Income Tax Act, 2058 (2002)


Special Provisions For Entity



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Special Provisions For Entity


52. Principles of taxation applicable in respect of entities: (1) For purposes of payment of tax, any entity shall be responsible distinctly from its beneficiaries.

(2) Distributions to be made by an entity shall be as mentioned in Section 53, and in distribution to be so made, tax shall be imposed on its beneficiaries pursuant to Section 54.

(3) The amounts derived by and expenses borne by an entity shall be deemed to have been received or borne by the entity irrespective of whether or not the entity has derived the same or borne expenses for other person.

(4) A property under ownership of an entity and the liability borne by it shall be deemed to be under ownership or burden of the entity. Such property under ownership and liability borne shall not be deemed to be under the ownership or burden of any other person.

(5) Foreign income tax paid by the manager, beneficiary of an entity or the entity, whosoever, for the income of the entity shall be deemed to have been paid by the entity.

(6) Transactions between any entity and its managers and beneficiaries shall be recognized subject to Chapter-7 and Section 45.

53. Distribution by entity: (1) The following matters have to be included in the distribution to be made by an entity:-

(a) Payment made by the entity to any of its beneficiaries in any capacity, or

(b) Capitalization of profits.

(2) Notwithstanding anything contained in Sub-section (1), any payment referred to in clause (a) of that Sub-section shall be deemed to have been distributed only in the following circumstances:-

(a) Where the payment exceed the amount paid by a beneficiary to the entity in exchange for a consideration likely to be obtained from the entity, and

(b) Where the following amounts are not included in the payment:-

(1) The amounts included in computing the income of the beneficiary,

(2) The payments from which tax has been deducted finally except for reason of distribution.

(3) Only if the distribution of any entity reduces the value of property or liability of that entity, such distribution shall be deemed to be a distribution of profits or return of capital.

(4) In any of the following circumstances, a distribution of any entity shall be deemed to be a distribution of profits, subject to Section 55:-

(a) Where the distribution is of a type referred to in Sub-section (3) and the amount as per the market value of the property exceeds the total amount of capital contribution consisting of the market value of the liability of the entity at the time of distribution and of capitalized profits, as well,

(b) Where profits are capitalized.

(5) The distribution referred to in Sub-section (3) shall be deemed to be a return of capital to the extent of non-distribution of profits.

(6) The distribution of any entity shall be deemed to be a dividend of that entity to the extent of non-return of capital.



Explanation: For purposes of this Section, "capitalization of profits" means and includes any capitalization made by issuing bonus share or similar other interest or increasing the paid up sum of the interest of that entity or crediting the profits to the premium and capital account of that entity.

54. Tax in dividend: (1) On the dividend distributed by a resident body, it shall be as follows:-

(a) Tax shall be imposed on a shareholder of any company as per the mode of final tax deduction, and

(b) No tax shall be imposed on other entities.

(2) The dividend distributed by any non-resident person to any resident beneficiary shall be included in the income of the beneficiary and tax imposed accordingly.

(3) Notwithstanding anything contained in Sub-section (1), in cases where in distributing a dividend by a resident company to another resident company, except for a dividend distributed by a resident company to an organization enjoying tax exemption, the resident company receiving the dividend controls twenty-five per cent or more voting right of the resident company distributing the dividend, directly or indirectly through itself or one or more associated entities, no tax shall be charged on the dividend distributed to such a resident entity.

(4) Notwithstanding anything contained in Sub-section (3), that Sub-section shall not be applicable in the following circumstances:-

(a) Dividend distributed to any company because of ownership of redeemable shares of the company distributing dividend.

(b) Dividend referred to in Section 58.

(5) The incomes referred to in Chapter-8 receivable for the interest of a beneficiary of an entity have to include the amount for capital return made by any entity for that interest.

Provided that, the dividend distributed by the entity need not to be included.

55. Dissolution of entity: (1) A distribution made in proportion to the portion of profit earned by and that of capital contributed by any beneficiary in disposing the interests in the course of dissolution of any entity shall be deemed to be the payment of partial dividend and partial capital of that entity, if all of the following conditions are fulfilled:-

(a) Where any distribution has been made by such entity in respect of cancellation, release or acceptance of the interest in that entity because of, inter alia, purchase by the entity of its interest or dissolution of the entity by following the process of law in force,

(b) Where, except in cases of full dissolution, the rights of the beneficiaries in the portion of profits of that entity have not been computed in proper portion or could not be computed reasonably, and

(c) Where the beneficiary who gets that distribution is not an associated person with the entity after the disposal.

(2) Notwithstanding anything contained in Sub-section (1), that the provisions contained in that Sub-section and Section 53 shall not be applicable in cases where any entity purchases the interest of any beneficiary in the entity through the securities market recognized under the law in force and make distribution to that beneficiary.

56. Transaction between entity and beneficiary: (1) If a property is disposed through transfer of ownership over the property in any manner of distribution between an entity and its beneficiary or in any other manner subject to Section 45, it shall be as follows:-

(a) The transferor of the property shall be deemed to have received, from the disposal, an amount equal to the market value of the property immediately before the disposal, and

(b) The transferee of the property shall be deemed to have incurred cost in a sum equal to that mentioned in clause (a) in acquiring the property.

(2) If any liability is disposed through transfer of the liability between any entity and its beneficiary subject to Section 45, it shall be as follows:-

(a) The transferor of the liability shall be deemed to have incurred cost, in disposing the liability, in a sum equal to the market value of the liability immediately before the disposal, and

(c) The transferee of the liability shall be deemed to have received an amount equal to that mentioned in clause (a) in assuming the liability.

(3) If any entity distributes dividends except profits as dividends to any beneficiary, the amount of such dividends shall be included in computing the income of the entity.

Provided that, provisions may be made to exclude the matters contained in this Sub-section in any circumstance as prescribed.

57. Change in control: (1) If the ownership of any entity changes by Fifty per cent or more as compared to its ownership until before the last three years, the entity shall be deemed to have disposed the property under its ownership or the liability borne by it.

(2) If the ownership of an entity is changed as mentioned in Sub-section (1), the entity shall not be allowed to carry out the following acts after such change:-

(a) To deduct interest incurred by that entity prior to the change in ownership and carried forward pursuant to Sub-section (3) of Section 14,

(b) To deduct the loss suffered by that entity prior to the change in ownership, pursuant to Section 20,

(c) To carry back a loss suffered after the change in ownership in any income year before such change, pursuant to Sub-section (4) of Section 20, Section 59 or 60,

(d) To make adjustment pursuant to Sub-section (4) of Section 24, in cases where it has been calculated for any amount or expenses pursuant to clause (a) of Sub-section (4) of Section 24 prior to the change in ownership, and correction has been made on that amount or expenses pursuant to clause (b) of Sub-section (4) of Section 24 after the change in ownership,

(e) To make adjustment pursuant to Sub-section (1) of Section 25, in cases where any amount has been calculated pursuant to clause (b) of Sub-section (1) of Section 25 prior to the change in ownership and the right to receive that amount has been relinquished or in the event of that being a debt claim, such person has written off such amount as a bad debt, after the change in ownership,

(f) To subtract, pursuant to Section 36, the loss suffered in disposing any property or liability prior to the change in ownership from the income earned from the disposal of the property or liability after the change in ownership,

(g) In cases where premium has been calculated pursuant to sub-clause (1) of clause (b) of Sub-section (4) of Section 60, prior to the change in ownership and such premium has been returned to the insured after the change in ownership, to claim for credit accordingly, or

(h) To carry forward in the forthcoming year the tax paid in respect of a foreign income prior to the change in ownership, pursuant to Section 71.

(3) In cases where the ownership of any entity changes in any manner mentioned in Sub-section (1) in any income year, the parts before and after the change in ownership in that income year shall be treated as separate income years.

58. Provision restricting reduction of dividend tax: (1) If any entity distributes dividends as follows, it shall be deemed to have made an arrangement for reducing dividend tax:-

(a) Where current or expected profits are reserved,

(b) Where any person who acquires an interest of the entity and the recipient of the interest or his associated person makes any payment to the present or previous beneficiary of the entity or his associated person irrespective of whether or not it is related to the acquisition of interest and whether or not it is made at the time of acquisition of interest,

(c) Where the payment is fully or partly reflected in the profits of the entity, or

(d) Where the entity distributes dividends to the recipient of interest after the recipient of interest has acquired interest from the entity and the profits covers the dividends fully or partly.

(2) In cases where dividends are distributed by any entity under an arrangement reducing dividend tax made pursuant to Sub-section (1), the arrangement shall be deemed to be as follows:-

(a) The payment made by the recipient of interest or his/her associated person shall not be deemed as payment made by that person but as distribution by that entity of dividends to the previous or present beneficiary as referred to in clause (b).

(b) The dividends distributed by that entity to the recipient of interest shall be deemed as equal to a sum to be set by subtracting the amount of payment said to have been made from the dividends as referred to in clause (a).

Chapter-11


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