TAX PLANNING AND SPECIFIC MANAGEMENT DECISIONS

Transcription

1 TAX PLANNING AND SPECIFIC MANAGEMENT DECISIONS STRUCTURE OF THE CHAPTER 3.1 Introduction 3.2 Tax Implications and incentives in setting up a new business 3.3 Tax implications and incentives in location of business 3.4 Tax implications and incentives in nature of business 3.5 Summary 3.1 INTRODUCTION UNIT 3 This lesson discusses the tax planning with respect to decisions related to setting up a new business, location of business and nature of business. 3.2 TAX IMPLICATIONS AND INCENTIVES IN SETTING UP A NEW BUSINESS Among other considerations like requirement of finance, resources, availability of materials, political environment etc., tax incentives play an important role while selecting a suitable form of organization for setting up a new business. Individuals/ Sole Proprietary Concern Following points are relevant in computing tax liability of individuals: 1. In computing the business income, an individual is not entitled to a deduction of any remuneration for work done by him and interest on own capital or loan invested in the business. 2. Salary and interest paid to other members are allowed as deduction to the owner member and these salaries and interest are taxable in the hands of other members under the head Salaries and Income from other sources respectively. Hindu Undivided Family (HUF) In computing the business income, interest on capital contributed by the family for the business is not deductible. However, remuneration to the karta and other family members for their services to the business is allowed as deduction and this remuneration is taxable in their individual hands under the head Salaries. Firm In computing business income, the following payments to the partners are deductible: 1. Interest on capital or loan given to the firm at the rate mentioned in the partnership deed but not exceeding 12% per annum. 2. Remuneration to the working partners as mentioned in the partnership deed but not exceeding the following limits: 72

2 i. On first Rs. 3,00,000 of the book profits or in case of 90% of book profits or Rs. 1,50,000 whichever is more; ii. On the remaining balance of book profits, 60% of book profits. [In simple terms, it can be said that remuneration as per the deed or remuneration as per the above rule, whichever is less should be deducted]. Notes 1. Remuneration and interest received from the firm by the partners is taxable under the head Profits and gains of business or profession in their individual hands. However, the share of a partner in the total income of the firm is exempt under section 10(2A). 2. Remuneration should be deducted only in case of working partners. 3. No limit of 12% interest rate is applied in case of deposits/ loans taken from outside. 4. The amount of remuneration which is allowed as deduction to the firm is taxable in the hands of partners in the ratio of remuneration of partnership deed. 5. Estimated profits (if not separately mentioned) means profits before interest and remuneration. 6. Where the assessee-partner borrows money for investing as capital in partnership, interest paid by the assessee on borrowed money is an allowable deduction. Dividends taxable in the hands of shareholders From assessment year , resident individuals, HUFs and firms receiving dividend in excess of Rs. 10 lakhs per annum have to pay 10% on gross amount of dividend + Surcharge (if any) + 3%. This additional tax in the hands of shareholders is applicable even if the company declaring dividend is subject to CDT under section 115-O. Further, dividends received from non-domestic companies and deemed dividend under section 2(22)(e) are not covered under this additional tax burden. Company Following points are relevant in computing tax liability of company: 1. The company can deduct the whole amount of interest paid on loan taken for business purposes and also the remuneration paid to the managing director, directors and other staff. 2. A company cannot pay interest on capital. It can pay dividend on capital. 3. A company has to pay dividend % [17.647% + 12% (surcharge) + 3% (cess)] for the assessment year as well as assessment year Limited Liability Partnership (LLP) A limited partnership is governed by the Limited Liability Partnership Act, A LLP is a body corporate formed and incorporated under the Limited Liability Partnership Act, 2008 and it is a legally separate entity from that of its partners. A LLP has perpetual succession. Any change in the partners of a LLP will not have any impact on its existence or rights and limited liability of a company and the flexibility of a partnership. LLP is liable to the outsiders to the extent of its assets. However, liability of the partners is limited to their agreed contribution in the LLP. LLP contains elements of both a corporate structure as well as a partnership firm structure. LLP pays tax on its taxable 30% + Surcharge (if applicable) + 3% for assessment year as well as assessment year

3 Case (Individual vs. HUF) There are two members, A and B in a joint Hindu undivided family having a capital of Rs. 25,00,000. They can run a business as a business of an individual joining the other as an employee and money-lender or as a Hindu Undivided Family If the business is run as of an individual, the other member will receive salary of Rs. 4,00,000 and 12% on Rs. 12,50,000. If the business is run as a H.U.F, each member will receive salary Rs. 3,00,000. Suggest which form of business organization should be adopted from tax point of view, if the expected business income is Rs. 11,00,000. The case relates to taking a decision of setting up of a new business as a sole proprietorship or as a HUF. Since the case related to tax planning, assessment year is applied. Option I: If business is run as a sole proprietorship For owner member (A): Amount (Rs.) Expected business income 11,00,000 Less: Remuneration to other member (B) 4,00,000 Less: Interest on capital to other member (B) 1,50,000 PGBP/ GTI 5,50,000 Less: Deductions U/S 80C to 80U Nil Net taxable income 5,50,000 Tax on Rs. 5,50,000 35,000 Less: Rebate under section 87A Nil 35,000 Add: 3% 1,050 Tax liability 36,050 For another member (B): Amount (Rs.) Salary: Remuneration 4,00,000 IFOS: Interest on capital 1,50,000 GTI 5,50,000 Less: Deductions U/S 80C to 80U Nil NTI 5,50,000 Tax on Rs. 5,50,000 35,000 Less: Rebate under section 87A Nil 35,000 Add: 3% 1,050 Tax liability 36,050 Total tax liability if business is run as an individual is Rs. 72,100 (36, ,050) 74

4 Option II: If business is run as a HUF For HUF: Amount (Rs.) Expected business income 11,00,000 Less: Remuneration to A 3,00,000 Less: Remuneration to B 3,00,000 GTI 5,00,000 Less: Deductions U/S 80C to 80U Nil NTI 5,00,000 Tax on Rs. 5,00,000 25,000 Less: Rebate under section 87A Nil 25,000 Add: 3% 750 Tax liability 25,750 For members: A (Rs.) B (Rs.) Salary 3,00,000 3,00,000 Other income Nil Nil GTI 3,00,000 3,00,000 Less: Deductions U/S 80C to 80U Nil Nil NTI 3,00,000 3,00,000 Tax on Rs. 3,00,000 5,000 5,000 Less: Rebate under section 87A 5,000 5,000 Nil Nil Add: 3% Nil Nil Tax liability Nil Nil Total tax liability if business is run as a HUF is Rs. 25,750 (25,750 + Nil + Nil) Conclusion: Since total tax liability is lower in option II, it is advised to run the business as a HUF. Case (Firm vs. Company) A and B wants to start a business, the estimated profits of which for the year are Rs. 10,00,000. They have two options for selecting a form of organization: a. Partnership firm: 12% interest on capital of Rs. 7,50,000 each Salary Rs. 2,00,000 p.a. each Equal distribution of remaining profits. b. Company: Rs. 5,00,000 each as share capital and Rs. 2,50,000 each as 15% Salary Rs. 2,00,000 p.a. each Distribution of remaining profits as dividends equally. 75

5 Which option is better from tax point of view? The case relates to taking a decision of setting up of a new business as a partnership firm or as a company. Since the case related to tax planning, assessment year is applied. Option I: If partnership firm is formed For firm: Amount (Rs.) Expected income 10,00,000 Less: Interest on capital to partner A 90,000 Interest on capital to partner B 90,000 Book profit 8,20,000 Less: Remuneration to partners On Rs. 3,00,000 of book profits, 90% 2,70,000 On the remaining balance, 60% 3,12,000 5,82,000 or remuneration as per deed i.e., 4,00,000 whichever is lower 4,00,000 PGBP/ GTI 4,20,000 Less: Deduction under chapter VIA Nil NTI 4,20,000 Tax 30.9% 1,29,780 Profit after tax of Rs. 2,90,220 (4,20,000 1,29,780) will be distributed amongst the partners. For partners: A (Rs.) B (Rs.) PGBP: Share of profit from firm [Sec. 10(2A)] exempt exempt Salary 2,00,000 2,00,000 Interest on capital 90,000 90,000 GTI 2,90,000 2,90,000 Less: Deduction U/S 80C to 80U Nil Nil NTI 2,90,000 2,90,000 Tax on Rs. 2,90,000 4,000 4,000 Less: Rebate under section 87A 4,000* 4,000* Nil Nil Add: Nil Nil Tax payable Nil Nil Total tax liability if firm is formed is Rs. 1,29,780 (1,29,780 + Nil + Nil) Option II: If company if formed For company: 76

6 Amount (Rs.) Expected income 10,00,000 Less: Interest on loan to A 37,500 Interest on loan to B 37,500 75,000 Less: Remuneration to A 2,00,000 Remuneration to B 2,00,000 4,00,000 GTI 5,25,000 Less: Deduction under chapter VIA Nil NTI 5,25,000 Tax 30.9% 1,62,225 Remaining profits after tax of Rs. 3,62,775 (5,25,000 1,62,225) will be distributed as dividend. Dividend distributed will be (3,62,775/ * 100) = 3,01,413 Dividend tax will be (3,62,775/ * ) = 61,362 For directors/ shareholders: A (Rs.) B (Rs.) Salary: Remuneration 2,00,000 2,00,000 IFOS: Interest on loan 37,500 37,500 Dividend [Section 10(34)] exempt exempt GTI 2,37,500 2,37,500 Less: Deduction U/S 80C to 80U Nil Nil NTI 2,37,500 2,37,500 Tax Nil Nil Total tax liability if company is formed is Rs. 2,23,587 (1,62, ,362 + Nil + Nil) Note W.e.f. assessment year , new manufacturing companies which are incorporated on or after can opt to be taxed at 25% + Surcharge + Cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation. It is assumed that this company will not go for this option and thus, as usual 30% rate is applicable. Conclusion Firm should be formed because tax liability is less in this option as compared to a company. 3.3 TAX IMPLICATIONS AND INCENTIVES IN LOCATION OF BUSINESS Location of establishing a business depends upon many factors. Tax incentives based on location of a business are available under different sections of the Act as give below Special provisions in respect of newly established Units in Special Economic Zones [Sec. 10AA] 77

7 This section applies to any undertaking, being the Unit, which fulfils all the following conditions 1. It has begun or begins to manufacture or produce articles or things or provide any services during the previous year in any Special Economic Zone. 2. It is not formed by the splitting up, or the reconstruction, of a business already in existence. 3. It is not formed by the transfer to a new business, of machinery or plant previously used for any purpose. Amount of deduction In computing the total income of an assessee (being an entrepreneur as referred to in section 2(j) of the Special Economic Zones Act, 2005) from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year and , the following deduction shall be allowed First 5 years 100% of profits and gains derived from the export, of such articles or things or from services for a period of 5 consecutive year beginning with the year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be. Next 5 years 50% of such profits and gains for further 5 years Next 5 years For the next 5 consecutive years, so much of the amount not exceeding 50% of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic Zone Re-investment Reserve Account") to be created and utilized for the purposes of the business of the assessee in the prescribed manner. Amount of profit eligible for deduction Profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on by the under-taking. Utilisation of the amount credited to the Special Economic Zone Re-investment Reserve Account The deduction under this section is allowed only if the amount credited to the Special Economic Zone Re-investment Reserve Account is to be utilised i. for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of 3 years following the previous year in which the reserve was created; and ii. until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India. Deemed profit 1. Where any amount credited to the Special Economic Zone Re-investment Reserve Account has been utilised for any other purpose, then the amount so utilised shall be deemed to be the profits, in the year in which the amount was so utilised and shall be charged to tax accordingly. 78

8 2. Where any amount credited to the Special Economic Zone Re-investment Reserve Account has not been utilised before the expiry of the specified period, then the amount not so utilised shall be deemed to be the profits in the year immediately following the period of 3 years as specified and shall be charged to tax accordingly. Consequences in case of conversion into SEZ Where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of 10 consecutive assessment years referred above shall be reckoned from the year in which the Unit began to manufacture, or produce or process such articles or things or services in such free trade zone or export processing zone. Consequences in case of amalgamation/ demerger Where any undertaking, being the Unit, which is entitled to the deduction under this section is transferred, before the expiry of the specified period, to another undertaking, being the Unit in a scheme of amalgamation or demerger a. no deduction shall be admissible under this section to the amalgamating or the demerged Unit, being the company for the previous year in which the amalgamation or the demerger takes place; and b. the provisions of this section shall, as they would have applied to the amalgamating or the demerged Unit being the company as if the amalgamation or demerger had not taken place. Notes 1. Export turnover" means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India. 2. "Export in relation to the Special Economic Zones" means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or otherwise. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. [Sec. 80-IA] Following industrial undertakings are covered under this section 1. Developing, operating and maintaining an infrastructure facility Any enterprise carrying on the business of developing, or operating and maintaining, or developing, operating and maintaining, any infrastructure facility and has started (or starts) operating and maintaining the infrastructure facility on or after April 1, However, this provision is not applicable to any enterprise which starts the development or operation and maintenance of the infrastructure facility on or after April 1, "Infrastructure facility" means a. a road including toll road, a bridge or a rail system; 79

9 b. a highway project including housing or other activities being an integral part of the highway project; c. a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system; or d. a port, airport, inland waterway, inland port or navigational channel in the sea. 2. Providing telecommunication services Any undertaking which has started (or starts) providing telecommunication services during April 1, 1995 and March 31, Developing, operating and maintaining an industrial park or special economic zone Any undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zone during April 1, 1997 and March 31, However, in the case of any undertaking which develops, develops and operates or maintains and operates an industrial park, the duration of the eligible period is April 1, 1997 and March 31, Power generation/ distribution An undertaking which is set up in any part of India for the generation or generation and distribution of power and it begins to generate power at any time during April 1, 1993 and March 31, Reconstruction or revival of power generating plant An undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant. Such Indian company is formed before November 30, 2005 with majority equity participation by public sector companies for the purposes of enforcing the security interest of the lenders to the company owning the power generating plant and such Indian company is notified before December 31, 2005 by the Central Government. Further, such undertaking begins to generate or transmit or distribute power before March 31, Amount of deduction 100% of the profits and gains derived from such business is allowed as deduction for 10 consecutive assessment years. However, in case of telecommunication services, 100% of profits are allowed as deduction upto first 5 assessment years and 30% of profits for the next 5 assessment years. Consequences in case of amalgamation/ demerger Where any undertaking of an Indian company which is entitled to the deduction under section 80- IA is transferred, before the expiry of the specified period, to another Indian company in a scheme of amalgamation or demerger a. no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and b. the provisions of this section shall apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the 80

10 amalgamation or demerger had not taken place. Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone [Sec. 80-IAB] This section is applicable for an undertaking (being a developer) or an enterprise which earns the income from the business of developing a Special Economic Zone, notified on or after April 1, 2005 under the Special Economic Zones Act, Amount of deduction Amount of deduction is 100% of the profits and gains derived from such business for 10 consecutive assessment years: It is optional for the assessee, to claim the deduction for any 10 consecutive assessment years out of 15 years beginning from the year in which a Special Economic Zone has been notified by the Central Government. Non-applicability The provisions of this section shall not apply to an assessee (being a developer) where the development of Special Economic Zone begins on or after April 1, Consequences in case of transfer In a case where an undertaking (being a Developer) who develops a Special Economic Zone on or after April 1, 2005 and transfers the operation and maintenance of such Special Economic Zone to another Developer (hereafter in this section referred to as the transferee Developer ), the deduction shall be allowed to such transferee Developer for the remaining period in the 10 consecutive assessment years as if the operation and maintenance were not so transferred to the transferee Developer. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings [Sec. 80-IB] Following industrial undertakings are covered under this section 1. Industrial undertaking manufacturing or producing articles or things other than nonpriority sector items given in the Eleventh Schedule The amount of deduction in such cases shall be 25% (or 30% in case the assessee is a company), of the profits and gains derived from such industrial undertaking for a period of 10 consecutive assessment years beginning with the initial assessment year. 2. Company engaged in scientific and industrial research & development The amount of deduction in such cases shall be a. 100% of the profits and gains of such business for a period of 5 assessment years beginning from the initial assessment year (provided the company is approved by the prescribed authority at any time till March 31, 1999); b. 100% of the profits and gains of such business for a period of 10 assessment years beginning from the initial assessment year (provided the company is approved by the prescribed authority at any time during April 1, 2000 and March 31, Business of Mineral Oils 81

11 Following conditions are to be satisfied for this business a. The undertaking is located in North-Eastern Region and has begun (or begins) commercial production of mineral oil before April 1, 1997; or b. The undertaking is located in any part of India and has begun (or begins) commercial production of mineral oil during April 1, 1997 and March 31, The amount of deduction shall be 100% of the profits for a period of 7 consecutive assessment years starting from the initial assessment year. 4. Developing and building housing projects Following condition is to be satisfied for this business The undertaking has commenced (or commences) development and construction of the housing project on or after October 1, 1998 and completes such construction i. till March 31, 2008 (applicable where a housing project has been approved by the local authority till March 31, 2004); or ii. within 4 years from the end of the financial year in which the housing project is approved by the local authority (applicable where a housing project has been approved by the local authority during ); or iii. within 5 years from the end of the financial year in which the housing project is approved by the local authority on or after April 1, The amount of deduction shall be shall be 100% of the profits derived in any year from such housing project. 5. Undertaking engaged in the business of processing, preservation and packaging of fruits or vegetables or meat and meat products or poultry or marine or dairy products or the integrated business of handling, storage and transportation of foodgrains The amount of deduction shall be 100% of the profits and gains derived from such undertaking for 5 assessment years beginning with the initial assessment year and thereafter, 25% (or 30% where the assessee is a company) of the profits and gains derived from the operation of such business in a manner that the total period of deduction does not exceed 10 consecutive assessment years. 6. Undertaking engaged in operating and maintaining a hospital in a rural area Following conditions are to be satisfied for this business i. Such hospital is constructed at any time during October 1, 2004 and March 31, ii. The hospital has at least 100 beds for patients. The amount of deduction in such cases shall be 100% of the profits and gains of such business for a period of 5 consecutive assessment years, beginning with the initial assessment year. "Initial assessment year" means the assessment year relevant to the previous year in which the business of the hospital starts functioning. Consequences in case of amalgamation/ demerger 82

12 Where any undertaking of an Indian company which is entitled to the deduction under section 80-IB is transferred, before the expiry of the specified period, to another Indian company in a scheme of amalgamation or demerger c. no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and d. the provisions of this section shall apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place. Special provisions in respect of certain undertakings or enterprises in certain special category States [Sec. 80-IC] This section is applicable if the following conditions are satisfied 1. Location, nature of article (or thing) to be produced and time-limit during which such production, etc. need to be done State in which the industrial undertaking or enterprise is set up Sikkim Himachal Pradesh Uttaranchal or North-Eastern States (i.e., Nature of article (or thing) to be manufactured or produced if industrial undertaking or enterprise is set up (or completes construction) in in notified EPZ, IIDC, IGC, IE, IP, STP, IA and TP Any article or thing (except the article or thing specified in the Thirteenth Nature of article or thing to be manufactured or produced if industrial undertaking or enterprise is set up (or completes construction) in any area of the State Any article or thing, specified in the Fourteenth Schedule Time period for commencement of production or substantial expansion During December 23, 2002 and March 31, 2007 Schedule) ----do do---- During January 7, 2003 and March do do---- During December 24, Amount deduction of 100% profits for 10 years commencing from the initial assessment year 100% profits for first 5 years commencing from the initial assessment year and 25% (30% in case of a company) for the next 5 years 100% profits for 10 years 83

13 States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura) 1997 and March 31, 2007 commencing from the initial assessment year 2. The undertaking or enterprise is not formed by splitting up, or the reconstruction, of a business already in existence. 3. It is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Notes 1. EPZ indicates Export Processing Zone, IIDC indicates Integrated Infrastructure Development Centre, IGC indicates Industrial Growth Centre, IE indicates Industrial Estate, IP indicates Industrial Park, STP indicates Software Technology Park, IA indicates Industrial Area and TP indicates Theme Park. 2. No deduction under any other section contained in Chapter VIA or in section 10A or section 10B is applicable. 3. "Initial assessment year" means the assessment year relevant to the previous year in which the undertaking or the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion. 4. "Substantial expansion" means increase in the investment in the plant and machinery by at least 50% of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken. Deduction in respect of profits and gains from business of hotels and convention centres in specified area [Sec. 80-ID] This section is applicable if the following conditions are satisfied 1. The undertaking is engaged in the business of a. hotel located in the specified area, if such hotel is constructed and has started (or starts) functioning at any time during the period during April 1, 2007 and July 31, 2010; or b. building, owning and operating a convention centre, located in the specified area, if such convention centre is constructed at any time during the period April 1, 2007 and July 31, 2010; or c. hotel located in the specified district having a World Heritage Site, if such hotel is constructed and has started (or starts) functioning at any time during the period April 1, 2008 and March 31,

14 2. The eligible business is not formed by the splitting up, or the reconstruction, of a business already in existence. 3. The eligible business is not formed by the transfer to a new business of a building previously used as a hotel or a convention centre, as the case may be. 4. The eligible business is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Amount of deduction 100% of the profits and gains derived from eligible business for 5 consecutive assessment years beginning from the initial assessment year is allowed as deduction. Notes 1. No deduction shall be allowed under any other section contained in Chapter VIA or section 10AA, in relation to the profits and gains of the undertaking. 2. "Convention centre" means a building of a prescribed area comprising of convention halls to be used for the purpose of holding conferences and seminars, being of such size and number and having such other facilities and amenities, as may be prescribed. 3. "Hotel" means a hotel of 2-star, 3-star or 4-star category as classified by the Central Government. 4. "Initial assessment year" i. in the case of a hotel, means the assessment year relevant to the previous year in which the business of the hotel starts functioning; and ii. in the case of a convention centre, means the assessment year relevant to the previous year in which the convention centre starts operating on a commercial basis. 5. "Specified area" means the National Capital Territory of Delhi and the districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad;] Special provisions in respect of certain undertakings in North-Eastern States [Sec. 80-IE] This section is applicable if the following conditions are satisfied 1. The undertaking has begun (or begins) a. to manufacture or produce any eligible article or thing; b. to undertake substantial expansion to manufacture or produce any eligible article or thing; or c. to carry on any eligible business. 2. The undertaking has begun (or begins) the eligible work in any of the North-Eastern States (i.e., Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura) 85

15 3. The undertaking has begun (or begins) aforesaid work, during the period April 1, 2007 and March 31, The undertaking is not formed by splitting up, or the reconstruction, of a business already in existence. 5. The undertaking is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Amount of deduction Amount of deduction is 100% of the profits and gains derived from eligible business for 10 consecutive assessment years commencing with the initial assessment year. Notes 1. In computing the total income of the assessee, no deduction shall be allowed under any other section contained in Chapter VIA or in section 10A or section 10AA or section 10B or section 10BA, in relation to the profits and gains of the undertaking. 2. No deduction shall be allowed to any undertaking under this section, where the total period of deduction inclusive of the period of deduction under this section, or under section 80- IC or under the second proviso to section 80-IB(4) or under section 10C, as the case may be, exceeds 10 assessment years. 3. "Initial assessment year" means the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things, or completes substantial expansion. 4. "Substantial expansion" means increase in the investment in the plant and machinery by at least 25% of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken. 5. "Eligible article or thing" does not include tobacco and manufactured tobacco substitutes, pan masala, plastic carry bags of less than 20 microns, goods produced by petroleum oil or gas refineries. 6. "Eligible business" means the business of i. hotel (not below two-star category); ii. adventure and leisure sports including ropeways; iii. providing medical and health services in the nature of nursing home with a minimum capacity of 25 beds; iv. running an old-age home; v. operating vocational training institute for hotel management, catering and food craft, entrepreneurship development, nursing and para-medical, civil aviation related training, fashion designing and industrial training; vi. running information technology related training centre; 86

16 vii. viii. manufacturing of information technology hardware; and bio-technology. Investment allowance for acquisition and installation of new plant and machinery in notified backward area in A.P., Bihar, Telangana or West Bengal [Sec. 32AD] Discussed in lesson 2 [Assessment of Companies] 3.4 TAX IMPLICATIONS AND INCENTIVES IN NATURE OF BUSINESS Many provisions of the Income-tax Act give incentives to the assessee for nature of their businesses. These provisions are Investment allowance for acquisition and installation of new plant and machinery [Sec. 32AC] Discussed in lesson 2 [Assessment of Companies] Investment allowance for acquisition and installation of new plant and machinery in notified backward area in A.P., Bihar, Telangana or West Bengal [Sec. 32AD] Discussed in lesson 2 [Assessment of Companies] Tea / Coffee/ Rubber development account [Sec. 33AB] An assessee can claim deduction under this section if the following conditions are satisfied: 1. The assessee must be engaged in the business of growing and manufacturing tea or coffee or rubber in India. 2. The assessee must make a deposit in a special account [i.e., deposit with National Bank for Agriculture and Rural Development (NABARD)] or deposit under a scheme approved by the Tea Board or Coffee Board or Rubber Board. 3. The aforesaid amount shall be deposited within 6 months from the end of the previous year or before the due date of furnishing return of income, whichever is earlier. Amount of deduction: The amount of deduction is lower of the following: a. a sum equal to amounts deposited in special account as mentioned above; or b. 40 per cent of the profit of such business computed under the head Profits and gains of business or profession before making any deduction under section 33AB and before adjusting brought forward business loss under section 72. Site restoration fund [Sec. 33ABA] An assessee can claim deduction under this section if the following conditions are satisfied: 1. The assessee must be engaged in the business of the prospecting for, or extraction or production of, petroleum or natural gas or both in India. 2. The Central Government has entered into an agreement with the taxpayer for such business. 87

17 3. The taxpayer must make a deposit with SBI in a special account in accordance with a scheme approved by the Ministry of Petroleum and Natural Gas or deposit any amount in a site restoration account under a scheme framed by the Ministry of Petroleum and Natural Gas. 4. The aforesaid amount shall be deposited before the end of the previous year. Amount of deduction: The amount of deduction is lower of the following: a. a sum equal to amounts deposited in site restoration account as mentioned above; or b. 20 per cent of the profits of such business computed under the head Profits and gains of business or profession before making any deduction under section 33ABA and before adjusting business forward business loss under section 72. Amortization of telecom licence fees [Sec. 35ABB] Discussed in lesson 2 [Assessment of Companies] Deduction in respect of expenditure on specified business [Sec. 35AD] This section provides investment-linked tax incentive. Deduction under section 35AD is available only in the case of a specified business given below: Specified business Who should own the business Approval (if any) Date of commencement of business 1. Setting up and operating a cold chain facility 2. Setting up and operating a warehousing facility for storage of agricultural produce 3. Laying and operating a crosscountry natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network 4. Building and operating anywhere Any person Not required On or after April 1, 2009 Any person Not required On or after April 1, 2009 An Indian Should be approved by company or a Petroleum and Natural Gas consortium of Regulatory Board and Indian notified by the Central companies or Government an authority/ Board/ corporation established under any Central or State Act Any person No approval required; however, hotel should be On or after April 1, 2007, in the case of laying and operating a cross-country natural gas pipeline network for distribution or storage. [However, in any other case the date is on or after April 1, 2009] On or after April 1,

18 in India, a hotel of 2 star or above category 5. Building and operating anywhere in India, any hospital with at least 100 beds for patients 6. Developing and building a housing project 7. Developing and building a housing project 8. Production of fertilizer in India 9. Setting up and operating an inland container depot or a container freight station 10. Bee-keeping and production of honey and beeswax classified by the Central Government as 2 star or above category Any person No approval required On or after April 1, 2010 Any person Developing and building housing project should be under a scheme for slum redevelopment or rehabilitation framed by the Central Government/ State Government and notified by the Board in accordance with prescribed guidelines Any person Developing and building a housing project should be under a scheme for affordable housing framed by the Central Government/ State Government and notified by the Board On or after April 1, 2010 On or after April 1, 2011 Any person Not required On or after April 1, 2011 Any person As notified or approved On or after April 1, under the Customs Act 2012 Any person No approval On or after April 1, 2012 Amount of deduction: 100 per cent of capital expenditure incurred wholly and exclusively for the purpose of specified business carried on by the assessee is deductible in the previous year in which the expenditure is incurred. Further, if the specified business is of the nature referred to in Point Nos. 1, 2, 5, 7, 8 (in the table given above) and has commenced its operation on or after April 1, 2012, it will be eligible for weighted deduction at the rate of 150 per cent of qualifying expenditure. Expenditure incurred on agricultural extension project [Sec. 35CCC] Discussed in lesson 2 [Assessment of Companies] 89

19 Expenditure incurred for skill development [Sec. 35CCD] Discussed in lesson 2 [Assessment of Companies] Deduction for expenditure on prospecting, etc., for certain minerals [Sec. 35E] This section is applicable if the following conditions are satisfied 1. The assessee is a resident person (other than a foreign company). 2. The assessee is engaged in any operations relating to prospecting for, or extraction or production of, any mineral. 3. The assessee has incurred an expenditure, on or after April 1, 1970, at any time during the year of commercial production and any one (or more) of the four years immediately preceding that year, wholly and exclusively on any operations relating to prospecting for any mineral specified in Part A (or group of associated minerals specified in Part B), of the Seventh Schedule or on the development of a mine or other natural deposit of any such mineral (or group of associated minerals). However, any portion of that expenditure which is met directly or indirectly by any other person or authority and any sale, salvage, compensation or insurance moneys realised by the assessee in respect of any property or rights brought into existence as a result of the expenditure is excluded from the eligible expenditure. Amount of deduction If all the above conditions are specified, amount of deduction is a. amount equal to one-tenth of the eligible expenditure (such one-tenth being hereafter in this section referred to as the instalment ); or b. such amount as is sufficient to reduce to nil the income (as computed before making the deduction under this section) of that previous year arising from the commercial exploitation [whether or not such commercial exploitation is as a result of the operations or development referred above in this section] of any mine or other natural deposit of the mineral or any one (or more) of the minerals in a group of associated minerals as aforesaid in respect of which the expenditure was incurred, whichever amount is less. Unadjusted expenditure The amount of the instalment relating to any relevant previous year, to the extent to which it remains unallowed, shall be carried forward to the next year and can be adjusted next year and so on. But in no case, no part of any instalment shall be carried forward beyond the tenth previous year as counted from the year of commercial production. Consequences in case of amalgamation/ demerger Where the undertaking of an Indian company which is entitled to deduction under section 35E, is transferred, before the expiry of the period of 10 years as specified above, to another Indian company in a scheme of amalgamation/ demerger i. no deduction shall be admissible under section 35E in the case of the amalgamating/ demerged company for the previous year in which the amalgamation/ demerger takes place; and 90

20 ii. the provisions of this section shall apply to the amalgamated/ resulting company as they would have applied to the amalgamating/ demerged company had there been no amalgamation/ demerger. Double deduction not allowed Where a deduction under this section is claimed, and allowed for any year in respect of the eligible expenditure, the expenditure so allowed as deduction shall not qualify for deduction under any other provision of this Act for the same or any other assessment year. Special provision for computing profits and gains of business on presumptive basis [Sec. 44AD] Section 44AD is applicable if all the following conditions are satisfied: 1. The assessee may be a resident individual, a resident HUF or a resident partnership firm (not being a limited liability firm). 2. The assessee has not claimed any deduction under sections 10A, 10AA, 10B, 10BA, 80HH to 80RRB in the relevant assessment year. 3. The assessee should be engaged in any business except the following: a. a person carrying on specified profession as referred to in section 44AA; b. a person earning income in the nature of commission or brokerage; c. a person carrying on any agency business; or d. a person who is in the business of plying, hiring or leasing goods carriages referred to in section 44AE. 4. Total turnover/ gross receipts in the previous year of the eligible business should not exceed Rs. 1 crore. Consequences if section 44AD is applicable: 1. The income from the eligible business is estimated at 8 percent* of the gross receipt or total turnover. However, the assessee can voluntarily declare a higher income in his return. 2. All deductions under sections 30 to 38, including depreciation and unabsorbed 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 partners under section 40(b) shall be allowed. The WDV is calculated, where necessary, as if depreciation as applicable has been allowed. Moreover, it will be assumed that disallowance, if any, under sections 40a, 40A and 43B has been considered while calculating the estimated 8%. 3. An assessee opting for the above scheme shall be exempted from payment of advance tax related to such business. 4. An assessee opting for the above scheme shall be exempted from maintenance of books of account related to such business as required under section 44AA. 91

21 5. If a taxpayer wants to declare lower income, he will have to maintain books of account as per section 44AA. Further, the taxpayer will have to get his books of account audited under section 44AB if the income so declared exceeds the exemption limit. Special provision for computing profits and gains of business of plying, hiring or leasing goods carriages [Sec. 44AE] Section 44AE is applicable, if any taxpayer is engaged in the business of plying, leasing or hiring goods carriages and he/ it does not own more than 10 goods carriages at any time during the 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 the whole or part of the amount payable is still due, shall be deemed to be the owner of such goods carriage. Consequences if section 44AE is applicable: 1. Income would be calculated on estimated of Rs. 7,500 for every month (or part of a month) during which the goods carriage is owned by the taxpayer. However a taxpayer can voluntarily declare a higher income in his return. 2. All deductions under sections 30 to 38, including depreciation and unabsorbed 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 partners under section 40(b) shall be allowed. The WDV is calculated, where necessary, as if depreciation as applicable has been allowed. Moreover, it will be assumed that disallowance, if any, under sections 40a, 40A and 43B has been considered while calculating the estimated income. 3. An assessee opting for the above scheme shall be exempted from maintenance of books of account related to such business as required under section 44AA. 4. If a taxpayer wants to declare lower income, he will have to maintain books of account as per section 44AA. Further, the taxpayer will have to get his books of account audited under section 44AB if the income so declared exceeds the exemption limit. 5. Income is calculated for the period during which the goods carriage is owned by the taxpayer and not on the basis of the period during which the goods carriage is put to use). Special provision for computing profits and gains of shipping business in the case of nonresidents [Sec. 44B] This section is applicable for non-resident assessees who are engaged in the business of operation of ships. Under this section, a sum equal to 7.5% of the aggregate of the following amounts shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" i. the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; 92

22 ii. iii. the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India; and the amount paid or payable or (received or deemed to be received), by way of demurrage charges or handling charges or any other amount of similar nature. Note Provisions of sections 28 to 43A does not apply. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils [Sec. 44BB] This section is applicable for non-resident assessees who are engaged in the business of providing services (or facilities) in connection with, or supplying plant and machinery on hire used (or to be used), in the prospecting for, or extraction or production of, mineral oils. Under this section, a sum equal to 10% of the aggregate of the following amounts shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" i. the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India; and ii. the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India. Note 1. Provisions of sections 28 to 41 and sections 43 and 43A does not apply. 2. The aforesaid provisions shall not apply to any income to which the provisions of section 42, 44D, 44DA, 115A or 293A apply. Option to declare lower income An assessee may claim lower profits and gains than the profits and gains specified in this section, if he keeps and maintains such books of account and other documents as required under section 44AA(2) and gets his accounts audited and furnishes a report of such audit as required under section 44AB. Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents [Sec. 44BBA] This section is applicable for non-resident assessees who are engaged in the business of operation of aircraft. Under this section, a sum equal to 5% of the aggregate of the following amounts shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" 93