Rule 118 — Relief in tax payable under section 206(1) due to operation of section 206(1)(i). Made under s.206, s.168, s.170, s.265 of the Income-tax Act, 2025.
Rule 118 gives effect to Section 206, Section 168, Section 170 and Section 265 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
Sub-rule (1) sets out the reduction in tax payable for the purposes of section 206(1)(i). The tax payable by the assessee company under section 206(1) for the tax year is reduced by the amount (A–B) – (C–D), where A is the tax payable under section 206(1) on the book profit of the tax year including the past income; B is the tax payable under section 206(1) on the book profit of the tax year excluding the past income; C is the aggregate of tax payable under section 206(1) on the book profit of the past year or years referred to in item D after increasing that book profit with the relevant past income of those years; and D is the aggregate of tax payable under section 206(1) on the book profit of those past years to which the past income belongs. In each of A, B, C and D, where there is no tax payable the value is taken as zero.
Sub-rule (2) provides that if the value of (A–B) – (C–D) is negative, its value shall be deemed to be zero.
Sub-rule (3) defines past income for sub-rule (1) as the amount of income of a past year or years included in the book profit of the tax year on account of an advance pricing agreement entered into under section 168 or on account of a secondary adjustment required under section 170.
Sub-rule (4) provides that on the application of sub-rule (1), the tax credit allowed under section 206(1)(m) shall be reduced by the amount allowed under sub-rule (1).
Sub-rule (5) requires the claim for relief under section 206(1)(i) to be made in Form No. 53, by uploading a signed printout of that Form in the manner specified by the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), verified by the person authorised to verify the return of income of the assessee company under section 265.
Where an advance pricing agreement or a secondary adjustment pulls income of earlier years into the book profit of the current year, the company's book profit for that year is inflated by amounts that belong economically to years already closed. Section 206(1)(i) allows relief for that distortion but does not compute it. The rule supplies the arithmetic, and it does so by comparison rather than by re-opening anything: it measures the extra tax the past income causes this year and sets against it the extra tax the same income would have caused in the years it belongs to.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Amount by which tax payable under section 206(1) is reduced | (A–B) – (C–D) | A, B, C and D as defined in sub-rule (1), each taken as zero where there is no tax payable | Sub-rule (1) |
| Floor on the relief | Zero | Where the value of (A–B) – (C–D) is negative | Sub-rule (2) |
| Reduction in the tax credit under section 206(1)(m) | The amount allowed under sub-rule (1) | On application of the provision of sub-rule (1) | Sub-rule (4) |
Read the formula as two differences. (A–B) is the current year's extra tax caused by the past income. (C–D) is what that same income would have added to the tax of the past years it belongs to. The relief is only the excess of the first over the second, and sub-rule (2) stops it turning into a charge when the second is larger. The relief is not free of consequence: sub-rule (4) reduces the tax credit under section 206(1)(m) by exactly the amount allowed, so a company that takes the relief now gives up an equal amount of credit later. Only two sources of past income count — an advance pricing agreement under section 168 and a secondary adjustment under section 170 — so income of earlier years brought in for any other reason is outside sub-rule (3). The claim is not made by adjusting the return; it is made in Form No. 53 in the manner the Director General of Income-tax (Systems) specifies.
A company's book profit for the tax year includes past income brought in on an advance pricing agreement. Tax under section 206(1) on the book profit including that income is Rs. 90 lakh and excluding it Rs. 70 lakh, so (A–B) is Rs. 20 lakh. Adding the same income to the book profit of the past years it belongs to would have produced Rs. 62 lakh against the Rs. 50 lakh actually payable for those years, so (C–D) is Rs. 12 lakh and the reduction is Rs. 8 lakh. That Rs. 8 lakh is claimed in Form No. 53, and the company's tax credit under section 206(1)(m) is reduced by Rs. 8 lakh.
A company meets this rule after an advance pricing agreement is concluded or a secondary adjustment is made, when the resulting past income lands in the book profit; the claim itself is made in Form No. 53 uploaded in the manner the Director General of Income-tax (Systems) specifies.
If the value of (A–B) – (C–D) is negative, its value shall be deemed to be zero.
On application of provision of sub-rule (1), the tax credit allowed to the assessee under section 206(1)(m) shall be reduced by the amount allowed under sub-rule (1).