tax planning with reference to new business- nature

8/9/2019 Tax Planning With Reference to New Business- Nature

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Tax Planning With Reference to NewBusiness- Nature of Business

Dr Amit Kumar Sinha

[email protected]

[email protected]


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Tea/Coffee/Rubber DevelopmentAccount {Sec 33 AB}

Conditions:

1. The assessee must be engaged in tea,

coffee rubber plantations

2. It must make a deposit in special account

3. The deposit should be made within

specified time limit4. The accounts of the assessee must be

audited


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Amount of Deduction

A sum equal to amounts deposited in special

account; or 40 per cent of the profit of such business

computed under the head profits and gains

of business or profession before making any

deduction U/S 33AB and before adjustingbrought forward business loss U/S 72,

Whichever is less.


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CASE

Darjeeling Tea Ltd. Is engaged in the business of growing and

Manufacturing of tea in India. During the previous year 2006-07, it

Deposits Rs. 100 lakh in the special account and claims the same

For the deduction under section 33AB. The companys business

Profit before making deduction under section 33AB and adjusting

Any unabsorbed loss of the business is Rs. 625 lakh. During 2007-

08, the company withdraws Rs. 35 lakh from the special account

Which is utilized as follows-

a. Rs. 25 lakh on December 31, 2007 for the purpose of thescheme framed by the Tea Board; and

b. Rs.4 lakh for other purpose on January 27, 2008

Rs. 6 lakh is not utilized up to March 31, 2008


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Consequences in the case of closureof business

Apart from the purpose specified in the approved

scheme, the amount standing in the credit of the

special account may be allowed to be withdrawn in

the following circumstances:

Where the amount can be

withdrawn & it is treated as

taxable profit

when the amount can be

withdrawn and it is not

treated as income

1. Closure of business 1. Death of tax payer

2. Dissolution of firm 2. Partition of HUF

3. Liquidation of company


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Consequences if the new asset istransferred within 8 years:

The deduction allowed under this section shall be withdrawn if the

asset acquired out of the money withdrawn from the special

account is sold or otherwise transferred.

To whom it is transferred Transfer within

8 years

Transfer after 8

years

Transfer to Cent. Govt., State

Govt., Local Auth. Stat. Corp. or a

Govt. Company

Deduction will

not be

withdrawn

Deduction will

not be

withdrawn

Transfer in a scheme of

succession of a firm by company

Deduction will

not be

withdrawn

Deduction will

not be

withdrawn

Transfer in any other case Deduction will

be withdrawn

Deduction will

not bewithdrawn


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Find out the tax consequences in the followingcases:

1. Business profit of X Ltd., a tea growing and Manufacturing

company, is Rs. 70 lakh for the A.Y. 2007-08. it deposits Rs.

25 lakh in the Special Account for claiming deduction U/S33AB. It wants claim set off ofB/F loss of Rs. 1200000.

2. By withdrawing Rs. 20 lakh on January 20 2008 from the

special account. X Ltd. Purchases a non-depreciable asset

for Rs. 18 lakh according to the scheme framed by the Tea

Board. The remaining amount of Rs. 2 lakh is not utilized upto 31st march 2008

3. The asset which is purchased for Rs. 18 lakh is sold to Y for

Rs. 31 Lakh on December 2010.


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Amortization of telecom licence fees{Sec. 35 ABB}

Conditions>

1. The expenditure is capital in nature2. It is incurred for acquiring any right to operate

telecommunication services

3. The expenditure is incurred either before thecommencement of business or thereafter at

anytime during any previous year4. The payment for which has actually been made to

obtain licence.


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Amount of Deduction

The payment will be allowed as deduction in

equal installments over the period startingfrom the year in which such payment has

been made and ending in the year in which

the licence come to an end.

Note: the Assessee can claim for deductionfrom the year in which actual payment for

expenditure is made.


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Profit or Loss on sale of telecomlicence

Any profit or loss on sale of licence is taken into consideration whilecomputing business income

Different Situations Tax Treatment1. When entire licence is transferred

1.1 When sales consideration is less

than WDV

(WDV-SC) is allowed as Deduction

u/s 35 ABB in the year of sale

1.2 When Sales consideration ismore than WDV (SC-WDV) is taxable as businessincome in the year of sale

2 When a part of licence is transfer

2.1 When sales consideration is less

than WDV

(WDV-SC) will be allowed as

Deduction for the unexpired period

2.2 When Sales consideration is morethan WDV

(SC-WDV) is taxable as businessincome in the year of sale


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Some point to be kept in mind

In situations 1.2 & 2.2 the amount taxable as

business income can not exceed deduction allowedu/s 35ABB in earlier years.

The deduction u/s 32 for depreciation is not available

In case of amalgamation or demerger resulting

company would be entitle for the same deduction.


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Examples 1

X Ltd., a company providing telecommunicationservice, obtain a telecom licence on April 20 2007for a period of 10 years which ends on 31March2017, licence fee being Rs. 18 lakh. Find outamount of deduction under section 35 ABB if-

1. The entire amount is paid on May 6 2007 or

2. The entire amount is paid onA

pril 1 20083. The entire amount is paid in three equal

installments on 30 April 2007, April 30 2008 andApril 30 2009.


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Examples 2

X Ltd. A company which provide telecom services acquires a

telecom licence on April 5 2007 for a period of 15 years which

ends on March 31, 2022. licence fee being Rs. 15 lakh paidon May 6, 2007. the licence is transferred by X Ltd. On

December 20, 2009 for-

1. Rs. 692000

2. Rs. 1370000

3. Rs. 1560000

4. Compute the amount chargeable to tax.


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Examples 2 continued

Suppose in the above problem X Ltd. Transfers

only 40 percent of the licence for 1. Rs. 680000

2. Rs. 1890000

On May 6, 2009. compute the amount

chargeable to tax


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Computation of Income on estimated basis inthe case of taxpayer engaged in the business

of civil construction {Sec. 44AD}

Conditions-

1. The taxpayer may be an individual, HUF,A

OP, Firm, Co-operative society, company or any other person. He or it may

be a resident or a non-resident.

2. The taxpayer is engaged in the business of civil construction

or supply of labour for civil construction work.

3. Gross receipts from the business do not exceed Rs.40 Lakh.

Gross receipt are the amount received from the clients for the

contract and will not include the value of material supplied by

the client.


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Consequences if sec 44AD is

applicable

Income to be calculated on estimated basis-

The income from the such business is estimated at 8% of the

gross receipt paid or payable to a taxpayer. A taxpayer can

voluntarily declare a higher income in his return.

Rate of 8% is comprehensive-

All deductions U/S 30 to 38 including depreciation, are deemed to

have been already allowed and no further deduction is allowed

under these sections.

However, in the case of a firm, the normal deduction in respect of

salary and interest to partner u/s 40(b) shall be allowed.


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Steps to be followed for the

determination of total income

1. The income as calculated will be aggregated with the income

of the assessee from any other business income or income

under other heads of the income in accordance with thenormal provisions of the income tax act.

2. The brought forward business losses and other losses shall

be deducted in accordance with the normal provisions of the

income tax act.

3. All deductions permissible under sections 80C to 80U shall beallowed.

4. Tax on net income shall be calculated according to the normal

provisions and rebate u/s 88E shall be allowed.


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Exemption from maintenance of

accounts book and compulsory audit

Following privileges are available to the taxpayer who

declares his income from the above business at therate of 8% of gross receipt (or at higher rate)-

1. He is not required to maintain the books of account

according to provisions section 44AA in respect of

aforesaid business.

2. He is not required to get his book of account

audited according to section 44AB in respect of

aforesaid business.


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Is it possible to declare lower income?

A taxpayer can declare his income to be lower than the

deemed profit and gain as stated above . Thefollowing consequences are applicable if the tax

payer declares his income which lower than the

deemed profit and gains as stated above-

1. The taxpayer will have to maintain the books of

accounts as per the section 44AA

2. The taxpayer will have to get his books of account

audited under section 44AB.


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Computation of Income on estimated basis inthe case of taxpayer engaged in the business ofplying, leasing or hiring trucks {Sec. 44AE}

Conditions-

1. The taxpayer may be an individual, HUF, AOP, Firm, Co-

operative society, company or any other person. He or it may

be a resident or a non-resident.

2. taxpayer engaged in the business of plying, leasing or hiring

trucks.

3. The taxpayer owns not more than 10 goods carriages at any

time during previous year. For this purpose, a taxpayer, whois in possession of a goods carriage, whether taken on hire

purchase or on installments and for which whole or part of the

amount payable is still due, shall be deemed to be the owner

of such goods carriage.


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Consequences if sec 44AE is

applicable

Income to be calculated on estimated basis:

Types of Goods carriage Estimated Income

1. Heavy goods vehicle Rs. 3500 for every month (or

part of a month) during

which the goods carriage is

owned by the taxpayer

2. Other than heavy goods

vehicle

Rs. 3150 for every month (or

part of a month) during

which the goods carriage is

owned by the taxpayer


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Estimated Income is

comprehensive

All deductions U/S 30 to 38 including

depreciation, are deemed to have beenalready allowed and no further deduction is

allowed under these sections.

However, in the case of a firm, the normal

deduction in respect of salary and interest topartner u/s 40(b) shall be allowed


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Example

X Ltd. Is engaged in the business of carriage of goods. On April 1,

2007, it owns 10 trucks (6 out of which are heavy goods

vehicles). On May 6, 2007, one of the heavy goods vehicle issold by X Ltd. To purchase a light goods vehicle on May 10,

2007 which is put to use only from June 17, 2007.

Find out the net taxable income of X ltd. For the A. Y. 2008-09 taking

in to consideration the following data-

Freight Collected 890000Less:

Operational Expenses 640000

Depreciation expenses u/s sec 32 190000

Other office expenses 15000

Net profit 45000Other business & non business income 70000


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Scheme for computing profits & gains ofretail traders {Section 44AF}

Conditions-

1. The taxpayer may be an individual, HUF, AOP,Firm, Co-operative society, company or any other

person. He or it may be a resident or a non-

resident.

2. The taxpayer is engaged in the business of retail

trade in any goods or merchandise.

3. Total turnover from the business does not exceed

Rs.40 Lakh.


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Consequences if sec 44AF is

applicable

Income to be calculated on estimated basis-

The income from the such business is estimated at 5% of the total

turnover. A taxpayer can voluntarily declare a higher income in

his return.

Rate of 5% is comprehensive-

All deductions U/S 30 to 38 including depreciation, are deemed to

have been already allowed and no further deduction is allowed

under these sections.

However, in the case of a firm, the normal deduction in respect of

salary and interest to partner u/s 40(b) shall be allowed.


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