CHAPTER - III
ASSESSMENT OF COMPANIES
3.1 DEFINITION OF A COMPANY
CHAPTER THREE
ASSESSMENT OF COMPANIES
3.1 DEFINITION OF A 'COMPANY':
Section 2(31) of the Income-tax Act, 1961, includes a
'company' within the definition of a "Person" and section 2(17)
defines 'company'. Section 2(17) says that a 'company'
means -
(i) Any Indian company; or
(ii) Any body corporate incorporated or under the laws of a
country outside India; or
(iii) Any institution, association or body, which is or was
assessable or was assessed as a company for any
assessment year under the Income-tax Act 1922 or which
is or was assessable or was assessed under the
Income-tax Act, 1961, as a company for any assessment
year commencing on or before the first day of April
1970; or
(iv) Any institution, association or body, whether incorporated
or not and whether Indian or non-Indian which is declared
by general or special order of the Board to be a
company;
PROVIDED that such institution, association or body shall
be deemed to be a company only for such assessment year
or assessment years(whether commencing before the 1st
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day of April 1971 or on or after that date) as may be specified
In the declaretion.
3.1.1 "Indian Company":
The expression 'Indian Company' has been defined
in Section 2(26) to mean a company formed and registered
under the Companies Act, 1956 (Act 1 of 1956), including:
(i) a company formed and registered under a^y law relating to
companies formerly in force in any part of India other
than the State of Jammu and Kashmir, and the Union
Territories specified in (iii) below;
(la) a corporate body established by or under a central, state
or provincial Act;
(ib) a corporate body established by or under a central,
state or provincial Act;
(ib) any institution, association or body, which is declared
by the Board to be a company under section 2(17);
(ii) in the esse ■ of the State of Jammu and Kashmir, a
company formed and registered under any law for the
time being in force in the State;
(iii) in the case of any of the Union Territories of Dadra
and Nagar Haveli, Goa, Daman and Diu and Pondicherry,
a company formed and registered under any law for
the time being in farce in that Union Territory.
There is a proviso in section 2(26), which also requires
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that in each of the above cases, the registered, or as the
case may be, the principal office of the company, corporation,
institution, association or body must be situated in India.
Therefore, now all foreign bodies corporate, irrespective
of their places of incorporation, are 'companies' for the
purpose of the Income-tax Act, 1961. Even for income-tax
purposes, if one or more of the following conditions are
satisfied:
(1) It was assessed under the Income-tax Act as a 'company '
for any assessment year for and upto the assessment
year 1969-70;
(2) Although not actually assessed under the Indian Income-tax
Act for any assessment year as aforesaid, it was liable
to such an assessment as a company for any assessment
year prior to the assessment year 1970-71;
(3) Whether Indian or non-Indian and whether incorporated
or not, it is declared by general or special order
of the Board to be a 'company'. Such a declaration,
howuvor, would hold yood unly for such assessment
year or years, as may be specified by the Board.
Such declaration may be necessary since non-company
assessees having a large income pay more tax than what
an assessee company with the same income is required to
pay
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It should be noted here that the Central Board of
Direct Taxes (CBDT) can suo-motu declare a foreign association
as a company for the purposes of an assessment under the
Indian income-tax though the association does ncn make an
application therefor. Furthermore, it is necessary to remember
that the question of declaring a foreign assessee to be a
company would arise only where the assessee is an association,
whether incorporated or not. An individual, or a firm, or a
family, can never be declared as a 'company'.
2.1.2 Types of Companies:
(i) Domestic Company:
A 'Domestic Company' means an Indian company or
any other company which, in respect of its income, is liable
to tax under the Act, has made prescribe arrangements for the
declaration and payment of dividends in accordance with
section 194. To comply with section 194:
(i) The share register of the company for all shareholders
should be regularly maintained at its principal place
of business In India in respect of any assessment year
atleast from 1st April of the relevant assessment year;
(ii) The General Body meeting for passing of accounts of the
relevant previous year and for declaring dividends
in respect thereof should be held only at a place
within India; and
(iii) The dividends declared, if any, should be payable only
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within India to all shareholders.
(ii) Foreign Company:
It moans a company that is not n domestic company.
(iii) Industrial Company:
Section 2(8) (c) of the Finance Act, 1984, defines an
'industrial company' as a company which is mainly engaged
in the business of generation or redistribution of electricity
or any form of power or in the carriage by road or inland
waterways of passengers or goods or in the manufacture
or processing of goods or in mining. A company is deemed
to be engaged in the above activity, if the income attributable
to any one or more ofthe above activities, included in
the total income of the previous year before allowing family
deductions (section 80) is not less than 51 per cent of such
noted*, which expresses that the requirement of 51 per cent, etc.,
is not necessary if the company is mainly engaged in such
activities. Cochin Company v. CIT (1978) 114 ITR 822 approves
this. 'Project' means a project for the construction of a
building, road, dam, bridge or other structure or assembly
or installation of any machinery or plait. But the Finance Act,
1985, makes this definition, more or less, irrelevant for
computing tax rates.
(iv) Investment Company:
An 'Investment Company* means a company whose gross
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total income (as under section 80-B) consists mainly of the
income which is chargeable under the heads 'Interest on
securities', 'Income from house property', 'Capital gains'
and 'Income from other sources'.
(v) Trading Company:
A 'Trading company' means a company whose business
consists wholly in the provision of technical know-how or
in the rendering of services in that connection to other
persons.
(vii) Widely-held Company:
This is also known as "a company in which public are
substantially interested" and means any of the following:
(1) It is a company owned by the Government or the Reserve
Bank of India or in which not less than 40 per cent
shares (value) are held by the Government or the
Reserve Bank of India or by a corporation owned by the
Reserve Bank of India;
(2) It is a company having noshare-capital and it is
declared by the CBDT as such;
(3) It is a company registered under section 25 of the
Companies' Act, 1956, namely, the companies for the
promotion of commerce, art, science, religion, charity,
prohibiting the payment of any dividend to its members;
(4) It is a company which is not a private company and its
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equity shares are, as on the last day of the previous year,
listed in a recognized stock exchange in India;
(5) It is a company (not a private company) and its shares
carrying 50per cent of voting power (40 per cent
in the case of industrial companies) have been allotted
to or acquired unconditionally by and were throughout
the previous year, beneficially held by -
(a) the government, or
(b) a statutory corporation, or
(c) a widely-held company or its subsidiary.
But the Finance Act, 1985, provides that a company which
carries on,as its principal business, the business
of acceptance of deposits from its members and which is
declared by the central government under section 620A
of the Companies' ActA to be a Nidhi or a mutual
benefit society, shall be regarded as widely-held
company.
(viii) Public Sector Company:
A 'Public sector company' means any corporation
established by or under any central, state or provincial
Act or a Government company as defined in section 617 of the
Companies' Act, 1956.
Section 104 is now withdrawn. Section 80M provides
for a deduction of inter-corporate dividends in the case
of domestic companies. This is specially important in the case
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of an existing company considering expansion of its activities.
The definition of dividend is now enlarged and includes
any payment by a company, not being a widely-held company,
made after 31.5.1987, by way of advance or loan to a
shareholder, being a person who is a beneficial owner of
share {not being preference shares) holding not less than
10% of the voting power or to any concern in which he is
a member or partner and in which he has a substantial
interest.
(ix) Closely-held company:
A company which is not a widely-held company is
called 'closely-held company'.
3.1.3 Classification of Companies:
The companies may be classified as under:
(a) Widely-held company, i.e. the company in which the public
is substantially interested; and
(b) Closely-held company.
This classification acadmically influences the tax liabilities
of both Indian and foreign companies. But practically, this
classification is effective only in respect of the Indian
companies. In the framework of the Income-tax Act, some
disincentives are associated with a closely-held form of
a company. The following may be noted in this connection:
(i) Section 2(22) (e): Any payment made by a closely held
company for the individual benefit of a shareholder
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having substantial interest in the company is generally
treated as a dividend, depending upon the extent of
accumulated profits possessed by this company.
(ii) Section 79: This section restricts the carrying forward and
adjustment of losses of closely-held companies, where
there Is a change in shareholding, which is intended
with a view to avoiding or reducing any tax liability.
(ill) Suction 104: I his suction imposes additional Income-tax
on these companies unless they declare atleast a minimum
dividend as prescribed under that section. But some
companies do have certain exemptions in this regard.
This is not applicable to a foreign company.
REFERENCES
1. Srinivas, E.A. (Ed.) : "Handbook of Corporate Tax Planning"
Second Edition, New Delhi: Tata McGraw-Hill Publishing
Company Limited.
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