Unit 4: Assessment of Companies

I. Orientation

Company assessment under the Income-tax Act, 1961 determines the taxable income of a company for a previous year and the corresponding tax payable for the assessment year. The process begins with the company’s accounting profit, applies statutory adjustments, and then compares the ordinary tax liability with special regimes such as Minimum Alternate Tax (MAT). Dividend taxation has changed significantly: the earlier Dividend Distribution Tax (DDT) regime applied to domestic companies until 31 March 2020, while dividends are generally taxable in shareholders’ hands from 1 April 2020.

• Governing framework: The Income-tax Act, 1961, supported by the Income-tax Rules, annual Finance Acts, and applicable notifications.
• Previous year: The financial year in which income is earned; for example, income earned from 1 April 2024 to 31 March 2025 belongs to the previous year 2024–25.
• Assessment year: The year immediately following the previous year in which income is assessed; previous year 2024–25 corresponds to assessment year 2025–26.
• Company status: A company may be domestic or foreign, and its residential status affects the scope of taxable income.
• Tax base: Tax is imposed on total income after applying statutory inclusions, deductions, exemptions, and set-off rules.
• Rate structure: The basic income-tax rate is supplemented, where applicable, by surcharge and Health and Education Cess at 4%.
• Separate regimes: MAT under section 115JB protects the tax base where book profits are substantial but normal taxable income is low.
• Distribution taxation: DDT and tax on income distributed to unit holders were important provisions under the earlier distribution-tax system; their present operation must be distinguished from historical assessments.

II. Computation of Taxable Income and Tax Liability of Companies

A. Computation of taxable income and tax liability of companies

The taxable income of a company is computed by converting accounting results into income assessed under the five heads of income and then applying statutory deductions and adjustments.

• Starting point: Begin with profit or loss shown in the statement of profit and loss, such as accounting profit of ₹10,00,000.
• Tax adjustments: Add back expenses that are not deductible under the Act, including income-tax paid, provisions for unascertained liabilities, and expenses prohibited by specific provisions.
• Allowable deductions: Deduct expenses incurred wholly and exclusively for business, subject to conditions under sections such as 30 to 43D.
  • Depreciation: Accounting depreciation is replaced by depreciation under section 32, calculated on the prescribed block-of-assets system.
  • Disallowances: Cash payments exceeding statutory limits, certain unpaid statutory liabilities, and specified related-party payments may be disallowed.
• Other heads: Income from house property, capital gains, and income from other sources are computed separately and included where applicable.
• Gross total income: This is the aggregate of income under all applicable heads after permitted inter-head adjustments.
• Deductions: Chapter VI-A deductions, where available, are deducted from gross total income. A company cannot claim deductions that the statute expressly excludes.
• Total income: Total income is rounded off under section 288B and taxed at the applicable company rate.

The basic computational sequence can be represented as:

Business income
+ Income from house property
+ Capital gains
+ Income from other sources
- Set-off of permissible losses
= Gross total income
- Eligible Chapter VI-A deductions
= Total income

• Tax liability: Tax on total income is calculated at the applicable rate, followed by surcharge and Health and Education Cess.
• Reliefs and credits: Advance tax, tax deducted at source, foreign-tax relief, and MAT credit are reduced from gross tax liability where legally available.
• Final payable amount: The balance becomes self-assessment tax or refund, depending on whether taxes already paid are lower or higher than the assessed liability.
• Worked example: If total income is ₹10,00,000 and the applicable basic rate is 25%, basic tax is ₹2,50,000. Cess at 4% is ₹10,000, producing tax of ₹2,60,000 before surcharge, prepaid taxes, or special adjustments.

B. Conditions and statutory adjustments

This subsection explains why accounting profit cannot automatically be treated as taxable income.

• Separate standards: Companies may prepare accounts under company law and applicable accounting standards, but tax computation follows the Income-tax Act.
• Timing differences: An expense recognized in accounts may be deductible only when actually paid or when statutory conditions are satisfied.
• Capital versus revenue: A capital expenditure, such as acquiring machinery, is generally not deducted immediately; depreciation may be claimed instead.
• Exempt income: Income exempt under the Act is excluded, while related expenditure may be restricted under section 14A.
• Loss treatment: Business losses and unabsorbed depreciation are carried forward only subject to statutory conditions, return-filing requirements, and time limits.
• Residential status: An Indian company is ordinarily resident in India, whereas a foreign company may be taxed on income received, accruing, or deemed to accrue in India.
• Compliance basis: The company must maintain books, file its return within the prescribed period, report tax-audit information where applicable, and pay advance tax in instalments.

III. Minimum Alternate Tax

A. Minimum alternate tax

MAT under section 115JB ensures that a company with substantial book profit does not reduce its tax liability below a statutory minimum through exemptions, deductions, or timing differences.

• Applicability: MAT generally applies to companies, subject to statutory exclusions and special regimes. Certain companies opting for specified concessional provisions may be outside MAT.
• Normal income-tax liability: First compute tax on total income under ordinary provisions, including applicable surcharge and cess.
• Book profit: Then compute book profit by starting with net profit in the statement of profit and loss prepared under the Companies Act and making prescribed additions and deductions.
• Prescribed adjustments: Additions may include income-tax provision, amounts carried to reserves, provision for unascertained liabilities, and certain exempt-income items. Deductions may include eligible withdrawn reserves and specified lower-of-profit adjustments.
• MAT rate: MAT is imposed at the statutory percentage of book profit, plus surcharge and cess. The effective result depends on the relevant assessment year and company status.
• Comparison rule: The company pays the higher of normal tax liability and MAT liability.

MAT liability = Book profit × prescribed MAT rate
Tax payable before credits = Higher of:
                              (normal tax liability, MAT liability)

Here, book profit means profit adjusted under section 115JB, and MAT credit means credit of excess MAT paid over normal tax in an eligible year.

• MAT credit: If MAT exceeds normal tax, the excess may generally be carried forward and set off against future excess normal tax, subject to the statutory period and conditions.
• Illustration: If normal tax is ₹7,00,000 and MAT is ₹9,00,000, current liability is ₹9,00,000. The possible MAT credit is ₹2,00,000, subject to future utilization rules.
• Purpose: MAT limits aggressive reduction of tax through book-accounting and tax-law differences while preserving the relevance of legitimate deductions.

B. Computation and limitations

MAT is a comparison mechanism, not a replacement for ordinary tax computation.

• Two calculations: A company must complete both the normal computation and the book-profit computation; omitting either can produce an incorrect liability.
• Accounts requirement: The starting profit must be based on accounts prepared in accordance with company-law requirements, with the auditor’s certification where prescribed.
• Limited adjustments: The Assessing Officer generally cannot freely rewrite net profit; only adjustments authorized by section 115JB are normally relevant.
• Credit restriction: MAT credit cannot automatically be used against every future tax liability and does not eliminate interest, surcharge, or other independent obligations.
• Special situations: Companies with international operations, tax holidays, or concessional regimes must verify whether MAT applies and whether the relevant benefit is restricted.

IV. Tax on Distributed Profits of Domestic Companies

A. Tax on distributed profits of domestic companies

Tax on distributed profits refers principally to the former Dividend Distribution Tax under sections 115-O to 115-Q, under which the domestic company paid tax when it declared, distributed, or paid dividends.

• Historical mechanism: Before 1 April 2020, DDT was imposed on the domestic company distributing dividends, generally in addition to corporate income tax.
• Distribution event: The liability was connected with declaration, distribution, or payment of dividend, whichever statutory trigger applied.
• Rate and grossing-up: DDT involved a prescribed rate, surcharge, and cess, with grossing-up rules ensuring that the tax burden reflected the amount distributed.
• Shareholder treatment: Dividends subject to DDT were generally exempt in the shareholder’s hands under the earlier regime, subject to specified exceptions such as additional tax on certain substantial dividend income.
• Inter-corporate dividends: Relief for dividend received by one domestic company and redistributed to shareholders was available through specific statutory provisions, preventing repeated taxation in defined circumstances.
• Current position: DDT was abolished for dividends declared, distributed, or paid on or after 1 April 2020. Dividends are generally taxed in the hands of shareholders under the ordinary provisions.
• Withholding: Tax may be deducted from dividend payments under the applicable TDS provisions, subject to thresholds, declarations, and the recipient’s status.
• Company deduction: A dividend distribution is an appropriation of post-tax profit and is not a business expense deductible in computing the company’s taxable income.

B. Historical and current assessment

The distinction between the old and current systems is essential when examining company tax records across different years.

• Earlier regime: The company paid DDT, while the recipient generally received a dividend with no further ordinary tax liability.
• Present regime: The shareholder includes taxable dividend income in total income, usually under “Income from other sources.”
• Interest deduction: Interest expenditure incurred to earn dividend income is subject to a statutory restriction; the deduction is generally limited to 20% of such dividend income.
• Rate consequence: A shareholder’s tax rate may be the slab rate or another applicable rate, so the post-2020 burden varies according to recipient status and income.
• Documentation: Companies must correctly classify the declaration date, payment date, TDS, shareholder category, and assessment year because these determine the applicable regime.

V. Tax on Income Distributed to Unit Holders

A. Tax on income distributed to unit holders

This provision historically concerned tax deducted or paid when specified mutual funds or other prescribed investment vehicles distributed income to unit holders, principally under section 115R.

• Meaning of unit holder: A unit holder is a person beneficially holding units of a mutual fund or specified collective investment vehicle.
• Distribution tax mechanism: Under the earlier regime, the specified fund paid additional income-distribution tax on income distributed to unit holders, with different treatment historically applying to individual or Hindu Undivided Family unit holders and other unit holders.
• Exempt receipt: Where distribution tax applied, the distributed income was generally exempt in the hands of the unit holder under the corresponding exemption provision.
• Tax base: The tax was linked to the amount distributed, not merely to the fund’s accounting profit.
• Purpose: The mechanism collected tax at the fund level and simplified taxation at the investor level for the covered distributions.

B. Current treatment of distributed income

The present system generally taxes income from units in the hands of the recipient rather than imposing the former distribution tax on the fund.

• Abolition: Tax on income distributed by specified mutual funds under the earlier distribution-tax framework was withdrawn for distributions made on or after 1 April 2020.
• Recipient taxation: The unit holder generally includes the distribution in taxable income under the applicable head, commonly “Income from other sources.”
• TDS: The payer may deduct tax at source under the relevant provision, and the unit holder claims credit in the return.
• Nature of receipt: Tax treatment depends on whether the amount is dividend income, interest, capital gain, or another distribution recognized under the applicable law.
• Capital gains distinction: Sale or redemption of units is a separate taxable event. The resulting capital gain depends on transfer value, cost, holding period, and the applicable short-term or long-term rules.
• Illustration: If a resident unit holder receives ₹50,000 as taxable distribution and ₹5,000 is deducted as TDS, ₹50,000 is considered in the recipient’s income computation and ₹5,000 is available as tax credit, subject to reporting and verification.
• Assessment control: The unit holder should reconcile the distribution with the annual information statement, fund statement, TDS certificate, and return-preparation records.
• Planning implication: Investors should compare the tax effect of distribution income with the tax consequences of redemption, reinvestment, and holding-period-based capital gains before choosing an investment structure.