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Unit 11: Computation of Taxable Income of Companies

and which has not made the prescribed arrangements for declaration and payment of dividends Notes
within India.
In this unit we will study the computation of taxable incomes for companies by taking into
consideration the concepts of MAT, tax on distributed profits of Indian companies and tax on
dividends and income by VCC etc.

11.1 Computation of Taxable Income of Companies – An Overview

Indian companies are taxable in India on their worldwide income, irrespective of its source and
origin. Foreign companies are taxed only on income which arises from operations carried out in
India or, in certain cases, on income which is deemed to have arisen in India. The later includes
royalty, fees for technical services, interest, gains from sale of capital assets situated in India
(including gains from sale of shares in an Indian company) and dividends from Indian companies.
Thus, the tax-liability on income of a company depends upon the residential status of the
company.

Residential Status of a Company

A Company is said to be resident in India during any relevant previous year if:
i. It is an Indian Company; or
ii. The control and management of its affairs is situated wholly in India. In case of Resident
Companies, the total income liable to tax includes (section 5(1)):
Any income which is received or is deemed to be received in India in the relevant
previous year by or on behalf of such company
Any income which accrues or arises or is deemed to accrue or arise in India during
the relevant previous year

Any income which accrues or arises outside India during the relevant previous year.
Similarly, a Company is said to be non-resident during any relevant previous year if:
i. It is not an Indian company, and
ii. The control and management of its affairs is situated wholly or partially outside India. In
case of Non-Resident Companies, the total income liable to tax includes (section 5(2)):
Any income which is received or is deemed to be received in India during the
relevant previous year by or on behalf of such company
Any income which accrues or arises or is deemed to accrue or arise to it in India
during the relevant previous year.

As a result a situation may arise where the same income becomes taxable in the hands of the
same company in one or more countries, leading to ‘Double Taxation’. The problem of double
taxation may arise on account of any of the following reasons:

A company (or a person) may be resident of one country but may derive income from
other country as well, thus he becomes taxable in both the countries.

A company or person may be subjected to tax on his world income in two or more
countries, which is known as concurrent full liability to tax. One country may tax on the
basis of nationality of tax-payer and another on the basis of his residence within its
border. Thus, a person domiciled in one country and residing in another may become
liable to tax in both the countries in respect of his world income.

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