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Unit 5: Computation of Taxable Income of Companies

2. A company or person may be subjected to tax on his world income in two or more countries, Notes
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.
3. 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 fl at 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.
5.1.2 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:
1. Entertainment expenses

2. Interest or other amounts paid to a non-resident without deducting without tax
3. Corporate taxes paid
4. Indirect general and administrative costs of a foreign head offi ce.

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 indefi nitely.
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 benefi cial

interest in the shares of the company exceeding 51 per cent disqualifies the private company from
the carry forward benefi t.

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