Tax Planning With Reference to New Business- Nature of Business

Dr Amit Kumar Sinha aksinha1@amity.edu dramitksinha@gmail.com

Tea/Coffee/Rubber Development Account {Sec 33 AB}
Conditions:
1.

2. 3.

4.

The assessee must be engaged in tea, coffee rubber plantations It must make a deposit in µspecial account¶ The deposit should be made within specified time limit The accounts of the assessee must be audited

Amount of Deduction
A sum equal to amounts deposited in µspecial account¶; or  40 per cent of the profit of such business computed under the head µprofits and gains of business or profession¶ before making any deduction U/S 33AB and before adjusting brought forward business loss U/S 72, Whichever is less. 

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 µspecial account¶ and claims the same For the deduction under section 33AB. The company¶s business Profit before making deduction under section 33AB and adjusting Any unabsorbed loss of the business is Rs. 625 lakh. During 200708, the company withdraws Rs. 35 lakh from the µspecial account¶ Which is utilized as followsa. Rs. 25 lakh on December 31, 2007 for the purpose of the scheme 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

Consequences in the case of closure of business
Apart from the purpose specified in the approved scheme, the amount standing in the credit of the µspecial account¶ may be allowed to be withdrawn in the following circumstances:
Where the amount can be withdrawn & it is treated as taxable profit when the amount can be withdrawn and it is not treated as income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 2. Dissolution of firm

1. Death of tax payer 2. Partition of HUF 3. Liquidation of company

Consequences if the new asset is transferred 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The deduction allowed under this section shall be withdrawn if the asset acquired out of the money withdrawn from the special account is sold or otherwise transferred.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 to Cent. Govt., State Govt., Local Auth. Stat. Corp. or a Govt. Company Transfer in a scheme of succession of a firm by company Transfer in any other case Transfer within 8 years Deduction will not be withdrawn Deduction will not be withdrawn Deduction will be withdrawn Transfer after 8 years Deduction will not be withdrawn Deduction will not be withdrawn Deduction will not be withdrawn

Find out the tax consequences in the following cases:
1.

2.

3.

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/S 33AB. It wants claim set off of B/F loss of Rs. 1200000. 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 up to 31st march 2008 The asset which is purchased for Rs. 18 lakh is sold to Y for Rs. 31 Lakh on December 2010.

Amortization of telecom licence fees {Sec. 35 ABB}
Conditions>
1. 2. 3.

4.

The expenditure is capital in nature It is incurred for acquiring any right to operate telecommunication services The expenditure is incurred either before the commencement of business or thereafter at anytime during any previous year The payment for which has actually been made to obtain licence.

Amount of Deduction
The payment will be allowed as deduction in equal installments over the period starting from 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 deduction from the year in which actual payment for expenditure is made.

Profit or Loss on sale of telecom licence
Any profit or loss on sale of licence is taken into consideration while computing business income

Different Situations
1. When entire licence is transferred

Tax Treatment

1.1 When sales consideration is less (WDV-SC) is allowed as Deduction than WDV u/s 35 ABB in the year of sale 1.2 When Sales consideration is more than WDV 2 When a part of licence is transfer 2.1 When sales consideration is less (WDV-SC) will be allowed as than WDV Deduction for the unexpired period
2.2 When Sales consideration is more than WDV (SC-WDV) is taxable as business income in the year of sale

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

Some point to be kept in mind  



In situations 1.2 & 2.2 the amount taxable as business income can not exceed deduction allowed u/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.

Examples 1
X Ltd., a company providing telecommunication service, obtain a telecom licence on April 20 2007 for a period of 10 years which ends on 31March 2017, licence fee being Rs. 18 lakh. Find out amount of deduction under section 35 ABB if1. The entire amount is paid on May 6 2007 or 2. The entire amount is paid on April 1 2008 3. The entire amount is paid in three equal installments on 30 April 2007, April 30 2008 and April 30 2009.

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 paid on May 6, 2007. the licence is transferred by X Ltd. On December 20, 2009 for1. Rs. 692000 2. Rs. 1370000 3. Rs. 1560000 4. Compute the amount chargeable to tax.

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

Computation of Income on estimated basis in the case of taxpayer engaged in the business of civil construction {Sec. 44AD}

Conditions1.

2.

3.

The taxpayer may be an individual, HUF, AOP, Firm, Cooperative society, company or any other person. He or it may be a resident or a non-resident. The taxpayer is engaged in the business of civil construction or supply of labour for civil construction work. 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.

Consequences if sec 44AD is applicable
Income to be calculated on estimated basisThe 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 comprehensiveAll 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. 

Steps to be followed for the determination of total income
1.

2.

3.

4.

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 the normal provisions of the income tax act. The brought forward business losses and other losses shall be deducted in accordance with the normal provisions of the income tax act. All deductions permissible under sections 80C to 80U shall be allowed. Tax on net income shall be calculated according to the normal provisions and rebate u/s 88E shall be allowed.

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 the rate 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.

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 . The following consequences are applicable if the tax payer declares his income which lower than the deemed profit and gains as stated above1. 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.

Computation of Income on estimated basis in the case of taxpayer engaged in the business of plying, leasing or hiring trucks {Sec. 44AE}
Conditions1. The taxpayer may be an individual, HUF, AOP, Firm, Cooperative 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, who is 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.

Consequences if sec 44AE is applicable
Income to be calculated on estimated basis:
Types of Goods carriage 1. Heavy goods vehicle Estimated Income Rs. 3500 for every month (or part of a month) during which the goods carriage is owned by the taxpayer Rs. 3150 for every month (or part of a month) during which the goods carriage is owned by the taxpayer

2. Other than heavy goods vehicle

Estimated Income 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

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 ³ heavy goods vehicles´). On May 6, 2007, one of the heavy goods vehicle is sold 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 dataFreight Collected Less: Operational Expenses Depreciation expenses u/s sec 32 Other office expenses Net profit
Other business & non business income

890000 640000 190000 15000 45000
70000

Scheme for computing profits & gains of retail traders {Section 44AF}
Conditions1. 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 nonresident. 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.

Consequences if sec 44AF is applicable
Income to be calculated on estimated basisThe 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 comprehensiveAll 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.