Library / Income-tax Act, 2025: The Professional's Master Guide

26. Other Corporate Tax Matters

26.1 Dividends, deemed dividends and inter-corporate dividends

There is no dividend distribution tax. Dividends are taxed in the hands of shareholders, with TDS at 10% for residents above Rs. 10,000 and at 20% (or treaty rate) for non-residents.
Deemed dividends under the definition in section 2 apply to closely held companies (see Income from Other Sources).
A domestic company receiving dividend from another company can claim a deduction under section 148 (old 80M) to the extent it distributes dividend at least one month before the return due date. Check eligibility where the company is under section 200.

Illustration 101: Inter-corporate dividend

Holdco Ltd. receives Rs. 5 crore dividend from its subsidiary and itself declares Rs. 3 crore dividend to its shareholders before 30 September 2027. Deduction under section 148 = Rs. 3 crore. Taxable dividend in Holdco = Rs. 2 crore.

26.2 Buyback of shares

From Tax Year 2026-27, the amount received on buyback is taxed as capital gains in the hands of shareholders. The company itself does not pay buyback tax. Promoter shareholders pay an additional tax so that the effective rate is about 22% for corporate promoters and 30% for non-corporate promoters (plus surcharge and cess as applicable). Compare with a dividend route using a multi-year model before recommending either.

26.3 Carry forward of losses in closely held companies (section 119, old 79)

A company in which the public is not substantially interested can carry forward and set off business losses only if shares carrying at least 51% of voting power were beneficially held by the same persons on the last day of the loss year and the year of set off. The 2025 Act makes clear that a change above 49% permanently extinguishes the right. Unabsorbed depreciation is not affected.

Eligible start-ups get relaxation: loss of the first ten years can be carried forward if all the original shareholders continue to hold their shares, even if the 51% test fails because of fresh investment.

Illustration 102: Investor exit

Nexa Tech Pvt. Ltd. has brought forward business loss of Rs. 5 crore. In Tax Year 2026-27, founders sell 60% of the shares to a strategic buyer. The 51% continuity test fails, so the Rs. 5 crore loss lapses. Unabsorbed depreciation of Rs. 80 lakh can still be carried forward. Factor this into deal valuation.

26.4 Start-ups and angel investments

Eligible start-ups (incorporated within the notified period, turnover up to Rs. 100 crore, recognised by DPIIT and certified by the Board) can claim 100% deduction of profits for any 3 consecutive years out of the first 10 under section 140 (old 80-IAC).
The "angel tax" on share premium above FMV (old section 56(2)(viib)) has been abolished and does not appear in the 2025 Act. Share capital credits must still be explained under section 102.
ESOP perquisite tax for employees of eligible start-ups can be deferred to the earliest of 48 months, exit or sale.

26.5 IFSC units (section 147, old 80LA)

Units in an International Financial Services Centre get a 100% deduction for 10 consecutive years out of 15, a MAT rate of 9%, and several exemptions for funds, ship leasing and aircraft leasing. Relocation of offshore funds to IFSC is tax-neutral within the notified window.

26.6 Income Computation and Disclosure Standards and method of accounting (section 276)

Business income must be computed using the cash or mercantile method regularly followed, subject to the notified ICDS. ICDS differ from Ind AS and AS in areas such as provisions (only when reasonably certain), foreign exchange (MTM on monetary items), construction contracts (percentage of completion, retention money), government grants and securities. Form 26 requires disclosure of ICDS adjustments.

26.7 Corporate compliance matrix

Item	Form (new)	Due date for Tax Year 2026-27
Advance tax	Challan	15 June, 15 September, 15 December 2026, 15 March 2027
TDS and TCS deposit	Challan	7th of next month (30 April for March)
Quarterly TDS / TCS statements	138, 140, 144 / 143	31 July, 31 October, 31 January, 31 May
Tax audit report	26	30 September 2027
Transfer pricing report	48	31 October 2027
Return (audit cases)	ITR-6	31 October 2027 (30 November 2027 for TP cases)
MAT report	66	With the return
Statement of financial transactions	165	31 May 2027
Master file / CbCR (if applicable)	56 / 59	Master file by the return due date (30 November 2027); CbCR within 12 months of year-end

26.8 Deemed dividend: detailed conditions

A payment by a closely held company is deemed dividend to the extent of its accumulated profits, if it is:

A loan or advance to a shareholder who beneficially holds 10% or more of voting power.
A loan or advance to a concern (firm, company, HUF) in which such a shareholder is a member or partner and has a substantial interest (20% or more).
A payment on behalf of, or for the individual benefit of, such a shareholder.

Exclusions: loans by a company whose substantial business is money lending, in the ordinary course of that business; advances in the course of normal commercial transactions (trade advances); and amounts later set off against dividends actually declared, to the extent already taxed.

Judicial view: Deemed dividend and the recipient

In CIT v. Ankitech Pvt. Ltd. (Delhi High Court, 2011), approved by the Supreme Court in CIT v. Madhur Housing and Development Co. (2017), it was held that where a loan is given to a concern in which the shareholder has substantial interest, the deemed dividend is taxed in the hands of the shareholder, not the borrowing concern, since the concern is not a shareholder. However, in National Travel Services v. CIT (2018), a bench of the Supreme Court doubted this view and referred the question to a larger bench; check the current position before advising. Trade advances for business purposes have consistently been held to be outside the provision.

26.9 Section 119 (old 79): how to apply the 51% test

Step	What to check
1	Is the company one in which the public is substantially interested (listed, or a subsidiary of such company)? If yes, section 119 does not apply
2	Identify beneficial owners of shares carrying voting power on the last day of the loss year
3	Identify beneficial owners on the last day of the year in which set off is claimed
4	Check that shares carrying at least 51% of voting power are held by the same persons on both dates
5	For eligible start-ups, check the alternative test: all shareholders of the loss year continue to hold those shares
6	Consider exceptions: change due to death or gift to relatives, amalgamation or demerger of a foreign holding company where 51% shareholders of the amalgamating company continue, and insolvency resolution plans approved under the IBC

Practice note

In a funding round or share sale, compute the change in beneficial voting shareholding on a cumulative basis from the loss year. Small rounds add up, and one more round may cross 49% and wipe out years of losses.

26.10 Start-ups: more detail

Eligibility for section 140: company or LLP incorporated on or after 1 April 2016 and before the notified date; turnover not above Rs. 100 crore in the year of claim; holds a certificate from the Inter Ministerial Board; not formed by splitting up or reconstruction of an existing business.
Deduction: 100% of profits for any 3 consecutive years out of the first 10 years from incorporation. Not available if the company opts for section 200.
ESOP deferral: employees of eligible start-ups pay tax on ESOP perquisite within 14 days after the earliest of 48 months from the end of the tax year of allotment, sale of shares, or leaving the company.
Losses: relaxed section 119 test, as explained.
Capital gains exemption for investment in start-ups by individuals on sale of residential property existed under old law for a limited period; check current availability before advising.

26.11 Corporate social responsibility

CSR spending required under section 135 of the Companies Act, 2013 is not deductible as business expenditure, because it is an application of income rather than an expense to earn it. However, some CSR contributions (for example, to the PM National Relief Fund or to approved institutions) may qualify for deduction under section 133 if the conditions are met, except where the section expressly excludes CSR contributions (such as for certain funds). Excess CSR spent and carried forward under company law has no separate tax effect.

26.12 Tax provisioning and the effective tax rate reconciliation

Illustration 103: Effective tax rate reconciliation

Sunrise Foods (previous illustration) has profit before tax of Rs. 12 crore. Current tax is Rs. 2,92,98,270. Deferred tax: the excess of tax depreciation over book depreciation (Rs. 60 lakh) creates a liability of Rs. 15,10,080, and the disallowed warranty provision (Rs. 40 lakh) creates an asset of Rs. 10,06,720, a net deferred tax charge of Rs. 5,03,360. Total tax expense = Rs. 2,98,01,630, an effective tax rate of 24.8%.

Reconciling item	Amount (Rs.)
Profit before tax x 25.168%	3,02,01,600
Add: tax effect of CSR (25 lakh x 25.168%)	6,29,200
Add: tax effect of penalty (3 lakh x 25.168%)	75,504
Less: LTCG of Rs. 1 crore taxed at 12.5% after exemption (25,16,800 at statutory rate less 14,12,125 actual)	(11,04,675)
Rounding	1
Total tax expense	2,98,01,630

The reconciliation shows auditors why the effective rate differs from the statutory rate. Any unexplained difference usually points to an error in the tax computation or the deferred tax working.

26.13 Tax audit and corporate governance

For companies, the tax audit in Form 26 is often the most detailed review of tax positions each year. Good practice includes: a tax positions register listing every judgment taken (for example, capital versus revenue, TDS characterisation, section 37 timing), board or audit committee review of significant uncertain tax positions under Ind AS 12 (Appendix C, uncertain tax treatments), and a contingent liability note that matches the actual demands and appeals pending.

26.14 Specified domestic transactions

Transfer pricing also applies to certain domestic transactions, called specified domestic transactions (section 164), where their aggregate value exceeds Rs. 20 crore in the year. These include transactions of a unit claiming profit-linked deductions (such as infrastructure or SEZ units) with related parties, and transactions of a company under section 201 with related persons. The purpose is to prevent profits being shifted into the tax holiday or low-tax unit through related party pricing. The accountant's report in Form 48 covers these transactions as well.

Judicial view: Origin of domestic transfer pricing

CIT v. Glaxo SmithKline Asia (P) Ltd. (Supreme Court, 2010): the Court suggested that transfer pricing rules be extended to domestic related party transactions to address profit shifting, which led to the introduction of specified domestic transactions in 2012.

26.15 Tonnage tax scheme (sections 226 to 234)

Indian shipping companies can opt for tonnage taxation, under which their shipping income is computed notionally on the net tonnage of qualifying ships, regardless of actual profit. The option is for 10 years, with conditions on training and reserve creation. It offers certainty and a low effective rate for shipping businesses.

26.16 Advance tax and MAT for companies

A company must estimate both normal tax and MAT when paying advance tax, and pay on the higher. Interest under sections 424 and 425 is computed on the basis of the higher tax. Companies with large capital gains or dividends in a quarter should revise their estimates promptly.

26.17 Year-end tax closing for a company

Update the tax computation with the latest estimate of taxable income and MAT; true up advance tax paid.
Confirm TDS deducted on all year-end provisions (audit fees, professional fees, bonus to contractors, rent).
Review MSME dues and statutory dues for section 37 timing.
Review related party transactions for arm's length pricing and the TP study.
Compute deferred tax, including on carried forward losses (only where recovery is probable).
Prepare the uncertain tax positions note under Ind AS 12, with probabilities and provisions.
Plan dividend declarations before the section 148 cut off, if relevant.

Chapter summary

• Deemed dividends, buyback taxation, and section 148 for inter-corporate dividends.

• Section 119: 51% continuity test for closely held company losses; relief for start-ups.

• Start-up deduction under section 140; ESOP deferral.

• ICDS, tax provisioning and effective tax rate reconciliation.