Page 43 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes
Example: Interest on Government securities is usually payable on specified dates, say on

1st January and 1st July. In all such cases, the interest would be said to accrue from 1st July to 31st
December and on 1st January, it will fall due for payment.
It must be noted that income which has been taxed on accrual basis cannot be assessed again
on receipt basis, as it will amount to double taxation. For example, when a loan to a director
has already been treated as dividend under section 2(22) (e) and later dividend is declared,
distributed and adjusted against the loan, the same cannot be treated as dividend income again.

With a view to removing difficulties and clarifying doubts in the taxation of income, Explanation

1 to Section 5 specifically provides that an item of income accruing or arising outside India shall
not be deemed to be received in India merely because it is taken into account in a balance sheet
prepared in India.
Further, Explanation 2 to Section 5 makes it clear that once an item of income is included in the
assessee total income and subjected to tax on the ground of its accrual/deemed accrual or receipt,
it cannot again be included in the person’s total income and subjected to tax either in the same or
in a subsequent year on the ground of its receipt - whether actual or deemed.

2.5.3 Income Deemed to Accrue or Arise in India (Section 9)

Certain types of income are deemed to accrue or arise in India even though they may actually
accrue or arise outside India. The categories of income which are deemed to accrue or arise in
India are:

(i) Any income accruing or arising to an assessee in any place outside India whether directly
or indirectly
(a) Through or from any business connection in India,

(b) Through or from any property in India,
(c) Through or from any asset or source of income in India, or
(d) Through the transfer of a capital asset situated in India.

Did u know? The legislative intent of this clause relating to the transfer of a capital asset
situated in India is to cover incomes, which are accruing or arising, directly or indirectly
from a source in India. The section codifies the source rule of taxation, which signifi es that

where a corporate structure is created to route funds, the actual gain or income arises only
in consequence of the investment made in the activity to which such gains are attributable
and not the mode through which such gains are realised.
This principle which supports the source country’s right to tax the gains derived from
offshore transactions where the value is attributable to the underlying assets, is recognised
internationally by several countries.

Consequently, Explanation 4 of the section has been inserted to clarify that the expression
“through” shall mean and include and shall be deemed to have always meant and included
“by means of”, “in consequence of” or “by reason of”.

Further, Explanation 5 has been inserted to clarify that an asset or a capital asset being
any share or interest in a company or entity registered or incorporated outside India shall
be deemed to be and shall always be deemed to have been situated in India, if the share
or interest derives, directly or indirectly, its value substantially from the assets located in
India.

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