of an AOP as a member 1,00,000
3. Income from units of UTI 75,000
4. Long term capital gains on sale of building 3,00,000

Other Information:
(i) Depreciation includes ` 1,50,000 on account of revaluation of fixed assets.
(ii) Depreciation as per Income-tax Rules is ` 2,80,000.
(iii) Brought forward loss as per books of account of the company is of ` 10 lakhs
which includes unabsorbed depreciation of ` 4 lakhs.
(iv) The AOPs, of which the company is a member, has paid tax at maximum
marginal rate.
(v) Provision for income-tax includes ` 45,000 of interest payable on income-tax.
Compute minimum alternate tax under section 115JB of the Income-tax Act, 1961, for
A.Y. 2022-23, assuming that Sona Ltd. is not required to comply with the Indian
Accounting Standards. Ignore the provisions of section 115BAA.
SOLUTION
Computation of “Book Profit” for levy of MAT under section 115JB for A.Y. 2022-23
Particulars ` `
Net Profit as per Statement of Profit and Loss 15,00,000
Add: Net profit to be increased by the following amounts as per
Explanation 1 to section 115JB:
- Provision for the loss of subsidiary 70,000
- Provision for doubtful debts, being the amount set aside 75,000
as provision for diminution in the value of any asset
- Provision for income-tax 1,05,000

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 ASSESSMENT OF VARIOUS ENTITIES 12.39

[As per Explanation 2 to section 115JB, income-tax shall

include, inter alia, any interest charged under the Act.
Therefore, whole of the amount of provision for income-
tax including ` 45,000 towards interest payable has to be
added]
- Depreciation 3,60,000 6,10,000
21,10,000
Less: Net profit to be decreased by the following amounts as per
Explanation 1 to section 115JB:
- Share in income of an AOP as a member 1,00,000
[In a case, where AOP has paid tax on its total income at
maximum marginal rate, no income-tax is payable by the
company, being a member of AOP, in accordance with the
provisions of section 86. Therefore, share in income of an
AOP on which no income-tax is payable in accordance
with the provisions of section 86, would be reduced while
computing book profit, since the same has been credited
to Statement of Profit and Loss]
- Income from units in UTI -
[Income from units in UTI is taxable in the hands of the
unitholders thus, the same would not be reduced while
computing book profits even though it is credited in the
Statement of Profit and Loss]
- Depreciation other than depreciation on revaluation of
assets (` 3,60,000 – ` 1,50,000) 2,10,000
- Unabsorbed depreciation or brought forward business
loss, whichever is less, as per the books of account.
[Lower of unabsorbed depreciation ` 4,00,000 and
brought forward business loss ` 6,00,000 as per books of
accounts has to be reduced while computing the book 4,00,000 7,10,000
profit]
Book Profit 14,00,000

Computation of MAT liability under section 115JB

Particulars `
15% of book profit 2,10,000
Add: Health and education cess@4% 8,400
Minimum Alternate Tax liability 2,18,400

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Notes:
(1) It is only the specific items mentioned under Explanation 1 to section 115JB, which
can be adjusted from the net profit as per the Statement of Profit and Loss prepared
as per the Companies Act for computing book profit for levy of MAT. Since the
following items are not specified thereunder, the same cannot be adjusted for
computing book profit:
• Interest to financial institution (unpaid before filing of return) and
• Penalty for infraction of law
(2) Provision for gratuity based on actuarial valuation is an ascertained liability [CIT v.
Echjay Forgings (P) Ltd. (2001) 251 ITR 15 (Bom.)]. Hence, the same should not be
added back to compute book profit.
(3) As per proviso to section 115JB(6), the profits from unit established in special
economic zone cannot be excluded while computing the book profit, and hence, such
income would be liable for MAT.
(xiv) Set-off of credit of tax paid under section 115JB [Section 115JAA]
(1) This section provides that where tax is paid in any assessment year in relation to
the deemed income under section 115JB(1), the excess of tax so paid over and
above the tax payable under the other provisions of the Income-tax Act, 1961, will
be allowed as tax credit in the subsequent years. However, no interest would be
payable on the tax credit allowed.
(2) The tax credit is, therefore, the difference between the tax paid under section
115JB(1) and the tax payable on the total income computed in accordance with the
other provisions of the Act.
(3) This tax credit is allowed to be carried forward for 15 assessment years succeeding
the assessment year in which the credit became allowable.
(4) Such credit is allowed to be set off against the tax payable on the total income in an
assessment year in which the tax is computed in accordance with the provisions of
the Act, other than 115JB, to the extent of excess of such tax payable over the tax
payable on book profits in that year.
Example 2:
P.Y. MAT as per Tax as per MAT Credit Actual MAT Credit
section regular Adjustment Tax Paid Balance
115JB provisions
2019-20 4,50,000 3,95,000 - 4,50,000 55,000

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 ASSESSMENT OF VARIOUS ENTITIES 12.41

2020-21 4,70,000 4,10,000 - 4,70,000 1,15,000

[55,000 +
60,000]
2021-22 3,80,000 4,00,000 20,000 3,80,000 95,000

(5) Where as a result of order passed, the amount of tax payable is reduced or
increased, the amount of tax credit allowed shall also be reduced or increased
accordingly.
(6) In case of conversion of a private company or unlisted public company into an LLP,
the tax credit under section 115JAA for MAT paid by the company under section
115JB would not be allowed to the successor LLP.
(7) Where the amount of tax credit in respect of any income-tax paid in any country or
specified territory outside India, under section 90 or section 90A or section 91,
allowed against the tax payable under the provisions of section 115JB(1) exceeds
the amount of such tax credit admissible against the tax payable by the assessee
on its income in accordance with the other provisions of this Act, then, while
computing the amount of credit under this sub-section, such excess amount shall be
ignored.
In other words, the amount of tax credit in respect of MAT shall not be allowed to be
carried forward to subsequent year to the extent such credit relates to the difference
between the amount of foreign tax credit (FTC) allowed against MAT and FTC
allowable against the tax computed under regular provisions of Act other than the
provisions relating to MAT.
Example 3:
Particulars Tax as per MAT as per
regular section
provisions 115JB
Tax amount 1,50,000 1,75,000
FTC 1,60,000 1,60,000
Deduction in respect of FTC, being lower of tax 1,50,000 1,60,000
payable in India and FTC
Excess FTC allowed against MAT under section 115JB 10,000
MAT credit 25,000
MAT Credit as reduced by excess FTC allowable against MAT 15,000
liability (` 25,000 – ` 10,000)

(8) A company opting for section 115BAA cannot set-off MAT credit available to it under
section 115JAA from the year in which it exercises such option.

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(6) Levy of additional income-tax on distributed income of a domestic company on

account of buy-back of shares [Chapter XII-DA]
(i) In case of buyback of shares (whether listed or unlisted) by domestic companies, additional
income-tax @20% (plus surcharge@12% and cess@4%) is leviable in the hands of the
company [Section 115QA(1)].
Consequently, the income arising to the shareholders in respect of such buyback of shares by
the domestic company would be exempt under section 10(34A) since the domestic company
is liable to pay additional income-tax on the buyback of shares.
As per section 115QA(2), a domestic company is liable to pay additional income-tax on buy-
back of shares, irrespective of the fact that no income-tax is payable by such domestic
company on its total income computed in accordance with the provisions of this Act.
Taxation provisions in respect of buyback of shares and specified securities
(1) (2) (3) (4)
Taxability in the Buyback of shares Buyback of Buyback of
hands of (listed or unlisted) by shares by a specified
domestic companies company, other securities by
than a domestic any company
company
Company Subject to additional Not subject to tax Not subject to
[email protected]%. in the hands of the tax in the hands
company. of the company.
Shareholder/ Income arising to Income arising to Income arising
holder of shareholders exempt shareholder to holder of
specified under section 10(34A) taxable as capital specified
securities gains u/s 46A. securities
taxable as
capital gains u/s
46A.

[Please refer Chapter 7: Capital Gains for detailed discussion on section 46A]
(ii) Such tax should be paid to the credit of the Central Government within 14 days from the
date of payment of any consideration for such buyback to the shareholder.

Meaning of buyback and distributed income

Buyback Purchase by a company of its own shares in
accordance with the provisions of any law for the
time being in force to companies [clause (i) of
Explanation to section 115QA]

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 ASSESSMENT OF VARIOUS ENTITIES 12.43

Distributed income The consideration paid by the company on buy-

back of shares as reduced by the amount which
was received by the company for issue of such
shares, determined in the manner as may be
prescribed [clause (ii) of Explanation to section
115QA]

Accordingly, the CBDT has, vide Notification no. 94/2016 dated 17-10-2016, inserted Rule
40BB to provide the manner of determination of the amount received by the company for
issue of shares being bought back in various circumstances including shares being issued
under tax neutral reorganisations and in different tranches as follows:
Sub- Circumstance Manner of determination of amount received
rule by the company in respect of issue of shares
No. being bought back
2 Where shares have been Amount actually received by the company in
issued by a company to any respect of such share including any amount
person way of subscription actually received by way of premium.
3 Where the company had at The amount actually received in respect of such
any time, prior to the buy- shares as reduced by the sum so returned
back of the share,
returned any sum out of the
amount received in respect
of such share
4 Where the share has been The fair market value of the share is computed
issued by a company under in accordance of Rule 3(8), to the extent
any plan or scheme under credited to the share capital and share
which an employees’ premium account by the company shall be
stock option has been deemed to be the amount received by the
granted or as part of sweat company for issue of said share.
equity shares “Sweat equity shares” means equity shares
issued by a company to its employees or
directors at a discount or for consideration other
than cash for providing know-how or making
available rights in the nature of intellectual
property rights or value additions, by whatever
name called [Clause (b) of Explanation to section
17(2)(vi)].
5 Where the share has been The amount received by the amalgamating
issued by a company being company in respect of such share or shares
an amalgamated company, determined in accordance with this rule, shall be
under a scheme of deemed to be the amount received by the
amalgamation, in lieu of the

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share or shares of an amalgamated company in respect of the share

amalgamating company so issued by it.
6 Where the Shares are Amount received by the resulting company in
issued by resulting respect of shares issued by it under a scheme
company under a scheme of demerger:
of demerger
Amount Net book value of assets
received by the transferred in a demerger
demerged co. in x --------------------------------
respect of the Net worth of the
original shares demerged co.
(determined as immediately before
per this Rule) demerger
Amount received in respect of the original
shares issued by the demerged company
post demerger:
The amount the amount as so
received by the (-) arrived under sub-
demerged rule (6).
company in
respect of the
original shares
7 Where the share has been The amount received by the company for issue
issued or allotted by the of such share shall be determined in accordance
company as part of with the following formula-
consideration for Amount received = A/B
acquisition of any asset or Where,
settlement of any liability
A = an amount being lower of the following
amounts-

(a) Fair Market Value The part of

of the assets and consideration being
liabilities as paid by issue of
determined by a x shares
merchant banker The total
consideration

(b) the amount of consideration for acquisition

of the asset or settlement of the liability to
be paid in the form of shares, to the extent

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 ASSESSMENT OF VARIOUS ENTITIES 12.45

credited to the share capital and share

premium account by the company;

B = the number of shares issued by the company

as part of consideration:
8 Where the shares have The amount received by the company for issue
been issued or allotted by of shares shall be determined in accordance with
a company on succession the following formula-
or conversion, as the case Amount received = (A-B)/C
may be, of a firm into the A = book value of the assets in the balance-
company or succession of sheet as reduced by any amount of tax paid as
sole proprietary concern by deduction or collection at source or as advance
the company tax payment as reduced by the amount of tax
claimed as refund under the Income-tax Act and
any amount shown in the balance-sheet as asset
including the unamortized amount of deferred
expenditure which does not represent the value
of any asset;
For determining book value of the assets, any
change in the value of the assets consequent to
their revaluation shall be ignored.
B = book value of liabilities shown in the
balance-sheet, but does not include the
following amounts, namely:-
(a) capital, by whatever name called, of the
proprietor or partners of the firm, as the
case may be;
(b) reserves and surpluses, by whatever name
called, including balance in profit and loss
account;
(c) any amount representing provision for
taxation, other than amount of tax paid, as
deduction or collection at source or as
advance tax payment as reduced by the
amount of tax claimed as refund under the
Income-tax Act, if any, to the extent of the
excess over the tax payable with reference
to the book profits in accordance with the
law applicable thereto;
(d) any amount representing provisions made
for meeting liabilities, other than
ascertained liabilities; and

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 12.46 DIRECT TAX LAWS

(e) any amount representing contingent

liabilities,
C = number of shares issued on conversion
or succession.
9 Where the share has been The consideration in respect of such share shall
issued or allotted, without be deemed to be “Nil”
any consideration, on the
basis of existing shareholding
in the company
10 Where the shares have The amount received by the company in respect
been issued on of such instrument as so converted.
conversion of preference
shares or bond or
debenture, debenture-
stock or deposit
certificate in any form or
warrants or any other
security issued by the
company
11 Where the share being The amount received by the company in respect
bought back is held in of such share shall be the amount received for
dematerialised form and the the issue of share determined in accordance with
same cannot be distinctly this rule on the basis of the first-in-first-out
identified method.
12 In any other case The face value of the share shall be deemed to
be the amount received by the company for issue
of the share.

(iii) No credit or deduction under the Act in respect of such income or additional income-tax:
The additional income-tax payable by the company shall be the final payment of tax on such
income. No credit or deduction shall be claimed by the company or any other person in
respect of such tax paid.
Further, no deduction under any provision of the Income-tax Act, 1961 shall be allowed to the
company or the shareholder in respect of income, which has been subject to additional
income-tax, or tax thereon.
(iv) Interest payable for non-payment of additional income-tax by the company [Section
115QB]
The principal officer of the domestic company and the company will be liable to pay simple
interest on the amount of additional income-tax not paid within the specified time. Such
interest is leviable at the rate of 1% for every month or part of the month on the amount of
such tax not paid or short paid for the period beginning on the date immediately after the last

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 ASSESSMENT OF VARIOUS ENTITIES 12.47

date on which such tax was payable and ending with the date on which the tax is actually
paid (Tax to be paid within 14 days from the date of payment of any consideration for such
buyback to the shareholder).
(v) Deemed Assessee-in-default [Section 115QC]
The principal officer of the domestic company and the company will be deemed to be an
assessee-in-default in respect of amount of tax payable by him or it, in case the additional
income-tax is not paid to the credit of Central Government within the specified time. In such a
case, all the provisions of the Act for the collection and recovery of income-tax would apply.
ILLUSTRATION 4
XYZ Ltd., a domestic company, purchases its own listed shares on 4 th July 2021. The consideration
for buyback amounted to ` 21 lakh, which was paid on the same day. The amount received by the
company two years back for issue of such shares determined in the manner specified in Rule 40BB
was ` 13 lakh. Compute the additional income-tax payable by XYZ Ltd. Compute the interest, if any,
payable if such tax is paid to the credit of the Central Government on 29 th September 2021.
SOLUTION
XYZ Ltd is liable to pay ` 1,86,368 as additional income-tax, which is the amount calculated
@23.296% (20% plus surcharge@12% plus health and education cess@4%) on ` 8 lakh, being its
distributed income (i.e., ` 21 lakh – ` 13 lakh).
The additional income-tax was payable on or before 18th July 2021. However, the same was paid
only on 29th September 2021.
Period for which interest@1% per month or part of a month is leviable -

Period No. of months/part of

month
19th July – 18th August 2021 (whole of first month) 1
19th August – 18th September 2021 (whole of second month) 1
19th September – 29th September 2021 (part of third month) 1
Total number of months 3

Interest under section 115QB is payable @1% per month for 3 months on the amount of
additional tax payable i.e., ` 1,86,300 (rounded off as per Rule 119A). Therefore, interest
payable under section 115QB is ` 5,589.
(7) Special provisions relating to income of shipping companies
To make the Indian shipping industry more competitive, a tonnage tax scheme for taxation of
shipping profits has been introduced. Tonnage tax will induce more ships to fly the Indian Flag.

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 12.48 DIRECT TAX LAWS

Chapter XII-G, containing sections 115V to 115VZC, provides for special provisions relating to
taxation of the income of shipping companies. With the introduction of tonnage tax scheme, the
companies have to exercise the option to be assessed under this scheme or under the normal
provisions of the Income-tax Act. The salient features of the scheme are as follows:
• A company owning at least one qualifying ship may join.
• A qualifying ship is one with a minimum tonnage of 15 tons and having a valid certificate.
• If a company is incorporated after the initial period or a company which is incorporated before
the initial period but becomes a qualifying company for the first time after the initial period,
this application is required to be made within three months of the date of incorporation or the
date on which it becomes a qualifying company, as the case may be.
(I) Computation of Tonnage Income from Business of Operating Qualifying Ships
Computation of profits and gains from the business of operating qualifying ships [Section
115VA]
(1) A company has the option to compute the income from the business of operating qualifying
ships in accordance with the provisions of this Chapter.
(2) Such income is deemed to be the income chargeable to tax under the head “Profits and gains
of business or profession” in respect of such business.
Operating ships [Section 115VB]
(1) A company shall be regarded as operating a ship if it operates any ship whether owned or
chartered by it.
(2) Even if only a part of the ship has been chartered in by it in an arrangement such as slot
charter, space charter or joint charter, the company would be regarded as operating a ship.
(3) However, a company will not be regarded as the operator of a ship which has been chartered
out on bareboat charter-cum-demise terms or on bareboat charter terms for a period
exceeding three years.
(4) “Bareboat charter” means hiring of a ship for a stipulated period on terms which give the charterer
possession and control of the ship, including the right to appoint the master and crew;
(5) “Bareboat charter-cum-demise” means a bareboat charter where the ownership of the ship is
intended to be transferred after a specified period to the company to whom it has been
chartered;
Meaning of “Qualifying company” [Section 115VC]
(1) A company will be a qualifying company if -
(a) it is an Indian company;

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 ASSESSMENT OF VARIOUS ENTITIES 12.49

(b) the place of effective management of the company is in India;

(c) it owns at least one qualifying ship; and
(d) the main object of the company is to carry on the business of operating ships.
(2) The expression “place of effective management of the company” has been defined in the
Explanation to the section to mean –
(a) the place where the board of directors of the company or its executive directors make
their decisions; or
(b) in a case where the board of directors routinely approve the commercial and strategic
decisions made by the executive directors or officers of the company, the place where
such executive directors or officers of the company perform their functions.
Meaning of “Qualifying ship” [Section 115VD]
(1) A ship is a qualifying ship if
(i) it is a seagoing ship or vessel of 15 net tonnage or more;
(ii) it is registered –
(a) under the Merchant Shipping Act, 1958; or
(b) outside India in respect of which a license has been issued by the Director-
General of Shipping under section 406 or 407 of the Merchant Shipping Act,
1958
(iii) there is a valid certificate in force indicating the net tonnage of such a ship;
(2) However, the following ships are not “qualifying ships” –
(i) a seagoing ship or vessel if the main purpose for which it is used is for the provision
of goods or services of a kind normally provided on land (“seagoing ship” means a
ship which is certified as seagoing by the competent authority of any country);
(ii) fishing vessels;
(iii) factory ships (which includes a vessel providing processing services in respect of
processing of the fishing produce);
(iv) pleasure craft (i.e. a ship, whose primary use is for the purposes of sport or
recreation);
(v) harbour and river ferries;
(vi) offshore installations;
(vii) a qualifying ship which is used as a fishing vessel for a period of more than thirty
days during a previous year.

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 12.50 DIRECT TAX LAWS

Manner of computation of income under tonnage tax scheme [Section 115VE]

(1) A tonnage tax company engaged in the business of operating qualifying ships should compute
the profits from such business under the tonnage tax scheme;
(2) “Tonnage tax company” means a qualifying company in relation to which tonnage tax option
is in force;
(3) “Tonnage tax scheme” means a scheme for computation of profits and gains of business of
operating qualifying ships under the provisions of this Chapter.
(4) The business of operating qualifying ships giving rise to “relevant shipping income” (i.e.
income referred to in section 115V-I(1)) has to be considered as a separate business, distinct
from all other activities or business carried on by the company.
(5) Such profits should be computed separately from the profits and gains from any other business.
(6) The tonnage tax scheme will apply only if an option to that effect is made (in accordance with
the provisions of section 115VP).
(7) The profits and gains from the business of operating qualifying ships of a company engaged
in such business and –
(a) not covered under the tonnage tax scheme or,
(b) which has not made an option to that effect,
have to be computed in accordance with the other provisions of this Act.
Tonnage income [Section 115VF]
(1) “Tonnage income” means the income of a tonnage tax company computed in accordance
with the provisions of this Chapter. The tonnage income has to be computed in accordance
with the provisions of section 115VG given below.
(2) The income so computed is deemed to be the profits chargeable under the head “Profits and
gains of business or profession”.
(3) Where income is so computed under section 115VG, the relevant shipping income (referred
to in section 115V-I(1)) will not be chargeable to tax.
Computation of tonnage income [Section 115VG]
(1) The tonnage income for a previous year is the aggregate of the tonnage income of each
qualifying ship.
(2) The tonnage income of a qualifying ship is to be calculated on the basis of the daily tonnage
income of such ship multiplied by the number of days in the previous year.
(3) In case the ship is operated by the company as a qualifying ship for only part of the previous
year, the tonnage income of the ship will be calculated on the basis of daily tonnage of such
ship multiplied by the number of days in part of the previous year.

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 ASSESSMENT OF VARIOUS ENTITIES 12.51

(4) The daily tonnage income of a qualifying ship has to be computed as under –
Qualifying ship having net tonnage Amount of daily tonnage income
Up to 1000 ` 70 for each 100 tons
Exceeding 1,000 but not more than 10,000 ` 700 plus ` 53 for each 100 tons
exceeding 1,000 tons
Exceeding 10,000 but not more than 25,000 ` 5,470 plus ` 42 for each 100 tons
exceeding 10,000 tons
Exceeding 25,000 ` 11,770 plus ` 29 for each 100 tons
exceeding 25,000 tons

(5) “Tonnage” means the tonnage of a ship indicated in the “valid certificate” (i.e. referred to in
section 115VX) and includes deemed tonnage computed in the prescribed manner.
(6) “Deemed tonnage” means the tonnage in respect of an arrangement of purchase of slots, slot
charter and an arrangement of sharing of break-bulk vessel.
(7) The tonnage is to be rounded off to the nearest multiple of hundred tons. For this if the last
figure that amount of tonne is fifty or more, the tonnage shall be increased to the next higher
tonnage which is a multiple of 100, otherwise, shall be reduced to the next lower tonnage
which is a multiple of 100.
(8) No deduction or set-off is allowed in computing the tonnage income under this Chapter.
ILLUSTRATION 5
Calculate tonnage income with respect to each of the following qualifying ships:
Qualifying Ships Q1 Q2 Q3 Q4

Net Tonnage 1,020 8,563 22,368 37,525

Days for which ship operated during the P.Y.2021-22 120 70 250 100

SOLUTION
Qualifying Ships Q1 Q2 Q3 Q4
Net Tonnage (rounded off) 1,000 8,600 22,400 37,500
Daily Tonnage (`) 700 4,728 10,678 15,395
Days for which ship operated during the 120 70 250 100
P.Y.2021-22
Tonnage Income (`) 84,000 3,30,960 26,69,500 15,39,500
Calculation of tonnage income in case of joint operation [Section 115VH]

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 12.52 DIRECT TAX LAWS

(1) Where a qualifying ship is operated by two or more companies –

(a) by way of joint interest in the ship or by way of an agreement for the use of the ship
and
(b) their respective shares are definite and ascertainable,
the tonnage income of each such company shall be an amount equal to a share of income
proportionate to its share of interest.
(2) Where two or more companies are operators of a qualifying ship, the tonnage income of each
company shall be computed as if each had been the only operator, if the conditions specified
in (a) and (b) of (1) above are not satisfied.
Meaning of “Relevant shipping income” [Section 115V-I]
(1) The “relevant shipping income” of a tonnage tax company means its profits from core
activities and its profits from incidental activities
(2) Where the aggregate of income from incidental activities exceeds one-fourth per cent of the
turnover from core activities, such excess will not form part of relevant shipping income for
the purposes of this Chapter and shall be taxable under the other provisions of this Act.
(3) The core activities of a tonnage tax company are –
(i) its activities from operating qualifying ships; and
(ii) Other ship-related activities, being,
(a) shipping contracts in respect of –
(1) earnings from pooling arrangements i.e.
(i) agreement between two or more persons for providing services
through a pool or
(ii) operating one or more ships and sharing earnings or operating
profits on the basis of mutually agreed terms;
(2) contracts of affreightment i.e. a service contract under which a tonnage
tax company agrees to transport a specified quantity of specified
products at a specified rate, between designated loading and
discharging ports over a specified period.
(b) Specific shipping trades, being, -
(1) on-board or onshore activities of passenger ships comprising of fares
and food and beverages consumed on board;
(2) slot charters, space charters, joint charters, feeder services, container
box leasing of container shipping.

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 ASSESSMENT OF VARIOUS ENTITIES 12.53

(4) The incidental activities of the tonnage tax company are the activities which are incidental to
the core activities and which may be prescribed for the purpose.
(5) The Central Government can, by notification, exclude any activity under “other ship-related
activities” mentioned in (3) above or prescribe the limit up to which such activities can be
included in the core activities.
(6) Every notification issued under this Chapter has to be laid before each House of Parliament
to make the same effective.
(7) If both Houses agree in making any modification therein, the notification will have effect in
such modified form.
(8) Similarly, if both Houses agree that the notification should not be issued, then such
notification will be of no effect.
(9) However, such modification or annulment will not affect anything previously done under that
notification.
(10) Where a tonnage tax company operates a non-qualifying ship, then the income attributable
to operation of the non-qualifying ship should be computed in accordance with the other
provisions of this Act.
(11) In the following cases, the relevant shipping income is to be computed as if the transfer had
been at market value of the goods and services as on the date of transfer–
(i) Where any goods or services held for the purposes of tonnage tax business are
transferred to any other business carried on by a tonnage tax company, or
(ii) where any goods or services held for the purposes of any other business carried on
by such tonnage tax company are transferred to the tonnage tax business, and
(iii) In both the above cases, the consideration, if any, for such transfer as recorded in the
accounts of the tonnage tax business does not correspond to the market value of such
goods or services as on the date of the transfer,
(12) Market value in relation to any goods and services means the price that such goods or
services would ordinarily fetch on sale in the open market.
(13) Where the computation of the relevant shipping income in the manner specified above
presents exceptional difficulties, the Assessing Officer may compute such income on such
reasonable basis as he may deem fit.
(14) If the Assessing Officer is of the opinion that owing to the close connection between the
tonnage tax company and such other person or for any other reason, the affairs of the
business transacted between the tonnage tax company and any other person are arranged
in such a manner that the company gets more than the ordinary profits which might be
expected to arise in the tonnage tax business, then he may take into account the amount of

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 12.54 DIRECT TAX LAWS

income which may be reasonably deemed to have been derived therefrom for computing the
relevant shipping income.
(15) In case the relevant shipping income of a tonnage tax company is a loss, then, such loss is
to be ignored for the purposes of computing tonnage income.
Treatment of common costs [Section 115VJ]
(1) Where a tonnage tax company also carries on any business or activity other than the tonnage
tax business, the common costs attributable to the tonnage tax business should be
determined on a reasonable basis.
(2) Where any asset, other than qualifying ship, is not exclusively used for the tonnage tax
business by the tonnage tax company, depreciation on such asset has to be allocated
between its tonnage tax business and other business.
(3) Such allocation of depreciation has to be done on a fair proportion to be determined by the
Assessing Officer, having regard to the use of such asset for the purpose of the tonnage tax
business and for the other business.
Depreciation [Section 115VK]
(1) The depreciation for the first previous year of the tonnage tax scheme has to be computed
on the written down value of the qualifying ships.
(2) The written down value of the block of assets, being ships, as on the first day of the previous
year, has to be divided in the ratio of the book written down value of the qualifying ships
(qualifying assets) and the book written down value of the non-qualifying ships (other assets).
(3) The block of qualifying assets would constitute a separate block of assets.
(4) The manner of computing the book written down value of the block of qualifying assets and
the block of other assets is as follows –
(a) the book written down value of each qualifying asset and each other asset as on the
first day of the previous year is to be determined by taking the book written down
value of each asset appearing in the books of account as on the last day of the
preceding previous year;
(b) Any change in the value of assets consequent to their revaluation after 10.9.04 is to
be ignored;
(c) The book written down value of all the qualifying assets and other assets are to be
aggregated;
(d) The ratio of the aggregate book written down value of the qualifying assets to the
aggregate book written down value of the other assets has to be determined.
(5) In case an asset forming part of the block of qualifying assets begins to be used for purposes
other than the tonnage tax business, an appropriate portion of the written down value

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 ASSESSMENT OF VARIOUS ENTITIES 12.55

allocable to such asset has to be reduced from the written down value of that block and added
to the block of other assets.
(6) In case an asset forming part of the block of other assets begins to be used for tonnage tax
business, an appropriate portion of the written down value allocable to such asset i.e., the
amount which bears the same proportion to the written down value of the block of other assets
as on the first day of the previous year as the book written value of the asset beginning to be
used for tonnage tax business bears to the total book written down value of all the assets
forming the block of other assets, has to be reduced from the written down value of the block
of other assets and has to be added to the block of qualifying asset.
(7) Depreciation computed for the previous year on such asset mentioned in (6) shall be allocated
in the ratio of number of days for which the asset was used for the tonnage tax business and
for purposes other than tonnage tax business.
(8) Depreciation on the block of qualifying assets and block of other assets so created shall be
allowed as if the written down value as on the first previous year has been brought forward
from the preceding previous year.
(9) The expression “book written down value” means the written down value as appearing in the
books of account.
Deemed deduction and set-off and carry forward of losses etc. [Section 115VL]
(1) Any loss/allowance or deduction under sections 30 to 43B relating to or allowable for any of
the relevant previous years, would be deemed to have been given full effect to in that previous
year itself;
(2) No set-off or carry forward of losses referred to in –
(i) sections 70(1) and 70(3); or
(ii) sections 71(1) and 71(2); or
(iii) section 72(1) or
(iv) section 72A(1),
relating to the business of operating qualifying ships of the company is permissible where
such loss relates to any of the previous years when the company is under the tonnage tax
scheme;
(3) No deduction under Chapter VI-A is allowable in relation to the profits and gains from the
business of operating qualifying ships;
(4) In computing the depreciation allowance under section 32, the written down value of any
asset used for the purposes of the tonnage tax business has to be computed as if the
company has claimed and has been actually allowed the deduction in respect of depreciation
for the relevant previous year.

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Set-off and carry forward of losses of tonnage tax business [Section 115VM]
(1) Any losses attributable to its tonnage tax business that have accrued to a company before its
entry in tonnage tax scheme can be set off only against the relevant shipping income when
the company is under the tonnage tax scheme.
(2) Such losses will not be available for set off against any income other than relevant shipping
income in any previous year beginning on or after the date when the company exercises its
option under section 115VP.
(3) Any apportionment necessary to determine such losses should be made on a reasonable basis.
Capital gains from transfer of tonnage tax assets [Section 115VN]
(1) Profits or gains arising from the transfer of a capital asset being an asset forming part of the
block of qualifying assets is chargeable to income-tax in accordance with the provisions of
section 45, read with section 50.
(2) The capital gains so arising has to be computed in accordance with the provisions of sections
45 to 51.
Book profit or loss to be excluded for the purpose of section 115JB [Section 115VO]
This section seeks to exclude the book profits or loss derived from the activities of a tonnage tax
company (referred to in section 115V-I(1)) for the purposes of section 115JB.
(II) Procedure for Option of Tonnage Tax Scheme
Method and time of opting for tonnage tax scheme [Section 115VP]
(1) A qualifying company may opt for the tonnage tax scheme by making an application to the
Joint-Commissioner having jurisdiction over the company in the prescribed form and manner.
(2) An existing qualifying company should make an application at any time after 30 th September
2004 but before 1st January 2005, which is the initial period.
(3) In case of a company incorporated after the initial period or a company incorporated before
the initial period but which becomes a qualifying company for the first time after the initial
period, an application can be made within three months of the date of its incorporation or the
date on which it became a qualifying company, as the case may be.
(4) The Joint Commissioner, on receipt of an application for option for tonnage tax scheme, may
call for such information or documents from the company as he thinks necessary in order to
satisfy himself about the eligibility of the company.
(5) After satisfying himself about the eligibility of the company to make such option for tonnage
tax scheme, he can either pass an order in writing approving the option for tonnage tax
scheme or, if he is not so satisfied, pass an order in writing refusing to approve the option for
tonnage tax scheme.

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 ASSESSMENT OF VARIOUS ENTITIES 12.57

(6) A copy of such order should be sent to the applicant.

(7) An order refusing to approve the option for tonnage tax scheme can be passed only after
giving the applicant a reasonable opportunity of being heard.
(8) Every order granting or refusing the approval of the option for tonnage tax scheme should be
passed before the expiry of one month from the end of the month in which the application was
received.
(9) Where an order granting approval for tonnage tax scheme is passed, the provisions of this
Chapter will apply from the assessment year relevant to the previous year in which the option
for tonnage tax scheme is exercised.
Period for which the tonnage tax option will remain in force [Section 115VQ]
(1) An option for tonnage tax scheme (after it has been approved under section 115VP(3)) would
remain in force for a period of ten years from the date on which such option has been
exercised.
(2) For this purpose, the option would be taken into account from the assessment year relevant
to the previous year in which such option is exercised.
(3) An option for tonnage tax scheme would cease to have effect from the assessment year
relevant to the previous year in which –
(i) the qualifying company ceases to be so or
(ii) a default is made in complying with the provisions contained in section 115VT or
section 115VU or section 115VV.
(4) The tonnage tax option will also cease to have effect in case –
(i) a company is excluded from the tonnage tax scheme under section 115VZC or
(ii) the qualifying company furnishes to the Assessing Officer, a declaration in writing to
the effect that the provisions of this Chapter may not be made applicable to it.
(5) In such a case, the profits of the company from the business of operating qualifying ships
shall be computed in accordance with the other provisions of the Income-tax Act.
Renewal of tonnage tax scheme [Section 115VR]
(1) An option for tonnage tax scheme approved under section 115VP may be renewed within one
year from the end of the previous year in which the option ceases to have effect.
(2) The provisions of sections 115VP and 115VQ discussed above would apply in relation to a
renewal of the option for tonnage tax scheme in the same manner as they apply in relation to
the approval of option for tonnage tax scheme.

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Bar from opting for tonnage tax scheme in certain cases [Section 115VS]
(1) A qualifying company is not eligible to opt for the tonnage tax scheme if –
(i) the company, on its own, opts out of the tonnage tax scheme or
(ii) it makes a default in complying with the provisions of section 115VT or section
115VU or section 115VV or
(iii) its option has been excluded from tonnage tax scheme in pursuance of an order
made under section 115VZC(1).
(2) In such cases, the qualifying company will not be eligible to opt for tonnage tax scheme for a
period of ten years from the date of such opting out or default or order, as the case may be.
(III) Conditions for Applicability of Tonnage Tax Scheme
Transfer of profits to Tonnage Tax Reserve Account [Section 115VT]
(1) A tonnage tax company is required to credit to a reserve account (called Tonnage Tax
Reserve Account) an amount not less than 20% of the book profits derived from its core and
incidental activities (referred to in section 115V-I(1)) in each previous year to be utilised in
the manner laid down below –
(i) The amount credited should be utilized for acquiring a new ship before the expiry of
8 years for the purposes of the business of the company; and
(ii) Until the acquisition of a new ship, the amount can be utilized for the purposes of
the business of operating qualifying ships other than for distribution by way of
dividends or profits or for remittance outside India as profits or for the creation of
any asset outside India. [Sub-section (3)]
(2) A tonnage tax company may transfer a sum in excess of twenty per cent of the book profits.
Such excess sum transferred should also be utilised in above manner.
(3) “Book profit” will have the same meaning as in the Explanation to section 115JB(2) so far as
it relates to income derived from the core and incidental activities.
(4) Where the company has book profit from the business of operating qualifying ships and book
loss from any other source, and consequently, the company is not in a position to create the
full or any part of the reserves as required, then –
(a) the company should create the reserves to the extent possible in that previous year.
(b) The shortfall, if any, will be added to the amount of the reserves required to be
created for the following previous year.
(c) Such shortfall will be deemed to be part of the reserve requirement of that following
previous year.

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 ASSESSMENT OF VARIOUS ENTITIES 12.59

(5) Consequences of mis-utilisation / non-utilisation [Sub-section (4)]

(i) Where any amount credited to the Tonnage Tax Reserve Account has –
(a) been utilized for any purpose other than that referred to in (1) above; or
(b) not been utilized for the purpose of acquiring a new ship for the purpose of the
business of the company within 8 years; or
(c) has been utilized for acquiring a new ship within 8 years but such ship is sold
or transferred, otherwise than in any scheme of demerger, within 3 years from
the end of the previous year in which it was acquired
then, an amount which bears the same proportion to the total relevant shipping
income of the year in which such reserve was created, as the amount out of such
reserve so utilized or not utilized bears to the total reserve created during that year
shall be taxable under the other provisions of the Act i.e.
Taxable amount =
Extent of reserves unutilized or misutilised
Relevant shipping income ×
Total reserve created during the year
(ii) Such amount as calculated above would be taxable -
(a) in case (a) of (i) above, in the year in which the amount was so utilized; or
(b) in case (b) of (i) above, in the year immediately following the period of8 years;
(c) in case (c) of (i) above, in the year in which the sale or transfer took place.
(iii) However, the income so taxable under the other provisions of the Act will be reduced
by the proportionate tonnage income charged to tax in the year of creation of such
reserves.
(6) Shortfall in credit to Tonnage Tax Reserve Account [Sub-section (5)]
If there is any shortfall in the amount credited to the Tonnage Tax Reserve Account, then the
amount which bears the same proportion to the total relevant shipping income as the shortfall
in credit to the reserves bears to the minimum reserve required to be credited, will be taxable
under the other provisions of the Act i.e.
Shortfall in credit to reserves
Taxable amount = Relevant shipping income ×
Minimum reserve to be credited
(7) Consequences of failure to create reserve for two consecutive previous years [Sub-
section (6)] -If the reserve required to be created is not created for any two consecutive
previous years, the option of the company for tonnage tax scheme will cease to have effect
from the beginning of the previous year following the second consecutive previous year in
which the failure to create the reserve had occurred.

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(8) Meaning of “new ship”: A new ship includes a ‘qualifying ship’, which before the date of its
acquisition by the qualifying company was used by any other person. However, it should not
have been owned by any person resident in India before the date of such acquisition.
ILLUSTRATION 6
Dolphy Ltd., a tonnage tax company provides following information for the P.Y. 2021-22:
(i) Relevant Shipping Income - ` 350 lakhs
(ii) Tonnage Income - ` 180 lakhs
(iii) Book profits derived from core and incidental activities - ` 400 lakhs
Provide answers to following questions, considering each of the questions given below
independently:
(a) Calculate the minimum reserve requirement of the company as per section 115VT.
(b) Calculate the taxable amount under the other provisions of the Act, if Dolphy Ltd. transferred
only ` 66 lakhs to tonnage tax reserve account during the P.Y. 2021-22.
(c) Calculate the taxable amount under the other provisions of the Act, if Dolphy Ltd. mis-utilised
amount of ` 12 lakhs during P.Y. 2022-23 out of ` 92 lakhs transferred to tonnage tax reserve
account during P.Y. 2021-22.
SOLUTION
(a) The minimum reserve requirement of the company as per section 115VT = 20% of the
book profits derived from core and incidental activities = ` 400 lakhs × 20% = ` 80 lakhs
(b) Taxable amount under the other provisions of the Act = Relevant shipping income × Shortfall
in the credit to the reserves/ Minimum reserve requirement = ` 350 lakhs × [(` 80 lakhs – 66
lakhs) / ` 80 lakhs)] = ` 350 lakhs × ` 14 lakhs / ` 80 lakhs = ` 61.25 lakhs
(c) Taxable amount under the other provisions of the Act for P.Y. 2022-23 = Relevant shipping
income during P.Y. 2021-22 × Extent of reserves misutilised/Total reserve created during
P.Y. 2021-22 = ` 350 lakhs × ` 12 lakhs / ` 92 lakhs = ` 45.65 lakhs
Minimum training requirement for a tonnage tax company [Section 115VU]
(1) A tonnage tax company, after its option has been approved under section 115VP(3) is
required to comply with the minimum training requirement in respect of trainee officers in
accordance with the guidelines framed by the Director-General of Shipping and notified in the
Official Gazette by the Central Government. [Sub-section (1)]
(2) A copy of the certificate issued by the Director-General of Shipping to the effect that such
company has complied with the minimum training requirement in accordance with the
guidelines referred to in sub-section (1) for the previous year is required to be furnished along
with the return of income.

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 ASSESSMENT OF VARIOUS ENTITIES 12.61

(3) If the minimum training requirement is not complied with for any five consecutive previous
years, the option of the company for tonnage tax scheme shall cease to have effect from the
start of the previous year following the fifth consecutive year in which the failure to comply
with the minimum training requirement occurred.
Limit for charter in of tonnage [Section 115VV]
(1) Every company which has opted for tonnage tax scheme should charter in not more than
forty-nine per cent of the net tonnage of the qualifying ships operated by it during any previous
year. The term “chartered in” does not include a ship chartered in by the company on bareboat
charter-cum-demise terms.
(2) Such proportion of net tonnage in respect of a previous year is to be calculated based on the
average of net tonnage during that previous year.
(3) The average of net tonnage is to be computed in such manner as may be prescribed in
consultation with the Director-General of Shipping.
(4) Where the net tonnage of ships chartered in exceeds the limit of 49% during any previous
year, the total income of such company in relation to that previous year is to be computed as
if the option for tonnage tax scheme does not have effect for that previous year.
(5) Where the said limit of 49% is exceeded in any two consecutive previous years, the option
for tonnage tax scheme shall cease to have effect from the beginning of the previous year
following the second consecutive previous year in which the limit had exceeded.
Maintenance and audit of accounts [Section 115VW]
An option for tonnage tax scheme by a tonnage tax company will not have effect in relation to a
previous year unless such company –
(i) maintains separate books of account in respect of the business of operating qualifying ships
and
(ii) furnishes, the report of an accountant, in the prescribed form duly signed and verified by such
accountant on or before the specified date referred to in section 44AB i.e., one month prior
to the due date for filing return of income.
Determination of tonnage [Section 115VX]
(1) The tonnage of the ship shall be determined in accordance with the valid certificate indicating
its net tonnage.
(2) “Valid certificate” means –
(i) in case of ships registered in India—
(a) having a length of less than twenty-four meters, a certificate issued under the
Merchant Shipping (Tonnage Measurement of Ship) Rules, 1987 made under
the Merchant Shipping Act, 1958;

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(b) having a length of twenty-four meters or more, an international tonnage certificate

issued under the provisions of the Convention on Tonnage Measurement of Ships,
1969 as specified in the Merchant Shipping (Tonnage Measurement of Ship) Rules,
1987 made under the Merchant Shipping Act, 1958;
(ii) in case of ships registered outside India,
(a) a license issued by the Director-General of Shipping under section 406 or
section 407 of the Merchant Shipping Act, 1958 specifying the net tonnage on
the basis of Tonnage Certificate issued by the Flag State Administration where
the ship is registered or
(b) any other evidence acceptable to the Director-General of Shipping produced by
the ship owner while seeking permission for chartering in the ship.
(IV) Amalgamation and Demerger of Shipping Companies
Amalgamation [Section 115VY]
(1) In case of amalgamation, the provisions relating to the tonnage tax scheme would apply to
the amalgamated company if it is a qualifying company.
(2) However, where the amalgamated company is not a tonnage tax company, it should exercise
an option for tonnage tax scheme under section 115VP(1) within three months from the date
of the approval of the scheme of amalgamation.
(3) Where the amalgamating companies are tonnage tax companies, the provisions of this
Chapter would apply to the amalgamated company for such period as the option for tonnage
tax scheme which has the longest unexpired period continues to be in force.
Example 4: If two tonnage tax companies X Ltd. and Y Ltd. are amalgamated to form a new
company Z Ltd., and the option for tonnage tax scheme of X Ltd. has an unexpired period of
8 years and Y Ltd. has an unexpired period of 6 years, then the provisions of this Chapter
would apply to the new company Z Ltd. for a period of 8 years.
(4) Where one of the amalgamating companies is a qualifying company on 1st October 2004 and
has not exercised option for tonnage tax scheme within the initial period, then –
(i) the provisions of this Chapter will not apply to the amalgamated company and
(ii) the income of the amalgamated company from the business of operating qualifying
ships has to be computed in accordance with the other provisions of the Act.
Demerger [Section 115VZ]
(1) Where in a scheme of demerger, the demerged company transfers its business to the
resulting company before the expiry of the option for tonnage tax scheme, then the scheme
would apply to the resulting company for the unexpired period if it is a qualifying company.

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 ASSESSMENT OF VARIOUS ENTITIES 12.63

(2) The option for tonnage tax scheme in respect of the demerged company will remain in force for
the unexpired period of the tonnage tax scheme if it continues to be a qualifying company.
(V) Other Provisions
Effect of temporarily ceasing to operate qualifying ships [Section 115VZA]
(1) A temporary cessation (as against permanent cessation) of operating any qualifying ship by a company
would not be considered as a cessation of operating of such qualifying ship. The company would still
be deemed to be operating such qualifying ship for the purposes of this Chapter.
(2) Where a qualifying company continues to operate a ship, which temporarily ceases to be a
qualifying ship, then such ship will not be considered as a qualifying ship for the purposes
of this Chapter.
(VI) Cases where provisions of this Chapter do not apply
Avoidance of tax [Section 115VZB]
(1) The tonnage tax scheme will not apply where a tonnage tax company is a party to any
transaction or arrangement which amounts to an abuse of the tonnage tax scheme.
(2) A transaction or arrangement will be considered as an abuse if the entering into or the
application of such transaction or arrangement results, or would, but for this section have
resulted, in a tax advantage being obtained by –
(a) a person other than a tonnage tax company; or
(b) a tonnage tax company in respect of its non-tonnage tax activities.
(3) “Tax advantage” includes—
(i) (a) the determination of the allowance for any expense or interest, or
(b) the determination of any cost or expense allocated or apportioned,
which has the effect of reducing the income or increasing the loss, as the case may
be, from activities other than tonnage tax activities chargeable to tax.
Such computation should be on the basis of entries made in the books of account in
respect of the previous year in which the transaction was entered into; or
(ii) a transaction or arrangement which produces to the tonnage tax company more than
ordinary profits which might be expected to arise from tonnage tax activities.
Exclusion from tonnage tax scheme [Section 115VZC]
(1) Where a tonnage tax company is a party to any transaction or arrangement which amounts
to an abuse of the tonnage tax scheme, the Assessing Officer has the power to exclude such
company from the tonnage tax scheme, by an order in writing, after giving an opportunity of
being heard to such company.

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(2) However, no order to this effect can be passed without the previous approval of the Principal
Chief Commissioner or Chief Commissioner.
(3) This section does not apply where the company shows to the satisfaction of the Assessing
Officer that the transaction or arrangement was a bona fide commercial transaction and has
not been entered into for the purpose of obtaining tax advantage under this Chapter.
Where an order has been passed by the assessing officer excluding the tonnage tax company from
the tonnage tax scheme, then, the option for tonnage tax scheme shall cease to be in force from the
first day of the previous year in which the transaction or arrangement was entered into.

12.2 TAXATION REGIME FOR SECURITIZATION TRUSTS

AND ITS INVESTORS
(1) Meaning of Securitisation Trust [Clause (d) of Explanation below section 115TCA]:
“Securitisation trust” means a trust being a -
Form Regulation
(i) A special purpose SEBI (Public Offer and Listing of Securitised Debt
distinct entity Instrument) Regulations, 2008
(ii) A special purpose The guidelines on securitisation of standard assets issued
vehicle by RBI
(iii) A trust setup by a Securitisation and Reconstruction of Financial Assets and
securitisation Enforcement of Security Interest Act, 2002 (SARFAESI
company or a Act) (or) the RBI directions/guidelines.
reconstruction
company

(2) Exemption of income of securitisation trust from the activity of securitisation:

The income of securitisation trust from the activity of securitisation shall be exempt under
section 10(23DA).
(3) Taxability of income from securitisation trust in the hands of the investor [Section
115TCA(1)]:
Section 115TCA(1) provides that the income accruing or arising to, or received by, a
person, being an investor from the securitisation trust, out of investments made in the
securitisation trust, shall be taxable in the hands of investor in the same manner as if the
investor had made investment directly in the underlying assets and not through the trust.

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(4) Nature of income paid or credited by securitisation trust in the hands of the investor
[Section 115TCA(2)]:
The income paid or credited by the securitisation trust shall be deemed to be of the same
nature and in the same proportion in the hands of the investor of the securitisation trust, as if
it had been received by, or had accrued and arisen to, the securitisation trust during the
previous year.
(5) Deemed credit to investor [Section 115TCA(3)]:
If the income accruing or arising to, or received by, the securitisation trust, during a previous
year has not been paid or credited to the investor, the same shall be deemed to have been
credited to the account of the said person on the last day of the previous year in the same
proportion in which such person would have been entitled to receive the income had it been
paid in the previous year.
(6) Statement specifying the details of nature of income to be furnished to investor and
prescribed income-tax authority [Section 115TCA(4)]:
The securitisation trust shall provide breakup regarding nature and proportion of its income and
such other relevant details to the investors and also to the prescribed income-tax authority in
the prescribed form and verified in the prescribed manner, within the prescribed period.
Rule 12CC- Prescribed period for furnishing the statement containing the details of
nature of income paid or credited to the investor by the securitisation trust and to the
prescribed income-tax authority under section 115TCA(4)[Notification No. 107/2016,
dated 28-11-2016]
Rule 12CC provides that the statement of income distributed by a securitisation trust to its
investor has to be furnished to the Principal Commissioner or the Commissioner of Income-
tax within whose jurisdiction the principal office of the securitisation trust is situated, by 30th
November of the financial year following the previous year during which such income is
distributed.
Further, the statement of income distributed also has to be furnished to the investor by 30th
June of the financial year following the previous year during which the income is distributed.
(7) Income taxed in the year of accrual not taxable again in the year of payment [Section
115TCA(5)]:
Where income has been included in the total income of the investor in a previous year, on
account of it having accrued or arisen in the said previous year, the same shall not be included
in the total income of such person in the previous year in which such income is actually paid
to him by the securitisation trust.

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(8) Deduction of tax at source in respect of income payable to investor [Section 194LBC]:
Tax deduction at source under section 194LBC shall be effected by the securitisation trust at
the time of payment or credit of income to the account of the investor, whichever is earlier.
S. No Payee Rate of TDS
(i) Resident individuals and HUF 25%
(ii) Resident payees, other than individuals and HUF 30%
(iii) Non-corporate non-residents and foreign companies Rates in force

Where any income as aforesaid is credited to any account in the books of account of the
person liable to pay such income, such crediting is deemed to be credit of such income to the
account of the payee and tax has to be deducted at source. The account to which such income
is credited may be called “Suspense account” or by any other name.
(9) Application for low or nil deduction of tax at source:
The facility for the investors to obtain low or nil deduction of tax certificate would be available;
the investor can make an application to the Assessing Officer, and he can, on an application
made by the assessee in this behalf, issue a certificate under section 197 in this behalf for
no deduction of income-tax or deduction of income-tax at a lower rate.
(10) Meaning of certain terms:
Explanation Term Meaning
(a) Investor Means a person who is holder of any securitised debt
instrument or securities, or security receipt issued by the
securitisation trust
(b) Securities Means debt securities issued by a Special Purpose
Vehicle as referred to in the guidelines on securitisation
of standard assets issued by RBI

12.3 SCHEME FOR TAXATION OF REAL ESTATE

INVESTMENT TRUST (REIT) AND INFRASTRUCTURE
INVESTMENT TRUST (INVIT) [CHAPTER XII-FA –
SECTION 115UA]
(1) The SEBI has notified the regulations relating to two categories of investment vehicles
namely, the Real Estate Investment Trust (REIT) & Infrastructure Investment Trust (Invit).
(2) The SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”) provide a
framework for registration and regulation of Real Estate Investment Trusts (“REIT's”).

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Salient features of the REIT Regulations, as approved by the SEBI:

(a) REITs shall be set up as a trust and registered with SEBI. It shall have parties such
as Trustee, Sponsor group, inducted sponsor and Manager.
(b) The trustee of a REIT means a person who holds the REIT assets in trust for the
benefit of the unit holders, in accordance with these regulations. The trustee has to
registered with the Board as Debenture Trustee and should not an associate of the
sponsor(s) or manager.
(c) REIT shall invest in commercial real estate assets, on a freehold or leasehold basis,
either directly or through a holdco and/or special purpose vehicles (SPVs).
In case of investment through a holdco, REIT shall hold or propose to hold not less
than 50% of the equity share capital or interest in such holdco. Such holdco in turn
would make investments in other SPVs, which ultimately hold the properties. Holdco
should not be engaged in any activity other than holding of the underlying SPVs,
holding of real estate/properties and any other activities pertaining to and incidental to
such holdings.
In such SPVs, a REIT or the holdco shall hold or propose to hold not less than 50% of
the equity share capital or interest. Further, such SPVs shall hold not less than 80%
of its assets directly in properties and shall not invest in other SPVs. Such SPVs should
also not be engaged in any activity other than holding and developing property and
any other activity incidental to such holding or development.
(d) Once registered, the REIT shall raise funds through an initial offer. Subsequent raising
of funds may be through follow-on offer, rights issue, qualified institutional placement,
etc. The minimum subscription size from any investor shall be ` 50,000.
(e) Units of REITs shall be mandatorily listed on a recognized Stock Exchange and REIT
shall make continuous disclosures in terms of the listing agreement. Trading lot for
such units consist of 100 units.
(f) For coming out with an initial offer, the REIT assets shall be of value not less than
` 500 crore. Further, minimum issue size for initial offer shall be ` 250 crore. Further,
the minimum number of unitholders should not be less than 200. Maximum
subscription from any investor other than sponsor(s), its related parties and its
associates shall not be more than 25% of the total unit capital.
(g) The Trustee shall generally have an overseeing role in the activity of the REIT. The
manager shall assume operational responsibilities pertaining to the REIT.
(h) A REIT may have sponsors and sponsor group. Such sponsors and sponsor group
shall collectively hold not less than 25% of the total units of the REIT for a period of
not less than 3 years from the date of listing of such units. However, any holding of
the sponsor(s) and sponsor group(s) exceeding the minimum holding i.e., 25%, shall
be held for a period of atleast one year from the date of listing of such units. Each

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sponsor shall hold not less than 5% of the number of units of the REIT on post-initial
offer.
(i) Not less than 80% of the value of the REIT assets shall be invested in completed and
rent and/or income generating properties.
Upto 20% of the value of REIT assets shall be invested in following:
(1) developmental properties, whether directly or through a company or LLP;
(2) mortgage backed securities;
(3) listed/ unlisted debt of companies/body corporates in real estate sector;
(4) equity shares of companies which are listed on a recognized stock exchange
in India which derive not less than 75% of their operating income from Real
Estate activity;
(5) unlisted equity shares of companies which derive not less than 75% of their
operating income from real estate activity
(6) government securities;
(7) unutilized FSI of a project where it has already made investment;
(8) TDR acquired for the purpose of utilization with respect to a project where it
has already made investment;
(9) money market instruments or cash equivalents.
(j) REIT shall distribute not less than 90% of the net distributable cash flows, subject to
applicable laws, to its unitholders, at-least on a half yearly basis.
(k) A REIT shall not invest in units of other REITs.
(3) Likewise, the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”)
provide a framework for registration and regulation of Infrastructure Investment Trusts
(“InvITs”).
(4) The Finance (No.2) Act, 2014 had introduced a special taxation regime for providing the
manner of taxability of –
(i) income in the hands of business trusts; and
(ii) income distributed by such business trusts in the hands of the unit holders.
Section 2(13A) of the Income-tax Act, 1961 defines a business trust to mean a trust registered
as an Infrastructure Investment Trust (Invit) under SEBI (Infrastructure Investment Trusts)
Regulations, 2014 or as a Real Estate Investment Trust (REIT) under SEBI (Real Estate
Investment Trusts) Regulations, 2014.

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Chapter XII-FA contains the special provisions relating to business trusts. Section 115UA(1)
provides that any income distributed by a business trust to its unit holders shall be deemed
to be of the same nature and in the same proportion in the hands of the unit holder, as it had
been received by, or accrued to the business trust.
(5) Exemption of certain income to business trust [Section 10(23FC)]
Section 10(23FC) exempts any income of a business trust by way of-
 interest or dividend received or receivable from a Special Purpose Vehicle (SPV). Thus,
the business trust enjoys a pass-through status in respect of interest or dividend
received or receivable from a SPV.
"SPV" means any Indian company, -
(i) in which the REIT holds or proposes to hold not less than 50% of the equity share
capital or interest;
(ii) which holds not less than 80% of its assets directly in properties and does not invest
in other special purpose vehicles; and
(iii) which is not engaged in any activity other than holding and developing property and
any other activity incidental to such holding or development;
(6) Exemption of Rental income of REIT from directly owned real estate asset [Section
10(23FCA)]
Any income of a business trust, being a REIT, by way of renting or leasing or letting out any
real estate asset owned directly by such business trust is exempt in the hands of the business
trust.
(7) Section 115UA(2) provides that subject to the provisions of sections 111A and 112, the total
income of a business trust shall be chargeable to tax at the maximum marginal rate.
(8) Any distributed income referred to in section 115UA received by unit holders is exempt in
their hands under section 10(23FD) to the extent it does not comprise of
- interest referred to in sub-clause (a) of section 10(23FC) or
- dividend income referred to in section 10(23FC)(b) from a special purpose vehicle
which has exercised option under section 115BAA or
- rental income referred to in section 10(23FCA),
(9) Section115UA(3) provides that distributed income or any part thereof, which is in the nature
of
- interest income received by the business trust from the SPV or
- dividend income received or receivable by the business trust from a SPV which has

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exercised the option under section 115BAA or

- rental income from real estate assets owned directly by the REIT [referred to in
section 10(23FCA)]
is deemed to be the income of the unit holder in the previous year of distribution and subject
to tax in the hands of the unit holder in that year.
(10) Any person responsible for making payment of income distributed on behalf of the business
trust to a unit holder is required to furnish a statement to the unit holder and the prescribed
authority within the prescribed time.
The statement should be in the prescribed form and manner. It should contain the particulars
of the nature of income paid during the previous year as well as the other details as may be
prescribed [Section 115UA(4)].
Rule 12CA provides that the statement of income distributed by a business trust to its unit
holder has to be furnished to the Principal Commissioner or the Commissioner of Income-tax
within whose jurisdiction the principal office of the business trust is situated, by 30th
November of the financial year following the previous year during which such income is
distributed.
Further, the statement of income distributed also has to be furnished to the unit holder by
30th June of the financial year following the previous year during which the income is
distributed.
(11) Under section 139(4E), a business trust is mandatorily required to furnish a return of its
income or loss in every previous year. All the provisions of the Income-tax Act, 1961 would
apply as if it were a return required to be furnished under section 139(1).
(12) The scheme of taxability of income in the hands of the business trust, unit holders, sponsors
etc. is briefed in the table given hereunder –
Transaction Section Tax and TDS implications
(1) Transfer of Tax implications in the hands of unit holders:
listed units of  STT leviable on trading of listed units on a
the business recognized stock exchange;
trust by the unit
2(42A)  The period of holding of units of business
holders
trust to qualify as “long-term capital assets”
is “more than 36 months”;
112A  Long-term capital gains upto ` 1 lakh would
be exempt in the hands of the unitholders;
Long-term capital gain exceeding ` 1 lakh
would be taxable @10% plus surcharge, if
applicable, and health and education cess
@4%.

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 ASSESSMENT OF VARIOUS ENTITIES 12.71

111A  Short-term capital gains would be subject to

concessional rate of tax@15% (plus
surcharge, if applicable, and cess@4%).
(2) Exchange of Tax implications in the hands of the sponsor:
shares in SPV 47(xvii)  Such exchange is not treated as a transfer.
by sponsor for Hence, taxability of capital gains on such
units of transfer deferred to the time of disposal of
Business Trust units by the sponsor;
112A &  the sponsor would get the same tax
111A treatment on offloading of units under an
Initial offer on listing of units as it would have
been available had he offloaded the
underlying shareholding through an IPO.
STT shall be levied on sale of such units of
business trust which are acquired in lieu of
shares of SPV, under an initial offer at the
time of listing of units of business trust in the
like manner as in the case of sale of unlisted
equity shares under an IPO. The benefit of
concessional tax regime of tax @15% on
STCG and @10% on LTCG exceeding ` 1
lakh under section 112A shall be available to
the sponsor on sale of units received in lieu
of shares of SPV subject to levy of STT.
49(2AC)  For computing capital gains in the hands of
the sponsor, cost of acquisition of units would
be deemed to be the cost of acquisition of
shares to the sponsor;
2(42A)  For computing capital gains in the hands of
the sponsor, the period of holding of units to
include the period of holding of shares for
determining whether the capital gains are
long-term or short-term.
(3) Interest Tax implications in the hands of the business
income of trust & unit holders and TDS implications in
business trust the hands of the SPV & business trust:
from SPV  Pass-through status for interest received by
business trust from SPV:
10(23FC)  Interest income is not taxable in the hands of
the business trust; and
194A(3)(xi)  SPV is not required to deduct tax at source
on interest paid to business trust.

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Tax consequences on distribution of such

income by the business trust to the
unitholders:
115UA(3) The distributed income or any part thereof,
received by a unit holder from the REIT, which is
in the nature of interest received or receivable
from a SPV is deemed as income of unit holder.
115A(1)(a)  Interest income taxable in the hands of the
(iiac) unit holders –
o @5%, in case of unit holders, being
non-corporate non-residents or
foreign companies; and
o at normal rates of tax, in case of
resident unit holders.
194LBA  Business trust to deduct tax at source on
interest component of income distributed
to unit holders at the time of payment or
credit of income to the account of the unit
holder, whichever is earlier:
o @5%, in case of unit holders, being
non-corporate non-residents or
foreign companies; and
o @10%, in case of resident unit
holders.
(4) Interest 194LC TDS implications in the hands of business
payments to trust:
non-resident  An Indian Company or a business trust
lenders on ECBs paying interest income to a non-resident, not
by the business being a company, or to a foreign company is
trust liable to deduct TDS@5% [Such interest
would attract tax in the hands of the non-
resident lenders @5% as per section 115A].
 The above concessional rate of TDS@5%
is applicable to Interest in respect of
money borrowed by the Indian Company
or the business trust in foreign currency
from a source outside India –
(i) Under a loan agreement between 1st
July 2012 and 30th June, 2023.
(ii) By issuing long term infrastructure
bonds between 1st July 2012 to 1st
October 2014.

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 ASSESSMENT OF VARIOUS ENTITIES 12.73

(iii) By issuing long term bond including

long term infrastructure bonds
between 1st October 2014 and 30th
June, 2023.
(iv) By way of issue of rupee denominated
bond on or before 30th June, 2023.
 However, tax is required to be deducted
@4% in respect of monies borrowed by it
from a source outside India by way of
issue of any long-term bond or rupee
denominated bond between 1st April, 2020
and 30th June, 2023, which is listed only
on a recognised stock exchange located
in any IFSC [Such interest would attract
tax in the hands of the non-resident
lenders @4% as per section 115A].
(5) Dividend Tax implications in the hands of the SPVs,
received by the business trust and unit holders and TDS
business trust implications in the hands of the SPV &
from SPV business trust:
10(23FC)(b)  Pass-through status for dividend received by
business trust from SPV:
- Dividend received or receivable from a
special purpose vehicle, by the business
trust would be exempt in its hands;
- Consequently, SPV is not required to
deduct tax at source on dividend paid to
business trust.
 Tax consequences on distribution of such
income by the business trust to the
unitholders:
115UA(3) The distributed income or any part thereof,
received by a unit holder from the REIT,
which is in the nature of dividend received or
receivable from a SPV, which has exercised
option under section 115BAA, is deemed as
income of unit holder.
10(23FD)  Dividend income taxable in the hands of
the unit holders –
115A(1) o @10%, in case of unit holders,
(a)(iiac) being non-corporate non-residents or
foreign companies; and

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o at normal rates of tax, in case of

resident unit holders.
(However, in case where SPV has not
exercised option under section 115BAA,
dividend income distributed by the
business trust would be exempt in the
hands of the unit-holders)
194LBA  Business trust to deduct tax at source on
dividend component of income distributed
to unit holders at the time of payment or
credit of income to the account of the unit
holder, whichever is earlier, where SPV
has exercised option under section
115BAA:
o @ 10%, in case of unit holders,
being non-corporate non-residents
or foreign companies; and
o @10%, in case of resident unit
holders.
(However, in a case where SPV has not
exercised option under section 115BAA,
no tax is required to be deducted at
source by the business trust on dividend
income distributed by it to the unitholders)
(6) Capital gains Tax implications in the hands of the Business
on disposal of Trust and Unit holders:
assets by the 115UA(2)  Capital gains is chargeable at the applicable
Business Trust rates in the hands of the Business Trust:
 In case of long-term capital gains, the
provisions of section 112 would apply;
 In case of short-term capital gains on sale
of listed shares, the provisions of section
111A would apply;
 Short-term capital gains, other than the
gains subject to tax under section 111A,
would be subject to maximum marginal
rate.
10(23FD)  If such capital gains are further distributed to
unitholders, the component attributable to
capital gains would be exempt in the hands
of the unit holders.

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 ASSESSMENT OF VARIOUS ENTITIES 12.75

(7) Rental income 10(23FCA)  Rental income of REIT from directly owned
arising to REIT real estate asset
from real Any income of a business trust, being a REIT,
estate property by way of renting or leasing or letting out any
directly held by real estate asset owned directly by such
it business trust is exempt in the hands of the
business trust
194-I  Rental income received or credited to a
REIT
Where the income by way of rent is credited
or paid to a business trust, being a REIT, in
respect of any real estate asset, owned
directly by such business trust, tax is not
deductible at source.
115UA(3)  Distributed income received by unit holder
The distributed income or any part thereof,
received by a unit holder from the REIT,
which is in the nature of income by way of
renting or leasing or letting out any real estate
asset owned directly by such REIT is deemed
as income of unit holder.
194LBA  Distribution by REIT to unit holders of
rental income from real estate assets
directly owned by it
► TDS@10% in case of distribution to a
resident unit holder
► TDS at rates in force in case of distribution
to a non-resident unit holder.
(8) Income of Tax implication in the hands of the Business
business trust Trust and Unit holders:
[Other than 115UA(2)  Long-term capital gains chargeable to tax u/s
interest and 112 – 20%
dividend from  Short-term capital gains chargeable to tax u/s
SPV, rental 111A – 15%
income from
 Any other income of the trust is chargeable to
real estate
tax at the maximum marginal rate (i.e.,
property]
@42.744%).
10(23FD)  The above income distributed to unit holders
would be exempt in their hands.

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ILLUSTRATION 7
A business trust, registered under SEBI (Real Estate Investment Trusts) Regulations, 2014, gives
particulars of its income for the P.Y.2021-22:
(1) Interest income from Beta Ltd. – ` 4 crore;
(2) Dividend income from Beta Ltd. – ` 2 crore;
(3) Short-term capital gains on sale of listed shares of Beta Ltd. – ` 1.5 crore;
(4) Short-term capital gains on sale of developmental properties – ` 1 crore
(5) Interest received from investments in unlisted debentures of real estate companies – ` 10
lakh;
(6) Rental income from directly owned real estate assets – ` 2.50 crore
Beta Ltd. is an Indian company in which the business trust holds 70% of the shareholding.
Discuss the tax consequences of the above income earned by the business trust in the hands of the
business trust and the unit holders, assuming that the business trust has distributed ` 10 crore to
the unit holders in the P.Y.2021-22. (Assume that Beta Ltd. does not opt to pay tax under section
115BAA)
SOLUTION
Tax consequences in the hands of the business trust and its unit holders
(1) Interest income of ` 4 crore from Beta Ltd.: There would be no tax liability in the hands of
business trust due to pass-through status enjoyed by it under sub-clause (a) of section 10(23FC)
in respect of interest income from Beta Ltd., being the special purpose vehicle. Therefore, Beta
Ltd. is not required to deduct tax at source on interest payment to the business trust.
The distributed income or any part thereof, received by a unit holder from the REIT, which is
in the nature of interest income received or receivable from a SPV is deemed income of the
unit holder as per section 115UA(3).
The business trust has to deduct tax at source under section 194LBA –
- @ 10%, on interest component of income distributed to resident unit holders; and
- @ 5%, on interest component of income distributed to non-corporate non-resident
and foreign companies’ unit holders.
The interest component of income received from the business trust in the hands of each
unitholder would be determined in the proportion of 4/11.1, by virtue of section 115UA(1).
(2) Dividend income of ` 2 crore from Beta Ltd.: The dividend distributed by the SPV to the
business trust is exempt by virtue of section 10(23FC). Any distributed income referred to in
section 115UA, which is in the nature of dividend income received or receivable from SPV, in

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 ASSESSMENT OF VARIOUS ENTITIES 12.77

a case where the SPV has exercised the option under section 115BAA, is taxable in the hands
of unitholders by virtue of section 10(23FD). However, since Beta Ltd., being a SPV does not
opt for section 115BAA, dividend component is exempt in the hands of the unitholders.
Consequently, business trust is not required to deduct tax at source on the dividend
component distributed to the unitholders.
(3) Short-term capital gains of ` 1.50 crore on sale of listed shares of Beta Ltd.: As per
section 115UA(2), the business trust is liable to pay tax@15% under section 111A in respect
of short-term capital gains on sale of listed shares of special purpose vehicle. There would,
however, be no tax liability on the capital gain component of income distributed to unit
holders, by virtue of the exemption contained in section 10(23FD).
(4) Short-term capital gains of ` 1 crore on sale of developmental properties: It is taxable
at maximum marginal rate of 42.744% in the hands of the business trust as per section
115UA(2). There would be no tax liability in the hands of the unit holders on the capital gain
component of income distributed to them, by virtue of the exemption contained in section
10(23FD).
(5) Interest of ` 10 lakh received in respect of investment in unlisted debentures of
real estate companies: Such interest is [email protected]%, being the maximum
marginal rate, in the hands of the business trust, as per section 115UA(2). However,
there would be no tax liability in the hands of the unit holders on the interest component
of income distributed to them, by virtue of section 10(23FD).
(6) Rental income of ` 2.50 crore from directly owned real estate assets: Any income of a
business trust, being a REIT, by way of renting or leasing or letting out any real estate asset
owned directly by such business trust is exempt in the hands of the trust as per section
10(23FCA).
Where the income by way of rent is credited or paid to a business trust, being a REIT, in
respect of any real estate asset held directly by such REIT, no tax is deductible at source
under section 194-I.
The distributed income or any part thereof, received by a unit holder from the REIT, which is
in the nature of income by way of renting or leasing or letting out any real estate asset owned
directly by such REIT is deemed income of the unit holder as per section 115UA(3). The
business trust has to deduct tax at source@10% under section 194LBA in case of distribution
to a resident unit holder and at rates in force in case of distribution to a non-resident unit
holder.
The rental income component received from the business trust in the hands of each unitholder
would be determined in the proportion of 2.5/11.1, by virtue of section 115UA(1).

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12.4 SPECIAL TAXATION REGIME FOR INVESTMENT

FUNDS AND INCOME RECEIVED FROM SUCH FUNDS
[CHAPTER XII-FB] [SECTIONS 115UB, 10(23FBA) &
10(23FBB)]
(1) Tax liability of the unit holders:
Any income accruing or arising to, or received by, a person, being a unit holder of an
investment fund, out of investments made in the investment fund shall be chargeable to
income-tax in the same manner as if it were the income accruing or arising to, or received by,
such person had the investments made by the investment fund, been made directly by him
[Section 115UB(1)].
Note – Accordingly, income in the hands of the non-resident investor from off shore
investments routed through Category I or Category II AIFs, being a deemed direct investment
outside India by the non-resident investor, is not taxable in India under section 5(2) of the Act
[Circular No. 14/2019, dated 3.7.2019].
(2) Exemption of income of investment fund other than income under the head profits and
gains from business and profession [Section 10(23FBA)]
The Scheme provides for exemption of income, other than income chargeable under the head
“Profits and gains of business or profession”, in the hands of investment fund. The
income in the nature of profits and gains of business or profession shall be taxable in the
hands of the investment fund.
(3) Exemption to unit holder of income under the head “Profits and gains from business
or profession” of investment fund [Section 10(23FBB)]
Income accruing or arising to, or received by, a unit holder of an investment fund, being that
proportion of income which is of the same nature as income chargeable under the head
“Profits and gains of business or profession” at investment fund level, shall be exempt under
section 10(23FBB). This implies that all income from investment fund is taxable in the hands
of unit holders except income under the head “PGBP”.
(4) TDS in respect of income of units of investment fund to unit holders [Section 194LBB]
Investment fund to deduct tax at source on any income (other than the proportion of income
which is of the same nature as income chargeable under the head “Profits and gains of
business or profession” which is taxable at investment fund level) payable by the investment
fund to a unit holder
- @10%, in case of payable to a resident unit holder

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- at rates in force in case of payable to a non-corporate non-resident or foreign company

unit holder
In case of income payable to a non-corporate non-resident or foreign company unit holder,
no deduction is to be made in respect of any income that is not chargeable to tax under the
Act.
Such tax has to be deducted at the time of credit of such income to the account of the payee
or at the time of payment, whichever is earlier.
For this purpose, any such income credited to any account, whether called “suspense
account” or by any other name, in the books of account of the person liable to pay such
income, such crediting shall be deemed to be the credit of such income to the account of the
payee, and the provisions of section 194LBB shall apply accordingly.
(5) Pass - through status for current year losses:
If in any year there is a loss under any head of income at the fund level and such loss cannot
be or is not wholly set-off against income under any other head of income of the said previous
year, then out of such losses,
(i) the loss arising to the Investment Fund under the head “Profits & Gains of Business
or Profession” shall not be allowed to be passed through to the investors but has to be
carried over at fund level to be set off against income of the next year in accordance
with the provisions of Chapter VI
(ii) loss other than loss under the head “profits and gains from business or profession”
would not be allowed be passed through to the investors if such loss has arisen in
respect of a unit which has not been held by the unit holder for a period of at least 12
months [Section 115UB(2)].
Note – By implication, losses other than those referred to in (i) and (ii) above, which cannot
be wholly set-off against current year income, would be passed on to the unit holders to be
carry forward and set-off in their individual hands in accordance with the provisions of Chapter
VI.
(6) Pass - through status for losses accumulated as on 31.3.2019:
Losses, other than loss under the head “profits and gains from business or profession”, if any,
accumulated at the level of investment fund as on 31.3.2019, shall be
- deemed to be the loss of a unit holder who held the unit as on 31.3.2019 in respect of
the investment made by him in the investment fund in the same manner as it were the
loss incurred by him had he made such investments directly and
- shall be allowed to be passed through to the investors for the remaining period
calculated from the year in which the loss has occurred for the first time taking that
year as the first year and set off against their income in accordance with the provisions
of Chapter VI.

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Further, such accumulated losses shall not be available to the investment fund on or after
1.4.2019.
(7) Nature of income in the hands of unitholders:
The income paid or credited by the investment fund shall be deemed to be of the same nature
and in the same proportion in the hands of the unit holder as if it had been received by, or
had accrued or arisen to, the investment fund during the previous year. [Section 115UB(3)].
(8) Tax on total income:
As per section 115UB(4), the total income of the investment fund is chargeable to tax as
follows:
Investment Fund Rate of tax
A company or a firm Rate or rates specified in the Finance Act of the
relevant year (30%/25%, as the case may be, for a
company and 30% for firm for A.Y.2022-23)
Other than a company or a firm Maximum marginal rate
(9) Deemed credit on the last day of the previous year:
If the income accruing or arising to, or received by, an investment fund, during a previous
year is not paid or credited to the unitholders, it shall be deemed to have been credited to the
account of the unit-holder on the last day of the previous year in the same proportion in which
such person would have been entitled to receive the income had it been paid in the previous
year [Section 115UB(6)].
(10) Summary:
The following table gives a summary of the above provisions:
Particulars Investment Fund Unit holder
(i) Income under the head Taxable Exempt
“Profits and gains of
business or profession” of
the Investment Fund
(ii) Income, other than profits Exempt. Taxable, as if he had
and gains of business or Tax to be deducted on directly made the
profession such income distributed investment.
to unitholders
- @10%, in case of
resident payee
- at rates in force in
case of non-resident
payee

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(iii) Loss under the head “Profits To be carried forward for Not passed on to
and gains of business or set-off as per Chapter VI investors
profession” incurred by the at the Fund level
investment fund
(iv) Loss (other than loss referred The Act is silent relating Not allowed to be
to in (iii) above) where such to the permissibility or carried forward by the
loss has arisen in respect of otherwise of carry forward unitholder. He cannot
unit which has not been held of these losses in the set-off such losses
by the unit holder for a hands of investment against his income.
period of at-least 12 funds.
months
(v) Losses (other than losses Not allowed to be carried Unit-holder can carry
referred to in (iii) and (iv) forward for set-off by the forward and set-off
above) remaining after set-off Investment Fund such losses against his
against current year income. income as per Chapter
VI

Note – Losses, other than business losses, accumulated at the level of the investment fund
as on 31.3.2019 would be deemed to be the loss of the unit holder who held the unit as on
31.3.2019 in respect of the investments made by him in the investment fund, in the same
manner as it were the loss incurred by him had he made such investments directly. Such
loss can be carried forward by the unitholder for the remaining period calculated from the
year in which the loss had occurred for the first time taking that year as the first year.
Accordingly, he can set-off such loss in accordance with the provisions of Chapter VI. The
loss so deemed to be the loss of the unitholder shall not be available to the investment fund
on or after 1.4.2019.
(11) Statement to be furnished:
The person responsible for crediting or making payment of the income on behalf of an
investment fund and the investment fund are required to furnish, within the prescribed time,
to the person who is liable to tax in respect of such income and to the prescribed income-tax
authority, a statement in the prescribed form and verified in the prescribed manner. Such
statement should give details of the nature of the income paid or credited during the previous
year and such other relevant details as may be prescribed [Section 115UA(7)].
Rule 12CB provides that the statement of income paid or credited by an investment fund to
its unit holder has to be furnished to the Principal Commissioner or the Commissioner of
Income-tax within whose jurisdiction the principal office of the investment fund is situated, by
15th June of the financial year following the previous year during which such income is paid
or credited.

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Further, the statement of income paid or credited also has to be furnished to the unit holder
by 30th June of the financial year following the previous year during which the income is
paid or credited.
(12) Every investment fund has to compulsorily file its return of income or loss under section
139(4F), if it is not required to do so under any other provision of section 139. The provisions
of the Act would apply as if such return of income or loss were a return required to be
furnished under section 139(1).
(13) Income taxed in the year of accrual not taxable again in the year of payment
[Explanation 2 below section 115UB]:
It has been clarified that any income which has been included in the total income of the unit
holder of an investment fund in a previous year, on account of it having accrued or arisen in
the said previous year, would not be included in his total income in the previous year in which
such income is actually paid to him by the investment fund.
(14) Meaning of certain terms:
Term Meaning
(a) Investment fund Any fund established or incorporated in India in the form of a
trust or a company or a limited liability partnership or a body
corporate which has been granted a certificate of registration as
a Category I or a Category II Alternative Investment Fund and
is regulated under the Securities and Exchange Board of India
(Alternative Investment Fund) Regulations, 2012, made under
the Securities and Exchange Board of India Act, 1992 or under
the International Financial Services Center Authority Act,
2019;
(b) Trust A trust established under the Indian Trusts Act, 1882 or under
any other law for the time being in force.
(c) Unit Beneficial interest of an investor in the investment fund or a
scheme of the investment fund and shall include shares or
partnership interests.

ILLUSTRATION 8
The following are the particulars of income of three investment funds for P.Y.2021-22:
Particulars A B C D
` in lakh
Business Income 2 (2) 5
Capital Gains 16 14 (6) 20
Income from other sources 4 4 8 (2)

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Compute the total income of the investment funds and each unitholder for A.Y.2022-23, assuming that:
(1) each investment fund has 20 unitholders each having one unit held by them for a period
exceeding 12 months; and
(2) income from investment in the investment fund is the only income of the unitholder.
If Investment Fund C has the following income components for A.Y.2023-24, what would be the total
income of the fund and the unit holder for that year?
Business Income ` 2 lakh
Capital Gains ` 9 lakh
Income from Other Sources ` 8 lakh
SOLUTION
Computation of total income of the investment fund for A.Y. 2022-23
Particulars A B C D
`
Business Income Nil 2,00,000 Nil 3,00,000
Total Income Nil 2,00,000 Nil 3,00,000

Computation of total income of a unit holder of the following Investment

funds for A.Y. 2022-23
Particulars A B C D
`
Capital Gains 80,000 70,000 - 1,00,000
Income from other sources 20,000 20,000 30,000 -
Total Income 1,00,000 90,000 30,000 1,00,000
Notes:
(i) The total income of Investment Fund B would be chargeable to tax @30% if the fund is a
firm and @30%/25%, as the case may, if the fund is a company and at the maximum
marginal rate, in any other case.
(ii) In case of Investment Fund D, the loss from other sources ` 2 lakh is set-off against
business income of ` 5 lakh.
(iii) In case of Investment Fund C, the business loss of ` 2 lakh is set-off against income from
other sources of ` 8 lakh. Loss of ` 6 lakh under the head “Capital gains” cannot be set-
off against income under any other head. The same can be carried forward by the

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Unitholder for set-off in the subsequent years since, the units are held for a period of 12
months or more.
(iv) For A.Y. 2023-24, the brought forward capital loss of ` 30,000 [` 6 lakh/20] can be set-off
against capital gains of ` 45,000 [` 9 lakh/20] by the unit-holder since, the period of holding
of units is 12 months or more. Business income of ` 2 lakh would be taxable in the hands of
the Investment Fund. Income from other sources of ` 40,000 (` 8 lakh/20) would be taxable
in the hands of the unitholders.

12.5 ASSESSMENT OF OTHER ENTITIES

(1) Levy of Alternate Minimum Tax (AMT) on all persons claiming profit-linked
deductions, other than companies [Chapter XII-BA–Sections 115JC to 115JF]

(i) Background: The Finance Act, 2011 had introduced the concept of AMT initially in relation
to LLPs and accordingly the LLPs were subject to AMT @18.5% of adjusted total income.
Though the concept of Alternate Minimum Tax (AMT) is similar to MAT in case of
corporates, however, the tax base in the case of LLPs is the adjusted total income
computed as per the Income-tax Act, 1961 and not the book profit computed after making
the specified adjustments to the profit as per the profit and loss account prepared in
accordance with Schedule VI to the Companies Act, 1956.
The Finance Act, 2012 extended the levy of AMT to certain persons other than companies,
in order to widen the tax base vis-à-vis profit-linked deductions. Accordingly, any person
other than a company, who has claimed deduction under any section (other than section
80P) included in Chapter VI-A under the heading “C – Deductions in respect of certain
incomes” or under section 10AA or under section 35AD would be subject to AMT with effect
from A.Y. 2013-14 [Section 115JEE(1)].
The provisions of AMT would, however, not be applicable to an individual, HUF, AOPs,
BOIs, whether incorporated or not, or artificial juridical person, if the adjusted total income
of such person does not exceed ` 20 lakh [Section 115JEE(2)].
(ii) Levy of [email protected]% on Adjusted Total Income: Accordingly, where the regular income-
tax payable by a person, other than a company, for a previous year computed as per the
provisions of the Income-tax Act, 1961 (other than Chapter XII-BA) is less than the AMT
payable for such previous year, the adjusted total income shall be deemed to be the total
income of the person. Such person shall be liable to pay income-tax on the adjusted total
income @ 18.5% [Section 115JC].
(iii) Meaning of Adjusted Total Income: “Adjusted total income” would mean the total income
before giving effect to Chapter XII-BA i.e. AMT provisions as increased by the deductions

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claimed, if any, under –

(1) any section (other than section 80P) included in Chapter VI-A under the heading “C
– Deductions in respect of certain incomes” (Section 80-IA to 80RRB);
(2) section 10AA (SEZ); and
(3) section 35AD, as reduced by the depreciation allowable under section 32, as if no
deduction under section 35AD was allowed in respect of the asset for which such
deduction is claimed.
(iv) Furnishing Report by Chartered Accountant: Such persons to whom this section applies
should obtain a report in the prescribed form from a Chartered Accountant certifying that the
adjusted total income and the AMT have been computed in accordance with the provisions
of this Chapter. The report has to be furnished on or before the specified date referred to in
section 44AB (i.e., one month prior to the due date for filing return of income), in such form
as may be prescribed, from an accountant referred to in the Explanation below section 288(2),
certifying that the adjusted total income and the alternate minimum tax have been computed
in accordance with the provisions of this Chapter and furnish such report by that date.
(v) Levy of AMT @9% of Adjusted Total Income in case of a unit located in IFSC: Where
the person subject to AMT is a unit located in an International Financial Services Centre
(IFSC) deriving its income solely in convertible foreign exchange, AMT would be leviable
@9% of Adjusted Total Income, instead of 18.5%.
(vi) Applicability of Interest and Penal provisions: Section 115JE specifically provides that
“save as otherwise provided in this Chapter, all other provisions of this Act shall apply to a
person referred to in this Chapter”. Hence, all other provisions relating to self-assessment
under section 140A, advance tax, interest under sections 234A, 234B and 234C, penalty etc.
would also apply to a person who is subject to AMT.
(vii) Non-applicability of AMT provisions: The provisions of this section shall not apply to a
person who has exercised the option under section 115BAC or section 115BAD [Section
115JC(5)]. (These sections 115BAC and 115BAD are discussed later on in this chapter)
Tax credit for AMT [Section 115JD]
(i) AMT paid in excess of the regular income-tax payable under the provisions of the Income-tax
Act, 1961 for the year would be eligible for credit to be carried forward and set-off against
income-tax payable in the later year to the extent of excess of regular income-tax payable
under the provisions of the Act over the AMT payable in that year. The balance tax credit, if
any, shall be carried forward to the next year for set-off in that year in a similar manner.
Where the amount of tax credit in respect of any income-tax paid in any country or specified
territory outside India under section 90 or section 90A or section 91, allowed against the
alternate minimum tax payable, exceeds the amount of the tax credit admissible against the

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regular income-tax payable by the assessee, then, while computing the amount of credit
under this sub-section, such excess amount shall be ignored.
In other words, the amount of tax credit in respect of AMT shall not be allowed to be carried
forward to subsequent year to the extent such credit relates to the difference between the
amount of foreign tax credit (FTC) allowed against AMT and FTC allowable against the
regular tax payable by the assessee.
(ii) AMT credit can be carried forward for set-off upto a maximum period of 15 assessment years
succeeding the assessment year in which the credit becomes allowable.
(iii) No interest shall, however, be payable on such tax credit.
(iv) If the amount of regular income-tax or AMT is reduced or increased as a result of any order
passed under the Income-tax Act, 1961, the amount of tax credit allowed under section 115JD
would also vary accordingly.
(v) A person who has exercised the option under section 115BAC or section 115BAD would not
be eligible to claim AMT credit [Section 115JD(7)]
Tax Credit allowable even if Adjusted Total Income does not exceed ` 20 lakh in the year of
set-off [Section 115JEE(3)]
The credit for tax paid under section 115JC shall be allowed in accordance with the provisions of
section 115JD, notwithstanding the conditions mentioned in sub-section (1) or (2) of section
115JEE. Hence, even if the assessee has not claimed any deduction under section 10AA or
section 35AD or Chapter VI-A under the heading “C- Deductions in respect of certain incomes” in
any previous year and the adjusted total income of that year does not exceed ` 20 lakh, it would
still be entitled to set-off his brought forward AMT credit in that year.
Related Provisions
(i) Correspondingly, under section 140A, for determination of self-assessment tax payable, tax
credit claimed to be set-off in accordance with section 115JD has also to be reduced.
(ii) Such tax credit allowed to be set-off in accordance with the provisions of section 115JD has
to be reduced from the amount of tax on total income determined under section 143(1) or on
regular assessment, on which interest under section 234A is leviable for default in furnishing
return of income.
(iii) Similarly, section 234B levies interest for default in payment of advance tax, to enable
reduction of tax credit under section 115JD while computing “assessed tax”.
(iv) Likewise, in section 234C levying interest for deferment of advance tax, such tax credit under
section 115JD has to be reduced for computing “tax due on the returned income”.

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ILLUSTRATION 9
Mr. Rajesh has income of ` 45 lakhs under the head “Profits and gains of business or profession”.
One of his businesses is eligible for deduction @100% of profits under section 80-IB for A.Y. 2022-
23. The profit from such business included in the business income is ` 20 lakhs. Compute the tax
payable by Mr. Rajesh, assuming that he has no other income during the P.Y. 2021-22 and he does
not opt to pay tax as per section 115BAC.
SOLUTION
Computation of regular income-tax payable under the provisions of the Act
Particulars `
Profits and gains of business or profession 45,00,000
Gross total Income 45,00,000
Less: Deduction under section 80-IB 20,00,000
Total Income 25,00,000
Tax payable
Up to ` 2,50,000 Nil
5% on next ` 2,50,000 12,500
20% on next ` 5,00,000 1,00,000
30% on balance ` 15,00,000 4,50,000
5,62,500
Add: Health and education cess@ 4% 22,500
Tax liability 5,85,000
Computation of Alternate Minimum Tax (AMT)
Particulars `
Total Income as per the regular provisions of the Income-tax Act, 1961 25,00,000
Add: Deduction under section 80-IB 20,00,000
Adjusted Total Income 45,00,000
AMT @ 18.5% of ` 45,00,000 8,32,500
Add: Health and Education Cess @ 4% 33,300
AMT liability 8,65,800

Since the regular income-tax payable as per the provisions of the Act is less than the AMT, the
adjusted total income of ` 45 lakhs would be deemed to be the total income of Mr. Rajesh and he
would be liable to pay tax @18.5% thereof. The tax payable by Mr. Rajesh for the A.Y. 2022-23
would, therefore, be ` 8,65,800.

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Mr. Rajesh would be eligible for credit to the extent of ` 2,80,800 [` 8,65,800 – ` 5,85,000] to be
set-off in the year in which tax on total income computed under the regular provisions of the Act
exceeds the AMT. Such credit can be carried forward for succeeding 15 assessment years.
(2) Assessment of Individuals
The term “individual” as such has nowhere been defined in the Income-tax Act, 1961. Section
2(31), however, states that “person” inter alia, includes an individual. In the commonly understood
sense of the term, an individual means a human being or a single person. The person may be
major, minor, married or unmarried, possessing sound or unsound mind. All the same, he is
assessable as an ‘individual’ and is liable to pay tax, if the total income earned by him during any
previous year exceeds the prescribed limit exempted from tax. If an individual who is liable to pay
tax for any year dies before he is assessed to tax, his executor, administrator or legal
representative is treated as the individual assessee for purposes of assessment of the income of
the deceased person. In the case of an individual who is a minor or a lunatic, the assessment of
his income will be made on his guardian or the trustee. However, if the incapacitated person has
no trustee or guardian or trustee or guardian is a non-resident and cannot be traced, the
assessment can be made directly on the minor or lunatic. The rights and duties of all
representative assessees are the same as those of the persons they are representing.
(i) Total income of an individual: The Total Income of an individual is arrived at after making
deductions under Chapter VI-A from the Gross Total Income. As we have learnt earlier, Gross
Total Income is the aggregate of the net income computed under the five heads of income,
after giving effect to the provisions for clubbing of income and set-off and carry forward and
setoff of losses.
(ii) Assessment of a non-resident individual
The manner for computation of total income explained above is also applicable to an
individual who is a non-resident during the previous year. The scope of deemed income
taxable in the hands of a non-resident as laid down in section 5 is explained in section 9(1)
which extends the liability to tax of a non-resident individual in respect of income which
although not actually accruing or arising in India deemed to be so accruing or arising,
assumes significance in the assessment of non-resident individual. For better understanding
of the provisions of section 9, students are advised to refer to Chapter 2 –“Non-resident
Taxation in Module 4 of the Study material containing the chapters relating to Part II: International
Taxation.
(iii) Flat rate of tax on winnings from lotteries, crossword puzzles etc. [Section 115BB]
Under section 115BB, gross winnings from lotteries, crossword puzzles, races including horse
races (other than income from the activity of owning and maintaining race horses), card
games and other games of any sort or from gambling or betting of any nature whatsoever
shall be chargeable to income-tax at a flat rate of 30% on the gross winnings.

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(iv) Special concessions in the case of individuals not being citizens of India
Although basically the law of income-tax is applicable alike to both citizens and non-citizens of India,
and there is no difference in the general principles for computing the total income under the Income-
tax Act, 1961, however, on a consideration of the peculiar circumstances in which a foreigner might
come to or live in India, certain concessions and reliefs are granted to them under section 10(6).
These have been discussed in detail in Chapter 2 –“Non-resident Taxation in Module 4 of the Study
material containing the chapters relating to Part II: International Taxation.
(v) Exemptions, reliefs and concessional rates of tax available to individuals
The tax exemptions and reliefs available under the Act to individuals in respect of income
chargeable to tax fall under the following categories:
(a) Income altogether excluded from the total income, and on which in consequence, no
income-tax is payable [Section 10].
(b) Deductions from gross total income both in respect of income, a part of which is not
chargeable to income-tax and payments made by the assessee, a part or the whole
of which is deductible from the gross total income [Chapter VIA]
(c) Option under section 115BAC for availing concessional tax slab rates
I. Option to pay income-tax at concessional tax slab rates
As per section 115BAC, individuals or HUFs (Assessment HUFs is discussed
in the next heading) have an option to pay tax in respect of their total income
(other than income chargeable to tax at special rates under Chapter XII such
as section 111A, 112, 112A, 115BB etc.) at the following concessional rates,
subject to certain conditions specified under section 115BAC(2) –
Tax Slab Rate of income-tax
(i) Upto ` 2,50,000 NIL
(ii) From ` 2,50,001 to ` 5,00,000 5%
(iii) From ` 5,00,001 to ` 7,50,000 10%
(iv) From ` 7,50,001 to ` 10,00,000 15%
(v) From ` 10,00,001 to ` 12,50,000 20%
(vi) From ` 12,50,001 to ` 15,00,000 25%
(vii) Above ` 15,00,000 30%

[Note: In case an individual of the age of 60 years or more is opting for

115BAC, the benefit of higher basic exemption limit would not be available
to him and tax liability would be computed in accordance with the above
tax slab rates]

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II. Conditions to be satisfied for availing concessional rates of tax: The

following are the conditions to be satisfied for availing concessional rates of
tax:

S. No. Particulars

(1) Certain deductions/exemptions not allowable: Section

115BAC(2) provides that while computing total income, the following
deductions/exemptions would not be allowed, if an individual or HUF
opts for concessional rates of taxes under section 115BAC(1):
Section Exemption/Deduction
10(5) Leave travel concession
10(13A) House rent allowance
10(14) Exemption in respect of special allowances or
benefit to meet expenses relating to duties or
personal expenses (other than those as may
be prescribed for this purpose).
10(17) Daily allowance or constituency allowance of
MPs and MLAs
10(32) Exemption in respect of income of minor child
included in the income of parent
10AA Tax holiday for units established in SEZ
16 (i) Standard deduction under the head
“Salaries”
(ii) Entertainment allowance
(iii) Professional tax
24(b) Interest on loan in respect of self-occupied
property
32(1)(iia) Additional depreciation
33AB Tea/Coffee/Rubber development account
33ABA Site Restoration Fund
35(1)(ii),(iia),(iii) Deduction in respect of contribution to
or 35(2AA) - notified approved research association/
university/college/other institutions for
scientific research [Section 35(1)(ii)]
- approved Indian company for scientific
research [Section 35(1)(iia)]
- notified approved research association/
university/college/other institutions for

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 ASSESSMENT OF VARIOUS ENTITIES 12.91

research in social science or statistical

research [Section 35(1)(iii)]
- An approved National
laboratory/university/ IIT/ specified person
for scientific research undertaken under an
approved programme [Section 35(2AA)]
35AD Investment linked tax incentives for specified
businesses
35CCC Deduction in respect of expenditure incurred
on notified agricultural project
57(iia) Deduction in respect of family pension
80C to 80U Deductions under Chapter VI-A (other than
employers contribution towards NPS under
section 80CCD(2) and deduction in respect of
employment of new employees under section
80JJAA).
(2) Certain losses not allowed to be set-off: While computing total
income, set-off of any loss -
(i) carried forward or depreciation from any earlier assessment
year, if such loss or depreciation is attributable to any of the
deductions referred to in (1) above; or
(ii) under the head house property with any other head of
income;
would not be allowed.

(3) Depreciation or additional depreciation: Depreciation u/s 32 is to

be determined in the prescribed manner. Depreciation in respect of
any block of assets entitled to more than 40%, would be restricted
to 40% on the written down value of such block of assets. Additional
depreciation u/s 32(1)(iia), however, cannot be claimed.

Additional points:
(i) An individual opting for the provisions of section 115BAC would be entitled
for
- travelling allowance (i.e., allowance granted to meet the cost of travel on
tour or transfer);
- daily allowance (i.e., allowance granted on tour or for the period of journey
in connection with transfer, to meet the ordinary daily charges incurred by
an employee on account of absence from his normal place of duty);

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- conveyance allowance (i.e., allowance granted to meet the expenditure

incurred on conveyance in performance of duties of an office or
employment of profit, where free conveyance is not provided by the
employer); and
- exemption in respect of transport allowance granted to an employee who
is blind or deaf and dumb or orthopedically handicapped with disability of
the lower extremities of the body to the extent of ` 3,200 p.m.
(ii) An individual, being an employee opting for section 115BAC, would not be
entitled for exemption of perquisite of free food and non-alcoholic beverages
provided by an employer through paid vouchers
(iii) In case of an individual or HUF opting for section 115BAC, total income
should be computed without set-off of any loss brought forward or
depreciation from any earlier assessment year, where such loss or
depreciation is attributable to any of the deductions listed in (1) above [Such
loss and depreciation would be deemed to have been already given effect to
and no further deduction for such loss or depreciation shall be allowed for any
subsequent year]
Example 5: Let us consider the case of Mr. X, who carries on business of
manufacturing of steel. He has unabsorbed depreciation as on 1.4.2021,
which includes amount attributable to additional depreciation u/s 32(1)(iia) of
P.Y.2020-21 or any earlier previous year in respect of block of plant and
machinery. If he exercises option under section 115BAC for P.Y.2021-22
relevant to A.Y.2022-23, the amount so attributable to additional depreciation
of earlier years remaining unabsorbed as on 1.4.2021 would not be eligible
for set-off against current year income and no further deduction for such loss
or depreciation shall be allowed for any subsequent year.

III. Time limit for exercise of option: The concessional rate would be applicable
only if option is exercised in the prescribed manner -
(i) In case of an individual or HUF having no income from business or
profession: Where such individual or HUF has no business income, the
option has to be exercised along with the return of income to be
furnished under section 139(1) for a previous year relevant to the
assessment year. In effect, such individual or HUF can choose whether
or not to exercise the option in each previous year. He may choose to
exercise the option in one year and not to exercise the option in another
year.
(ii) In case of an individual or HUF having income from business or
profession: The option has to be exercised on or before the due date
specified under section 139(1) for furnishing the return of income for any
previous year relevant to assessment year 2022-23 or any later

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assessment year and once such option is exercised, it would apply to

subsequent assessment years.
The option can be withdrawn only once where it was exercised by the
individual or HUF having business income for a previous year other than
the year in which it was exercised. Thereafter, the individual or HUF shall
never be eligible to exercise option under this section, except where
such individual or HUF ceases to have any business income in which
case, option under (i) above shall be available.
IV. Consequences for failure to satisfy conditions mentioned in section
115BAC(2): The following are the consequences for failure to satisfy the
conditions mentioned above:
(i) In case of an individual or HUF having no income from business or
profession: On failure to satisfy the conditions mentioned in point no.
(1), (2) and (3) of II above in any previous year, the option exercised
would be invalid in respect of the assessment year relevant to that
previous year.
Consequently, the other provisions of the Income-tax Act, 1961 would
apply as if the option had not been exercised for the assessment year
relevant to that previous year.
(ii) In case of an individual or HUF having income from business or
profession: On failure to satisfy the conditions mentioned in point no.
(1), (2) and (3) above in any previous year, the option exercised would
be invalid in respect of the assessment year relevant to that previous
year and subsequent assessment years.
Consequently, the other provisions of the Income-tax Act, 1961 would
apply to the person as if the option had not been exercised for the
assessment year relevant to that previous year and subsequent
assessment years.
AMT liability not attracted: Individuals or HUFs exercising option u/s 115BAC are
not liable to alternate minimum tax u/s 115JC.
Notes: (1) It may be noted that in case of individuals or HUFs not having income from
business or profession, the total income and tax liability (including provisions relating
to AMT, if applicable under normal provisions) may be computed every year both in
accordance with normal provisions of the Income-tax Act, 1961 and in accordance with
the provisions of section 115BAC, in order to determine which is more beneficial and
accordingly decide whether or not to opt for section 115BAC for that year.
(2) For the purpose of tax deduction at source, the CBDT has, vide Circular No. C1 of
2020, dated 13th April, 2020, clarified that an employee, having income other than
income under the head "Profits and gains of business or profession" and intending to
opt for the concessional rate under section 115BAC, is required to intimate to the

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deductor, being his employer, of such intention for each previous year and upon such
intimation, the deductor shall compute his total income, and make TDS thereon in
accordance with the provisions of section 115BAC. If such intimation is not made by
the employee, the employer shall make TDS without considering the provisions of
section 115BAC.
It is also clarified that the intimation so made to the deductor shall be only for the
purposes of TDS during the previous year and cannot be modified during that year.
However, the intimation would not amount to exercising option in terms of section
115BAC and the person shall be required to do so alongwith the return to be furnished
under section 139(1) for that previous year. Thus, option at the time of filing of return
of income under section 139(1) could be different from the intimation made by such
employee to the employer for that previous year.
Further, in case of a person who has income under the head "Profit and gains of
business or profession" also, the option for taxation under section 115BAC once
exercised for a previous year at the time of filing of return of income under section
139(1) cannot be changed for subsequent previous years except in certain
circumstances.
Accordingly, a person having income under the head “Profits and gains from business
or profession” also shall also intimate to his employer. However, the intimation to the
employer in his case for subsequent previous years must not deviate from the option
under section 115BAC once exercised in a previous year.
(vi) Rebate of tax and relief in certain cases
♦ Income from association of persons or bodies of individuals: If the assessee is a
member of an association of persons or a body of individuals (other than a company,
co-operative society or society) income-tax shall not be payable by him in respect of
any portion of the amount receivable by him from the association or body on which tax
has already been paid by the association or body at the maximum marginal rate or any
higher rate [Section 86].
In any other case, the share of member shall form part of his total income.
Further, if the total income of AOP or BOI is not chargeable to income-tax, then the
share of member shall be chargeable to tax as part of his total income.
For the purposes of this provision in the case of an association of persons which is
assessable under section 67A, the members of the AOP whose shares in the income
are indeterminate or unknown, will be entitled to receive equal shares in the income
of the AOP and the individual share of such member will be determined accordingly.
♦ Rebate of income-tax to certain individuals: Section 87A provides a rebate from the
tax payable by an assessee, being an individual resident in India, whose total income
does not exceed ` 5,00,000. Such assessee shall get a tax relief of ` 12,500. In effect,
the rebate would be the tax payable or ` 12,500, whichever is less.

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♦ Relief when salary etc. is paid in arrears or in advance [Section 89]: It has already
been explained in the Chapter relating to salaries that arrears or advances of salaries
are assessable in the hands of the recipients in the year in which these are received.
Consequently, in a financial year, an employee may become chargeable to tax in
respect of salary for more than 12 months. Likewise, any payment in the nature of
profit in lieu of salary (within the meaning of section 17(3)) is also chargeable in the
year of receipt in addition to the normal salary received by the employee. In
consequence, the aggregate salary income may become liable to tax at a rate higher
than that at which it would otherwise have been assessed. To obviate such a hardship,
the Assessing Officer has been empowered to grant relief in appropriate cases, on the
employee making an application, in accordance with Rule 21A of the Income-tax
Rules, 1962.
In appropriate cases coming under section 192(2A), where the employer is the
Government or a public sector undertaking, co-operative society, local authority,
university, institution or body, such employer himself is entitled to take into account
the relief under section 89(1) [Refer Chapter 4: Salaries in Module 1 of the Study
Material for manner of computation of relief].
♦ Relief from taxation in respect of income from retirement benefit account
maintained in a notified country [Section 89A]: Where a specified person has
income accrued in a specified account, such income shall be taxed in such manner
and in such year as may be prescribed.
Meaning of certain terms:
Terms Meaning
Notified country A country as notified by the Central Government
Specified An account maintained in a notified country by the specified
account person in respect of his retirement benefits and the income
from such account is not taxable on accrual basis but is
taxed by such country at the time of withdrawal or
redemption.
Specified person A person resident in India who opened a specified account
in a notified country while being non-resident in India and
resident in that country.

♦ Rates of Surcharge Applicable to Individuals

The Finance (No.2) Act, 2019 has levied an enhanced surcharge of 25% and 37%,
where the total income of individuals/HUF/AOPs/BoIs/artificial juridical persons
exceeds ` 2 crores and ` 5 crores, respectively. However, the enhanced surcharge

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is not applicable on tax payable on dividend income or tax payable at special rates
under section 111A and 112A on short-term capital gains and long-term capital gains
arising from the transfer of equity share in a company or unit of an equity-oriented
fund/business trust, which has been subject to securities transaction tax. [Refer to
Chapter 1: Basic Concepts in Module 1 of the Study Material, containing rates of
surcharge for understanding the manner of computation of surcharge on capital gains,
dividends and other income components of total income]
(3) Assessment of Hindu Undivided Families
(i) Concept of HUF: A Hindu undivided family (HUF) is treated as a separate entity for the
purpose of assessment under the Income-tax Act, 1961. It is included in the definition of the
term “person” under section 2(31). The levy of income-tax is on “every person”. Therefore,
income-tax is payable by a HUF. "Hindu undivided family" has not been defined under the
Income-tax Act. The expression is, however, defined under the Hindu Law as a family, which
consists of all males lineally descended from a common ancestor and includes their wives
and daughters (Concept of HUF is already discussed in detail in Chapter 1: Basic Concepts).
(ii) Assessment of Hindu Undivided family: The income of a HUF is to be assessed in the
hands of the HUF and not in the hands of any of its members. This is because HUF is a
separate and a distinct tax entity.
(iii) Assessment of HUF after partition of HUF [Section 171]: There are two types of partition.
They are –
(a) Total partition – is a partition by which the entire family property is divided amongst
the coparceners. After the total partition, the HUF ceases to exist as such.
(b) Partial partition – is a partition which is partial as regards either the persons
constituting the joint family or as regards the properties belonging to the joint family
or both. In case of a partial partition as regards persons constituting the joint family,
some coparceners may separate from the joint family while the others might continue
to remain as part of the joint family. In case of a partial partition as regards the
property, there may be a division or severance of interest in respect of some part of
the estate of the joint family, while the rest of the estate may continue to remain as
property of the joint family.
Effect of partial partitions made after 31 st December 1978: However, partial
partitions after 31st December 1978 are not recognized for tax purposes. If any
partial partition has been effected after 31.12.1978, then no claim of such partial
partition shall be recorded by the Assessing Officer. Such family will continue to be
assessed as if no such partial partition has been effected. Every member of the HUF,
immediately before such partial partition, and the HUF shall be jointly and severally
liable for any sum payable under the Act. The several liability of a member would be
proportionate to the share of joint family property allotted to him on such partial
partition.

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When a claim of total partition of HUF has been made by any member of the HUF on
behalf of the HUF, the Assessing Officer shall inquire into such claim. For this purpose,
he shall give notice to all the members of the HUF. Thereafter, the Assessing Officer
shall, on completion of inquiry, record a finding as to whether total partition has taken
place and if so, the date when such partition was effected.
If partition has been effected in the previous year, the total income of the HUF for
the previous year up to the date of partition shall be assessed as income of the HUF.
Every member of the HUF, in addition to any tax for which he is separately liable, is
jointly and severally liable for payment of tax on such assessed income of the HUF.
The several liability of a member would be proportionate to the share of joint family
property allotted to him on such partition.
If partition has been effected after expiry of previous year, the total income of the
HUF for the previous year shall be assessed as income of the HUF. Every member of
the HUF is jointly and severally liable for payment of tax on such assessed income of
the HUF.
If partition has already taken place: If the Assessing Officer finds after completion
of the assessment of a HUF that the partition has already taken place, the Assessing
Officer shall proceed to recover the tax from every person who was a member of the
family before the partition.
Every such member of the HUF is jointly and severally liable for payment of tax on
such assessed income of the HUF.
(iv) Computation of total income of HUF: The following points should be taken into
consideration while determining the total income of HUF -
(a) Income from the transfer of a self-acquired property by an individual to his HUF for
inadequate consideration or conversion of the self-acquired property into property
of the HUF is not considered as the income of the HUF. It would be included in the
income of the individual member who transferred the property to the HUF [Section
64(2)]
(b) Income from an impartible estate is included in the hands of the holder of the estate
and not in the hands of the HUF. Even if the impartible estate is owned by the HUF,
income from such estate is includible in the hands of the holder of the estate who is
the eldest member of the HUF.
(c) Section 10(2) exempts any receipt by an individual as a member of a HUF out of the
family income.
(d) If a member of the HUF receives any fee or remuneration as a director or a partner
in a company or firm as a consequence of the investment made in such concern out
of the funds of the HUF, such fee/remuneration shall constitute income of the HUF.
However, any such fee or remuneration earned by a member of a HUF as a director
or partner for services rendered purely in his personal capacity, will be included in
the income of the individual member and not the HUF.

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(v) Exercise of option under section 115BAC: HUFs can also exercise option to pay tax
availing concessional tax rate available under section 115BAC, subject to certain conditions
to be satisfied. Detailed discussion pertaining the provisions of section 115BAC is contained
under “Assessment of individuals”.
(vi) Rates of surcharge applicable to HUF
The Finance (No.2) Act, 2019 has levied an enhanced surcharge of 25% and 37%, where the
total income of individuals/HUF/AOPs/BOIs/artificial juridical persons exceeds ` 2 crores and
` 5 crores, respectively. However, the enhanced surcharge has been withdrawn on tax
payable on dividend income and tax payable at special rates under section 111A and 112A
on short-term capital gains and long-term capital gains arising from the transfer of equity
share in a company or unit of an equity-oriented fund/business trust, which has been subject
to securities transaction tax [Refer to Chapter 1: Basic Concepts containing rates of
surcharge for understanding the manner of computation of surcharge on capital gains,
dividends and other income components of total income].
(vii) Conversion of separate property into property of HUF: However, to the above exemption
there is an exception provided by section 64(2). Even though we have discussed this in the
appropriate place it will be better to recapitulate.
Before this, let us understand the concept of conversion. Generally, income from self-
acquired property of an individual, who is a member of a HUF will be assessed as his personal
income and not as the income of the family. However, the individual can convert his separate
properties into the property of the HUF. There are no legal formalities to be complied with.
These principles have been upheld by various judicial rulings.
It naturally follows that once the assets belonging to the individual are impressed with the
character of joint family property, the income arising therefrom, should be assessed as the
income of the HUF. However, the deeming provisions of section 64(2) specifically provide
that the entire income from the converted property is taxable as the income of the transferor.
This provision applies not only to property converted in the above manner but also covers
transfer of property by an individual, directly or indirectly, to the family otherwise than for
adequate consideration, in other words, gifts. Accordingly, where an individual makes direct
or indirect gift of his separate property to the Hindu Undivided family of which he is a member
or if he transfers his separate property to his family for less than its fair market value, the
provisions of section 64(2) will be attracted and the entire income from such separate property
converted into HUF property will be included in the total income of the individual.
(viii) Business in the personal capacity of the Karta or member: Where the Karta or any
member of a joint family carries on a business on his personal capacity, the income from any
such business would constitute his personal income. It does not matter even if the business

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of the member and of the joint family are identical in nature and size. Suppose the capital for
the individual’s business is borrowed from the funds of the family what will be the position?
Consider the following example.
Example 6: A HUF consists of the Karta, his wife, two sons and daughter. The HUF runs a
departmental store. One of the two sons is qualified in business administration and the other
one is an automobile engineer. Together they start a garage for repairing all types of motor
cars. The technical aspects are looked after by the engineer while the general administration
is taken care of by the son qualified in business administration. For starting the business, the
HUF has advanced an interest-free loan of ` 50,000. The business is yielding good profits.
Now the question arises whether the income from the business should be assessed in the
hands of the Hindu undivided family.
It is obvious that the family, in providing the interest-free loan to the business of the brothers
has suffered a detriment. However, the Delhi High Court has laid down the following proposition
in this connection in the case of CIT vs. Charandass Khanna & Sons (1980) 123 ITR 194 (Delhi).
If investment plays a minor role and it is primarily the personal efforts, specialised skill and
enterprise of the individual coparceners which resulted in the new business being set up and
the profits accruing, it may not essentially be said that the income belongs to the HUF. In
Example 6, the good profits are more due to the specialised skills acquired by the two sons in
their respective fields. Of course, the capital, got from the family as interest free loan, has its
role to play but it is nevertheless a minor one. Therefore, we can say that the income from the
business set up by the brothers is assessable in their hands as individuals according to the
agreed rate of sharing and not as the income of the family.
The Supreme Court has also upheld this principle in K.S. Subbiah Pillai vs. CIT (237 ITR 11).
It was held that remuneration received on account of personal qualification and exercise of
individual exertion was assessable as individual income and not as income of HUF. The
following principles have been broadly applied by the Supreme Court for determining the
character of the receipt by way of remuneration paid to a coparcener:
(i) when the remuneration received by the coparcener though not in form but in substance
was one of the modes of return made to the family because of investment of the family
funds, it has to be assessed as the income of Joint Hindu Family.
(ii) when the remuneration is not paid to the detriment of the family funds, it is
assessable as the income of recipient Karta or coparcener as an individual.
(iii) when it is a compensation for the services, skill or labour of the coparcener, it has
to be assessed as the income of such a coparcener in his individual capacity.

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Example 7: The Karta of a HUF receives salary in his capacity as a treasurer and secretary
of a bank. The HUF has furnished ` 1,00,000 as security deposit. Decide whether the
salary can be assessed as the income of the HUF.
The position of treasurer and secretary requires considerable personal skill and integrity on
the part of the incumbent. It is true that the security deposit might have been furnished by
the HUF, however, since the salary is paid to the Karta primarily for the exercise of his
personal skill and integrity, it is to be assessed as his individual income.
Hence, students should carefully understand the following:
(a) Where the funds of a HUF are invested in a company or a partnership firm, the
dividends or share of profits are generally taxable as the income of the family. In
such a case the fee, salary, commission or other remuneration received by the Karta,
or any member of the family, in his capacity as director or partner would also be
taxable as income of the family. The reasons for this treatment are as follows:
(1) The income is earned by the detriment to the joint family funds.
(2) It is earned with the aid of joint family funds.
(3) There is real and sufficient connection between the investment of the joint
family funds and the income by way of remuneration earned.
(b) However, where the income is earned by the Karta or any other member of the
family by the exercise of the personal skill, the income should be assessed in their
individual hands even if some detriment is caused to the family funds, say, by way
of loan, guarantee etc. whose role is only secondary.
(ix) Members of HUF and Partnership firms: A Hindu undivided family can become a partner
in a firm. However, since it has no separate legal entity of its own, its Karta alone can be
partner in the firm representing the family. The coparcenary has no place in the partnership.
When the Karta of joint Hindu family enters into a partnership with strangers, the member of
the family does not, ipso facto, become partners in that firm. They have no right to take part
in its management or to sue for its dissolution. The creditors of the firm are entitled to
proceed against the joint family assets including the shares of the non-partner coparceners
for their debts. This is because under Hindu Law, the Karta has the right when carrying on
business to pledge the credit of the joint family to the extent of its assets. The liability on the
part of other members of the HUF arises by reason of their status as coparceners and not
by reason of any contract of partnership by them.
Partnership between Karta representing family and Coparcener: A Karta of a HUF
representing the family on the one hand, and a member of that family in his individual
capacity on the other, can enter into a valid partnership. An individual coparcener, while
remaining joint, can possess, enjoy and utilise in any way he likes, property which is his

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individual property. Therefore, when he enters into partnership with the family, he retains
his share and interest in the property of the family while he simultaneously enjoys the
benefit of his separate property and fruits of its investment.
(x) Salary paid to Karta for managing the family’s business: If remuneration is paid to the
Karta of Hindu undivided family under a valid agreement which is bona fide and in the
interest of and expedient for the business of the family and the payment is genuine and not
excessive, such remuneration would be an expenditure laid out wholly and exclusively for
the purpose of the business of the family and would be allowable as an expenditure.
(xi) Salary paid to member: A Hindu undivided family can be allowed to deduct salaries paid to
member of the family if the payment is made as a matter of commercial or business
expediency, but the service rendered must be to the family.
(xii) Gifts by HUF: A HUF as such is incapable of making a gift to any of its member. However,
the Karta of a HUF has power to gift out of joint family property for certain approved
purposes. The gift should be reasonable. For example, a father may make a gift of the
ancestral moveable properties of the joint family, of which he is the Karta, for the purpose of
discharging duties prescribed by Hindu Law. The income of the joint family will stand
reduced to the extent to the income arising out of the assets thus gifted out.
(xiii) Gifts to HUF: Can an outsider make a gift to HUF? Under what circumstances will a gift
made by an outsider be considered as a gift to the HUF? The answers to these questions
are as follows:
(a) If the HUF to which such a gift is made consists of only one coparcener, then the
gifted property can be held by the members of the family only as tenants-in-
common, i.e., the income arising out of such gifted property can be assessed as
income in the hands of the Association of Persons (AOP).
(b) If the HUF to which such a gift is made consists of minimum two coparceners, then
the gifted property can be held by the members of the family as joint tenants and
the income arising out of such gifted property can be assessed as income in the
hands of the joint Hindu family.
Section 56(2)(x) provides that any sum of money or value of property received by a
HUF without consideration would be chargeable to income-tax under the head
“Income from other sources”, if the aggregate value or in case of immovable property
stamp duty value of the property exceeds ` 50,000 during a year. However, a sum
received by a HUF from its relative, i.e., a member of the HUF, is exempt. For
details, refer Chapter 8 on “Income from other sources”.
ILLUSTRATION 10
Mr. Ram (aged 56) is Karta of his HUF. The HUF consists of himself, his wife and two sons viz.
Mr. C (aged 28) and Minor D (aged 16). The HUF is assessed to income tax and has business

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income from the year 2010-11 onwards. The business income of HUF for the year ended
31.3.2022 is ` 5,00,000 (computed). Mr. Ram is employed in a private company and his salary
income for the same period is ` 6,10,000 (computed).
You are requested to answer the following treating each of them as independent situations:
(i) Mr. C gave cash gift of ` 1,00,000 to the HUF of Mr. Ram. What would be the total income
of HUF?
(ii) The HUF has one house property fetching rent of ` 10,000 per month and some movable
assets. There is a proposal to make a partial partition of HUF by allotting the house
property to Mr. C. Is it advisable to do a partial partition?
(iii) Minor D earned ` 70,000 by use of his special skill and talent. How would his income be taxed?
(iv) A car owned personally by Mr. Ram was blended with HUF during the year. It was leased
out for a monthly rent of ` 10,000 from 1-10-2021. How would this income be taxed?
SOLUTION
(i) Cash gift of ` 1 lakh by Mr. C, Ram’s major son, to the HUF of Mr. Ram would not be taxable
in the hands of the HUF, since gifts from a relative of the HUF does not fall within the scope of
income taxable under section 56(2)(x). Since Mr., being Mr. Ram’s son, is a member of Ram’s
HUF, he is a relative of the HUF. Hence, the total income of HUF would be ` 5 lakhs, being
the business income computed.
Note- Salary income of Mr. Ram, the Karta of the HUF, who is employed in a private
company would be taxed in his individual hands, since the remuneration earned by the
Karta on account of the personal qualifications and exertions and not on account of the
investment of the family funds cannot be treated as income of the HUF.
(ii) Partial partition (after 31.12.1978) is not recognized and the HUF, which has been hitherto
assessed to tax, shall continue to be liable to be assessed as if no such partial partition has
taken place [Section 171(9)].
The rental income in this case would continue to be assessed in the hands of the HUF,
even after partial partition. Therefore, it is not advisable to do a partial partition.
(iii) Income of ` 70,000 earned by Minor D by use of his special skill and talent would be
taxable in his individual hands. It will not be included in the hands of his parent by virtue of
the exception to section 64(1A) contained in the proviso to section 64(1A).
(iv) As per section 64(2), where a member of the HUF blends his self-acquired property for
inadequate consideration with the HUF, income derived therefrom is deemed to arise to the
transferor-member and not to the HUF. In this case, Mr. Ram has blended his personal
property (i.e., car) with the HUF.

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Since there is no consideration in case of blending, the income from car computed in the
prescribed manner, [which can be as per the presumptive provisions or lease rental of ` 60,000
(` 10,000 × 6 months) less depreciation] would be deemed as the income of Mr. Ram.

(4) Assessment of Local Authority

(i) General meaning: The expression “local authority” has not been defined by the Income-tax
Act, 1961. A local authority is a person under section 2(31) of the Income-tax Act, 1961,
and thus, constitutes a separate unit of assessment. It is chargeable to tax on its total
income in respect of the previous year, computed in accordance with and under the basic
provisions of the Act, which apply to other taxable entities and for all purposes of the Act,
this entity is included in the term ‘person’. All municipal corporations, or councils,
committees, panchayat boards, port trusts, district boards and other authorities legally
entitled to or entrusted by the Central or State Government with the control and/or
management of a municipal or local fund are covered by the expression ‘local authority’.
(ii) Exemptions: Under section 10(20), the income of a local authority which is chargeable to
tax under the heads ‘Income from house property,’ ‘Capital gains’ and ‘Income from other
sources’ accruing or arising to it anywhere in or outside India and income from a trade or
business carried on by it which accrues or arises to it from the supply of a commodity or
service with its own jurisdiction area or from the supply of water or electricity within or
outside its own jurisdictional area are totally exempt from tax.
In other words, a local authority is taxable only in respect of the income arising to it from
any business carried on by it provided that such income arises from the supply of any
commodity or service, not being water or electricity outside its jurisdictional area, i.e.,
territorial limits.
A local authority is said to be resident at the place where the control and management of its
affairs are situated, and its residential status is governed by section 6(4). A local authority in
India is always resident in India, except where the control and management of its affairs is
exercised wholly from outside India.
(iii) Tax rate: After total income, i.e., the income of a local authority chargeable to tax has been
determined, the whole of it would attract tax at the rate applicable i.e., the one prescribed
by the relevant Finance Act. There is no minimum amount exempt from tax in the case of a
local authority. For income tax purposes, local authority is chargeable to tax at 30% on its
total income of the previous year computed in accordance with the provisions of the Act,
plus surcharge @ 12% if its total income exceeds ` 1 crore plus health and education cess
@ 4%.
(5) Assessment of firms/LLPs and their partners
A firm is to be assessed as a unit and the share income from the firm in the hands of the partners
is exempt. There is no need for registration.

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(i) General: Meaning of terms ‘firm’, ‘partner’ and ‘partnership’ has been already discussed in
Chapter 1: Basic Concepts. Under section 2(23) of the Income-tax Act, 1961, the terms
‘firm’, ‘partner’ and ‘partnership’ have the same meanings respectively as have been
assigned to them under the Indian Partnership Act, 1932, but the expression ‘partner’ also
includes any other person who being a minor, has been admitted to the benefits of an
existing partnership. In addition, the definitions also include the terms limited liability
partnership, a partner of limited liability partnership as they have been defined in the
Limited Liability Partnership Act, 2008.
A firm though not a legal person or juridical entity, is chargeable to tax as a separate entity
distant from the partners and the partners are assessable as individuals and not as an
association persons or body of individuals. The term ‘firm’ as used in the Act covers both
registered and unregistered firms.
The residential status of a firm to be determined depending upon the fact whether or not the
control and management of its affairs is exercised from within India. Even if the negligible
part of the control and management is exercised from within India, the firm would be
resident in India for all the purposes. For determining the residential status of a firm, it is
immaterial to ascertain the residential status of partners thereof because a firm may be
resident even in cases where all the partners are not resident in India and they control or
manage the affairs from India.
Every firm is liable to pay tax flat rate of 30% on its total income of the previous year
computed in accordance with the provisions of the Act, plus surcharge @ 12% if its total
income exceeds ` 1 crore plus health and education cess @4%.
The following are the salient features of assessment of partnership firms:
(a) The firm will be taxed as a separate entity. There will be no distinction between
registered and unregistered firm.
(b) The share of the partner in the income of the firm will not be included in the hands
of the partner. It will be exempt under section 10(2A).
(c) Any salary, bonus commission or remuneration, by whatever name called, which is
due to or received by a partner will be allowed as a deduction subject to certain
restrictions.
(d) Where a firm pays interest to any partner, the firm can claim deduction of such
interest from its total income subject to certain conditions. However, the maximum
rate at which interest can be allowed to a partner will be 12% per annum.
(e) The income of the firm will be taxed at a flat rate of 30% plus surcharge @12% if
its total income exceeds `1 crore plus health and education cess @4%.

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(ii) Partnership Firm Assessed as Such (PFAS) [Section 184]

♦ Conditions to be fulfilled:
To get the status of PFAS, the firm should be evidenced by an “instrument”. The
word “instrument” means a document of legal nature by which any right or liability
is created, limited, extended, or extinguished.
Instrument does not necessarily mean a regular partnership deed, but it may constitute
any other relevant document. If the terms of a partnership are contained in a number of
documents or in the correspondence between the parties, the documents or letters would
constitute “instrument” for the purposes of section 184(1)(i).
The next condition is that the individual shares of partners must be specified in the
instrument. A firm cannot get the status of PFAS unless the instrument of partnership
specifies the individual shares of partners in the profits of the partnership. Evidence
regarding the shares of partners should be available within the framework of the
instrument. It should not involve searching of a number of documents.
The next condition is that a certified copy of the instrument should accompany the
first return of income of a firm. As already noted, “instrument” in this sense refers
not only to the partnership deed but also other documents from which the
existence of partnership can be proved. Accordingly, certified copies of all
documents will have to be submitted. Section 184 requires that the copy of the
instrument shall be certified in writing by all partners other than minors. If,
however, the return is made after the dissolution of the firm, it should be certified
by all partners other than minors who were partners in the firm immediately before
dissolution and by the legal representative of any such partner who is deceased.
The certified copy of the instrument of partnership shall accompany the return of
income of the firm of the previous year relevant to the assessment year.
If there is any change in the constitution of the firm or profit-sharing ratio during any
previous year, a certified copy of the revised instrument of partnership should be filed
along with the return of income of the relevant assessment year. Even if there is a
change in remuneration/payment of interest to partners but there is no change in profit
sharing ratio, a copy of the revised instrument of partnership should be submitted
along with return to comply with the provisions of section 40(b).
Section 184(5) provides that where the firm commits any default as mentioned in
section 144 (Best Judgment assessment - Refer Chapter 17: Assessment Procedure
for detailed discussion), the firm shall be so assessed that no deduction for payment of
interest, salary, bonus, commission or remuneration, by whatever name called, made
by the firm to any partner shall be allowed in computing the income chargeable under
the head “Profits and gains of business or profession”. However, the interest, salary,
bonus, commission or remuneration so disallowed shall not be charged to tax in the
hands of the partners under section 28(v).

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♦ Computation of income of partnership firm: While computing the income of a firm

assessed as such, we have to keep in mind the following points:
(a) Remuneration is to be allowed
(b) Interest is to be allowed
(c) Unabsorbed depreciation and other losses should be provided for.
♦ Remuneration paid to partners: First let us discuss the question of deduction of
remuneration to the partners. In this context we have to remember the conditions
prescribed by section 37 as regards the allowability of residuary expenses.
Accordingly, no capital expenditure or personal expenses will be allowed. Further the
remuneration paid must be only and exclusively for the purposes of the business of
the firm. Apart from the general conditions prescribed in section 37 there are certain
specific conditions prescribed by section 40(b).
They are as follows: -
(1) Such remuneration should be paid only to the working partner.
(2) It should be authorised by the partnership deed.
(3) It should not pertain to a period prior to partnership deed.
(4) It should not exceed the permissible limit.
Payment should be to a working partner:
Explanation 4 to section 40(b) defines working partner as one who is actively
engaged in conducting the affairs of the business or profession of the firm of which
he is a partner. This definition is very general. It seems that a partner can be a
working partner in more than one firm. If a partner is employed somewhere else too,
he can still be a working partner in the firm. However, in all such situations the
partner must in fact be a working partner in the firm. In other words, merely because
a person is working somewhere else too, such a fact does not by itself debar him
from being a working partner in a firm in which he is a partner. As stated before, to
be a working partner, the partner has to be actively engaged in conducting the affairs
of the business or profession of the firm. Now in order to be actively engaged in
conducting the affairs of the business or profession does not require either expressly
or by implication that the concerned partner should be so actively engaged in
conducting the business affairs on a full-time basis. A partner can be said to be
actively engaged in conducting the affairs of the firm even if he devotes a part and
not the whole of his working hours.
Further, in order to be actively engaged in the affairs, a partner is not expected to
be engaged in the whole of the affairs of the business of the firm, nor is he
expected to know everything about the affairs of the business of the firm. For

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example, in a firm with many partners, one partner may be looking after purchases,
another after sales and another after production and still another after
administration, finance and accounts. It cannot be contended that just because
they are not overall in charge, they cannot be considered as working partner.
Another significant point to be noted here is that the definition of “working partner”
in Explanation 4 contemplates an individual. Therefore, a partner other than an
individual (example a company) cannot be working partner. An interesting situation
may be considered here. When a company is a partner in a firm, a director or
shareholder of the company can very well be an employee of the firm in which the
company is a partner. Any salary/remuneration paid by the firm to such an
employee would be totally outside the ambit of disallowance under section 40(b).
This would be so because the individual who is an employee of the firm is not a
partner in the firm. It is the company in which he is the director, which is the
partner and, section 40(b) contemplates allowance of remuneration paid by a firm
to its partners and not to other employees.
It should be authorised by the Partnership Deed:
Any payment of salary, bonus, commission or remuneration by whatever name
called to a working partner is not allowed as a deduction if the payment is not
authorised by partnership deed or it is not in accordance with the terms of
partnership deed. As a result, a mere general authority in the partnership deed that
such and such working partners would be paid remuneration as may be agreed
upon between the partners from time to lime will not be sufficient. The partnership
deed will have to contain clear direction as to the quantum of remuneration to be
paid to the working partners. The CBDT had, vide Circular No. 739 dated 25-3-
1996, clarified that no deduction under section 40(b)(v) will be admissible unless
the partnership deed either specifies the amount of remuneration payable to each
individual working partner or lays down the manner of quantifying such
remuneration. For example, such remuneration may be specified by way of annual
fixed payment or as a certain specified percentage of the firm’s book profit at the
year end. It may be noted that such remuneration need not be paid on a monthly
basis. An item like commission can be paid even as a percentage of sales.
Remuneration also can be a yearly payment.
Now, a question arises whether the names of individual working partners should be
specified in the partnership deed or whether it is sufficient if the total remuneration
payable to the working partners as a whole is indicated. One opinion is that it is not
necessary that the individual partners should be identified or designated. It will be
sufficient to lay down an authorisation in the deed to the effect that remuneration
will be payable to the class of working partners up to so and so percentage of the
book profit. And further that, within such limits the working partners shall share

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such remuneration in any ratio as may be agreed upon. In other words, this
concept gives recognition to the working partners as a class and authorising
remuneration for the class rather than identifying or designating individual working
partners and authorising remuneration for each individual working partner. There is
nothing in the section 40(b) which prohibits this type of interpretation. However, in
order to avoid litigation, it is better that the deed identifies and designates the
working partners as well as the remuneration payable to them.
As a result of this stipulation, every firm constituted on or after April 1, 1992 will
have to provide for an appropriate clause in its partnership deed satisfying this
requirement. However, so far as the existing firms are concerned, they will have to
execute a supplementary deed or a deed of change in the constitution so as to
incorporate a clause within the deed of partnership relating to payment of
remuneration to its working partners.
It should not pertain to period prior to partnership deed:
By virtue of a further restriction contained in 40(b)(iii), such remuneration paid to the
working partners will be allowed as deduction to the firm from the date of such
partnership deed and not from any period prior thereto. Consequently, if for instance a
firm incorporates the clause relating to payment of remuneration to the working
partners by executing an appropriate deed as on July 1st, but effective from April 1st,
the firm would get deduction for the remuneration paid to its working partners from July
1st onwards but not for the period from April 1st to June 30th. In other words, it will not
be possible to give retrospective effect to oral agreements entered into vis-a-vis such
remuneration prior to putting the same in a written partnership deed.
ILLUSTRATION 11
A and B entered into partnership agreement on April 1, 2021. As per the deed, each
of them will be entitled to salary of ` 2,000 per month apart from profit. On August 1,
2021, they executed a supplementary deed by which they increased the
remuneration to ` 3,000 each effective from 1st April 2021. Discuss the validity of
the supplementary deed.
SOLUTION
Remuneration will be payable effective from the date of the deed which provides
for the payment of such remuneration. In the given case, the original deed provides
for remuneration at the rate of ` 2,000 for each partner from April 1, 2021
onwards. The supplementary deed is executed on August 1, 2021 increasing the
limit of remuneration. Such increase in the limit of remuneration will be allowable
only from 1st August 2021, being the date of supplementary deed. Hence, for the
period from 1st April 2021 to 31st July 2021, the partners will be allowed
remuneration only at the rate of ` 2,000 per month.

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It should not exceed the permissible limit:

As we have seen earlier, salary, bonus, commission or other remuneration may be
paid to any working partner in accordance with and as authorised by the terms of
the partnership deed and in relation to any period falling after the partnership
deed. However, the maximum amount of such payment to all the partners during
the previous year should not exceed the limits given below:-
Book Profit Quantum of Deduction
On the first ` 3 lakh of book profit or ` 1,50,000 or 90% of book profit,
in case of loss whichever is higher
on the balance of book profit 60% of book profit

Book Profit:
The permissible remuneration is to be computed as a percentage of book profit.
For this purpose, we have to draw up the profit and loss account and find the net
profit. This profit and loss account is to be prepared in the manner laid down in
Chapter IV-D. It may be noted that Chapter IV-D contains the provisions relating to
computation of income under the head ‘Profits and gains of business or
profession’. Further, Explanation 3 also lays down that if while arriving at the
above net profit, the remuneration paid/payable by a firm to its partners is debited
to such a profit and loss account, the aggregate of such remuneration paid/payable
to the partners shall be added to the net profit in order to arrive at the book profit.
When the Act says that the profit and loss account should be prepared in the
manner laid down in Chapter IV-D, it means that only those items which are
chargeable under section 28 as income will be taken into account and only
deductions permissible thereunder will be allowed. For example, rent from house
property, dividend, interest on bank deposit or government securities are not
chargeable as income from business or profession under section 28. Therefore, if
the profit and loss account of a firm contains these above receipts, they have to be
excluded while calculating the net profit. In the same way, items which are to be
disallowed under the various provisions from sections 28 to 44D will have to be
eliminated. It naturally follows, therefore, that brought forward business losses will
not be deducted while calculating book profit. In simple terms, ‘book profit’ means
income computed under the head “Profits and gains of business or profession”
before deduction of partners remuneration. Accordingly, unabsorbed depreciation
can be set-off under section 32(2) against such income to arrive at the book profit,
but not unabsorbed business loss under section 72.
The above table shows the upper limits up to which deduction is allowed to firm in
respect of the remuneration paid to its working partners. It does not mean that a

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firm is prohibited from paying remuneration beyond these limits. A firm can pay
remuneration to working partners beyond these limits, but it will suffer
disallowance in respect of such excess under section 40(b) and consequently pay
tax on it @ 30%. If a firm pays remuneration to non-working partners, the same will
be the result. However, the above limits apply to the remuneration paid to the
group of all working partners in a firm taken together and not to each individual
partner. Finally, it may be noted that section 40(b) does not compel a firm to pay
remuneration to its working partners. It is purely at the discretion of the firm.
However, once a firm pays remuneration to its working partners it will be subject to
the restrictive provisions of section 40(b). It is also open to a firm to pay salary
only to a few working partners and not all the working partners.
♦ Interest payable to partners: So far as allowability of interest paid by a firm to its
partners under section 40(b) is concerned, the following conditions have been
prescribed by section 40(b):
(1) The interest payable by a firm to its partners should be authorised by and in
accordance with the partnership deed.
(2) The interest payable by a firm to its partners should not be for a period falling
prior to the date of such partnership deed authorizing the payment of such
interest.
(3) The rate of interest payable to the partners shall not exceed 12% simple
interest per annum.
Apart from the above conditions the conditions prescribed by section 36(1)(iii) and
section 40(a)(i) should also be satisfied. Section 36(1)(iii) provides that the amount
of interest paid in respect of capital borrowed must be for the purposes of the
business or profession. Section 40(a)(i) provides that any interest which is payable
outside India or in India to a non-corporate non-resident or to foreign company will
not be allowed as a deduction unless tax has been deducted therefrom.
An important question could be regarding the amount with reference to which this
interest @12% will have to be calculated. For example, a partner may have
contributed capital to the firm and in addition may also advance loan to the firm. The
question would be whether the interest paid by the firm on capital would be allowable
or that on the loan would be allowable. Moreover, some firms have an accounting
system of maintaining current accounts of partners in addition to the capital
accounts. When some balance is standing to the credit of a partner in such current
account as well the question arises whether the interest paid on the balance in the
current account will be allowable within the meaning of section 40(b).
In this regard, it may be noted that section 40(b) does not refer to nor does it make
any distinction between the capital contributed by a partner to the firm, the loan

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advanced by a partner to the firm or the balance in the current account of a

partner. Therefore, the interest paid by a firm to its partners on the credit balance
standing in all the accounts/whether in capital account, loan account or current
account, shall be allowed as deduction to the firm under section 40(b). The idea
seems to be to allow interest on the funds employed in the firm by a partner.
As it happens, many a time, a partner may have debit balance in his current
account and credit balance in his capital account or loan account. The question
which would arise in such a situation could be whether the interest payable to such
a partner at the rate of interest authorised by and in accordance with partnership
deed will be reckoned with reference to the aggregate of the credit balance in the
capital account and the loan account including the debit balance in the current
account or whether it should be calculated on the net balance that is the aggregate
of the credit balance in the capital account and in the loan account as reduced by
the debit balance in the current account. It appears that in such a situation the
equitable principle would be to allow interest reckoned with reference to the net
balance. Alternatively, if interest is recovered from a partner on the debit balance
in his account and interest is paid to the same partner on the credit balance in his
account, the net amount paid to that partner would be subjected to the provisions
of section 40. However, interest received from one partner cannot be set-off
against interest paid to another partner under this proviso.
The next issue which is to be considered here is the point of time at which interest
should be credited to the partners’ accounts. For example, a firm may adopt a
policy of crediting interest quarterly to the credit of the partners’ accounts. In such
a case, the firm would be paying in effect interest on interest at the year end. This
would amount to compounding interest quarterly. This is not permitted under
section 40(b) because what that section contemplates is simple interest and simple
interest here would mean interest which is calculated yearly or annually. Paying
the interest on interest credited periodically during a year would be contrary to the
concept of simple interest per annum.
ILLUSTRATION 12
M/s. HIG, a firm, consisting of three partners namely, H, I and G, carried on the
business of purchase and sale of television sets in wholesale and manufacture and
sale of pens under a deed of partnership executed on 1.4.2011. H, I and G were
partners in their individual capacity.
The deed of partnership provided for payment of salary amounting to ` 1,25,000
each to H and G, who were the working partners. A new deed of partnership was
executed on 1.10.2021 which, apart from providing for payment of salary to the two
working partners as mentioned in the deed of partnership executed on 1.4.2011, for

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the first time provided for payment of simple interest @ 12% per annum on the
balances standing to the credit of the Capital accounts of partners from 1.4.2021.
The firm was dissolved on 31.3.2022 and the capital assets of the firm were
distributed among the partners on 20.4.2022. The net profit of the firm for the year
ended 31.3.2022 after payment of salary to the working partners and debit/credit of
the following items to the Profit and Loss Account was ` 1,50,000:
(i) Interest amounting to ` 1,00,000 paid to the partners on the balances
standing to the credit of their capital accounts from 1.4.2021 to 31.3.2022.
(ii) Interest amounting to ` 50,000 paid to the partners on the balances standing
to the credit of their Current accounts from 1.4.2021 to 31.3.2022.
(iii) Interest amounting to ` 20,000 paid to the Hindu undivided family of partner H
@ 18% per annum.
(iv) Payment of ` 25,000 towards purchase of television sets (stock in trade)
made by crossed cheque on 1.11.2021.
(v) ` 30,000 being the value of gold jewellery received as gift from a
manufacturer for achieving sales target.
(vi) Depreciation amounting to ` 15,000 on motor car bought and used
exclusively for business purposes but registered in the name of partner ‘H’.
(vii) Depreciation under section 32(1)(ii) amounting to ` 37,500 of new
machinery bought and installed for manufacture of pens on 1.11.2021 at a
cost of ` 5,00,000.
(viii) Interest amounting to ` 25,000 received from bank on fixed deposits made
out of surplus funds.
The firm furnishes the following information relating to it:
(a) Closing stock-in-trade was valued at ` 60,000 as per the method of lower of
cost or net realizable value consistently followed by it. The net realizable
value of the closing stock-in-trade was ` 65,000.
(b) Brought forward business loss relating to the assessment year 2021-22 was
` 50,000.
(c) The fair market value of the capital assets as on 20.4.2022 was ` 20,00,000
and the cost of their acquisition was ` 15,00,000.
Compute the total income of M/s. HIG for the Assessment Year 2022-23.
You are required to furnish explanations for the treatment of the various items given
above.

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SOLUTION
Computation of total income of M/s. HIG for the A.Y. 2022-23
Particulars ` `
Net profit as per profit & loss account 1,50,000
Add: Interest to partners on capital accounts for the 50,000
period from 1.4.2021 to 30.9.2021 disallowed (total
interest ` 1,00,000 but deduction limited to 6
months only hence 50% thereof is deductible and
the balance is added) [Note (i)]
Interest to partners on current accounts from 50,000
1.4.2021 to 31.3.2022 – not authorized by the deed,
hence disallowed [Note (ii)].
100% of ` 25,000 paid towards purchase of 25,000
television sets otherwise than by an account payee
cheque drawn on a bank or an account payee bank
draft or use of electronic clearing system through a
bank account or through such other electronic mode
as may be prescribed (being stock in trade, hence
disallowed) [Note (iv)].
Difference on account of valuation of closing stock- 5,000
in-trade at net realisable value (` 65,000 less
` 60,000) [Note (ix)]
Salary paid to working partners considered 2,50,000 3,80,000
separately.
5,30,000
Less: Additional depreciation on new machinery
(` 5,00,000 x 20%) = ` 1,00,000. Only 50% is
allowable as deduction. [Note (vii)] 50,000
4,80,000
Less: Interest received from bank on fixed deposits
considered separately 25,000
4,55,000
Less: Salary to working partners -
(i) As per limit in section 40(b)
On first ` 3,00,000 @ 90% 2,70,000
On the balance of `1,55,000 @ 60% 93,000
3,63,000
(ii) Salary actually paid 2,50,000

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Deduction allowed being (i) or (ii) whichever is 2,50,000

less
2,05,000
Less: Business loss relating to A.Y. 2021-22 set off 50,000
Income from business 1,55,000
Income from other sources
Interest received from bank on fixed deposits [Note (viii)]. 25,000
Total Income 1,80,000

Notes:
(i) Interest to partners authorised by the partnership deed will be allowed as
deduction only for the period beginning with the date of the partnership deed
and not for any earlier period as per section 40(b)(iv). Therefore, interest paid
to the partners on the balances standing to the credit of their capital accounts
from 1.10.2021 alone is eligible for deduction, since the partnership deed was
executed only on 1.10.2021. Interest for the period prior to 1.10.2021 is not
allowed.
(ii) The partnership deed of 1.10.2021 provides for payment of interest on
balances in capital accounts of partners only. As such, the interest paid on the
balances standing to the credit of the current accounts of partners is not
allowable under section 40(b). The Kerala High Court has, in Novel
Distributing Enterprises v. DCIT (2001) 251 ITR 704 (Ker), on identical facts,
held that interest paid to the partners on their current account balances is not
allowable.
(iii) Since H is a partner in his individual capacity, interest paid to the Hindu
Undivided Family of partner H does not attract disallowance under section
40(b)(iv). Also, assuming that the provisions of section 40A(2) do not get
attracted in this case, such interest shall be allowed as deduction in full even
though the interest rate is more than 12% p.a.
(iv) Section 40A(3) provides for disallowances @100% of the expenditure incurred
for an amount exceeding Rs. 10,000 otherwise than by an account payee
cheque drawn on a bank or an account payee bank draft or use of electronic
clearing system through a bank account or through such other electronic
mode as may be prescribed. Since the firm has made payment of ` 25,000
towards purchase of television sets by a crossed cheque and not by an
account payee cheque, 100% of such expenditure would be disallowed.
(v) Gold jewellery valued at ` 30,000 received as gift from a manufacturer for
achieving sales target is taxable under section 28(iv), being a benefit arising

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from business. Since it has already been credited to profit and loss account,
no further adjustment is required.
(vi) Depreciation on motor car bought and used exclusively for the purposes of
business is allowable though not registered in the name of the firm in view of
the ratio of the decision of the Supreme Court in Mysore Minerals Ltd. v. CIT
(1999) 239 ITR 775.
(vii) The firm is entitled to additional depreciation @ 20% under section 32(1)(iia)
in respect of the new machinery installed for manufacture of pens. Since the
new machinery is put to use for less than 180 days during the relevant
previous year, the additional depreciation is restricted to 50% of the
prescribed rate of 20% i.e. it is restricted to 10%. The balance additional
depreciation can be claimed in the immediately succeeding financial year.
(viii) Interest received from bank on fixed deposits made out of surplus funds is
assessable under the head 'Income from other sources’. Hence, it is not taken
into account for the purpose of computing book-profit.
(ix) As per para 24 of ICDS II: Valuation of Inventories, closing stock has to be
valued at net realizable value in the case of a dissolved firm. As such, the
closing stock-in-trade of the firm has to be valued at the net realizable value
of ` 65,000. Since it has been valued at ` 60,000, being the cost, the balance
` 5,000 has to be added.
(x) Net profit shown in the profit and loss account computed in the manner laid
down in Chapter IV-D as increased by the aggregate amount of the
remuneration paid or payable to all the partners constitutes book profit as per
Explanation 3 to section 40(b). Carry forward and set off of business loss is
covered under Chapter VI. Hence, brought forward business loss relating to
the assessment year 2021-22 is not considered for calculation of book-profit.
(xi) Section 9B would be attracted in the hands of M/s HIG in the A.Y. 2023-24, since
capital assets are received by the partner on 20.4.2022, i.e., P.Y. 2022-23.
♦ Partner in a representative capacity: If an individual is a partner in a firm in a
representative capacity (that is on behalf and for the benefit of another person) and
not in his personal capacity then, interest paid by the firm to such individual in his
personal capacity and not as a representative capacity will not be subject to the
conditions and ceiling as prescribed for disallowance. But interest paid by the firm to
such individual as representative partner or person represented shall be subject to
the conditions and ceiling as prescribed (Explanation 1).

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Example 8: X is a partner in a firm in a representative capacity for and on behalf of

his HUF. Supposing the firm pays interest of ` 6,000 to X in his personal capacity
and not in his capacity as the representative of HUF, it will be allowed as deduction
and the prescribed ceiling will not apply. However, if such payment is made to X as a
representative partner or if the firm has paid the interest directly to the HUF, then the
payment will be subject to the conditions and ceiling as prescribed.
♦ Interest received by a non-representative partner: If interest is paid to an
individual partner who is not the representative partner and the interest received by
him is on behalf of or for the benefit of another person, then such interest payment
shall be allowed without applying the ceiling limits.
Example 9: X is a partner of a firm in his individual capacity and is not a
representative partner. Interest is paid by the firm to him in respect of a deposit
made by his wife. This will be allowed as a deduction because such interest is
received by him purely on behalf of another person.
♦ Computation of income of partner of a firm (PFAS): While computing the income
of a partner including a minor partner of a firm, the following points have to be taken
into consideration.
Share income exempt under section 10(2A): The partner’s share in the total
income of firm (PFAS) will be exempt in his hands and will not be included in his
total income. His share in the total income of the firm will be calculated as follows:-
Partner's share in profits of firm as per partnership deed
Total income of firm×
Total profit of the firm
By virtue of this exemption, a partner of PFAS will not be taxed in respect of his
share in the firm’s income since the firm itself will be taxed as a separate entity @
30%. There will be no allocation of income among the partners. On account of this
exemption, he will not be entitled to set-off his share in the firm’s loss against his
other personal income.
♦ Chargeability of remuneration and interest: Remuneration and interest received
by a partner of a PFAS in accordance with the conditions prescribed under section
40(b) will be taxable in his hands as income from profits and gains of business or
profession.
If remuneration or interest paid to a partner is disallowed in the assessment of the
firm due to the fact that they are not in accordance with the conditions prescribed
under section 40(b) then the partner will not be taxed in respect of the amount
disallowed because in such a case the firm itself will be liable to pay tax on the
amount which has been disallowed in its assessment. In other words, if the firm is
given the benefit of deduction of remuneration and interest paid to a partner then
the liability to tax in respect of such amount will be that of a partner. If the firm is

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not given the benefit of deduction because of the non-compliance with the
provisions of section 40(b) then the firm itself will be liable in respect of the amount
and the partner will not be taxed in respect of it in his personal assessment. It is
obvious that such remuneration or interest which has been disallowed in the hands
of the firm but actually received by a partner will be assumed to be his share in the
income of such firm and exemption under section 10(2A) will operate.
Suppose a portion of the remuneration and interest in the assessment of the firm is
disallowed since they exceed the overall ceiling limit prescribed under section
40(b), the question arises as to how to allocate such disallowance in the hands of
the partner. One reasonable basis is to assume that the remuneration and interest
paid to the partners concerned has been disallowed in proportion to the gross
remuneration and interest paid to them and the exemption of the disallowed sum
should be available to the partners in the same proportion.
♦ Assessment of firms – Some of the important issues to be considered by the
Assessing Officer while framing assessment [Circular 12/2019, dated
19.6.2019]:
(i) While computing remuneration which is allowable to a working partner under
section 40(b)(v), the term 'in accordance with the terms of the partnership
deed' in clauses (ii) and (v) of section 40(b) implies that remuneration should
not be undetermined or undecided. Hence, in all situations, partnership deed
should form the basis for determination of remuneration payable to the
working partners. Furthermore, in situations where the remuneration either so
specified in the partnership deed or computed as per the method indicated
therein falls short of the amount allowable under section 40(b)(v), it would be
restricted to the figure computed on the basis of the partnership deed.
(ii) While computing remuneration payable to the working partners under section
40(b)(v) of the Act, the remuneration should not exceed a particular aggregate
amount which is based upon the figure of 'book profit'. Explanation 3 to
section 40(b) contains definition of 'book profit' for the purposes of
determination of remuneration of the partners and provides that 'book profit'
shall mean the net profit, as shown in the profit & loss account for the relevant
previous year, computed in the manner laid down in Chapter IV-D as
increased by the aggregate amount of the remuneration paid or payable to all
the partners of the firm if such amount has been deducted while calculating
the net profit. Therefore, while computing 'book profit' for purposes of section
40(b)(v), all incomes such as capital gain, interest, rental income, income
from other sources etc. which do not fall under the head 'Profits and gains of
business or profession', should be excluded.

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(iii) Under section 185, any non-compliance by the firm or its partners with
provisions of section 184 may result in denial of expenses such as
remuneration, interest etc. payable to the partners which are otherwise
allowable under the provisions of the Act.
(iv) Where firms try to inflate the profits eligible for deduction undersection 80-IA
by not claiming expenditure towards remuneration, salary, interest etc. which
are payable to the partners, the Assessing Officers may examine these
transactions in light of provisions of section 80-IA(10) which empower
Assessing Officer tore-compute profit of the eligible business after excluding
the profits of the related activity/business which produced the excessive profit.
(v) While framing assessments in case of firms claiming carry forward and set off
of losses, Assessing Officers have to verify such claims taking into
consideration provisions of section78 which disallow such a carry forward and
set off in case of change in constitution of the firm or on succession.
♦ Rate of tax: A PFAS will be chargeable in respect of its total income at the rate of
30% plus surcharge @12% if its total income exceeds ` 1 crore, plus health and
education cess@4%thereon.
♦ Treatment of losses: If PFAS incurs any loss, the firm alone can set off and forward
such losses to be set off against income of the subsequent years. The firm will not
be allowed to apportion its unabsorbed losses among its partners.
♦ Set off of carry forward loss in case of change in the constitution of the firm
[Section 78]: If there is a change in the constitution of the firm, the loss of a
retired/deceased partner can be carried forward by the firm only to the extent that it
does not exceed such partner’s share in the profits of the firm of the relevant
previous year. However, it is to be carefully noted that section 78 is applicable only
in case there is a change in the constitution of the firm as result of retirement or
death of a partner in the previous year. In other words, it does not apply when there
is a change in the profit-sharing ratio or change in the constitution because of
induction of a new partner. Similarly, section 78 will not apply to set off and carry
forward of unabsorbed depreciation etc.
Example 10: ABC & Co. is a firm with 3 partners – A, B & C having equal profit-
sharing ratio. For the P.Y. 2021-22, the loss from business is ` 3,00,000 and
unabsorbed depreciation is ` 1,50,000. Business loss and unabsorbed depreciation
represents the amount after inter-source and inter-head set-off. C retires on
31.03.2022 from the firm. Firm can carry forward business loss of ` 2,00,000
(3,00,000–1,00,000) and unabsorbed depreciation of ` 1,50,000 for set-off against
income of subsequent assessment years.

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♦ Tax rate of firm [Section 167A]: In the case of a firm which is assessable as a firm,
tax shall be charged at the rate as specified in the Finance Act of the relevant year.
♦ Liability of partner of LLP in liquidation [Section 167C]: This section provides for
the liability of partners of LLP in liquidation. In case of liquidation of an LLP, where
tax due from the LLP cannot be recovered, every person who was a partner of the
LLP at any time during the relevant previous year will be jointly and severally liable
for payment of such tax unless he proves that non-recovery cannot be attributed to
any gross neglect, misfeasance or breach of duty on his part in relation to the affairs
of the LLP. This provision would also apply where tax is due from any other person
in respect of any income of any previous year during which such other person was a
LLP. “Tax due”, for the purpose of this section includes penalty, interest or any other
sum payable under the Income-tax Act, 1961.
♦ Assessment in case of change in constitution, succession and dissolution of a
firm [Section 187 to 189A]
Change in constitution of a firm: Where at the time of making an assessment
under section 143 or 144 it is found that a change has occurred in the constitution
of a firm, assessment shall be made on the firm as constituted at the time of
making the assessment.
Meaning of change in constitution of the firm: It means
(a) If one or more of the partners cease to be partners (other than a case where
ceases to be a partner by way of demise of the partner) or one or more new
partners are admitted, in such circumstances that one or more of the persons
who were partners of the firm before the change continue as partner or
partners after the change.
(b) All the partners of firm continue to be the partner of the firm but there is a
change in their profit-sharing ratio or change in shares of some of them.
Succession of one firm by another: In a case where a firm carrying on a
business or profession is succeeded by another firm; separate assessment will be
made on the predecessor firm and the successor firm in accordance with the
provisions of section 170.
Liability of partners: Where any tax, penalty or other sum payable by the firm for
the relevant previous year is due, then every person being a partner of a firm and
the legal representative of deceased partner during the previous year shall be
jointly and severally liable along with the firm in respect of such sum.
Dissolution of firm or discontinuance of business: Where a firm is dissolved or
business or profession is discontinued by the firm, the Assessing Officer shall
make an assessment of the total income of the firm as if no discontinuance or

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dissolution has taken place and all the provisions of the Act relating to levy of a
penalty or any other sum chargeable under this Act, shall be applicable
accordingly.
Every person who was at the time of dissolution or discontinuance a partner of a
firm and the legal representative of deceased partner shall be jointly and severally
liable for the amount of tax, penalty or other sum payable by the firm and all the
provisions of the Act shall apply accordingly. If any proceedings have commenced
in respect of any assessment year before dissolution or discontinuance, the
proceeding may be continued against such persons (i.e., partner and legal
representative) from that stage. The liability of legal representative is limited to the
extent to which the estate is capable of meeting the liability.
Tax consequences on transfer of capital asset to a partner on dissolution or
reconstitution of a firm - Section 9B deals with taxability on receipt of capital
asset or stock in trade or both by a partner from a firm on dissolution or
reconstitution of firm. The taxability of receipt of money or capital asset or both by
a partner on reconstitution of a firm is dealt with in section 45(4). Thus, in a case of
reconstitution of firm, where a partner receives capital asset from the firm, the
provisions of both section 9B and 45(4) are attracted in the hands of the firm. The
taxation under these two provisions has to be worked out independently.
Tax treatment on dissolution of firm is dealt with in section 9B and is not covered
under section 45(4). For details, please refer Chapter 7: Capital Gains in Module 1
ILLUSTRATION 13
Vijay Agencies, a partnership firm constituted by three partners with equal shares
was dissolved on 1-03-2021 after a search. The tax liability of the firm outstanding
to be paid was determined at ` 15 lakhs. Out of three partners, one was declared
insolvent on 18-03-2022 by the Court. The Assessing Officer, for recovering the
demand, attached the Bank Accounts of other two partners and could recover an
amount of ` 6 lakhs from the Account of one such partner. You are asked the
following questions by the partners of the dissolved firm:
(i) About the liability of each of them to pay outstanding demand.
(ii) Whether the action of Assessing Officer to attach the Bank Account of
partners to recover the tax demand of the dissolved firm is justified?
SOLUTION
As per section 189(3), every person who was at the time of dissolution, a partner of
the firm, shall be jointly and severally liable for the amount of tax, penalty or other
sum payable and all the provisions of the Act relating to assessment of such tax or
imposition of such penalty or other sum, shall apply. Therefore,

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(i) the three partners (till one was declared as insolvent by the Court) are jointly
and severally liable for making the payment of outstanding dues of ` 15
Lakhs. After insolvency of one partner, the other two partners are jointly and
severally liable to pay such demand.
(ii) Accordingly, the action of the Assessing Officer to attach the bank accounts of
the partners for recovery of outstanding demand is correct and the amount of
` 6 lakhs recovered by attachment of the bank account of one of the partners
is also in order.
♦ Conversion of company into an LLP
(i) Consequent to the Limited Liability Partnership Act, 2008 coming into effect in
2009 and notification of the Limited Liability Partnership Rules w.e.f. 1st April,
2009, the Finance (No.2) Act, 2009 had incorporated the taxation scheme of
LLPs in the Income-tax Act, 1961 on the same lines as applicable for general
partnerships, i.e. tax liability would be attracted in the hands of the LLP and
tax exemption would be available to the partners. Therefore, the same tax
treatment would be applicable for both general partnerships and LLPs.
(ii) Under section 56 and section 57 of the Limited Liability Partnership Act, 2008,
conversion of a private company or an unlisted public company into an LLP is
permitted. Consequently, section 47(xiiib) has been inserted under the
Income-tax Act, to provide that -
(1) any transfer of a capital asset or intangible asset by a private company
or unlisted public company to an LLP; or
(2) any transfer of a share or shares held in a company by a shareholder
on conversion of a company into a LLP in accordance with section 56 and
section 57 of the Limited Liability Partnership Act, 2008, shall not be regarded
as a transfer for the purposes of levy of capital gains tax under section 45,
subject to fulfillment of certain conditions. This clause has been introduced to
facilitate conversion of small private and unlisted public companies into LLPs.
These conditions are as follows:
(1) the total sales, turnover or gross receipts in business of the company
should not exceed ` 60 lakh in any of the three preceding previous
years;
(2) all the shareholders of the company immediately before conversion
become partners of the LLP in the same proportion as their
shareholding in the company;

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(3) no consideration other than share in profit and capital contribution in

the LLP arises to the shareholders;
(4) the erstwhile shareholders of the company continue to be entitled to
receive at least 50% of the profits of the LLP for a period of 5 years
from the date of conversion;
(5) The total value of assets as appearing in the books of account of the
company in any of the three previous years preceding the previous
year in which the conversion takes place, should not exceed ` 5 crore;
(6) all assets and liabilities of the company become the assets and
liabilities of the LLP; and
(7) no amount is paid, either directly or indirectly, to any partner out of the
accumulated profit of the company for a period of 3 years from the date
of conversion.
(iii) However, if subsequent to the transfer, any of the above conditions are not
complied with, the capital gains not charged under section 45 would be
deemed to be chargeable to tax in the previous year in which the conditions
are not complied with, in the hands of the LLP or the shareholder of the
predecessor company, as the case may be [Section 47A(4)].
(iv) Further, the successor LLP would be allowed to carry forward and set-off the
business loss and unabsorbed depreciation of the predecessor company
[Section 72A(6A)].
(v) However, if the entity fails to fulfill any of the conditions mentioned in (ii)
above, the benefit of set-off of business loss/unabsorbed depreciation availed
by the LLP would be deemed to be the profits and gains of the LLP
chargeable to tax in the previous year in which the LLP fails to fulfill any of the
conditions listed above.
(vi) The tax credit under section 115JAA for MAT paid by the company under
section 115JB would not be allowed to the successor LLP [Section
115JAA(7)].
(vii) The actual cost of the block of assets in the case of the successor LLP shall
be the written down value of the block of assets as in the case of the
predecessor company on the date of conversion [Explanation 2C to section
43(6)].
(viii) The aggregate depreciation allowable to the predecessor company and
successor LLP shall not exceed, in any previous year, the depreciation
calculated at the prescribed rates as if the conversion had not taken place.

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Such depreciation shall be apportioned between the predecessor company

and the successor LLP in the ratio of the number of days for which the assets
were used by them [Section 32(1)].
(ix) The cost of acquisition of the capital asset for the successor LLP shall be
deemed to be the cost for which the predecessor company acquired it. It
would be further increased by the cost of improvement of the asset incurred
by the predecessor company or the successor LLP [Section 49(1)].
(x) If the capital asset became the property of the LLP as a result of conversion
of a company into an LLP, and deduction has been allowed or is allowable in
respect of such asset under section 35AD, the actual cost would be taken as
Nil [Explanation 13 to section 43(1)].
However, where an asset, in respect of which deduction is claimed and
allowed under section 35AD is deemed to be the income of the assessee in
accordance with the provisions of section 35AD(7B) (on account of being
used for a purpose other than specified business under section 35AD), the
actual cost of the asset to the assessee shall be actual cost to assessee as
reduced by the amount of depreciation allowable had the asset been used for
the purpose of business, calculated at the rate in force, since the date of its
acquisition [Proviso to Explanation 13 to section 43(1)]
(xi) If a company eligible for deduction under section 35DDA in respect of
expenditure incurred under Voluntary Retirement Scheme (one-fifth of such
expenditure allowable over a period of five years) is converted into a LLP and
such conversion satisfies the conditions laid down in section 47(xiiib), then,
the LLP would be eligible for such deduction from the year in which the
transfer took place.
(xii) If a shareholder of a company receives rights in a partnership firm as
consideration for transfer of shares on conversion of a company into a LLP,
then the cost of acquisition of the capital asset being rights of a partner
referred to in section 42 of the LLP Act, 2008 shall be deemed to be the cost
of acquisition to him of the shares in the predecessor company, immediately
before its conversion [Section 49(2AAA)].
(6) Assessment of AOPs/ BOIs and their members
Section 2(31) defines “person” as including “association of persons” or a body of individuals. The
expression association of persons is to be understood in its ordinary sense meaning there by a
group or congregation of persons. The expression association of persons is of a wider connotation
and scope than that of a body of individuals. An association of persons may have as its members
not only individuals (including minors) but also companies, firms, joint families and other

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associations. When there is a group of persons formed for the promotion of an enterprise or when
co-adventures join together in a common action, they are assessable as an association of
persons. Ordinarily, there can be no association of persons in business unless the members of the
group join together out of their own volition or will.
In order to constitute an association of persons, the members thereof must join any common
purpose or common action and the object of the association must be to produce income. Mere
receipt of income by a group of members in common will not make it an association unless
income is earned by its own effort in common.
The co-owners, co-legatees and joint receivers joining for a common purpose or action would
be assessable as an association of persons. For example, if the funds of a number of
beneficiaries are put together and one business is carried on with the combined resources by
the trustee, guardian or administrator, the business must be regarded as a single business
assessable in the hands of an association of persons. However, section 26 specifically
provides an exception to the assessment of co-owners as an association of persons.
According to that section, where the shares of the co-owners in respect of income from house
property are defined and ascertainable, the co-owners must be assessed not as an
association of persons but individually even if the property may be owned and managed and
developed jointly by the co-owners.
For the purpose of assessment, it is not necessary that the association should be legally
constituted. In other words, it is not necessary that there must be mutual rights and
obligations amongst the members enforceable in law. The illegality, invalidity or incorrectness
in the constitution of an association does not in any way affect its liability to tax or its
chargeability as a unit of assessment. A partnership which is illegal or otherwise void will have
to be assessed as an association of persons. The question whether there is an association of
persons or not depends upon the facts and circumstances of each case.
Computation of total income of AOPs/BOIs
1. Computation of total income in the case of an association of persons or body of individuals
will be done in the same manner as in the case of any other assessee.
2. In computing the total income, interest, salary, bonus, commission, remuneration, by
whatever name called, paid to members will not be allowed [Section 40(ba)]
However, in the case of payment of interest the following provisions will apply:
Explanation 1: If interest is paid by an AOPs/BOIs to any member who has also paid interest
to the AOPs/BOIs then only that amount of interest paid by the AOPs/BOIs will be disallowed
in its assessment which is in excess of the interest paid by the member to the AOPs/BOIs i.e.,
net interest shall be disallowed.
Explanation 2: If an individual is a member of an AOPs/BOIs in a representative capacity, on
behalf of or for the benefit of another person, then interest paid by the AOPs/BOIs to such

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individual in his personal capacity will not be taken into account for the purpose of
disallowance. However, interest paid by the AOPs/BOIs to such individual or vice-versa as
representative member or interest paid by the AOPs/BOIs directly to the beneficiary will be
taken into account for the purpose of disallowance.
Explanation 3: If interest is paid to a member who is not a member in a representative
capacity, but such interest is received by him on behalf of or for the benefit of another person
the interest payment will be allowed.
♦ Computation of tax where shares of members in AOPs/BOIs are unknown [Section
167B]: Tax on the total income would be computed as follows:
Circumstances Taxability
1. If individual share of Tax will be levied at the maximum marginal rate.
any member is not However, if total income of any member of AOPs/BOIs
known is taxable at a rate higher than maximum marginal rate
(for example, a foreign company which is a member),
then total income of AOPs/BOIs shall be chargeable to
tax at such higher rate of tax.
2. If individual share of a
member is known and

(a) total income of The AOPs/BOIs will pay tax at the maximum marginal
any member rate.
(excluding his However, if total income of any member of AOPs/BOIs
share from is taxable at a rate higher than maximum marginal rate
AOPs/BOIs) (for example, a foreign company which is a member),
exceeds the basic then, total income of AOPs/BOIs shall be chargeable
exemption limit to tax as follows:
• Portion of income attributable to such member
shall be taxable at such higher rate as applicable
to that member.
• Balance income shall be taxable at the maximum
marginal rate of tax.
(b) no member has The AOPs/BOIs will pay tax at the normal rates
total income applicable to an individual
(excluding his
share from
AOPs/BOIs)
exceeding the
basic exemption
limit

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♦ Rate of Surcharge applicable to AOP /BOI whether incorporated or not, having

income under section 115AD of the Income-tax Act
The Finance (No.2) Act, 2019 has levied an enhanced surcharge of 25% and 37%, where
the total income of individuals/HUF/AOPs/BOIs exceeds ` 2 crores and ` 5 crores,
respectively. However, the enhanced surcharge has been withdrawn on tax payable at
special rates under section 115AD on dividend income or short-term capital gains and long-
term capital gains arising from the transfer of securities referred to in 115AD(1)(b) [Refer
Chapter 2: Non-resident Taxation in Module 4, Part II: International Taxation for the table
containing the rates of surcharge applicable to AOPs/BOIs (having any income under
section 115AD)]
♦ Assessment of share in the hands of member [Section 86]:
- A member’s share in the total income of an AOPs/BOIs will be treated as
follows:
If an AOPs/BOIs has paid tax at the maximum marginal rate, or a higher rate, the
member’s share in the total income of the firm will not be included in his total
income.
If the AOPs/BOIs has paid tax at regular rates applicable to an individual, the
member’s share in the income of the AOPs/BOIs computed under section 67A shall
form part of his total income. However, the member will be allowed rebate under
section 110 at the average rate in respect of such share.
- If the AOPs/BOIs has not paid tax on its total income, the member’s share in the total
income of the AOPs/BOIs will be included in his total income and taxed at regular rates.
♦ Computation of member’s share in the total income of AOPs/BOIs [Section 67A]: A
member’s share in the income of an AOPs/BOIs (wherein the shares of members are
determinate and known) will be computed as follows:
(a) Any interest, salary, bonus, commission, remuneration, etc. paid to a member
during the previous year will be deducted from the total income of the association
or body, and the balance will be apportioned among the members in proportion to
their respective shares.
(b) If the amount apportioned to a member as per (a) is a profit, any interest, salary,
etc. paid to him by the association or body during the previous year will be added
to that amount and the aggregate sum will be such member’s share in the income
of the AOPs/BOIs.
(c) If the amount apportioned to a member as per (a) is a loss, any interest, salary, etc.,
paid to him by the association or body will be deducted from the amount of loss and
the balance sum will be such member’s share in the income of the AOPs/BOIs.

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The share of a member in the income/loss of the AOPs/BOIs will, for the purposes of
assessment, be apportioned under the various heads of income in the same manner in
which income/loss of the association has been determined under each head.
Any interest paid by a member on capital borrowed by him for the purpose of investment in
the AOPs/BOIs will be allowed as deduction while computing his share of income under the
head “Profits and gains of business or profession.”
♦ Determination of tax where total income includes income on which no tax is payable
[Section 110]:
If the total income of an assessee includes any income on which no income-tax is payable,
the assessee would be entitled to a deduction, from the amount of income-tax with which he
is chargeable on his total income, of an amount equal to the income-tax calculated at the
average rate of income-tax on the amount on which no income-tax is payable.
♦ Share of member of an AOPs/BOIs in the income of the AOPs/BOIs to be reduced
from net profit for computing book profit for levy of MAT [Section 115JB]
(i) Under section 115JB, in the case of a company, if the tax payable on the total
income computed as per the normal provisions of the Income-tax Act, 1961 is less
than 15% of its book profit, such book profit shall be deemed to be the total income
of the company and the tax payable for the relevant previous year shall be 15% of
its book profit.
(ii) Explanation 1 below section 115JB(2) provides that the expression “book profit”
means profit as shown in the statement of profit and loss account prepared in
accordance with the provisions of the Companies Act or in accordance with the
provisions of the relevant statute governing a company, as increased or reduced
by certain adjustments, as specified thereunder.
(iii) Under section 86, no income-tax is payable on the share of a member of an
AOPs/BOIs in the income of the AOPs/BOIs in certain circumstances. A company
which is a member of an AOPs is also not required to pay tax in respect of its
share in the income of the AOPs in such cases. However, prior to A.Y.2016-17,
under section 115JB, a company which is a member of an AOPs was liable to MAT
on such share also, since such income was not then excluded from the book profit
while computing the MAT liability of the member. It may be noted that in a similar
situation, in the case of a partner of a firm, the share in the profits of the firm is
exempt in the hands of the partner as per section 10(2A) and no MAT is payable
by the partner on such profits, since income to which any provision of section 10
applies, has to be reduced for computing book profit.
(iv) In order to ensure equity, clause (iic) in Explanation 1 below section 115JB(2) has
been inserted with effect from A.Y. 2016-17 to provide that the share of a member

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of an AOPs or BOIs, in the income of the AOPs or BOIs, on which no income-tax is

payable in accordance with the provisions of section 86, should be reduced while
computing book profit for levy of MAT under 115JB, if any such amount is credited
to statement of profit and loss account. Consequently, clause (fa) has also been
inserted in Explanation 1 to add back the expenditures, if any, debited to the
statement to profit and loss, corresponding to such income, while computing book
profit for levy of MAT.
ILLUSTRATION 14
JK Associates is an Association of Persons (AOPs) consisting of two members, J, aged 40 years and
K, aged 37 years. Shares of the members are: 60% (J) and 40% (K). Income of the AOPs for the
previous year 2021-22 is ` 7 lakhs.
Compute tax liability of the AOP and the members in the following situations, assuming that J and
K do not opt to pay tax as per section 115BAC:
(i) J and K have their income, other than income from AOPs, amounting to ` 1 lac and ` 5.7 lakhs,
respectively.
(ii) J and K’s income, other than income from AOPs, amount to ` 1.50 lac and ` 2.30 lakhs,
respectively.
SOLUTION
Computation of tax of AOPs is governed by section 167B.Tax on total income of AOP is
computed as follows:
(i) If individual share of a member is known, and the total income of any member, excluding
his share from such AOPs, exceeds the basic exemption limit, then, the AOPs will pay tax
at the maximum marginal rate.
(ii) If individual share of a member is known and no member has total income (excluding his
share from AOPs) exceeding the basic exemption limit, then, the AOPs will pay tax at the
rates applicable to an individual.
Section 86 provides for assessment of share in the hands of members of AOPs as follows:
A member’s share in the total income of AOPs will be treated as follows:-
(i) If an AOPs has paid tax at the maximum marginal rate or a higher rate, the member’s share
in the total income of AOPs will not be included in his total income and will be exempt.
(ii) If the AOPs has paid tax at regular rates applicable to an individual, the member’s share in
the income of AOPs will be included in his total income and he will be allowed rebate at the
average rate of tax in respect of such share.

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Tax Liability of J K Associates, AOPs

(i) As K’s income, other than that from the AOPs, exceeds the basic exemption limit, the AOPs
shall pay tax at maximum marginal rate of 42.744 % (i.e. 30% plus 37% surcharge plus health
and education cess @ 4%). Thus, the tax payable by AOP = ` 7,00,000 x 42.744 % =
` 2,99,208.
(ii) Since none of the members have income, other than income from the AOPs, exceeding the
basic exemption limit, the AOPs would be taxed at the rates applicable to an individual.
Therefore, the AOP’s tax liability = ` 52,500 + ` 2,100 = ` 54,600.
Tax Liability of J and K
Particulars J K
` `
(i) Share of profit from AOP Exempt Exempt
Income from other sources 1,00,000 5,70,000
Total Income 1,00,000 5,70,000
Tax liability NIL 26,500
Less: Rebate under section 87A - Nil
NIL 26,500
Add: Health and education cess @4% 1,060
Total tax payable 27,560

(ii) Share of profit from AOP 4,20,000 2,80,000

Income from other sources 1,50,000 2,30,000
Total Income (A) 5,70,000 5,10,000
Tax liability 26,500 14,500
Add: Health and Education cess @ 4% 1,060 580
Total tax payable (B) 27,560 15,080
Average rate of tax [B/A x 100] 4.835% 2.957%
Total tax liability 27,560 15,080
Less: Rebate under section 86 read with section 110 in
respect of share of profit from AOP (share in AOP x
Average rate of tax) 20,307 8,280
Tax liability of members 7,253 6,800
Tax Payable (Rounded off) 7,250 6,800

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(7) Assessment of Co-operative Societies

(i) General provisions: The expression “co-operative society” means a society registered
under the Cooperative Societies Act, 1912 or under any other law for the time being in force
in any State for the registration of co-operative societies [Section 2(19)]. For purposes of
taxation, it is treated as a separate assessable entity. The profits of any business of
insurance carried on by a co-operative society are to be computed in accordance with the
rules set out in the First Schedule to the Act. Apart from this, the computation of income in
the case of a co-operative society should also be made in the same way under each head
of income as in the case of any other assessee. Entrance fees received by a co-operative
society from its members is taxable as its income from business irrespective of the nature of
the business carried on by the society as was held in Co-operative Central Bank vs. C.l.T.
(1965) 57 ITR 579.
A member of a co-operative society to whom a building or a part thereof is allotted or leased
under a house building scheme of the society must be deemed to be the owner of that
building or part thereof under section 27(iii). Accordingly, the co-operative society is not
liable to pay tax in respect of the income from the house property even though it may be the
real owner according to official records and the tenant may have taken the building on
lease. But where the tenant is not a member of the society or where the house is allotted to
him otherwise than under a house building scheme of the society, the society will be liable
to tax in respect of the income of the house property.
(ii) Exemptions: Section 80P provides certain exemptions to co-operative societies. However,
the exemption is not available to co-operative banks, other than primary agricultural credit
societies and primary co-operative agricultural and rural development banks. Students may
refer to the detailed discussion of this provision in Chapter 11 “Deductions from Gross Total
Income”. It may also be noted that the provisions of section 194A which require deduction
of income-tax at source from interest other than interest on securities, credited or paid, do
not apply to such income credited or paid–
(i) by a co-operative society (other than a co-operative bank) to a member thereof or
to any other co-operative society;
(ii) in respect of deposits with a primary agricultural credit society or a primary credit
society or a co-operative land mortgage bank or a co-operative land development
bank;
(iii) in respect of deposits (other than time deposits) with a co-operative society, other
than a co-operative society or bank engaged in carrying on the business of
banking.
(iii) Option to exercise concessional rates of tax under section 115BAD: Section 115BAA
has been inserted by the Taxation Laws (Amendment) Act, 2019 to provide an option to

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an existing domestic company to pay tax at concessional rate of 22%, if it does not claim
incentive/exemption and deduction as provided in said section.
I. Option to pay tax at concessional rate: On similar lines, section 115BAD also
provide an option to resident co-operative society to pay tax @22% plus surcharge
@10% plus Health and education cess @4% (effective tax rate is 25.168%) on the
total income subject to the conditions mentioned in point (II) below.
II. Conditions to be satisfied for availing concessional rate of tax: The following are
the conditions for availing concessional rate of tax:
S. No. Particulars
(1) Certain deductions/exemptions not allowable: Section 115BAD(2)
provides that while computing total income, the following
deductions/exemptions would not be allowed, if a co-operative society opts
for concessional rate of tax under section 115BAD(1):
Section Exemption/Deduction
10AA Tax holiday for units established in SEZ
32(1)(iia) Additional depreciation
33AB Deduction for deposit into Tea development account,
coffee development account and rubber development
account
33ABA Site Restoration Account
35(1)(ii),(iia),(iii) or Deduction in respect of contribution to
35(2AA) - notified approved research association/
university/college/other institutions for scientific
research [Section 35(1)(ii)]
- approved Indian company for scientific research
[Section 35(1)(iia)]
- notified approved research association/
university/college/other institutions for research
in social science or statistical research [Section
35(1)(iii)]
- An approved National laboratory/university/ IIT/
specified person for scientific research
undertaken under an approved programme
[Section 35(2AA)]
35AD Investment linked tax incentives for specified
businesses

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35CCC Deduction in respect of expenditure incurred on

notified agricultural project
80C to 80U Deductions under Chapter VI-A (other than under
section 80JJAA).

(2) Certain losses not allowed to be set-off: While computing total income, set-
off of any loss carried forward or depreciation from any earlier assessment
year, if such loss or depreciation is attributable to any of the deductions
referred to in (1) above, would not be allowed.

(3) Depreciation or additional depreciation: Depreciation u/s 32 is to be

determined in the prescribed manner. Depreciation in respect of any block of
assets entitled to more than 40%, would be restricted to 40% on the written
down value of such block of assets. Additional depreciation u/s 32(1)(iia),
however, cannot be claimed.

Additional point:
In case of a co-operative society opting for section 115BAD, total income should be
computed without set-off of any loss brought forward or depreciation from any earlier
assessment year, where such loss or depreciation is attributable to any of the deductions
listed in (1) above [Such loss and depreciation would be deemed to have been already
given effect to and no further deduction for such loss or depreciation shall be allowed for
any subsequent year]

III. Deduction under section 80LA(1A) allowable: In case of a person, having a Unit in the
International Financial Services Centre, as referred to in section 80LA(1A), which has
exercised option under this section, the deduction under the said section shall be available
to such Unit subject to fulfilment of the conditions contained in that section.
IV. Time limit for exercise of option: The concessional rate would be applicable only if option
is exercised in the prescribed manner on or before the due date of filing return of income
specified under section 139(1) for any previous year relevant to the assessment year
commencing on or after A.Y. 2021-22. Once such option is exercised, it would apply to
subsequent assessment years and cannot be subsequently withdrawn for the same or any
other previous year.
V. AMT liability not attracted: Co-operative societies exercising option u/s 115BAD are not
liable to alternate minimum tax u/s 115JC.
ILLUSTRATION 15
Transfer fees are received by a cooperative housing society from its incoming and outgoing
members. Are such transfer fees liable to tax in the hands of the cooperative society?

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SOLUTION
The issue under consideration is whether the transfer fees received by a co-operative housing
society from its incoming and outgoing members is taxable or exempt on the principle of mutuality.
On this issue, the High Court, in Sind Co-operative Housing Society v. ITO (2009) 317 ITR 47,
observed that under the byelaws of the society, charging of transfer fees had no element of trading or
commerciality. Both the incoming and outgoing members have to contribute to the common fund of
the assessee. The amount paid was to be exclusively used for the benefit of the members as a class.
The High Court, therefore, held that transfer fees received by a co-operative housing society, whether
from outgoing or from incoming members, is not liable to tax on account of the principle of mutuality,
since the predominant activity of such co-operative society is maintenance of property of the society
and there is no taint of commerciality, trade or business.
Further, section 28(iii), which provides that income derived by a trade, professional or similar
association from specific services performed for its members shall be treated as business income,
can have no application since the co-operative housing society is not a trade or professional
association.
Applying the rationale of the above ruling, transfer fees received by a co-operative housing society
from its incoming and outgoing members would not be liable to tax in the hands of the co-operative
society.
(8) Assessment of Mutual Concerns
(i) General principles of mutuality –
(a) The first principle of mutuality is that no person can trade with himself or make
income out of himself. A mutual association arises where persons forming a group
associate together with a common object and contribute monies for achieving that
object and divide the surplus amongst themselves in the character. The cardinal
requirement in the case of mutual association is that all the contributors to the
common fund must be entitled to participate in the surplus and all the participators
to the surplus must be contributors to the common fund. In other words, there must
be complete identity between the contributors and the participators.
(b) The participation in the surplus need not be immediate but it may assume the
shape of a reduction in the future contribution or a division of the surplus on
dissolution.
(c) It does not make any difference whether the persons joining together form an
association or incorporate a company because the fact of incorporation does not
destroy the identity of the contributors and participators.
(d) Where there is mutuality, the fact that some members alone take advantage of the
mutual enterprise would not affect the mutual character of the association.

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(e) There is nothing in law which prohibits a mutual association from carrying on a
trade so long as it is confined to its own members.
(f) It is not necessary that the surplus should be returned to every member of the
association pro rata. The identification between the contributors and the
participators should be regarded as one whole and not in relation to each
individual.
(g) It is not necessary that all the activities of such an association should be mutual in
character. There may be activities of a non-mutual character but the exemption
from tax will apply to the surplus arising out of the mutual enterprise.
From the above principles we can conclude that one cannot trade with oneself and earn
taxable profits thereby. Hence if there is a mutual concern, ordinarily there should be no tax
on the profits arising out of mutual operations. But the Income-tax Act, 1961 provides for
assessment of the income of a mutual concern in the following circumstances:
(1) Where the mutual concern is a mutual insurance society and the income is derived
from the carrying on of any business of insurance.
(2) Where the mutual concern is a trade, professional or similar association and the
income in question is derived from specific service performed for its members.
(ii) Insurance business: Under section 2(24)(vii) any surplus accruing to life as well as
general mutual insurance concerns will fall within the definition of the word “income” and as
such would be taxable as income from business. Section 44 expressly provides the profits
and gains of any business of insurance including that carried on by a mutual insurance
company or a cooperative society shall be computed not according to the provisions of the
Act for computation of income under the various heads but according to the method
prescribed in the Rules contained in the First Schedule to the Act.
(iii) Trade and professional associations: A trade, professional or similar association may be
a mutual concern. Section 28(iii) enacts that “income derived by a trade, professional or
similar association from specific services performed for its members” shall be taxable as
business profits. Under section 2(24)(v) any sum chargeable under section 28(iii) is deemed
to be income. The object of these provisions seems to be to tax as profit the surplus arising
from specific services rendered to members by a mutual trade, professional or similar
association which otherwise may not be liable to tax in view of the general principles
applicable to mutual concerns.
It may carefully be noted that a trade association is not the same thing as a trading
association. A trade association means an association of tradesmen or businessmen for the
protection or advancement of their common interests. Again clause (iii) of section 28 taxes
the profit accruing only on specific services rendered by an association to its members. Any
surplus arising to a mutual association in other way e.g. from entrance fees or members’

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periodic subscriptions would be outside the scope of this clause and would be non-taxable
on the general principles stated above.
Since the surplus arising to trade, professional or similar association during the process of
advancement of the common interest of the members is not includible in the taxable income
it follows that the concerned expenditure will not also be allowed. Section 44A gives a
benefit in this regard. It provides that in the case of such trade associations which did not
distribute any parts of its income to its members, the amount of any deficit (deficiency)
(excess of expenditure incurred for the advancement of the common interest of the
members of the association over receipt from the members) would be deductible from the
assessable income of the association to the maximum extent of 50% of such income.
This deficiency is to be deducted in the first instance from the assessable income under the
head “Profits and gains of business or profession”. If the deficiency exceeds such income
the balance of deficiency can be set off against assessable income from any other head.
The maximum limit of 50%, however, still operates. It should be noted that any adjustment
of the deficiency is permissible only after effect has been given as provided in the Act to all
losses, allowances etc., for the year in question or brought forward from earlier years.
(iv) Clubs: The consensus of judicial opinion is that any surplus accruing to a members’ club
from the subscriptions and charges for various conveniences paid by members is not
income or profit at all, nor can a social club be deemed to trade as far as its dealings with
its own members are concerned. The position would be the same even though the club may
be incorporated as a company or registered as a society. But a club is taxable on the profit
derived from subscriptions and charges paid by non-members and on the income derived
from its capital assets. Where a club is an incorporated company carrying on business it
may be taxable on the money received from its members as well as non-members in the
course of its business.
However, if the club is not a member’s club but is a proprietary club i.e. if the club is owned by
an outsider and not by the members themselves, the proprietor would be taxable on the profits
earned by running the club. The position would not in any way be affected by the fact that the
proprietor is a limited company and some of the shareholders are members of the club.

12.6 OTHER PROVISIONS RELATED TO VARIOUS

ENTITIES
(1) Tax on income from life insurance business
Section 115B provides for a concessional rate of tax for taxing the profits and gains derived
from the business of life insurance. Under these provisions, in the case of an assessee whose
total income includes any profits and gains derived from the business of life insurance
computed in accordance with the First Schedule to the Income-tax Act, 1961, the income-tax

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payable shall be the aggregate of -

(i) the amount of income-tax calculated on the income from life insurance business included
in total income at the rate of 12½% and
(ii) the amount of income-tax with which the assessee would have been chargeable had the
total income of the assessee been reduced by the amount of profits and gains from the life
insurance business.
Income accruing or arising to a company from life insurance business referred to in section
115B would not be subject to MAT. [Section 115JB(5A)].
Taxation of income/loss of non-life insurance business: Rule 5 of the First Schedule to the
Income-tax Act, 1961 provides that the profits and gains of non-life insurance business would
be the profit before tax and appropriations as disclosed in the profit and loss account
prepared in accordance with the provisions of the Insurance Act, 1938 or the IRDA Act, 1999,
subject to following adjustment -
- expenditure or allowances not allowable under sections 30 to 43B,
- any provision for diminution in the value of investment debited to profit and loss account
has to be added back,
- any gain or loss on realization of investments not credited or debited to profit and loss
account, shall be added or deducted, as the case may be, and
- reserve for unexpired risk as prescribed shall be allowed.
(2) Special Rates of tax in respect of certain specified income or assets
♦ Tax on income from GDRs purchased in foreign currency or capital gains arising
from transfer of such GDRs [Section 115ACA]
(i) Eligible assessee [Section 115ACA(1)(a)/(b)]-This section applies to resident
individuals who are employees of an Indian company engaged in specified
knowledge based industry or service, or employee of its subsidiary engaged in
specified knowledge based industry or service.
(ii) Eligible income and special rate of tax [Section 115ACA(1)(a)/(b)] - Where the
total income includes the following income namely –
(a) income by way of dividends in respect of Global Depository Receipts of an
Indian company engaged in specified knowledge based industry or service,
purchased by an eligible assessee in foreign currency issued in accordance
with such employees’ stock option scheme as the Central Government may
specify in this behalf,

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(b) income by way of long-term capital gains arising from the transfer of the
aforesaid Global Depository Receipts,
then the same will be taxed at the rate of 10%.
(iii) No deduction is allowed [Section 115ACA(2)]- In the case of the aforesaid
resident employee, no deduction shall be allowed under any provisions of this Act,
where the gross total income consists only of income by way of dividend from
Global Depository Receipts.
However, where the gross total income includes dividend income or long term
capital gain from such Global Depository Receipts, the deduction under any
provisions of the Act shall be allowed only on that portion of gross total income
which does not include such income from the Global Depository Receipts.
(iv) No benefit of first and second proviso of section 48 [Section 115ACA(3)]- The
first and second provisos to section 48 relating to the computation of capital gains
shall not apply in case of transfer of Global Depository Receipts of an Indian
company purchased by the resident employee in foreign currency. In other words,
no indexation will be available even if the assets are long term capital assets.
(v) Meaning of certain terms:
S. Term Meaning
No.
1. Global Any instrument in the form of a depository receipt or
Depository certificate (by whatever name called) created by the
Receipts Overseas Depository Bank outside India or in an
International Financial Services Centre and issued to
investors against the issue of –
(i) ordinary shares of issuing company, being a
company listed on a recognized stock exchange in
India; or
(ii) foreign currency convertible bonds of issuing
company;
(iii) ordinary shares of issuing company, being a
company incorporated outside India, if such
depository receipt or certificate is listed and
traded on any International Financial Services
Centre
2. Specified (i) information technology software;
knowledge- (ii) information technology service;
based industry
(iii) entertainment service;
or service
(iv) pharmaceutical industry;

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(v) bio-technology industry; and

(vi) any other industry or service, as may be notified by
the Central Government
3. Subsidiary The term includes subsidiary incorporated outside India
4. Information Any service which results from the use of any information
technology technology software over a system of information
service technology products for realising value addition
5. International An IFSC which has been approved by the Central
Financial Government under section 18(1) of the SEZ Act, 2005.
Services As per section 18(1), the Central Government may
Centre [IFSC] approve the setting up of an IFSC in a SEZ prescribe
the requirements for setting up and operation of such
Centre.
The Central Government shall approve only one IFSC
in a SEZ.
6. Overseas A bank authorised by the issuing company to re-issue
Depository Global Depository Receipts against issue of Foreign
Bank Currency Convertible Bonds or ordinary shares of the
issuing company.

♦ Concessional Taxation Regime for royalty income in respect of patent developed and
registered in India [Section 115BBF]
(i) The Finance Act, 2016 introduced a concessional taxation regime for royalty
income from patents for the purpose of promoting indigenous research and
development and making India a global hub for research and development.
(ii) The purpose of the concessional taxation regime is for encouraging entities to
retain and commercialise existing patents and for developing new innovative
patented products.
(iii) Further, this beneficial taxation regime will incentivise entities to locate the high-
value jobs associated with the development, manufacture, and exploitation of
patents in India.
(iv) The nexus approach has been recommended by the OECD under Action Plan 5 in
Base Erosion and Profit Shifting (BEPS) project. This approach requires attribution
and taxation of income arising from exploitation of Intellectual property (IP) in the
jurisdiction where substantial research and development (R & D) activities are
undertaken instead of the jurisdiction of legal ownership. The provisions of section
115BBF are accordingly in line with such approach.

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(v) Concessional rate of tax - Section 115BBF provides that where the total income
of the eligible assessee includes any income by way of royalty in respect of a
patent developed and registered in India, then such royalty shall be taxable at the
rate of 10% (plus applicable surcharge and cess). For this purpose, developed
means at-least 75% of the expenditure should be incurred in India by the eligible
assessee for any invention in respect of which patent is granted under the Patents
Act, 1970.
(vi) No expenditure is allowed - No deduction for any expenditure or allowance in
respect of such royalty income shall be allowed under the Act.
(vii) Option of concessional rate to be exercised before due date under section
139(1) - The eligible assessee has to exercise the option for taxation of income by
way of royalty in respect of a patent developed and registered in India in
accordance with the provisions of section 115BBF in the prescribed manner, on or
before the due date specified under section 139(1) for furnishing the return of
income for the relevant previous year.
(viii) Not eligible to opt for concessional taxation under this section for 5 assessment
years - Where an eligible assessee opts for taxation of income by way of royalty in
respect of a patent developed and registered in India for any previous year in
accordance with section 115BBF, and the assessee offers the income for taxation for
any of the five assessment years relevant to the previous year succeeding the previous
year not in accordance with section 115BBF(1),then the assessee shall not be eligible
to claim the benefit of section 115BBF for five assessment years subsequent to the
assessment year relevant to the previous year in which such income has not been
offered to tax in accordance with section 115BBF(1).
(ix) Non-applicability of MAT provisions - Further, the amount of income by way of
royalty in respect of patent chargeable to tax under section 115BBF would not be
subject to MAT under section 115JB. The same would be reduced while arriving at
the book profit. Consequently, the related expenditure would be added back for
arriving at the book profit.
(x) Meaning of certain terms
S. No. Term Meaning
1 Eligible assessee Eligible assessee means:
• A person resident in India,
• who is the true and first inventor of the
invention and
• whose name is entered on the patent
register as the patentee in accordance with
Patents Act, 1970.

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Eligible assessee includes:

every such person, being the true and the first
inventor of the invention, where more than one
person is registered as patentee under Patents
Act, 1970 in respect of that patent.
2 Royalty “Royalty”, in respect of a patent, means
consideration (including any lump sum
consideration but excluding any consideration
which would be the income of the recipient
chargeable under the head “Capital gains” or
consideration for sale of product manufactured
with the use of patented process or the patented
article for commercial use) for the—
(1) transfer of all or any rights (including the
granting of a licence) in respect of a patent;
or
(2) imparting of any information concerning the
working of, or the use of, a patent; or
(3) use of any patent; or
(4) rendering of any services in connection
with the activities referred to in (1) to (3)
above.
3 Lumpsum “Lump sum” includes an advance payment on
account of such royalties which is not returnable

(3) Tax on income from transfer of Carbon credits [Section 115BBG]

(i) Carbon credits is an incentive given to an industrial undertaking for reduction of the
emission of GHGs (Green House gases).
(ii) A reduction in emissions entitles the entity to a credit in the form of a Certified Emission
Reduction (CER) certificate. The CER is tradable and its holder can transfer it to an entity
which needs Carbon Credits to overcome an unfavourable position on carbon credits.
(iii) To bring clarity on the issue of taxation of income from transfer of carbon credits and to
encourage measures to protect the environment, section 115BBG provides that where the
total income of the assessee includes any income from transfer of carbon credit, such
income shall be taxed at a concessional rate of 10% (plus applicable surcharge and cess)
(iv) No expenditure is allowed - No expenditure or allowance in respect of such income shall
be allowed under the Act.
(v) Meaning of "Carbon credits": Carbon credits in respect of one unit shall mean reduction of
one tonne of carbon dioxide emissions or emissions of its equivalent gases which is

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validated by the United Nations Framework on Climate Change and which can be traded in
market at its prevailing market price.
(4) Tax incentives to International Financial Services Centres
In order to encourage the growth of International Financial Services Centres (IFSCs) into a
world class financial services hub, it is necessary to ensure a competitive tax regime to
International Financial Services Centre. Accordingly, the certain incentives have been
provided to units set up in the IFSC under the Income-tax Act, 1961. These incentives are
discussed in detail at the respective places in various chapters of the study material. Some of
these incentives are listed here:

Section Exemption/Levy Incentive to IFSCs

(i) - Levy of STT and CTT Exemption from levy of STT and CTT
The provisions of Chapter VII Provisions of Chapter VII of the Finance
of the Finance (No.2) Act, (No.2) Act, 2004 providing for levy of STT,
2004 provides for levy of not to apply to taxable securities
securities transaction tax transactions entered into by any person on
(STT) on transactions in a recognised stock exchange located in
taxable securities. IFSC where the consideration for such
transaction is paid or payable in foreign
currency, thereby exempting such
transactions from STT with effect from 1st
June, 2016
The provisions of Chapter VII The provisions of Chapter VII of the
of the Finance Act, 2013 Finance Act, 2013 providing for levy of
provides for levy of CTT, not to apply to taxable commodities
commodities transaction tax transactions entered into by any person on
(CTT) on transactions in a recognised association located in unit of
taxable commodities. IFSC where the consideration for such
transaction is paid or payable in foreign
currency, thereby exempting such
transaction from CTT with effect from 1st
June, 2016.
(ii) 112A Exemption of LTCG upto Exemption of LTCG upto ` 1 lakh and
` 1 lakh and taxability @10% taxability @10% on Long term capital
on Long term capital gain gain exceeding ` 1 lakh even if STT not
exceeding ` 1 lakh only if paid:
STT is paid: Section 112A(3) exempt tax on long-term
Exemption of income by way capital gains upto ` 1 lakh and subject long
of long term capital gains ` 1 term capital gains exceeding ` 1 lakh
lakh arising from transfer of @10%, in respect of income arising from
listed equity shares or listed transaction undertaken in foreign currency

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units of an equity oriented fund on a recognised stock exchange located in

or business trust provided an International Financial Services Centre
securities transaction tax is even when securities transaction tax is not
paid at the time of sale and at paid in respect of such transaction.
the time of acquisition in
certain cases.
Long term capital gains in
excess of ` 1 lakh is subject to
tax @10%, if STT is paid as
above.
(iii) 111A Levy of STCG@15% if STT is Levy of STCG@15% even if STT is not
paid paid
Short term capital gains Second proviso to section 111A(1)
arising from transfer of listed provides that short term capital gains
equity shares or listed units of arising from transaction undertaken in
an equity- oriented fund or foreign currency on a recognised stock
business trust is taxable at a exchange located in an International
concessional rate of 15% Financial Services Centre would be taxable
provided securities transaction at a concessional rate of 15% even when
tax is paid. securities transaction tax is not paid in
respect of such transaction.
(iv) 115JB MAT levy @15%: Concessional rate of MAT@9%:
In case of a company, if the Sub-section (7) of section 115JB provides
tax payable on the total that in case of a company, being a unit
income as computed under the located in International Financial Services
Income-tax Act, is less than Centre and deriving its income solely in
15% of its book profit, such convertible foreign exchange, the minimum
book profit shall be deemed to alternate tax shall be chargeable at the rate
be the total income of the of 9% instead of 15%.
company and the Minimum
Alternate Tax (MAT) payable
by the company for the
relevant previous year shall be
15%of such book profit.
(v) 115JC AMT levy @18.5%: Concessional rate of AMT@9%:
Where the regular income-tax Section 115JC(4) provides that where the
payable by a person, other person subject to AMT is a unit located in
than a company, computed International Financial Services Centre and
under Income-tax Act, 1961 is deriving its income solely in convertible
less than the AMT payable, foreign exchange, the alternate minimum
then adjusted total income tax shall be chargeable at the rate of 9%
would be deemed to be the instead of 18.5%.

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 ASSESSMENT OF VARIOUS ENTITIES 12.143

total income of the person and

such person shall be liable to
pay income-tax on the
adjusted total income
@18.5%.
(vi) 80LA Deduction in respect of Deduction@100% of profits increased to
certain income of off- shore 10 consecutive assessment years out of
banking units in SEZ 15 consecutive assessment years for a
Deduction@100% of such unit of IFSC
income of offshore banking Section 80LA has been amended to
unit in a SEZ is allowed for 5 provide 100% deduction in respect of
consecutive assessment income of unit of IFSC from its business
years. Thereafter, 50% of which is approved for setting up in SEZ for
such income is allowable as any 10 consecutive assessment years at
deduction for the next 5 the option of the assessee, out of 15
consecutive assessment assessment years, beginning with the
years. assessment year relevant to the previous
year, in which the permission under section
23(1)(a) of the Banking Regulation Act,
1949 or permission or registration under
the SEBI Act, 1992 or IFSC Act, 2019.
(vii) 115A No deduction under Chapter Deduction u/s 80LA to be allowed to a
VI-A against dividend and unit of an IFSC against interest and
interest income chargeable dividend income chargeable to tax u/s
to tax u/s 115A 115A
Section 115A(1) provides The proviso to section 115A(4) provides
special rate of tax on, inter that the condition of non-availability of
alia, interest and dividend deduction under Chapter VI-A shall not
income arising to non- be applicable to deduction under section
corporate non-resident and 80LA allowed to a unit of IFSC i.e., a unit
foreign company. of an IFSC can claim deduction under
Section 115A(4) prohibits section 80LA against interest and
any deduction under Chapter dividend income specified therein.
VI-A from such income.
(viii) 194LC TDS@5% in respect of Concessional rate of TDS@4% in
interest payable by an respect of interest payable on moneys
Indian company or Business borrowed from a source outside India by
Trust:
way of long-term bond or rupee
An Indian company or a denominated bond listed only on a

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business trust paying interest recognized stock exchange in any IFSC

on money borrowed in foreign
currency from a source outside TDS rate applicable will be 4%, in respect
India to a non-corporate non- of interest payable on monies borrowed by
resident or to a foreign an Indian Company or a business trust
company is liable to deduct tax from a source outside India by way of issue
@ 5% of any long-term bond or rupee
denominated bond between 1st April, 2020
and 30th June, 2023, which is listed only on
a recognised stock exchange located in
any IFSC.
(ix) 115BAA/ Option to pay tax at Deduction u/s 80LA to be available to
115BAD concessional rate to domestic units set up in an IFSC, even if option
companies or resident co- under section 115BAA/115BAD is
operative society, subject to
exercised
not claiming deductions
under Chapter VI-A: In case of a person, having a Unit in an
Domestic companies and IFSC, as referred to in section 80LA(1A),
resident co-operative societies which has exercised option under section
can exercise option to pay tax at 115BAA or 115BAD, as the case may be,
concessional rate of 22% under deduction under section 80LA would also
section 115BAA or 115BAD, be available to such Unit subject to
respectively subject to the fulfilment of the conditions contained in that
condition that their total income section.
would be computed without
providing deduction inter alia
under Chapter VI-A [other than
80JJAA or 80M (in case of
domestic companies only)]
(x) 115BAC Option to pay tax at Deduction u/s 80LA to be available to
concessional rate to an units set up in an IFSC, even if option
individual or a HUF subject under section 115BAC is exercised
to not claiming deductions
under Chapter VI-A: In case of a person, having a Unit in an
An individual or a HUF can IFSC, as referred to in section 80LA(1A),
exercise option to pay tax at which has exercised option under section
concessional rate under 115BAC, as the case may be, deduction
section 115BAC subject to the under section 80LA would also be available
condition that their total to such Unit subject to fulfilment of the
income would be computed conditions contained in that section.
without providing deduction
inter alia under Chapter VI-A
[other than 80JJAA]

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SIGNIFICANT SELECT CASES

1. ITO v. Venkatesh Premises Co-operative Society Ltd. (2018) 402 ITR 670 (SC)

Issue Decision

Are non-occupancy The doctrine of mutuality is based on the common law

charges, transfer charges, principle that a person cannot make a profit from
common amenity fund himself. Accordingly, the transfer charges, non-
charges received by co- occupancy charges common amenity fund charges
operative societies from its and other charges received by a co-operative society
members exempt on the from its members are exempt owing to application of
basis of the doctrine of the doctrine of mutuality.
mutuality?

2. CIT v. Govindbhai Mamaiya (2014) 367 ITR 498 (SC)

Issue Decision

Where land inherited by Three brothers inherited a property consequent to

three brothers is demise of their father. A part of this bequeathed land
compulsorily acquired by was acquired by the State Government and
the State Government, compensation was paid for it. In this case, the
would the resultant capital property in question came to the assessees’
gain be assessed in the possession through inheritance i.e., by operation of
status of “Association of law. It is not a case where any ‘association of
Persons” (AOP) or in their persons” was formed by volition of the three brothers.
individual status? Further, even the income earned in the form of
interest is not because of any business venture of the
three assessees, but is the result of the act of the
Government in compulsorily acquiring the said land.
Thus, the basic test to be satisfied for making an
assessment in the status of AOP is absent in this
case. Hence, the income from asset inherited by the
legal heirs is taxable in their individual hands and not
in the status of AOP.

3. Joint CIT v. Rolta India Ltd. (2011) 330 ITR 470 (SC)

Issue Decision

Can interest u/s 234B and Section 115JB(5) provides that all other provisions of
234C be levied where a the Income-tax Act, 1961 shall apply to every

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company is assessed on assessee, being a company, mentioned in that

the basis of book profits section. Section 115JB is a self-contained code
u/s 115JB? pertaining to MAT, and by virtue of sub-section (5)
thereof, the liability for payment of advance tax would
be attracted. Therefore, if a company defaults in
payment of advance tax in respect of tax payable u/s
115JB, it would be liable to pay interest under
sections 234B and 234C.

4. Madras Gymkhana Club v. DCIT (2010) 328 ITR 348 (Mad.)

Issue Decision

Would the interest earned The assessee-club providing facilities like gym,
on surplus funds of a club library, etc., to its members earned interest from fixed
deposited with institutional deposits which it had made by investment of its
members satisfy the surplus funds with its corporate members.
principle of mutuality to
Interest earned from investment of surplus funds in
escape taxability?
the form of fixed deposits with institutional members
does not satisfy the principle of mutuality and hence
cannot be claimed as exempt on this ground. The
interest earned is, therefore, taxable.

5. Sind Co-operative Housing Society v. ITO (2009) 317 ITR 47 (Bom)

Issue Decision

Can transfer fees received Transfer fees received by a co-operative housing

by a co-operative housing society, whether from outgoing or from incoming
society from its incoming members, is not liable to tax on the ground of
and outgoing members be principle of mutuality since the predominant activity of
exempt on the ground of such co-operative society is maintenance of property
principle of mutuality? of the society and there is no taint of commerciality,
trade or business.
Further, section 28(iii), which provides that income
derived by a trade, professional or similar association
from specific services performed for its members shall
be treated as business income, can have no
application since the co-operative housing society is
not a trade or professional association

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6. CIT v. Anil Hardware Store (2010) 323 ITR 368 (HP)

Issue Decision

In a case where the The manner of fixing the remuneration of the partners
partnership deed does not has been specified in the partnership deed. In a given
specify the remuneration year, the partners may decide to invest certain
payable to each individual amounts of the profits into other ventures and receive
working partner but lays less remuneration than that which is permissible
down the manner of fixing under the partnership deed, but there is nothing which
the remuneration, would debars them from claiming the maximum amount of
the assessee-firm be remuneration payable in terms of the partnership
entitled to deduction in deed. The method of remuneration having been laid
respect of remuneration down; the assessee-firm is entitled to deduct the
paid to partners? remuneration paid to the partners u/s 40(b)(v)

7. CIT v. Trans Asian Shipping Services (P) Ltd (2016) 385 ITR 637 (SC)

Issue Decision

Can income derived by The requirement of producing a certificate would not

an Indian shipping apply when entire ship is not chartered and the
company from slot arrangement pertains only to purchase of slots, slot
charter arrangement in charter etc. The legal fiction created by section
other ships be 115VG(4) is to be given proper meaning.
computed applying the Accordingly, income from slot charter arrangement in
special provisions other ships can be computed applying the special
under Chapter XII-G of provisions under Chapter XII-G.
the Income-tax Act,
1961, relating to Note: As per section 115VG(4), for the purposes of
Tonnage Tax Scheme, Chapter XII-G, the tonnage shall mean the tonnage of
in spite of non- a ship indicated in the certificate referred to in section
fulfillment of the 115VX and includes the deemed tonnage computed
condition of holding a in the prescribed manner. The manner has been
valid certificate in prescribed in Rule 11Q of the Income-tax Rules,
respect of such ships 1962.
indicating its net Further, the Explanation to section 115VG(4) provides
tonnage in force? that for the purposes of this sub-section, 'deemed
tonnage' shall be the tonnage in respect of an
arrangement of purchase of slots, slot charter and an
arrangement of sharing of break-bulk vessel.

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Rules 11Q(1) provides that for the purpose of

Explanation to section 115VG(4), deemed tonnage in
respect of an arrangement of purchase of slots and
slot charter shall be computed on the following basis:
2.5 TEU = 1 Net Tonnage (1NT)
Where TEU is Twenty-foot Equivalent Unit
(Container of this size)

8. CIT v. Metal and Chromium Plater (P) Ltd. [2019] 415 ITR 123 (Mad)

Issue Decision

Should capital gains Capital gains which forms part of the net profit in the
exempt under section statement of profit and loss of the assessee-
54EC, which forms part of company, in respect of which exemption under
the net profit in the section 54EC is available while computing total
statement of profit and income under the regular provisions of the Income-tax
loss of the assessee- Act, 1961, should not be taken into account for
company, be taken into calculation of minimum alternate tax on book profits
account for calculation of under section 115JB.
tax on book profits as per Note – The following is an extract of Circular
section 115JB? No.13/2001 dated 9.11.2001, issued by the CBDT at
the time of insertion of section 115JB in the Income-
tax Act, 1961 -
“It may be emphasised that the new provision of
section 115JB is a self-contained code. Sub-section
(1) lays down the manner in which income-tax
payable is to be computed. Sub-section (2) provides
for computation of "book profit". Sub-section (5)
specifies that save as otherwise provided in this
section, all other provisions of this Act shall apply to
every assessee, being a company mentioned in that
section. In other words, except for substitution of tax
payable under the provision and the manner of
computation of book profit, all the provisions of the
tax including the provision relating to charge,
definitions, recoveries, payment, assessment, etc.,
would apply in respect of the provisions of this
section.”

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 ASSESSMENT OF VARIOUS ENTITIES 12.149

The CBDT Circular clarifies that except for

substitution of tax payable under the provision and
manner of computation of book profit, all other
provisions relating to charge, definitions, recoveries,
payment, assessment, etc., would apply in respect of
section 115JB. Therefore, “book profit” for levy of
MAT has to be computed in the manner laid down
under section 115JB i.e., by making the adjustments
as specified in the Explanations contained therein to
the net profit as per the statement of profit and loss.
This implies that exemptions and deductions available
under the regular provisions of the Act would not be
available unless expressly provided for in the
Explanations to section 115JB [For example, income
exempt under section 10, 11 and 12 of the Income-tax
Act, 1961 have to be deducted while computing book
profit for levy of MAT, if credited to the statement of
profit and loss, by virtue of specific provision in clause
(ii) of Explanation 1 below section 115JB(2)].
Therefore, it appears that the intent of sub-section (5)
is to make applicable other provisions like payment of
advance tax, interest under sections 234B and 234C,
return filing, penal and prosecution provisions under
the Income-tax Act, 1961 etc. to a case where tax is
computed under section 115JB. The Madras High
Court has, however, in this case interpreted sub-
section (5) of section 115JB to also permit adjustment
for exemption under section 54EC while computing
MAT, even though the same is not expressly provided
for in the Explanations to section 115JB.

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TEST YOUR KNOWLEDGE

Question 1
XYZ Ltd. is engaged in the manufacture of textile since 01-04-2009. Its Statement of Profit & Loss
shows a profit of ` 700 lakhs after debit/credit of the following items:
(1) Depreciation calculated on the basis of useful life of assets as per provisions of the
Companies Act, 2013 is ` 50 lakhs.
(2) Employer's contribution to EPF of ` 2 lakhs and Employees' contribution of ` 2 lakhs for the
month of March 2022 were remitted on 30th June, 2022.
(3) The company appended a note to its Income Statement that industrial power tariff
concession of ` 2.5 lakhs was received from the State Government and credited the same
to Statement of P & L.
(4) The company had provided an amount of ` 25 lakhs being sum estimated as payable to
workers based on agreement to be entered with the workers union towards periodical wage
revision once in 3 years. The provision is based on a fair estimation of wages and
reasonable certainty of revision once in 3 years.
(5) The company had made a provision of 10% of its debtors towards bad and doubtful debts.
Total sundry debtors of the company as on 31-03-2022 was` 200 lakhs.
(6) A debtor who owed the company an amount of ` 40 lakhs was declared insolvent and
hence, was written off by debit to Statement of Profit and loss.
(7) Sundry creditors include an amount of ` 50 lakhs payable to A & Co, towards supply of raw
materials, which remained unpaid due to quality issues. An agreement has been made on
31-03-2022, to settle the amount at a discount of 75% of the outstanding. The amount
waived is credited to Statement of Profit and Loss.
(8) The opening and closing stock for the year were ` 200 lakhs and ` 255 lakhs, respectively.
They were overvalued by 10%.
(9) Provision for gratuity based on actuarial valuation was ` 500 lakhs. Actual gratuity paid
debited to gratuity provision account was ` 300 lakhs.
(10) Commission of ` 1 lakhs paid to a recovery agent for realization of a debt. Tax has been
deducted and remitted as per Chapter XVIIB of the Act.
(11) The company has purchased 500 tons of industrial paper as packing material at a price of
` 30,000/ton from PQR, a firm in which majority of the directors are partners. PQR's normal
selling price in the market for the same material is ` 28,000/ton.
Additional Information:
(1) There was an addition to Plant & Machinery amounting to ` 50 lakhs on 10-06-2021, which

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 ASSESSMENT OF VARIOUS ENTITIES 12.151

was used for more than 180 days during the year. Additional depreciation has not been
adjusted in the books.
(2) Normal depreciation calculated as per Income-tax Rules, 1962 is ` 80 lakhs.
(3) The company had credited a sub-contractor an amount of ` 10 lakhs on 31-03-2021
towards repairing a machinery component. The tax so deducted was remitted on 31-12-2021.
(4) The company has collected ` 7 lakhs as GST from its customers and paid the same on the
due dates. However, on an appeal made, the High Court directed the Department to refund
` 3 lakhs to the company. The company, in turn, refunded ` 2 lakhs to the customers from
whom the amount was collected and the balance of ` 1 lakh is still lying under the head
“Current Liabilities”.
Compute total income and tax payable for A.Y. 2022-23. Ignore MAT provisions and the provisions
of section 115BAA.
Note - The turnover of XYZ Ltd. for the P.Y.2019-20 was ` 405 crore.
Answer
Computation of Total Income of XYZ Ltd. for the A.Y.2022-23
Particulars Amount (` )
Profits and Gains from Business and Profession
Profit as per Statement of profit and loss 7,00,00,000
Add: Items debited but to be considered separately or to be
disallowed
(a) Depreciation as per Companies Act, 2013 50,00,000
(b) Employees’ contribution to EPF 2,00,000
[Since employees’ contribution to EPF has not been
deposited on or before the due date under the PF Act, the
same is not allowable as deduction as per Explanation 2
below to section 36(1)(va). Since the same has been
debited to Statement of profit and loss, it has to be added
back for computing business income].
(c) Employer’s contribution to EPF Nil
[As per section 43B, employers’ contribution to EPF is
allowable as deduction since the same has been
deposited on or before the due date of filing of return
under section 139(1). Since the same has been debited to
Statement of profit and loss, no further adjustment is
necessary]
(d) Provision for wages payable to workers Nil
[The provision is based on fair estimate of wages and

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 12.152 DIRECT TAX LAWS

reasonable certainty of revision, the provision is allowable

as deduction, since ICDS X requires ‘reasonable certainty
for recognition of a provision, which is present in this
case. As the provision has been debited to Statement of
profit and loss, no adjustment is required while computing
business income]
(e) Provision for doubtful debts [10% of ` 200 lakhs] 20,00,000
[Provision for doubtful debts is allowable as deduction
under section 36(1)(viia) only in case of banks, public
financial institutions, state financial corporations, state
industrial investment corporations and non-banking
financial corporations. Such provision is not allowable as
deduction in the case of a manufacturing company. Since
the same has been debited to Statement of profit and loss,
it has to be added back for computing business income]
(f) Bad debts written off Nil
[Bad debts write off in the book of account is allowable as
deduction under section 36(1)(vii). Since the same has
already been debited to Statement of profit and loss, no
further adjustment is required]
(g) Provision for gratuity 2,00,00,000
[Provision of ` 500 lakhs for gratuity based on actuarial
valuation is not allowable as deduction as per section
40A(7). However, actual gratuity of ` 300 lakhs paid is
allowable as deduction. Hence, the difference has to be
added back]
(h) Commission paid to recovery agent for realization of a Nil
debt.
[Commission of ` 1 lakh paid to a recovery agent for
realisation of a debt is an allowable expense under
section 37 as per DCIT v. Super Tannery (India) Ltd.
(2005) 274 ITR 338 (All). Since the same has been
debited to Statement of profit and loss, and tax has been
deducted at source, no further adjustment is required]
(i) Purchase of paper at a price higher than the fair market 10,00,000
value
[As per section 40A(2), the difference between the
purchase price (` 30,000 per ton) and the fair market
value (` 28,000 per ton) multiplied by the quantity
purchased (500 tons) has to be added back since the
purchase is from a related party, a firm in which majority
of the directors are partners, at a price higher than the fair
market value]

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 ASSESSMENT OF VARIOUS ENTITIES 12.153

(j) GST not refunded to customers out of GST refund 1,00,000

[The amount of GST refunded to the company by the
Government is a revenue receipt chargeable to tax under
section 41(1). Deduction can be claimed of amount
refunded to customers [CIT v. Thirumalaiswamy Naidu &
Sons (1998) 230 ITR 534 (SC)]. Hence, the net amount 2,83,00,000
of` 1,00,000 (i.e., ` 3,00,000 minus ` 2,00,000) would be
chargeable to tax]
9,83,00,000
Less: Items credited but to be considered separately/
permissible expenditure and allowances
(k) Industrial power tariff concession received from State Nil
Government
[Any assistance in the form of, inter alia, concession
received from the Central or State Government would be
treated as income as per section 2(24)(xviii). Since the
same has been credited to Statement of profit and loss,
no adjustment is required.
(l) Discount given by Sundry Creditors for supply of raw Nil
materials
[Discount of 75% given by Sundry Creditors for supply of
raw materials is taxable under section 41(1). Since the
same has already been credited to Statement of profit
and loss, no further adjustment is required]
(m) Depreciation as per Income-tax Act, 1961 80,00,000
(n) Over-valuation of stock [` 55 lakhs × 10/110] 5,00,000
[The amount by which stock is over-valued has to be
reduced for computing business income. ` 50 lakhs,
being the difference between closing and opening stock,
has to be adjusted to remove the effect of over-valuation]
(o) Additional Depreciation [See Note 1 below] 10,00,000
[Additional depreciation@20% is allowable on ` 50 lakhs,
being actual cost of new plant & machinery acquired on
10.06.2021, as the same was put to use for more than
180 days in the P.Y.2021-22.]
(p) Payment to a sub-contractor where tax deducted last year
was remitted after the due date of filing of return [See
Note 2 below] 3,00,000
[30% of ` 10 lakhs, being payment to a sub-contractor,
would have been disallowed under section 40(a)(ia) while
computing the business income of A.Y.2021-22, since tax
deducted was remitted after the due date of filing of

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 12.154 DIRECT TAX LAWS

return. However, the same is allowable in A.Y.2022-23,

since the remittance has been made on 31.12.2021]
98,00,000
Total Income 8,85,00,000

Computation of tax liability of XYZ Ltd. for A.Y.2022-23

Particulars `
Tax @30% on the above total income (since the turnover exceeded `400 2,65,50,000
crore in the P.Y. 2019-20)
Add: Surcharge @ 7% (since total income exceeds `1 crore but less than
` 10 crore) 18,58,500
2,84,08,500
Add: Health and Education cess @ 4% 11,36,340
Total tax liability 2,95,44,840

Notes:
(1) ` 50 lakhs, being the addition to plant and machinery on 10.6.2021 qualifies for additional
depreciation @ 20% under section 32(1)(iia). Since only the normal depreciation as per
Income-tax Rules, 1962, has been debited to profit and loss account, additional
depreciation of ` 10 lakhs (being 20% of ` 50 lakhs) has to be deducted while computing
business income.
(2) Since the tax deducted during the P.Y.2020-21 was remitted only on 31.12.2021, i.e., after the
due date of filing of return for A.Y.2021-22, ` 3,00,000, being 30% of ` 10 lakh would have
been disallowed while computing the business income of that year. Since the tax deducted
has been remitted on 31.12.2021, ` 3,00,000 would be allowed as deduction while computing
the business income of the A.Y.2022-23.
Question 2
Parik Hospitality Limited is engaged in the business of running hotels of 3-star category. The
company's Statement of Profit and Loss for the previous year ended 31 st March 2022 shows a
profit of ` 152 lakhs after debiting or crediting the following items:
(a) Payment of ` 0.25 lakh and ` 0.30 lakh in cash on 3rd December 2021 and 10th December
2021, respectively, for purchase of raw corn to Mr. Raja, an agriculturist, and Mr. Khalid, a
spice trader for purchase of masala used for corn products, respectively.
(b) Contribution towards employees' pension scheme notified by the Central Government under
section 80CCD for a sum of ` 3 lakhs calculated at 12% of aggregate of basic salary and
dearness allowance (forming part of retirement benefits) payable to the employees in terms
of employment.

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 ASSESSMENT OF VARIOUS ENTITIES 12.155

(c) Payment of ` 6.50 lakhs towards transportation of various materials procured by one of its
hotels to M/s. Bansal Transport, a partnership firm, without deduction of tax at source. The
firm opts for presumptive taxation under section 44AE and has furnished a declaration to this
effect. It also furnished its Permanent Account Number in the tender document.
(d) Profit of ` 12 lakhs on sale of a plot of land to Avimunya Limited, a domestic company, the
entire shares of which are held by the assessee company. The plot was acquired by Parik
Hospitality Limited on 1st June 2020.
(e) Contribution of ` 2.50 lakhs to Indian Institute of Technology with a specific direction for use of
the amount for scientific research programme approved by the prescribed authority.
(f) Expense of ` 10 lakhs on foreign travel of two directors for a collaboration agreement with a
foreign company for a brewery project to be set up. The negotiation did not succeed, and
the project was abandoned.
(g) Fees of ` 1 lakh paid to independent directors for attending Board meeting without
deduction of tax at source under section 194J.
(h) Depreciation charged ` 10 lakhs.
(i) ` 10 lakhs, being the additional compensation received from the State Government
pursuant to an interim order of Court in respect of land acquired by the State Government in
the previous year 2015-16.
(j) Dividend received from a foreign company ` 5 lakhs in which it holds 15% of the equity
share capital.
Additional information:
(i) As a corporate debt restructuring, the bank has converted unpaid interest of ` 10 lakhs upto
31st March 2021 into a new loan account repayable in five equal annual installments. The
first installment of ` 2 lakhs was paid in March 2022 by debiting new loan account.
(ii) Depreciation as per Income-tax Act, 1961` 15 lakhs.
(iii) The company received a bill for ` 2 lakhs on 31st March 2022 from a supplier of vegetables
for supply made in March 2022. The bill was omitted to be recorded in the books in March
2022. The bill was paid in April 2022 and the necessary entry was made in the books then.
(iv) Dividend of ` 7 lakhs is distributed on 25.09.2022 to its shareholders.
Compute total income of Parik Hospitality Limited for the Assessment Year 2022-23 indicating the
reason for treatment of each item assuming that the company is not eligible for deduction u/s 35AD.
Ignore the provisions relating to minimum alternate tax and the provisions of section 115BAA.

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Answer
Computation of Total Income of Parik Hospitality Ltd. for the A.Y.2022-23
Particulars Amount (`)
Profit as per Statement of profit and loss 1,52,00,000
Add: Items debited but to be considered separately or to
be disallowed
(a) Payment to middleman for purchase of raw corn etc. in 30,000
an amount exceeding `10,000
[Under section 40A(3), disallowance is attracted in respect of
expenditure for which cash payment exceeding` 10,000 is
made on a day to a person. Payment of ` 25,000 to farmer
for purchase of corn is covered by exception under Rule
6DD. However, payment of ` 30,000 to spice trader is not
covered under the exception - CBDT Circular 27/2017 dated
3/11/2017].
(b) Contribution towards employees’ pension scheme in 50,000
excess of 10% of salary disallowed under section 40A(9)
[Contribution to the extent of 10% of salary (basic salary
+ dearness allowance, if it forms part of pay for
retirement benefits) is allowable as deduction under
section 36(1)(iva). In this case, 2% is in excess of 10%
i.e., Rs.3,00,000 x 2/10, would be disallowed]
(c) Payment to transport contractor without deduction of tax at -
source
[Since the contractor opts for presumptive taxation under
section 44AE and furnished a declaration to this effect,
tax is not required to be deducted at source under
section 194C in respect of payment to transport
contractor].
(f) Expenses on foreign travel of two directors for a 10,00,000
collaboration agreement which failed to materialize
[Where expenditure is incurred for a project not related
to the existing business and the project was abandoned
without creating a new asset, the expenses are capital in
nature as per Mc Gaw-Ravindra Laboratories (India) Ltd.
v. CIT (1994) 210 ITR 1002 (Guj.). Brewery project is not
related to the existing business of running three - star
hotels]
(g) Fees paid to directors without deducting tax at source
[30% of `1 lakh] 30,000

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 ASSESSMENT OF VARIOUS ENTITIES 12.157

[Disallowance @ 30% would be attracted under section

40(a)(ia) for non-deduction of tax at source from
director’s remuneration on which tax is deductible under 11,10,000
section 194J]
1,63,10,000
Less: Items credited but to be considered separately/
Expenditure to be allowed
(d) Profit on sale of plot of land to 100% subsidiary 12,00,000
[Short-term capital gains arise on sale of plot of land
held for less than 24 months. However, in this case,
since the transfer is to a 100% subsidiary company and
the subsidiary company is an Indian company, the same
would not constitute a transfer for levy of capital gains
tax as per section 47(iv). Since this amount has been
credited to the statement of profit and loss, the same has
to be deducted for computing business income].
(e) Contribution to IIT for scientific research -
[Contribution to IIT for scientific research programme
approved by the prescribed authority qualifies for
deduction @100% under section 35(2AA). Since the
amount of contribution has already been debited to
the statement of profit and loss, there is no further
adjustment required].
(h) Depreciation 5,00,000
[Depreciation allowable under the Income-tax Act, 1961
is ` 15 lakhs whereas the depreciation as per books of
account debited to the statement of profit and loss is
` 10 lakhs. Hence, the additional amount of ` 5 lakhs
has to be deducted while computing business income]
(i) Additional compensation received from State 10,00,000
Government
[Since the additional compensation has been received
pursuant to an interim order of the Court, the same
would be deemed as income chargeable to tax under the
head “Capital Gains” in the year of final order as per
section 45(5). Since the compensation has been credited
to the statement of profit and loss, the same has to be
deducted while computing business income]
(j) Dividend received from foreign company 5,00,000
[Dividend received from foreign company is taxable
under the head “Income from other sources”. Since the
said dividend has been credited to the statement of profit

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and loss, the same has to be deducted while computing

business income]
(i) Interest paid during the year 2,00,000
[Conversion of unpaid interest into loan shall not be
construed as payment of interest for the purpose section
43B. The amount of unpaid interest converted into a new
loan will be allowable as deduction only in the year in
which such converted loan is actually paid. Since ` 2
lakhs has been paid in the P.Y.2021-22, the same is
allowable as deduction]
(iii) Purchases omitted to be recorded in the books 2,00,000
[Since the purchase is made in March, 2022 (i.e.,
P.Y.2021-22), in respect of which bill of ` 2 lakhs
received on 31.3.2022 has been omitted to be recorded
in the books in that year, it has to be deducted to
compute the business income [Kedarnath Jute
Manufacturing Company Ltd. v. CIT (1971) 82 ITR 363
(SC)]. It is logical to assume that the company is 36,00,000
following mercantile system of accounting].
Income under the head “Profits and Gains of Business or 1,27,10,000
Profession”

Income from Other Sources

Dividend received from foreign company
[Dividend received from a foreign company is chargeable to
tax under the head “Income from other sources”.] 5,00,000
Gross Total Income 1,32,10,000
Less: Deduction under Chapter VI-A
Deduction u/s 80M in respect of inter-corporate dividends [to
the extent of dividend distributed by it on or before the due 5,00,000
date specified u/s 139(1) of filing return of income]
Total Income 1,27,10,000

Question 3
Hyper Ltd., engaged in diversified activities, earned a profit of ` 14,25,000 after debit/credit of the
following items to its statement of profit and loss for the year ended on 31.3.2022:
(a) Items debited to Statement of Profit and Loss `
Provision for loss of subsidiary 85,000
Provision for income-tax demand 1,05,000

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 ASSESSMENT OF VARIOUS ENTITIES 12.159

Depreciation 3,60,000
Interest on deposit credited to buyers on 31.3.2022 for advance received 1,00,000
from them, on which tax was deducted in April 2022 and was deposited on
31.7.2022
(b) Items credited to Statement of Profit and Loss
Long term capital gain on sale of equity shares on which securities 3,60,000
transaction tax was paid at the time of acquisition and sale
Income from units of UTI (Gross) 75,000
The company provides the following additional information:
(i) Depreciation includes ` 1,50,000 on account of revaluation of fixed assets.
(ii) Depreciation allowable as per Income-tax Rules is ` 2,80,000.
(iii) Brought forward Business Loss/Unabsorbed Depreciation:
F.Y. Amount as per books Amount as per Income-tax
Loss Depreciation Loss Depreciation
` ` ` `
2018-19 2,50,000 3,00,000 2,00,000 2,50,000
2019-20 Nil 2,70,000 1,00,000 1,80,000
2020-21 3,50,000 3,15,000 1,20,000 2,10,000

You are required to:

(i) compute the total income of the company for the assessment year 2022-23 giving the
reasons for treatment of items and
(ii) examine the applicability of section 115JB of the Income-tax Act, 1961, and compute book
profit and the tax credit to be carried forward.
Assume the tax rate applicable to Hyder Ltd for the P.Y. 2021-22 is 30%. Ignore the provisions of
section 115BAA.
Answer
Computation of total income of M/s Hyper Ltd. for the A.Y. 2022-23

Particulars ` `
Profit as per Statement of Profit & Loss 14,25,000
Add: Items disallowed/considered separately
Provision for loss of subsidiary [since it is not wholly and 85,000
exclusively for the purpose of business of the assessee]
Provision for income-tax [disallowed under section 40(a)(ii)] 1,05,000

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Interest on deposit credited on 31.3.2022 and tax deducted in April

2022 which was deposited on 31.7.2022 [30% disallowed under
section 40(a)(ia) since tax is deducted only in the next year]. 30,000
Depreciation debited to statement of profit and loss [only depreciation
calculated as per the Income-tax Rules, 1962 is allowable as deduction] 3,60,000 5,80,000
20,05,000
Less: Items credited but not includible under business income
or are exempt under the provisions of the Act
Long-term capital gain on sale of equity shares on which securities
transaction tax was paid, since it is not a business income. 3,60,000
Income from units of UTI, since it is not a business income. 75,000 4,35,000
15,70,000
Less: Depreciation (allowable as per the Income-tax Rules, 1962) 2,80,000
12,90,000
Less: Set-off of brought forward business loss and unabsorbed
depreciation
Brought forward business loss under section 72 4,20,000
Brought forward depreciation under section 32 6,40,000 10,60,000
Income from business 2,30,000
Capital Gains
Long term capital gain on sale of equity shares on which securities
transaction tax was paid at the time of acquisition and sale 3,60,000
Income from Other Sources
Income from units of UTI 75,000
Total Income 6,65,000
Tax on LTCG exceeding ` 1 lakh @ 10% 26,000
Tax on other income of ` 3,05,000 @ 30% 91,500
1,17,500
Add: Health and Education cess @ 4% 4,700
Tax Payable as per the Income-tax Act, 1961 1,22,200

Computation of Book Profit under section 115JB

Particulars ` `
Profit as per Statement of Profit & Loss 14,25,000
Add: Net Profit to be increased by the following amounts as
per Explanation 1 below section 115JB(2)
Provision for loss of subsidiary 85,000

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Provision for income-tax 1,05,000

Depreciation debited to statement of profit and loss 3,60,000 5,50,000
19,75,000
Less: Net Profit to be reduced by the following amounts as
per Explanation 1below section 115JB(2)
Depreciation debited to statement of profit and loss (excluding 2,10,000
depreciation on account of revaluation of fixed assets)
(i.e.,` 3,60,000 – ` 1,50,000)
Brought forward business loss or unabsorbed deprecation as per
books of account, whichever is less, taken on cumulative basis 6,00,000 8,10,000
Book Profit 11,65,000

15% of book profit 1,74,750

Add: Health and Education cess @4% 6,990
Minimum Alternate Tax u/s 115JB 1,81,740

In case of a company, it has been provided that where income-tax payable on total income
computed as per the provisions of the Act is less than 15% of book profit, the book profit shall be
deemed as the total income and the tax payable on such total income shall be 15% thereof plus
health and education cess @4%.
Accordingly, in this case, since income-tax payable on total income computed as per the
provisions of the Act is less than 15% of book profit, the book profit of ` 11,65,000 is deemed to
be the total income and income-tax is payable @ 15% thereof plus health and education cess
@4%. The tax liability, therefore, works out to be `1,81,740.
Section 115JAA provides that where tax is paid in any assessment year in relation to the deemed
income under section 115JB(1), the excess of tax so paid, over and above the tax payable under
the other provisions of the Income-tax Act, 1961, will be allowed as tax credit in the subsequent
years.
The tax credit is, therefore, the difference between the tax paid under section 115JB(1) and the tax
payable on the total income computed in accordance with the other provisions of the Act. This tax
credit is allowed to be carried forward for 15 assessment years succeeding the assessment year in
which the credit became allowable.
Such credit is allowed to be set off against the tax payable on the total income in an assessment
year in which the tax is computed in accordance with the provisions of the Act, other than section
115JB, to the extent of excess of such tax payable over the tax payable on book profits in that
year.

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Particulars `
Tax on book profit under section 115JB 1,81,740
Less: Tax on total income computed as per the other provisions of the Act 1,22,200
Tax credit to be carried forward under section 115JAA 59,540

Question 4
The profit as per the statement of profit and loss of XYZ Ltd., an Indian company, for the year
ended 31.3.2022 is ` 190 lakhs arrived at after making the following adjustments:

Particulars ` (in lakhs)

(i) Depreciation on assets 100
(ii) Reserve for currency exchange fluctuation 50
(iii) Provision for tax 40
(iv) Proposed dividend 120

Following further information are also provided by company:

(a) Provision for tax includes ` 2 lakhs of interest payable on income-tax.
(b) Depreciation includes ` 40 lakhs towards revaluation of assets.
(c) Amount of ` 50 lakhs credited to statement of P & L was drawn from revaluation reserve.
(d) Balance of statement of profit and loss shown in balance sheet at the asset side as at
31.3.2021 was ` 30 lakhs which includes unabsorbed depreciation of ` 10 lakhs.
Compute the book profit under section 115JB for the year ended 31.3.2022.
Answer
Computation of book profit of XYZ Ltd. for the year ended 31.3.2022
Particulars ` `
Profit as per Statement of Profit & Loss 1,90,00,000
Add: Net profit to be increased by the following amounts
as per Explanation 1 below section 115JB(2)
Depreciation on assets debited to Statement of P&L 1,00,00,000
Reserve for currency exchange fluctuation, since the amount
carried to any reserve, by whatever name called, is to be added
back 50,00,000
Provision for tax (See Note below) 40,00,000
Proposed dividend 1,20,00,000 3,10,00,000
5,00,00,000

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Less: Net profit to be decreased by the following amounts

as per Explanation 1below section 115JB(2)
Depreciation other than depreciation on revaluation of assets 60,00,000
(` 100 lakhs - ` 40 lakhs)
Withdrawal from revaluation reserve restricted to the extent of 40,00,000
depreciation on account of revaluation of assets (` 50 lakhs or
` 40 lakhs, whichever is less)
Unabsorbed depreciation or brought forward business loss,
whichever is less, as per the books of account. Unabsorbed
depreciation ` 10 lakhs and brought forward business loss
` 20 lakhs – whichever is less 10,00,000
1,10,00,000
Book profit 3,90,00,000

Note – For the purpose of section 115JB, book profit means the profit as per the statement of
profit and loss prepared in accordance with Schedule III to the Companies Act, 2013, as adjusted
by certain additions/deductions as specified. One of the adjustments is to add back income-tax
paid or payable, and the provisions therefor. Explanation 2 after sub-section (2) of section 115JB
clarifies that income-tax includes, inter alia, interest on income-tax. Therefore, the entire provision
of ` 40 lakhs for income-tax is added back for computing book profit for levy of minimum alternate
tax.
Question 5
Mr. Harish, aged 66, running business as a proprietor furnishes the particulars of his income for
the year ended 31.03.2022 as under:
(a) Net Profit of ` 3,65,500 from the wholesale business of textiles and fabrics arrived at after
charge of following expenses in the Profit & Loss Account:
(i) Personal travelling expenses of ` 12,750.
(ii) Purchase of furniture items for shop on 13.6.2021 of ` 25,000 but charged in shop
expenses.
(b) He owns a house with two floors constructed with the financial assistance of HDFC, out of
which ground floor is used by him for self-use and first floor was let out on rent for ` 8,500 p.m.
from April 2021. The municipal tax paid for the whole house was of ` 2,500 and interest paid on
housing loan for the construction was ` 52,000. Both the floors of the house are identical.
(c) He deposited insurance premium on the life of self of ` 12,500, wife ` 13,500, son and
daughter of ` 28,000, repaid housing loan of ` 50,000 and paid ` 55,000 by credit card for
health insurance of himself and his family.
Compute the total income and the amount of tax payable by Mr. Harsh on such income for the
Assessment Year 2022-23 assuming that he does not opt to pay tax under section 115BAC.

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Answer
Computation of total income of Mr. Harsh for the A.Y. 2022-23
Particulars ` `
Income from house property
Self-occupied portion (50%)
Annual Value under section 23(2) Nil
Less: Deduction under section 24(b)
Interest on housing loan [` 52,000 × 50%] 26,000 (26,000)
Let-out portion (50%)
Income of let out portion being rent of ` 8,500 p.m. received for
12 months (Rent received has been taken as the GAV in the
absence of other information).
Gross Annual Value under section 23(1) (` 8,500 × 12) 1,02,000
Less: 50% of municipal taxes paid allowable in respect of rented
out portion (i.e., 50% of ` 2,500) 1,250
Net Annual Value (NAV) 1,00,750
Less: Deduction under section 24
30% of NAV under section 24(a) 30,225
Interest on housing loan under section 24(b) 26,000 44,525
18,525
Profits and gains of business or profession
Net profit as per profit and loss account of wholesale business of
textiles and fabrics 3,65,500
Add: Expenses charged in profit and loss account either not
allowable or to be considered separately -
Personal travelling expenses of proprietor 12,750
Purchase of furniture wrongly debited to shop expenses 25,000
4,03,250
Less: Depreciation on furniture @10% on ` 25,000 2,500 4,00,750
Gross Total Income 4,19,275
Less: Deduction under Chapter VI-A
Under section 80C
- Life insurance premium
Self 12,500
Wife 13,500

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Son and daughter 28,000

- Housing loan repaid 50,000
1,04,000
Under section 80D [Medical insurance premium]
Mediclaim insurance premium of ` 55,000 [maximum
deductible is ` 50,000 where it covers a resident senior 50,000 1,54,000
citizen]
Total Income 2,65,275
Total Income (rounded off) 2,65,280
Tax on total income of ` 2,65,280 Nil
(The basic exemption limit for senior citizen is ` 3,00,000 for A.Y.
2022-23)
Question 6
PQR LLP, a limited liability partnership set up a unit in Special Economic Zone (SEZ) in the
financial year 2017-18 for production of washing machines. The unit fulfills all the conditions of
section 10AA of the Income-tax Act, 1961. During the financial year 2020-21, it has also set up a
warehousing facility in a district of Tamil Nadu for storage of agricultural produce. It fulfills all the
conditions of section 35AD. Capital expenditure in respect of warehouse amounted to ` 75 lakhs
(including cost of land ` 10 lakhs). The warehouse became operational with effect from 1 st April
2021 and the expenditure of ` 75 lakhs was capitalized in the books on that date.
Relevant details for the financial year 2021-22 are as follows:
Particulars `
Profit of unit located in SEZ 40,00,000
Export sales of above unit 80,00,000
Domestic sales of above unit 20,00,000
Profit from operation of warehousing facility (before considering deduction under 1,05,00,000
Section 35AD).
Compute income tax (including AMT under Section 115JC) payable by PQR LLP for Assessment
Year 2022-23.
Answer
Computation of total income and tax liability of PQR LLP for A.Y.2022-23
(under the regular provisions of the Income-tax Act, 1961)
Particulars ` `
Profits and gains of business or profession
Unit in SEZ 40,00,000

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Less: Deduction under section 10AA [See Note (1) below] 32,00,000
Business income of SEZ unit chargeable to tax 8,00,000
Profit from operation of warehousing facility 1,05,00,000
Less: Deduction under section 35AD [See Note (2) below] 65,00,000
Business income of warehousing facility chargeable to tax 40,00,000
Total Income 48,00,000
Computation of tax liability (under the normal/regular
provisions)
Tax @ 30% on ` 48,00,000 14,40,000
Add: Health and Education cess @ 4% 57,600
Total tax liability 14,97,600

Computation of adjusted total income of PQR LLP for levy of Alternate Minimum Tax
Particulars ` `
Total Income (as computed above) 48,00,000
Add: Deduction under section 10AA 32,00,000
80,00,000
Add: Deduction under section 35AD 65,00,000
Less: Depreciation under section 32
On building @10% of ` 65 lakhs 1 6,50,000 58,50,000
Adjusted Total Income 1,38,50,000
Alternate Minimum Tax @18.5% 25,62,250
Add: Surcharge@12% (since adjusted total income >` 1 crore) 3,07,470
28,69,720
Add: Health and Education cess@4% 1,14,789
29,84,509
Tax liability under section 115JC (rounded off) 29,84,510

Since the regular income-tax payable is less than the alternate minimum tax payable, the adjusted
total income shall be deemed to be the total income and tax is leviable @18.5% thereof plus
surcharge @ 12% and cess @4%. Therefore, the tax liability is ` 29,84,510.

1Assuming the capital expenditure of ` 65 lakhs is incurred entirely on buildings

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AMT Credit to be carried forward under section 115JD

`
Tax liability under section 115JC 29,84,510
Less: Tax liability under the regular provisions of the Income-tax Act, 1961 14,97,600
14,86,910

Notes:
(1) Deduction under section 10AA in respect of Unit in SEZ =
Export turnover of the Unit in SEZ
Profit of the Unit in SEZ×
Total turnover of the Unit in SEZ
` 80,00,000
` 40,00,000 × = ` 32,00,000
` 1,00,00,000
(2) Deduction @ 100% of the capital expenditure is available under section 35AD for A.Y.2022-
23 in respect of specified business of setting up and operating a warehousing facility for
storage of agricultural produce which commences operation on or after 01.04.2012.
Further, the expenditure incurred, wholly and exclusively, for the purposes of such specified
business, shall be allowed as deduction during the previous year in which he commences
operations of his specified business if the expenditure is incurred prior to the
commencement of its operations and the amount is capitalized in the books of account of
the assessee on the date of commencement of its operations.
Deduction under section 35AD would, however, not be available on expenditure incurred on
acquisition of land.
In this case, since the capital expenditure of ` 65 lakhs (i.e., ` 75 lakhs – ` 10 lakhs, being
expenditure on acquisition of land) has been incurred in the F.Y. 2020-21 and capitalized in
the books of account on 1.4.2021, being the date when the warehouse became operational,
` 65,00,000, being 100% of ` 65 lakhs would qualify for deduction under section 35AD.
Question 7
Victory Polyfibres, a partnership firm, has earned a gross total income of ` 300 lakhs for the year
ended 31-3-2022. The firm has not undertaken any international transaction or specified domestic
transaction during the said year.
The above income includes a profit of ` 220 lakhs from an undertaking having a turnover of ` 80
crores. This is the fifth year and deduction under section 80-IA is available to the extent of ` 200
lakhs.
There are some grey areas in the taxation workings and hence, the assessee is contemplating to file
the return of income on 7-12-2022, after seeking clarifications from tax experts.
Advise the assessee-firm by working out the total income and tax payable, where the return is filed
on 31-10-2022 or when the same is filed on 7-12-2022.

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What is the practical solution as regards obtaining clarifications, which might or might not have an
impact on the total income? You may ignore interest under section 234A, 234B, 234C and 234F
while making the computation in support of your advice.
Answer
As per section 80AC, while computing the total income of an assessee of a previous year
(P.Y.2021-22, in this case) relevant to any assessment year (A.Y.2022-23, in this case), any
deduction is admissible, inter alia, under section 80-IA, such deduction shall not be allowed unless
it furnishes a return of income for such assessment year on or before the ‘due date’ specified in
section 139(1).
Since the turnover of the partnership firm has exceeded the prescribed threshold limit in the
previous year 2021-22, it would be subject to audit under section 44AB, in which case the ‘due
date’ of filing its return of income for A.Y.2022-23 would be 31st October, 2022 as per section
139(1).
Computation of total income and tax liability of M/s. Victory Polyfibres for A.Y.2022-23
I. Where the firm files its return of income on 31st October 2022:
Particulars ` in
lakhs
Gross Total Income 300.00
Less: Deduction under section 80-IA 200.00
Total Income 100.00
Tax liability@ 30% 30.00
Add: Health and Education cess@4% 1.20
Regular income-tax payable 31.20

Computation of Alternate Minimum Tax payable [Section 115JC]

Particulars ` in
lakhs
Total Income 100.00
Add: Deduction under section 80-IA 200.00
Adjusted Total Income 300.00
Alternate Minimum Tax (AMT) @ 18.5% on ` 300 lakhs 55.50
Add: Surcharge@12% (Since adjusted total income >` 1 crore) 6.66
62.16
Add: Health and Education cess@4% 2.49
Total tax payable (AMT) 64.65

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Since the regular income-tax payable by the firm is less than the alternate minimum tax
payable, the adjusted total income shall be deemed to be the total income of the firm for
P.Y.2021-22 and it shall be liable to pay income-tax on such total income @ 18.5% [Section
115JC(1)]. Therefore, the tax payable for the A.Y. 2022-23 would be ` 64.65 lakhs.
Tax credit for Alternate Minimum Tax [Section 115JD]
` in lakhs
Total tax payable for A.Y.2022-23 (Alternate Minimum Tax) 64.65
Less: Regular income-tax payable 31.20
To be carried forward for set-off against regular income-tax payable 33.45
(upto a maximum of fifteen assessment years).

II. Where the firm files its return of income on 7th December 2022:
Where the firm files its return on 7-12-2022, it would be a belated return under section
139(4). Consequently, as per section 80AC, deduction under 80-IA would not be available.
In such circumstances, the gross total income of ` 300 lakhs would be the total income of
the firm.
Particulars ` in lakhs
Income-tax @ 30% of ` 300 lakhs 90.000
Add: Surcharge @12% (since total income exceeds ` 100 lakhs) 10.800
Income-tax (plus surcharge) 100.800
Add: Health and Education cess @ 4% 4.032
Total tax liability 104.832

Practical solution regarding obtaining clarifications

The practical solution regarding obtaining clarifications would be to file the return of income
under section 139(1) on or before the ‘due date’, i.e. 31.10.2022, and claim deduction under
section 80-IA. In such a case, the firm can claim deduction of ` 200 lakhs under section 80-
IA. Thereafter, consequent to the clarifications obtained, if any change is required, it can file
a revised return under section 139(5) within 31.12.2022 which would replace the original
return filed under section 139(1). A revised return filed under section 139(5) would replace
the original return filed under section 139(1).
If the firm files the return of income under section 139(1) on or before 31.10.2022, its tax
liability would stand reduced to ` 64.65 lakhs, as against ` 104.832 lakhs to be paid if
return is furnished after due date. Further, it would also be eligible for tax credit for alternate
minimum tax under section 115JD to the extent of ` 33.45 lakhs. Therefore, the firm is
advised to file its return of income on or before 31.10.2022.

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Question 8
T and Q are individuals, aged 28 years and 30 years respectively, who constitute an Association of
Persons, sharing profit and losses in the ratio of 2:1. For the accounting year ended 31 st March
2022, the Profit and Loss account of the business is as under:
Figures are in ` ‘000s
Cost of goods sold 4,250 Sales 4,900
Remuneration to: Dividend from Indian companies 25
T 130 Capital gains-Long term (computed) 640
Q 170
Employees 256
Interest to:
T 48.3
Q 35.7
Other expenses 111.7
GST penalty due 39
Net profit 524.3
5,565 5,565

Additional information furnished:

(i) Other expenses included:
(a) wrist watches costing ` 2,500 each were given to 12 dealers, who had exceeded the
sales quota prescribed under a sales promotion scheme;
(b) employer’s contribution of ` 6,000 to the Provident Fund for the month of November,
2021 was paid on 14th January 2022.
(c) ` 30,000 was paid in cash to an advertising agency for publicity.
(ii) Outstanding GST penalty was paid on 15th October 2022. The penalty was imposed by the
Proper Officer for non-filing of returns and statements by the due dates.
T and Q had, for this year, income from other sources of ` 3,60,000 and ` 2,32,000 respectively.
Required to:
(i) Compute the total income of the AOPs for the assessment year 2022-23; and
(ii) Discuss the tax implication for that year in the hands of the individual members.

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Answer
(i) Computation of total income of the AOP for A.Y.2022-23
Particulars `
Profit & gains of business (See Working Note below) 3,12,300
Long term capital gain 6,40,000
Income from other sources - Dividend from Indian companies 25,000
Total income 9,77,300

Working Note - Computation of profits and gains of business

Particulars ` `
Net profit as per profit & loss account 5,24,300
Add: Inadmissible payments
Interest to members T & Q (` 48,300 + ` 35,700) 84,000
Advertising [Disallowance under section 40A(3) (100% 30,000
of ` 30,000 being a cash payment)]
Remuneration to members T & Q (` 1,30,000 + 3,00,000
`1,70,000)
GST penalty (See Note 3 below) 39,000 4,53,000
9,77,300
Less: Income not taxable under this head
Long term capital gain 6,40,000
Dividend from Indian companies 25,000 6,65,000
Profits and gains of business 3,12,300

Notes:
1. Since the employer’s contribution to PF has been paid during the previous year
itself, it is allowable as deduction.
2. Penalty imposed for delay in filing GST return is not deductible since it is on
account of infraction of the law requiring filing of the return within the specified
period. – CIT v. Ratanchand Bholanath (S.S) (1986) 160 ITR 500 (M.P.)
ii) Tax implication in the hands of members T & Q for the A.Y. 2022-23
Members of the AOPs have to pay tax on their total income taking into account savings/
investments etc.
Since one of the members has total income excluding share from AOP more than the basic
exemption limit, the AOPs will be chargeable to tax at the maximum marginal rate.

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Since the AOPs is taxed at maximum marginal rate, the share income of members is not
taxable in their hands individually as per section 86.
Question 9
The assessee, Pandey Co-operative Housing Society, is a registered co-operative housing society,
formed with the objective of maintaining the property owned by it, to effect repairs and
maintenance of the common property of the members, and to confer to the members, the usual
rights and privileges. For the assessment year 2022-23, the assessee has received ` 3 lakhs as
transfer fees from the transferor members and like amount from the transferees, who at the time of
transfer, were not members of the society. Discuss the eligibility to tax the aforesaid receipts in the
hands of the assessee.
Answer
Transfer fees received by a co-operative housing society, whether from outgoing or from incoming
members, is not liable to tax on the ground of principle of mutuality where the predominant activity of
such co-operative society is maintenance of property of the society. It was so held by the Bombay
High Court in Sind Co-op Housing Society v. ITO (2009) 317 ITR 47.
Further, section 28(iii), which provides that income derived by a trade, professional or similar
association from specific services performed for its members shall be treated as business income,
can have no application since the co-operative housing society is not a trade or professional
association.
Therefore, ` 3 lakhs received as transfer fees by Pandey Co-operative Housing Society from its
transferor members and its transferees, is not chargeable to tax.
Question 10
M/s. Beta & Co., a partnership firm in India, is engaged in development of software and providing
IT enabled services through two units, one of which is located in a notified Special Economic Zone
(SEZ) in Noida (commenced operations from 01.04.2010) and the other located in a domestic tariff
area (DTA). The particulars relating to previous year 2021-22 furnished by the assessee are as
follows:
Total Turnover: SEZ unit ` 210 lakhs; DTA unit ` 90 lakhs
Export Turnover: SEZ unit ` 150 lakhs; DTA unit ` 50 lakhs
Profit: SEZ unit ` 50 lakhs; DTA unit ` 40 lakhs.
Amount debited to Statement of Profit and Loss and credited to Special Economic Zone Re-
Investment Reserve Account ` 20 lakhs.
Considering that the firm has no other income during the year, compute the tax payable by the firm
for the A.Y. 2022-23 by integrating, analysing and applying the relevant provisions of income-tax
law.

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Answer
Computation of total income and tax liability of M/s. Beta & Co., a partnership firm, as per
the normal provisions of the Act for A.Y. 2022-23
Particulars `
(in lakhs)
Business income (before deduction under section 10AA)
SEZ Unit 50.00
Add: Amount debited to SEZ Re-investment Reserve 20.00
70.00
DTA Unit 40.00
Gross Total Income 110.00
Less: Deduction u/s 10AA
= ` 70 lakhs × ` 150 lakhs/` 210 lakhs = 50 × 50% (being the 13th year) 25.00
Amount credited to SEZ Re-investment Reserve Account 20.00
whichever is less is deductible 20.00
Total Income 90.00
Tax on total income@30% 27.00
Add: Health and Education Cess@4% 1.08
Tax liability (as per normal provisions) 28.08
Computation of Adjusted total income and Alternate Minimum tax of M/s. Beta & Co., a
partnership firm, as per the provisions of section 115JC for A.Y.2022-23
Particulars ` (in lakh)
Total income as per the normal provisions 90.00
Add: Deduction under section 10AA 20.00
Adjusted total income 110.00
[email protected]% of Adjusted Total Income 20.350
Add: Surcharge @12% as the adjusted total income is > ` 1 crore 2.442
22.792
Add: Health and Education cess @4% 0.912
Alternate Minimum Tax as per section 115JC 23.704

Since the tax payable as per the normal provisions of the Act is more than the alternate minimum
tax payable, the total income as per normal provisions shall be liable to tax and the tax payable for
A.Y. 2022-23 shall be ` 28.08 lakhs.

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Question 11
Lambda Ltd. is engaged in the manufacture of fabrics since 01-04-2012. Its Statement of Profit
and Loss for the previous year ended 31 st March, 2022 shows a profit of ` 750 lakhs after
debiting or crediting the following items:

(a) Depreciation charged on the basis of useful life of assets as per Companies Act is ` 52
lakhs.
(b) Industrial power tariff concession of ` 4.80 lakhs, received from Maharashtra State
Government was credited to Statement of profit and loss.
(c) The company had provided ` 18 lakhs, being sum fairly estimated as payable with
reasonable certainty, to workers on agreement to be entered with the workers union
towards periodical wage revision once in every three years.
(d) Dividend received from a US company ` 12 lakhs.
(e) Loss ` 17 lakhs, due to destruction of a machine worth ` 24 lakhs by fire due to short
circuit and ` 3 lakh received as scrap value. The insurance company did not admit the
claim of the company on charge of gross negligence.
(f) Provision for gratuity based on actuarial valuation was ` 320 lakhs. Actual gratuity paid
debited to gratuity provision account was ` 160 lakhs.
(g) Advertisement charges ` 2.30 lakhs, paid by cheque for advertisement published in the
souvenir of a political party registered with the Election Commission of India.
(h) Long term capital gain ` 3 lakhs on sale of equity shares on which Securities Transaction
Tax (STT) was paid at the time of acquisition and sale.
Additional Information:
(i) Normal depreciation computed as per Income-tax Rules is ` 71 lakhs.
(ii) GST ` 8 lakhs collected from its customers was paid by the company on the due dates.
On an appeal, the High Court directed the GST department to refund ` 3 lakhs to the
company. The company in turn refunded ` 2 lakhs to the customers from whom it was
collected and the balance ` 1 lakh is still lying under the head "Current Liabilities".
Compute the total income of Lambda Ltd. for the A.Y. 2022-23 by analyzing and applying the
relevant provisions of income-tax law. Briefly explain the reasons for treatment of each item.
Ignore the provisions relating to Minimum Alternate Tax. Assume that the company has not
opted for section 115BAA.

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Answer
Computation of Total Income of Lambda Ltd. for the A.Y. 2022-23
Particulars Amount (`)
I Profits and gains of business and profession
Net profit as per the statement of profit and loss 7,50,00,000
Add: Items debited but to be considered separately
or items of expenditure to be disallowed
(a) Depreciation as per Companies Act 52,00,000
(c) Provision for wages payable to workers -
[Since the provision is based on a fair estimate of
wages payable with reasonable certainty, the
provision is allowable as deduction. ICDS X
requires a reliable estimate of the amount of
obligation and ‘reasonable certainty’ for
recognition of a provision, which is present in this
case.
As the provision of ` 18 lakhs has been debited
to statement of profit and loss, no adjustment is
required while computing business income]
(e) Loss due to destruction of machinery by fire 17,00,000
[Loss of ` 17 lakhs due to destruction of
machinery caused by fire is not deductible since it
is capital in nature.
Since the loss has been debited to statement of
profit and loss, the same is required to added
back while computing business income]
(f) Provision for gratuity 1,60,00,000
[Provision of ` 320 lakhs for gratuity based on
actuarial valuation is not allowable as deduction.
However, actual gratuity of ` 160 lakhs paid is
allowable as deduction.
Hence, the difference has to be added back to
income [` 320 lakhs (-) ` 160 lakhs]
(g) Advertisement in souvenir of a political party 2,30,000
[Advertisement charges paid in respect of
souvenir published by a political party is not
allowable as deduction from business profits of
the company. Since the expenditure has been
debited to statement of profit and loss, the same
has to be added back while computing business
income] 2,31,30,000
9,81,30,000

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Add: Income taxable but not credited to statement

of profit and loss
AI(ii) GST not refunded to customers out of GST 1,00,000
refund received from State Govt.
[The amount of GST refunded to the company by
the Government is a revenue receipt chargeable to
tax.
Out of the refunded amount of ` 3 lakhs, the
amount of ` 2 lakh stands refunded to customers
would not be chargeable to tax. 2
The balance amount of ` 1,00,000 lying with the
company would be chargeable to tax]
9,82,30,000
Less: Items credited to statement of profit and loss,
but not includible in business income/ permissible
expenditure and allowances
(b) Industrial power tariff concession received from -
State Government
[Any assistance in the form of, inter alia,
concession received from the Central or State
Government would be treated as income. Since the
same has been credited to statement of profit and
loss, no adjustment is required]
(d) Dividend received from US company 12,00,000
[Dividend received from foreign company is taxable
under “Income from other sources”. Since the same
has been credited to the statement of profit and
loss, it has to be deducted while computing
business income]
(e) Scrap value of machinery 3,00,000
[Scrap value of machinery, being capital in nature,
has to be reduced from WDV of machinery. Since
the same has been credited to the statement of
profit and loss, it has to be deducted while
computing business income]
(h) Long term capital gains on sale of equity shares 3,00,000
[The taxability or otherwise of long-term capital
gain on sale of equity shares has to be
considered while computing income under the
head “Capital Gains”. Since such capital gains
has been credited to statement of profit and loss,

2CIT v. Thirumalaiswamy Naidu & Sons (1998) 230 ITR 534 (SC)

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 ASSESSMENT OF VARIOUS ENTITIES 12.177

the same has to be reduced to arrive at the

business income.]
AI(i) Depreciation as per Income-tax Rules, 1961 [See
Note below] 71,00,000 89,00,000
Profits and gains from business and profession 8,93,30,000
II Income from Other Sources
Dividend received from foreign company 12,00,000
[Dividend received from a foreign company is chargeable
to tax under the head” Income from other sources”]
III Capital Gains
Long term capital gain on sale of equity shares 3,00,000
[Long term capital gains in excess of ` 1 lakh (i.e., ` 2
lakh, being ` 3 lakh – ` 1 lakh) on sale of equity shares
on which STT is paid at the time of acquisition and sale
would be taxable@10% u/s 112A, without indexation
benefit.]
Gross Total Income 9,08,30,000
Less: Deduction under Chapter VI-A
Under section 80GGB [Contribution by a company to a
registered political party is allowable as deduction, since
payment is made otherwise than by cash. Expenditure
incurred by an Indian company on advertisement in
souvenir published by such political party tantamounts to
contribution to such political party.] 2,30,000
Total Income 9,06,00,000
Note – As per section 43(6)(c), for computation of written down value (WDV) of a block of asset at
the end of the year, the amount of scrap value received has to be reduced from the value of block
of assets at the beginning of the previous year and cost of assets purchased during the year.
Depreciation is calculated on the value so arrived of the block of asset as on 31.3.2022. In the
question, adjustment (e) states that scrap value of ` 3 lakh is received in respect of destroyed
machinery and same is credited in the statement of profit and loss. In the additional information,
since, depreciation as per Income-tax Rules, 1962 is given, no further adjustment for scrap value
is done, presuming that the same has already been reduced to arrive at the value of the block as
on 31.3.2022 and depreciation has been calculated on the said value of the block.
Alternatively, since scrap value has been credited to the statement of profit and loss, it is
possible to take a view that the amount of scrap value is not reduced while computing the
value of the assets. In such a case, depreciation allowable would be ` 70,55,000 [i.e.,
` 71,00,000 – ` 45,000, being 15% of ` 3,00,000]. The business income and total income
would be ` 8,93,75,000 and ` 9,06,45,000, respectively.

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 12.178 DIRECT TAX LAWS

Question 12
X, Y and HUF of Z (represented by Z) are partners with equal shares in profits and losses of a
firm, M/s Popular Cine Vision, which is engaged in the production of TV serials and telefilms.
The earlier partnership deed did not authorise payment of remuneration or interest to partners. The
partnership deed was revised by the partners on 1st June 2021 to authorise payment of
remuneration of ` 1 lac per month to each working partner and simple interest at 15% per annum
on partners’ capital. X, Y and Z are actively associated with the affairs of the firm.
The Profit & Loss Account of the firm for the year ended 31st March 2022 shows a net profit of
` 10 lakhs after debiting/crediting the following:
(a) Interest amounting to ` 5 lakhs each was paid to partners on the balances standing to their
capital accounts from 1stJune, 2021 to 31st March 2022.
(b) Remuneration to the partners including partner in representative capacity ` 30 lakhs.
(c) Interest amounting to ` 2 lakhs paid to Z on loan provided by him in his individual capacity
at 16% interest.
(d) Royalty of ` 5 lakhs paid to partner X, who is a professional script writer, for use of his
scripts as per agreement between the firm and X. The same is authorized by partnership
deed.
(e) Two separate payments of ` 18,000 and ` 15,000 made in cash on 1st February, 2022 to
Altaf, a hairdresser, against his bill for services rendered in January, 2022 and two
payments of ` 19,000 and ` 10,000 made in cash on 1st February and 2nd February, 2022,
respectively, to Priyam, an assistant cameraman, against her bill for services provided in
January, 2022.
(f) Amount of ` 5 lakhs provided in the books on 31st March 2022 as liability for remuneration
to Shreya, a film artist and a non-resident. Tax deducted at source under section 195 from
the amount so credited was paid on 3rd June 2022.
(g) Amount of ` 6 lakhs provided as gratuity for the year on the basis of actuarial valuation.
Gratuity actually paid to one retired employee during the year is ` 1.50 lakhs.
(h) Interest of ` 1.20 lakhs received on income-tax refund under section 244(1A) in respect of
A.Y. 2018-19.

Compute the total income of the firm for the assessment year 2022-23 stating the reasons for
treatment of each item.

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 ASSESSMENT OF VARIOUS ENTITIES 12.179

Answer
Computation of Total Income of M/s. Popular Cine Vision for the A.Y.2022-23
Particulars ` `
Profits and Gains from Business or Profession
Net Profit as per Profit & Loss A/c 10,00,000
Add: Expenses disallowed or considered separately:
Interest to partners in excess of 12% (Note 1) 3,00,000
Disallowance under section 40A(3) for aggregate cash
payment exceeding ` 10,000 in a single day (Note 5) 52,000
Provision for gratuity (Note 7) 4,50,000
Partners’ Remuneration 30,00,000
Royalty paid to Partner X (Note 4) 5,00,000 43,02,000
53,02,000
Less: Interest on income-tax refund (Note 8) 1,20,000
Book Profit 51,82,000
Less: Partners’ remuneration allowable under section 40(b)(v)
(i) As per limit prescribed in section 40(b)
On first ` 3,00,000 90% 2,70,000
On the balance ` 48,82,000 60% 29,29,200
31,99,200
(ii) Remuneration actually paid or payable
(` 1,00,000 × 10 months × 3 partners) + (Royalty ` 5
lakhs)
(i) or (ii) whichever is less, is deductible 35,00,000 31,99,200
19,82,800
Income from other sources
Interest on income-tax refund 1,20,000
Gross Total Income 21,02,800
Deductions under Chapter VI-A Nil
Total Income 21,02,800
Notes:
1. As per section 40(b), simple interest at 12% p.a. to partners relating to the period after
the date of partnership deed is allowable. Excess interest @ 3% paid from 1 st June
2021 to 31 st March 2022 is to be disallowed. Excess interest of 3% being `15,00,000 x
3/15 = ` 3,00,000.
2. Even though Z is a partner in a representative capacity, he is still a partner. Therefore,

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 12.180 DIRECT TAX LAWS

remuneration to Z should also be subject to the limits prescribed in section 40(b). This view
finds support from the decision of the Supreme Court in the case of Rashik Lal & Co. vs CIT
(1998) 229 ITR 458 (SC).
3. As per Explanation 1 to section 40(b), where an individual is a partner in a firm in
representative capacity, the provisions of section 40(b) shall not apply to any interest
payable by the firm to such individual in his personal capacity. Z represents his HUF in the
firm. However, Z gave the loan in his individual capacity. Hence, assuming that the
provisions of section 40A(2) do not get attracted in this case, such interest shall be allowed
as deduction in full even though the interest rate is more than 12% p.a.
4. It may be noted that the limits specified under section 40(b)(v) are applicable in case of
payment of salary, bonus, commission, or remuneration, by whatever name called, to a
working partner. From a plain reading of the section, it is clear that any remuneration, by
whatever name called, paid to a working partner, is subject to the limits laid down in section
40(b)(v). Therefore, the royalty of ` 5 lakhs paid to partner X would also be subject to the
limits laid down in section 40(b)(v). Hence, the same has to be added back for computing
book profits.
5. Section 40A(3) provides for disallowance of any expenditure in respect of which the
actual payment exceeding ` 10,000 is made otherwise than by an account payee
cheque, account payee bank draft or use of ECS through bank account or through such
other electronic mode as may be prescribed in a single day to a person. Hence, the
payments of ` 18,000 and ` 15,000 in cash on 1.2.2022 to Altaf, a hairdresser, shall be
disallowed, since the aggregate payment of ` 33,000 exceeds the limit of ` 10,000.
The payment of bill of the assistant cameraman of ` 19,000 on 1st February is also liable for
disallowance under section 40A(3) since the aggregate payment in cash on a single day
has exceeded ` 10,000.
6. As per section 40(a)(i), any sum payable to a non-resident shall not be allowed as
deduction, if tax has not been deducted at source or after deduction, has not been paid on
or before the due date specified under section 139(1). Tax deducted from the amount of
remuneration credited to payee's account on 31st March 2022 has to be deposited latest by
31st July 2022/ 31st October 2022 (as the case may be). The firm has paid the tax on 3rd
June 2022 and hence, the remuneration shall be allowed. Since the same is already debited
to profit and loss account, no further adjustment is made.
7. As per section 40A(7), any provision made for payment of gratuity to employees on their
retirement or on termination of employment for any reason is disallowed. However, gratuity
of ` 1.50 lakhs paid to retired employees is allowable as deduction. Hence, the balance
provision of ` 4.50 lakhs (i.e., ` 6 lakhs – ` 1.50 lakhs) is to be disallowed.
8. Interest on income-tax refund is assessable under the head "Income from other sources".

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