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Tax Planning With Reference to NewBusiness- Nature of Business
Dr Amit Kumar Sinha
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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special account may be allowed to be withdrawn in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withdrawn & it is treated as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withdrawn and it is not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The deduction allowed under this section shall be withdrawn if the
asset acquired out of the money withdrawn from the special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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