Course Code: COM6EJ313 (7) • Course Title: Corporate Taxation and Tax Planning • Semester: VI • Credits: 4 • Contact Hours: 60
Module I Title: ASSESSMENT OF COMPANIES (8 Contact Hours)
Syllabus Units Covered: Unit 1: Introduction to Corporate Taxation — Definition of Company u/s 2(17), Classifications: Domestic Company u/s 2(22A), Foreign Company u/s 2(23A), Widely Held Company u/s 2(18), Closely Held Company • Unit 2: Residential Status of Companies u/s 6(3) — Indian Companies, Place of Effective Management (POEM) Framework for Foreign Companies, Scope of Total Income & Incidence of Tax u/s 5 • Unit 3: Set-Off and Carry Forward of Losses in Companies — Intra-Head (Sec 70), Inter-Head (Sec 71), Business Loss (Sec 72), Unabsorbed Depreciation (Sec 32(2)), Special Statutory Restriction on Closely Held Companies u/s 79 (51% Voting Power Continuity Test & Startup Relief u/s 79(2)) • Unit 4: Deductions Available to Corporate Assessees under Chapter VI-A — Sec 80GGB (Political Donations), Sec 80-IAC (Eligible Startups), Sec 80JJAA (New Employment Generation), Sec 80M (Inter-Corporate Dividends) • Calicut University Academic Examination Bank (Part A: 2 Marks, Part B: 5 Marks, Part C: 10/15 Marks).
1. Introduction to Corporate Taxation & Legal Typologies of Companies
In Indian direct tax jurisprudence, a company is recognized as an independent artificial juridical entity distinct from its shareholders. Corporate taxation is governed by the Income Tax Act, 1961, which prescribes distinct rules for computing corporate gross total income, allowable business deductions, and tax rates.
Under Section 2(17) of the Income Tax Act, 1961, the term "Company" is defined expansively to include:
- Any Indian company as defined in Section 2(26);
- Any body corporate incorporated by or under the laws of a country outside India (foreign company);
- Any institution, association, or body which is assessed or was assessable as a company for any assessment year up to 1970–71;
- Any institution, association, or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Central Board of Direct Taxes (CBDT) to be a company.
1. DOMESTIC COMPANY [SEC 2(22A)]
• Tax Concession: Eligible for concessional corporate tax regimes under Section 115BAA (22%) and Section 115BAB (15%).
2. FOREIGN COMPANY [SEC 2(23A)]
• Tax Rate: Subject to a standard corporate tax rate of 35% (reduced from 40% by Finance Act 2024) + applicable surcharge and 4% Health & Education Cess.
3. WIDELY HELD COMPANY [SEC 2(18)]
• Includes: Listed public companies on recognized Indian stock exchanges, government-owned corporations (at least 40% equity held by Government/RBI), and Section 8 non-profit licensed companies.
4. CLOSELY HELD COMPANY
• Special Tax Scrutiny: Subject to anti-abuse loss carry-forward restrictions under Section 79.
2. Residential Status of Companies and Tax Incidence [Section 6(3) & Section 5]
The total world income of a company is brought to tax in India based strictly on its residential status determined for the relevant previous year under Section 6(3):
Statutory Test of Residential Status for Companies [Section 6(3)]
Case 1: An Indian Company:
An Indian company (incorporated in India under the Companies Act) is ALWAYS a Resident in India for tax purposes, irrespective of where its management or business operations are physically situated.
A foreign company is treated as a Resident in India in any previous year ONLY IF its Place of Effective Management (POEM) is in India in that year.
Definition of POEM: Section 6(3) Explanation defines POEM as "the 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." If POEM is outside India, the foreign company is Non-Resident (NR).
A. Scope of Total Income & Tax Incidence [Section 5]
| Nature of Income Stream | Resident Company (Indian / POEM in India) | Non-Resident Company (Foreign Company) |
|---|---|---|
| Income received or deemed to be received in India during the previous year | Taxable | Taxable |
| Income accruing or arising, or deemed to accrue or arise in India (Section 9) | Taxable | Taxable |
| Income accruing, arising, or received outside India (Global / Foreign Income) | Taxable in India (Global Taxation) | Not Taxable in India |
3. Set-Off and Carry Forward of Losses in Companies
Companies are entitled to set off and carry forward business and capital losses under Sections 70 to 80, subject to standard rules and specialized corporate anti-abuse provisions:
| Category of Loss | Set-Off in Same Year | Carry Forward Period | Set-Off in Subsequent Years |
|---|---|---|---|
| Normal Business Loss (Sec 72) | Can be set off against any head of income except Salaries (intra-head and inter-head u/s 70 & 71). | Up to 8 Assessment Years immediately succeeding the year of loss. | Can be set off ONLY against Profits and Gains of Business or Profession (PGBP). |
| Speculation Business Loss (Sec 73) | Can be set off ONLY against profits of another speculation business. | Up to 4 Assessment Years. | Can be set off ONLY against speculation profits. |
| Unabsorbed Depreciation [Sec 32(2)] | Can be set off against any head of income (except salaries) in the current year. | Indefinite Carry Forward (No time limit). | Can be set off against ANY head of income (except salaries), even if business is discontinued. |
| Capital Losses (Sec 74) | LTCL only against LTCG; STCL against both STCG and LTCG. | Up to 8 Assessment Years. | LTCL against LTCG only; STCL against STCG and LTCG. |
A. Special Anti-Abuse Restriction on Closely Held Companies [Section 79]
Under Section 79 of the Income Tax Act, where a change in shareholding takes place in a closely held company (company in which the public are not substantially interested), no business loss incurred in any previous year prior to the previous year of change shall be carried forward and set off against the income of the previous year, UNLESS:
- On the last day of the previous year in which the loss is sought to be set off, shareholders carrying not less than 51% of the total voting power beneficially held the shares on the last day of the year in which the loss was incurred (The 51% Continuity of Voting Power Test).
- Statutory Relief for DPIIT-Recognized Eligible Startups [Sec 79(2)]: In the case of an eligible startup referred to in Section 80-IAC, loss carry-forward is permitted even if the 51% voting power condition is breached, provided that 100% of the original shareholders who held shares on the last day of the year of loss continue to hold those shares in the set-off year.
4. Deductions Available to Corporate Assessees under Chapter VI-A
From Gross Total Income (GTI), corporate assessees can claim specific deductions under Chapter VI-A (provided the company does not opt for concessional Section 115BAA/115BAB regimes):
SECTION 80GGB — POLITICAL DONATIONS
• Deduction Quantum: 100% of sums contributed to any registered political party or an electoral trust.
• Statutory Condition: Contribution must be made through non-cash banking modes (cheque, draft, ECS, RTGS/NEFT). Zero deduction for cash donations.
SECTION 80-IAC — ELIGIBLE STARTUPS
• Deduction: 100% of profits for any 3 consecutive assessment years out of 10 years from incorporation.
• Condition: Turnover must not exceed ₹100 Crores in any previous year.
SECTION 80JJAA — EMPLOYMENT GENERATION
• Tenure: Allowed for 3 consecutive Assessment Years (Total benefit = 90% of incremental employee wages).
• Conditions: New employees must be employed for at least 240 days (150 days for apparel/footwear) with monthly emoluments ₹25,000.
SECTION 80M — INTER-CORPORATE DIVIDENDS
• Deduction: Allows a domestic company to deduct dividend income received from another domestic company, foreign company, or business trust, to the extent such dividend is re-distributed to its own shareholders on or before the due date of filing ITR.
5. Practical Numerical Assessment Problems
Practical Problem 1: Application of Section 79 Loss Carry-Forward Restriction
Case Data: Zeta Private Ltd is a closely held company. In Previous Year 2024–25, it incurred an unabsorbed business loss of ₹15,00,000. Its shareholding pattern on 31st March 2025 was:
• Shareholder A = 40% • Shareholder B = 30% • Shareholder C = 30%.
During Previous Year 2025–26, Shareholder A sells his entire 40% equity stake to Shareholder D, and Shareholder B sells a 15% stake to Shareholder E. On 31st March 2026, the shareholding pattern is:
• Shareholder D = 40% • Shareholder E = 15% • Shareholder B = 15% • Shareholder C = 30%.
In PY 2025–26, Zeta Pvt Ltd earns a business profit of ₹25,00,000 before set-off. Can the company set off its brought forward loss of ₹15,00,000 under Section 79?
1. Under Section 79 of the Income Tax Act, 1961, a closely held company can carry forward and set off accumulated business losses only if shareholders carrying at least 51% of voting power on the last day of the loss year (31/03/2025) continue to hold shares on the last day of the set-off year (31/03/2026).
2. Verification of Continuing Shareholders on 31/03/2026:
• Shareholder A: Held 40% in 2025 → Holds 0% in 2026 (Exited).
• Shareholder B: Held 30% in 2025 → Holds 15% in 2026 (Continuing).
• Shareholder C: Held 30% in 2025 → Holds 30% in 2026 (Continuing).
• Total Voting Power of Continuing Shareholders on 31/03/2026 = .
3. Conclusion: Because the continuing original shareholders hold only 45% of voting power (which is strictly less than the statutory minimum of 51%), Zeta Pvt Ltd FAILS the Section 79 test.
• The brought-forward business loss of ₹15,00,000 CANNOT be set off against the current profit of ₹25,00,000.
• Total Taxable Business Income for PY 2025–26 = ₹25,00,000 in full.
6. Comprehensive Calicut University Academic Examination Bank
Under Section 6(3), a company's residential status determines whether it is taxed on global income or Indian-sourced income:
- Statutory Tests:
- Indian Companies: Always resident in India by birth/incorporation.
- Foreign Companies: Resident in India only if its Place of Effective Management (POEM) is in India in that previous year.
- CBDT POEM Guidelines:
- Active Business Outside India (ABOI) Test: A foreign company is presumed to have its POEM outside India if it satisfies the ABOI test (passive income of total income, less than 50% of assets, employees, and payroll situated in India) AND the majority of Board meetings are held outside India.
- Two-Stage POEM Determination: (1) Identification of the persons who actually make the key management and commercial decisions, and (2) Determination of the physical place where these decisions are de facto formulated. Commercial reality takes precedence over legal form.
The Income Tax Act distinguishes between normal business losses and unabsorbed depreciation:
- Business Loss vs. Unabsorbed Depreciation:
- Business Loss (Sec 72): Carried forward for a maximum of 8 assessment years; can only be set off against future business profits (PGBP); requires timely filing of ITR u/s 139(3).
- Unabsorbed Depreciation (Sec 32(2)): Carried forward indefinitely; becomes part of subsequent year's current depreciation; can be set off against any head of income except salaries; does not mandate timely filing of ITR.
- Anti-Abuse Section 79 for Closely Held Companies:
Enacted to prevent the trafficking of corporate tax losses (where profitable companies buy shell companies with accumulated tax losses solely to reduce tax bills). If 51% of voting power shifts to new owners, all accumulated business losses lapse permanently, unless protected under the startup relief clause of Section 79(2).
An exhaustive academic examination answer must systematically explore the following structural sections:
- Introduction & Corporate Entity Definition:
Define Company u/s 2(17). Explain the corporate tax philosophy in India—treating companies as distinct legal taxable entities separate from shareholders. Classify companies: Domestic, Foreign, Widely Held, Closely Held.
- Residential Status of Companies & Tax Incidence:
- Section 6(3) criteria: Indian companies always resident; Foreign companies resident if POEM is in India.
- Detailed analysis of Place of Effective Management (POEM): Active Business Outside India (ABOI) test, key management decisions, board meetings, digital operations.
- Incidence of tax under Section 5: Resident companies taxed on worldwide global income; Non-resident foreign companies taxed only on Indian-sourced/received income.
- Carry Forward and Set-Off of Losses (Sections 70 to 80):
- Normal business losses u/s 72 (8 years, set off against PGBP only, Section 139(3) return filing mandate).
- Unabsorbed depreciation u/s 32(2) (infinite carry forward, set off against any head, priority order of set-off).
- Capital losses u/s 74 and speculation losses u/s 73.
- In-Depth Scrutiny of Section 79 Anti-Abuse Provisions:
- Legislative objective: Combating tax avoidance through purchasing loss-making shell entities.
- The 51% continuity of beneficial voting power test on the last day of the previous year.
- Exemptions: Startups u/s 80-IAC (100% original shareholder continuity), NCLT resolution plans under Insolvency and Bankruptcy Code (IBC), amalgamation/demerger of foreign companies.
- Corporate Deductions under Chapter VI-A:
- Section 80GGB: 100% deduction for political contributions via banking channels.
- Section 80-IAC: 100% tax holiday for eligible DPIIT startups for 3 out of 10 years.
- Section 80JJAA: 30% incentive for 3 years on additional employee remuneration.
- Section 80M: Inter-corporate dividend cascading deduction.
- Conclusion: Summarize how corporate tax assessment in India balances revenue generation and anti-avoidance vigilance with targeted industrial incentives for employment generation, startup innovation, and ease of doing business.