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Income Tax Laws – I

Notes · A company or person who is non-resident in both the countries may be subjected to tax in
each one of them on income derived from one of them, for example, a non-resident person
has a Permanent establishment in one country and through it he derives income from the
other country.

Did u know? For companies, income is taxed at a flat rate of 30% for Indian companies,
with a 5% surcharge applied on the tax paid by companies with gross turnover over 1
crore (10 million).
Foreign companies pay at the income tax at the rate of 40% plus 2% surcharge on the income tax
payable. An education cess of 3% on both the tax and the surcharge are payable, yielding
effective tax rates of 32.5% for domestic companies and 41.2% for foreign companies. From
2005–06, electronic filing of company returns is mandatory.

11.1.1 Taxable Income of Companies

The main source of income of a company is generally from “business”. A company would also
earn income from under the following heads:
a. Income from house property

b. Income from capital gains
c. Income from other sources
Taxable income is calculated according to the rules for each class of income and then aggregated
to determine total taxable income.

Deductibility of Expense

While calculating income from business or profession, expense incurred wholly and exclusively
for business purposes are generally deductible. These include depreciation on fixed assets,
interest paid on borrowings in the financial year etc.
Certain expenses are specifically disallowed or the amount of deduction is restricted. These
expenses include:

Entertainment expenses
Interest or other amounts paid to a non-resident without deducting without tax
Corporate taxes paid

Indirect general and administrative costs of a foreign head office.
Set-off and Carry Forward of Losses

Business losses incurred in a tax year can be set off against any other income earned during that
year, except capital gains. Unabsorbed business losses can be carried forward and set off against
business profits of subsequent years for a period of eight years; the unabsorbed depreciation
element in the loss can however, be carried forward indefinitely. However, this carry forward
benefit is not available to closely-held (private) companies in which there has been no continuity
of business or shareholding pattern. Also, any change in beneficial interest in the shares of the
company exceeding 51 per cent disqualifies the private company from the carry forward benefit.

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