Module -1 Corporate direct Tax planning notes

Syllabus Overview
Module 1: Corporate Income Tax - Head - wise computation of
income of companies, set-off and carry forward of losses,
deductions from gross total income, Computation of Taxable
Income of Companies and Computation of Corporate Tax
Liability of companies.
2

Theoritical
Concepts
Let’s start with the first set of slides
1

Introduction
▸ The companies in India are governed by Companies Act 1956 or 2013. The Act
defines company as “An artificial person created by law, having a separate legal
entity, with perpetual succession and common seal”.
▸ Meaning of Company
▸ Company means
i. Any Indian company or
ii. Any body corporate incorporated by or under any laws of a country outside India
, or
iii. Any institution, association or body, declared by general or special order of the
board (CBDT) to be a company for specified assessment years.
4

Types of Companies
▸ 1. Company (Section 2(17)] Company means
i. Any Indian company or
ii. Any body corporate incorporated by or under any laws of a country outside India
iii. Any institution, association or body, declared by general or special order of the Board
be a company for specified assessment year
5

Types of Companies
▸ 2. Indian Company- Section 2(26): Indian Company means a company formed and
registered under the Companies Act, 1956 and includes statutory corporation and
any institution, association or body declared by the Board to be a company. If the
registered/principal office of the company, corporation, Institution, association or
body is in India.
▸ 3. Domestic Company- Section 2(22A): Domestic Company means an Indian
Company, or any other company, which has made prescribed arrangement for
declaration and payment within India of the dividends payable out of its taxable
income.
▸ 4. Foreign Company- Section 2(23A): Foreign Company means a company, which
is not domestic company.
6

Types of Companies
▸ 5. Company in which the public are substantially interested Section 2(18): It
means,
1. A company owned by Government/ RBI or in which 40% or more of the shares are held
by the Government or RBI or a corporation owned by RBI; or
2. A company which is registered under section 25 of the companies Act, 1956. or
3. A company having no share capital if it is declared for specified years by order of the
Board (CBDT) to be a company in which the public are substantially interested or
4. Nidhi or Mutual benefit finance company, or - (Similar to NBFC’s)
5. Company wherein 50% or more of the voting power was throughout the previous year
held by one or more co-operative societies: or
7

Types of Companies
6. A public listed company which is listed on a recognized stock exchange in India as on
the last day of the previous year, or
7. A public company, if its 50% or more of voting power was throughout the previous year
held by
 Government statutory corporation or
 Any company in which public are substantially interested
 Any 100% subsidiary of company in which public are substantially interested
▸ Note: Companies under Section 25 refers to companies registered for promoting
commerce, art, science, religion, charity and prohibiting the payment of any dividends
to its members.
▸ Note: A Nidhi or mutual benefit finance company is a company which carries on as its
principle business , the business of acceptance of deposits from its members and which
is declared by the central government under sec 620 A of the companies act to be a
nidhi or mutual benefit society. 8

Types of Companies
▸ 6. Investment Company: Investment company means a company whose gross total
income consists mainly of income which is chargeable under the heads "Income from
house property or/and "Capital gain or/and "Income from other sources.
▸ 7. Widely-held Company: A company in which the public are substantially interested
is known as widely held company.
▸ 8. Closely held Company: A company in which the public are not substantially
interested is known as closely held company.
▸ 9. Banking Company: A company to which the Banking regulation Act, 1949 is
applicable and includes any banking institution referred to in Sec 51 of the Act.
▸ 10. Industrial Company: A company which is engaged in the business of generation
or distribution of electricity or any other form of power or in the construction of ships
or in the manufacture or processing of goods or in mining is known as industrial
company.
9

Residential Status of a Company
▸ Residential Status of a Company Section 6(3):
▸ For the purpose of determining residential status of the company, Companies are
classified into two types
▸ 1. Indian Company: It is always a Resident company
▸ 2. Foreign Company: It can have two types of residential status is either Resident or
Non Resident
▸ • Foreign company is resident in India only if during the PY, the management of its
affairs is situated wholly in India.
▸ • Foreign company is Non Resident in India only if during the previous year, control
and management of its affairs is wholly or partly situated out of India.
10

Residential Status of a Company
▸ New provisions under Finance Act 2015: The Finance Act 2015 has proposed to amend
the test of Prudence for foreign companies to provide that a company would be treated
as resident in India, if its place of effective management in the previous year is in
India.
▸ 1. Indian Company: Is always a Resident company
▸ 2. Foreign Company: It can have two types of residential status, either Resident or
Non Resident.
 Foreign company is resident in India only if during the PY, place of effective
management is situated wholly in India.
 Foreign company is Non Resident in India only if during the PY, place of effective
management is out of India.
▸ POEM: (Place of effective management) has been defined to mean a place where key
management and commercial decisions that are necessary for the conduct of the
business of an entity as a whole are in substance made.
11

Income chargeable under the head "Profits and gains of business or
profession [sec 28]
▸ The following income shall be chargeable to income-tax under the head "Profits and gains of
business or profession.
1) The profits and gains of any business or profession carried on by the assessee during the relevant
PY.
2) Any compensation or other payment due to or received by a
a) Any person managing the whole or substantially the whole of the affairs of an Indian company or
any other company (located in India). MD remuneration , CEO’s remuneration , Remuneration of
BOD’s
b) Any person holding an agency in India for any part of the activities relating to the business of any
other person.
12

Income chargeable under the head "Profits and gains of business
or profession [sec 28]
3) Income derived by a trade, professional or other similar association from specific service performed
for its members. Ex: FKCCI, ASSOCHAM, CII etc.
4) Profits on sale of licence granted under the Imports (Control) Order, 1955.
5) Cash assistance received or receivable by any person against exports under any scheme of the
Government of India. Packing assistance
6) Duty drawback of customs or excise allowed to any person against exports under the Customs and
Central Excise Duties Drawback Rules, 1971.--- Refund of DUTY already paid to Govt
7) Any profit on the transfer of the Duty Entitlement Pass Book Scheme (DEPB), U/S 5 of the Foreign
Trade (Development and Regulation) Act, 1992. ----helps exporter to apply for credit on imported
items
13

Income chargeable under the head "Profits and gains of business or
profession [sec 28]
8) Any profit on the transfer of the Duty Free Replenishment Certificate (DFRC), U/S 5 of the Foreign
Trade (Development and Regulation) Act, 1992.- Issued to export merchant who imports items for
manufacturing
9) The value of any benefit or perquisite, whether convertible into money or not, arising from business
or the exercise of a profession.
10) Interest on partners’ capital, salary, bonus, commission or remuneration etc. due to and received by a
partner of a firm from such firm. However subject to the deduction allowed u/s 40 (b).
11) Any sum, whether received or receivable, on account any capital asset (other than land or Goodwill
or financial instrument) being demolished, destroyed, discarded or transferred.
12) Any sum received under a Key man insurance policy including bonus on such policy.
13) Any sum, whether received or receivable under an agreement for not carrying out any activity in
relation to any business; or (b) not sharing any knowhow, patent, copyright, trade mark, licence,
franchise or any other business or commercial right. 14

Expenses Expressly Allowed
▸ Expenses Expressly Allowed: Expenses Expressly Allowed as deduction are known
as allowable expenses or admissible expenses. Section 30 to 37 of Income Tax Act
deals with expenses that are allowed, these deduction are:
1) Rent, rates, taxes, repairs and insurance for buildings - Section 30
2) Repairs and insurance of plant and machinery-Sec 31
3) Depreciation-Sec 32
4) Investment in new Plant and Machinery Section 32 AC.
5) Expenditure on Scientific Research Section 35
6) Expenditure on Acquisition or purchase of patients or copyright -Section 35A
15

7) Expenditure on know how Section 35 AB
8) Amortization of Telecom license Fees Section 35ABB
9) Expenditure on Eligible projects or schemes Section 35AC- national committee has
approved around 28 projects
10) Expenditure on specified Business Section 35AD
11) Payment made to associations and institutions for carrying out Rural development
programmes Section 35CCA- 100% allowed- PMGSY,PMAGY etc.
12) Payment for carrying out programmes of conservation of Natural Resources -Section
35CCB -100% allowed
16

13) Amortization of Preliminary expenses Section 35 D, allowed in 5 yearly instalments.
14) Expenditure on Demerger or Amalgamation Section 350DD.
15) Amortization of Expenditure under Voluntary Retirement Scheme Section 35DDA
16) Amortisation Of Expenditure on Prospecting etc, for Development of Certain Minerals
Section 35 E
17) Other specified deduction Section 36
18) General deduction Section 37
17

Allowable Losses
▸ The following losses which arise in relation to business or profession is allowed as deduction
1) Loss by theft and embezzlement by employee
2) Loss arising from negligence or dishonesty of employees
3) Loss due to robbery and dacoity.
4) Loss due to Fire, accident, enemy war action.
5) Loss due to white ants (Termites)
6) Loss due to non-recovery of advances.
7) Loss due to destruction by an act of God ( Natural calamities )
8) Loss due to exchange rate fluctuations in case of foreign currency transaction.
9) Loss arising from sale of securities held in the regular course of Business (Not being in the nature of
Investment)
18

Expenses Expressly Disallowed: - Inadmissible expenses
▸ Payment or expenses expressly disallowed u/s 40A of the Income Tax
1) Unreasonable expenses
2) Unreasonable Payments made to relative for the goods or services obtained from them
3) If any payment exceeding Rs 20,000 (Rs 35,000 in case of plying of transport vehicles) is not made
by crossed cheque/draft on a bank and claimed as deduction 100% of the whole of such expenditure
is disallowed.
4) Personal expenses of the proprietor/s , such as drawings of the proprietor/s, salary to proprietors,
Interest on proprietors' capital, Medical expenses of proprietor/s, LIC premium on Proprietor's and
his family members life.
5) Any capital expenditure
6) Any provision or transfer to reserves other than those which are expressly allowed in the IT Act
7) Legal expenses incurred to defend against criminal liability
19

Other Inadmissible expenses
1) Interest, Salary, royalty fees for beneficial services or any other sum payable outside
India is not deductible unless tax is deducted at source or tax is paid.
2) Advertisement made in any articles, brochure, Newspaper or magazines or the like
published by political party
3) Income Tax ,Wealth Tax, Fringe Benefit tax, Gift tax Property tax or Estate duty.
Advance Income tax, Tax penalty. Penal interest etc are not deductible
4) Donations or presents if not exclusively for the purpose of business or profession
5) Gratuity paid to employee as a special case Ex-gratia
6) Penalty and damages paid for infringement of law.
7) Expenses paid on other heads of Income but included in Business Income.
20

Depreciation
Depreciation. Sec 32:Depreciation usually means loss or decline in the value which occurs
gradually over useful life of a material thing, due to physical wear, tear and is generally limited
to losses or decline in value which cannot be restored by current repairs and maintenance. OR
Depreciation refers to a gradual, permanent, continuous fall in the book value of the asset, due
to constant use and wear and tear of assets.
CONDITIONS OF CLAIMING DEPRECIATION:
1: Asset must be owned by assessee
2: It must be used for the purpose of business or profession
3: It should be used during the relevant previous year.
4: The asset must fall under eligible class of assets5: Depreciation is available on tangible as
well as intangible assets
21

Depreciation
5: Depreciation is available on tangible as well as intangible assets
The assets in respect of which depreciation is claimed must belong to either of the following categories
namely, i.e ASSETS WHICH ARE QUALIFIED FOR DEPRECIATION
i. Part-A: Buildings, machinery & plant or furniture & fixtures, being tangible assets.
ii. Part-B: know how, patents, copyrights, trademarks, licenses, franchises or any other business
commercial rights of similar nature, being intangible assets acquired on or after the day of April 1998,
 Building includes roads, bridges, culverts well and tube wells
 Machinery is an asset which is directly connected with production or manufacture or processing of a
product
 Plant includes ships, vehicles, Books, Scientific apparatus, surgical equipment and does not includes tea
business, Livestock, Buildings, furniture and fitting.
22

Depreciation
5: Depreciation is available on tangible as well as intangible assets
The assets in respect of which depreciation is claimed must belong to either of the following categories
namely, i.e ASSETS WHICH ARE QUALIFIED FOR DEPRECIATION
i. Part-A: Buildings, machinery & plant or furniture & fixtures, being tangible assets.
ii. Part-B: know how, patents, copyrights, trademarks, licenses, franchises or any other business
commercial rights of similar nature, being intangible assets acquired on or after the day of April 1998,
 Building includes roads, bridges, culverts well and tube wells
 Machinery is an asset which is directly connected with production or manufacture or processing of a
product
 Plant includes ships, vehicles, Books, Scientific apparatus, surgical equipment and does not includes tea
business, Livestock, Buildings, furniture and fitting.
23

Depreciation
2) The assets must be owned, wholly or partly by the assesses and used for the purposes of the business or
profession during the relevant previous year, the following deduction shall be allowed
i. In the case of assets of an undertaking engaged in generation or generation and distribution of power
such percentage on the actual cost thereof to the assesses as may be prescribed.
ii. In the case of any block of assets, such percentage on the written down value thereof as may be
prescribed
3) Registered ownership is not necessary, even if the assessee is a beneficial owner or a owner u/s53A of
transfer of Property Act.
4) The asset put to use in the business can be active use or passive use. Passive usage means keeping the
asset ready for use.
24

Method of Depreciation
There are two methods of depreciation recognized by Income Tax Act. They are
1) Straight Line Method :It is applicable only on tangible assets of business engaged in generation and
distribution of power for assets acquired on/after 1.4.1997
2) Write Down Value Method: it is applicable on block of asset for all other business entities (both on
tangible and intangible assets)
Meaning of Block of Assets: Block of assets means a group of assets falling within a class of assets being
tangible and intangible in respect of which same percentage of depreciation is prescribed.
25

Additional Depreciation
COMPUTATION OF ADDITIONAL DEPRECIATION Sec 32(1)(iia)
1: The assessee must be engaged in manufacture / production of any article or thing.
2: New plant and machinery should be acquired and installed after March 31,2005.
3: It should be an eligible plant and machinery.
The following plant & machinery assets are not eligible for additional depreciation:
▸ Road transport vehicles and Ships and Aircrafts
▸ Any plant or machinery which is installed in any office or premises or any residential accommodation or
accommodation in the nature of guest house.
▸ Any plant or machinery which, before its installation by the assessee, was used either within or outside India by any
other person.
▸ Any plant or machinery, the entire cost of which is allowed as a deduction(by way of depreciation or otherwise)
during the previous year. 26

Additional Depreciation
Assessee engaged in the following activities is not eligible for additional depreciation:
▸ Cooking food in a hotel.
▸ Construction of dam, building or contract for civil engineering.
▸ Cutting and polishing raw diamonds.
▸ Hatching of eggs.
▸ Pressure pilling for building.
▸ Mining of stones.
▸ Rate of additional depreciation: Additional depreciation shall be available @20% of the actual cost in
the year of acquisition of Plant and Machinery. If the asset is put into use for less than 180 days in the
year in which it is acquired, the rate of additional depreciation will be 10%.
27

Depreciation
Capital Gain / Loss:
▸ If the amount in "Depreciable balance" is negative it represents Short term capital gain (STCG).
▸ If the amount in "Depreciable balance" is positive,
▸ 1. It represents Short term capital loss (STCL) when all assets in the block are sold.
▸ 2. It represents Depreciable balance if all assets in the block are not sold.
Important notes:
 If the asset is purchased and put to use for more than 180 days during the previous year - (100%) Full rate
depreciation
 If the asset is purchased and put to use for less than 180 days during the previous year - 50% of Rate of Normal
depreciation
 Asset purchased during the previous year but not put to use – No Depreciation> No depreciation is admissible on
imported car. However, if the following conditions are satisfied, additional depreciation @ 35% shall be allowed.
28

Depreciation
▸ Any assessee newly setting up an undertaking or enterprise for manufacture or production of any article
or thing on or after 01.04.2015.
▸ Such undertaking shall be set up in any notified backward areas in the States of Andhra Pradesh, Bihar,
Telangana and West Bengal.
▸ Acquisition and installation of new plant and machinery shall be made between 01.04.2015 and
31.03.2022.
29

Terminal Depreciation and Balancing Charge
▸ Terminal Depreciation [Sec. 32(1)(iii)] and Balancing Charge [Sec.41(2)]
a) Applicable for any undertaking engaged in generation or generation and distribution of
power.
b) It must be a depreciable asset, on which depreciation is claimed on straight line basis.
c) Such depreciable asset is sold, discarded, demolished or destroyed in a previous year.
▸ If there arises,
1. Loss on sale = Terminal Depreciation
2. Gain on Sale = Balancing Charge
30

Terminal Depreciation and Balancing Charge
▸ Calculation of Terminal Depreciation and Balancing charge:
1. Calculate WDV or book value of the depreciable asset on the first day of the previous year
in which the asset is sold, discarded. Demolished or destroyed.
2. Ascertain Net Sale Consideration.
3. If Value as per (1) is > value as per (2) = loss = Terminal Depreciation.
▸ EX: Book Value on 1-4-2021 is Rs40,000 , Sale consideration is Rs30,000 then , loss=Rs
10,000.
1. If Value as per (1) is < value as per (2) = profit / gain= Balancing charge
2. EX: Book Value on 1-4-2021 is Rs40,000, Sale consideration is Rs50,000 then, profit =Rs
10,000. 31

Table showing circumstances of capital loss, capital gain, terminal depreciation and
Balancing charge
32
WDV Method WDV Method SL method SL method
WDV @ beginning
of the year -10,000
WDV @
beginning of the
year -10,000
Book value@ beginning of
the year -10,000
Book value@
beginning of the
year -10,000
Net sale
consideration is-
20,000
Net sale
consideration is-
5,000
Net sale
consideration is-
20,000
Net sale
consideration is-
5,000
10,000 is Capital
Gain
5,000 is Capital
loss
10,000 is Balancing
charge
5,000 is
Terminal
depreciation

Conditions for computation of Normal Depreciation and Additional Depreciation
33

Block of Assets – Rates of Depreciation for AY 2022-23
34

35

36

Format for computation of Depreciation and WDV (applicable for problems on
Depreciation)
37
Particulars Amount (Rs)
WDV of the block of assets at the beginning of the year on 1-04-
2021
(+) purchase of asset during the year
(-) Sale of asset during the year
Total depreciable value of the Block
(-) Depreciation at prescribed rate -% on above value
(-) Additional depreciation if any
Xxx
xxx
xxx
xxx
(xxx)
(xxx)
WDV at the end of the year (31-03-2022) XXX

Computation of Taxable Income of the Companies and Tax liability (under normal provisions)
▸ Step 1 Ascertain Business Income & Ascertain income of the company under different heads of income.
▸ Step 2 Aggregate of income of other persons u/s 60 and 61(if applicable).
▸ Step 3 adjust current and bought forward losses according to provisions of sections 70 to 80 and Unabsorbed
Depreciation u/s 32(2).
▸ Step 4 Add the total income computed from above steps to form gross total income.
▸ Step 5 Allow the following deductions permissible to company under Chapter VIA deductions (i.e 80G to 80LA)
▸ Step 6 The answer obtained is Net Income
▸ Step 7 Determine the residential status of the company and apply the prescribed rates of Income tax on Total
Income and compute Tax Liability.
38

▸ Step 1: Ascertain Business Income &Ascertain income of the company under different heads of income.
▸ The company can earn income from following four heads of income only
 Income from House Property
 Profit and Gains of business and Profession- i.e Busines Income
 Capital Gains
 Income from other sources
▸ Step 2 Aggregate of income of other persons u/s 60 and 61(if applicable)
▸ The income earned by other persons will be aggregated in the hands of company as per provisions under sec 60 and
61.
39

▸ Transfer of income where there is no transfer of assets –sec 60: when an income from an assets is transferred by a
person to another person, without the transfer of an asset, then such income shall be included in the total income of
the transferor, whether such transfer is revocable or not.
▸ Revocable transfer of assets –sec 61: When there is a revocable transfer of an asset by a person to another person,
any income arising/derived from such assets shall be included in the total income of the transferor.
▸ Step 3 adjust current and bought forward losses according to provisions of sections 70 to 80 and Unabsorbed
Depreciation u/s 32(2)
▸ If there are any loss from Business or Profession (other than speculative loss) which cannot be adjusted in the year
in which it is incurred , then such unadjusted loss can be carried forward adjusted in next year or can be carried
forward for max 8 subsequent years only against income under the head “ Profits and Gains of Business and
Profession”
40

 Such losses under the head “Profits and Gains of Business and Profession” can be carried forward only if the
return of Income is filed on or before the due date of filing the return in the year in which such loss is incurred u/s
139(1).
 In case of unabsorbed depreciation, it can be carried forward and adjusted in subsequent years and it has no time
limit.
▸ Step 4 Add the total income computed from above steps to form gross total income.
▸ Step 5 Allow the following deductions permissible to company under Chapter VIA deductions (i.e 80G to 80LA)
▸ Step 6 The answer obtained is Net Income
41

▸ Format for computation of Business Income or Taxable Income from Business
42

▸ Format for computation of Total Income (step 1 to step 6 can be understood)
43
Particulars Amt(Rs)
Income from House property
Income from Business or Profession (Business income)
Income from Capital gains
Income from Other Sources
(+)Income of other persons u/s 60 and 61
(-) Brought forward loss, Unabsorbed depreciation and other expenditure
xxx
xxx
xxx
xxx
xxx
(xxx)
Gross Total Income
(-) Deductions U/S 80G to 80 LA
XXX
(xxx)
Total income XXX

▸ Step 7 Determine the residential status of the company and apply the prescribed rates of Income tax on Total Income
and compute Tax Liability.
▸ Format for Computation of tax Liability (under normal provisions)
44
Particulars Amt(Rs) Amt(Rs)
Total
Income
XXX
Tax on total income
(+) Surcharge at applicable rates ( If TI > 1 Crore)
(+) Health & education cess @ 4% on (Tax +
surcharge)
Xxx
xxx
xxx
Xxx
(+) Dividend distribution Tax -115-0 xxx
Tax Payable xxx
(-) 1)Dividend Distribution Tax paid
2)Advance tax paid
3)Tax deducted at source
(xxx)
(xxx)
(xxx)
Tax Liability/ Refund XXX

Tax Rates Applicable for Assessment Year 2022-23
45

46

47

48
Tax rates applicable on other Income

CHAPTER VI -A Deductions for AY 2022-23
49

Computation of Taxable income under Minimum Alternative Tax (MAT)
Background of Minimum Alternative Tax - A company is liable to pay tax on income computed as per the Income Tax
Act, but the profit and loss account of company is prepared as per the provisions of Companies Act, 1956 or 2013. The
taxable income calculated as per Income Tax Act and Profits calculated as per Companies Act will not be same. By
taking advantage of this situation many companies had showed profits in their Profit and loss account but were not
paying any tax because their income computed as Income Tax Act was either nil or negative or too low. Here companies
showed book profits and paid dividends to shareholders, but were not paying any income tax. Such companies were
called as Zero Tax Companies In order to bring such companies under the Income Tax bracket, MAT was introduced
 The MAT was introduced for the first time in 1983 w.e.f AY 1984-85 by the Finance Act.
 The concept of MAT was introduced in Income Tax Act under [section 115] w.e.f AY 1988-89 by withdrawing it from
Finance Act
 Section 115B was introduced in Finance Act, 2000 w.e.f 1.4.2001 whereby a company shall be liable to pay higher
tax computed under Income Tax Act provisions and tax computed under MAT
50

▸ Applicability of MAT
 The provisions of MAT is applicable only to Companies.
 The tax payable under Minimum Alternative Tax (MAT) is governed by section 115/ 115JAA and 115JB.
 MAT provisions will be applicable only when the tax under normal provisions are less than the MAT rate (i.e 18.5%
of Book profits + surcharge and cess).
▸ Steps for Computation of Tax liability under MAT provisions
▸ Step-1: Compute the Book profits
▸ Step-2: Computation of MAT @18.5 % on Book profits +Surcharge+ H& E Cess and find tax payable amount.
▸ Step-3: Deduct the Tax credit if any, available from tax payable amount
▸ Step-4: Deduct DDT, advance tax and TDS paid if any, the resultant will be Tax Liability under MAT. 51

▸ Format for Computation of Book Profit under MAT provisions
52

▸ Format for Computation of tax Liability (under MAT provisions)
53
Particulars Amt(Rs) Amt(Rs)
Book Profit XXX
MAT @18.5% on Book profit
(+) Surcharge at applicable rates ( If TI > 1Crore)
(+) Health & education cess @ 4% on (Tax +
surcharge)
Xxx
xxx
xxx
Xxx
(+) Dividend distribution Tax -115-0 Xxx
Tax payable Xxx
(-) Tax credit if available
(-) 1)Dividend Distribution Tax paid
2)Advance tax paid
3)Tax deducted at source
(xxx)
(xxx)
(xxx)
MAT payable /Tax Liability under MAT XXX

▸ Tax Credit for tax paid under MAT [Sec 115JAA (IA)]
 If any tax is paid by the company assessee from the AY 2006-07 onwards, credit in respect of tax so paid can be
claimed.
 Amount of credit = MAT- tax payable on total income under normal provision.
 Tax credit can be carried forward and set off for 10 subsequent assessment years immediately succeeding the AY in
which the Tax credit is available.
54

Carry forward and set off
▸ Set off of losses
▸ Set off of losses means adjusting the losses against the profit or income of that particular year. Losses that
are not set off against income in the same year can be carried forward to the subsequent years for set off
against income of those years. A set-off could be an intra-head set-off or an inter-head set-off.
▸ Intra-head Set Off
▸ The losses from one source of income can be set off against income from another source under the same
head of income.
▸ For eg: Loss from Business A can be set off against profit from Business B, where Business A is one source
and Business B is another source and the common head of income is “Business”.
▸ Exceptions to an intra-head set off:
1. Losses from a Speculative business will only be set off against the profit of the speculative business. One
cannot adjust the losses of speculative business with the income from any other business or profession.
2. Loss from an activity of owning and maintaining race-horses will be set off only against the profit from an
activity of owning and maintaining race-horses.
3. Long-term capital loss will only be adjusted towards long-term capital gains. However, a short-term capital
loss can be set off against both long-term capital gains and short-term capital gain.
4. Losses from a specified business will be set off only against profit of specified businesses. But the losses
from any other businesses or profession can be set off against profits from the specified businesses.
55

▸ Inter-head Set Off
▸ After the intra-head adjustments, the taxpayers can set off remaining losses against income from
other heads.
▸ Eg. Loss from house property can be set off against salary income.
▸ Given below are few more such instances of an inter-head set off of losses:
1. Loss from House property can be set off against income under any head
2. Business loss other than speculative business can be set off against any head of income except
income from salary.
▸ One needs to also note that the following losses can’t be set off against any other head of income:
▸ a. Speculative Business loss
▸ b. Specified business loss
▸ c. Capital Losses
▸ d. Losses from an activity of owning and maintaining race-horses
56

▸ Carry forward of losses
▸ After making the appropriate and permissible intra-head and inter-head adjustments, there could
still be unadjusted losses. These unadjusted losses can be carried forward to future years for
adjustments against income of these years. The rules as regards carry forward differ slightly for
different heads of income.
These have been discussed here:
▸ Losses from House Property :
• Can be carry forward up to next 8 assessment years from the assessment year in which the loss
was incurred
• Can be adjusted only against Income from house property
• Can be carried forward even if the return of income for the loss year is belatedly filed.
▸ Losses from Non-speculative Business (Regular Business) Loss
was incurred
• Can be adjusted only against Income from business or profession
57

▸ Speculative Business Loss
was incurred
• Can be adjusted only against Income from speculative business
• Cannot be carried forward if the return is not filed within the original due date.
• Not necessary to continue the business at the time of set off in future years
▸ Specified Business Loss under 35AD
• No time limit to carry forward the losses from the specified business under 35AD
• Cannot be carried forward if the return is not filed within the original due date
• Can be adjusted only against Income from specified business under 35AD
58

▸ Speculative Business Loss
was incurred
• Can be adjusted only against Income from speculative business
• Cannot be carried forward if the return is not filed within the original due date.
▸ Specified Business Loss under 35AD
• No time limit to carry forward the losses from the specified business under 35AD
• Can be adjusted only against Income from specified business under 35AD
59

▸ Let us understand with an example-
▸ Mr P has invested in equity shares. Below are the details related to his capital gain/loss transactions
for different years.
▸ Assuming there is 15% tax on STCG and 20% tax on LTCG. The order of adjusting STCL and LTCL is not prescribed in the Act.
Hence, the STCL and LTCL are first adjusted with LTCG of the year to reduce the tax liability.
60

▸ Losses from owning and maintaining race-horses
was incurred
• Can only be set off against income from owning and maintaining race-horses only
61

▸ Points to note:
1. A taxpayer incurring a loss from a source, income from which is otherwise exempt from tax, cannot set off
these losses against profit from any taxable source of Income
2. Losses cannot be set off against casual income i.e. crossword puzzles, winning from lotteries, races, card
games, betting etc.
▸ How to Set off & Carry Forward Capital Losses
▸ Set off of Capital Losses
▸ The Income Tax does not allow loss under the head capital gains to be set off against any income from
other heads – this can be only set off within the ‘Capital Gains’ head.
• Long Term Capital Loss can be set off only against Long Term Capital Gains.
• Short Term Capital Losses are allowed to be set off against both Long Term Gains and Short Term Gains.
▸ Carry Forward of Losses
▸ Fortunately, if you are not able to set off your entire capital loss in the same year, both short term and long
term loss can be carried forward for 8 assessment years immediately following the assessment year in
which the loss was first computed.
▸ If capital losses have arisen from a business, such losses are allowed to be carried forward and carrying on
of this business is not compulsory.
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▸ Treatment of Long term Loss on Shares and Equity Funds
▸ If you have incurred a long term capital loss on selling shares or equity mutual fund units after
31.3.2018 then you can set them off against any LTCG. As profits/gains on long term shares or
equity funds are now taxable in excess of Rs.1 lakh.
▸ Also, you can carry forward these losses for setting off in later years up to 8 assessment years. Prior
to 31.03.2018, there was no tax on long term gains on shares & equity funds, therefore long term
gains on shares & equity funds were considered as a dead loss. Therefore, the same was not
allowed to set off or carried forward.
▸ Shares and Equity Funds are long term capital assets when held for more than 12 months.
63

64
THANKS!
Any questions?
You can find me at:
mukund.vk@pg.spmcollege.ac.in
▸ 7892808725

Module -1 Corporate direct Tax planning notes

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