ONTIV

M.Com. V Sem

Interest on capital
48,000
R 48,000
interestof loan capital
48,000 48,000
R 48,000 48,000
Rent of the house occupied
by Jand R equally 60,00060,000
Maintenance expenses of

the two cars .50,00050,000

used by J and R
96,000
Sundry expenses
Net proft 10,00,00010,00,000
23,32,000 23,32,000 | 23,32,000 | 23,32,000
Please advise them.
Jand R approach you in this matter.

Solution
Rs Rs
Option1-Firm

(a) Computationoftotal income of FAS:

10,00,000
Net profits
Add: 1. Interest on capital
4 12,000
x 48,000
16
Rx48,000 12,000
16
2. Interest on loan: J 12,000
R 12,000

3. Medical treatment: J and R 30,000

4. Rentof the house-not used for business purposes (Sec.30) 60,000
5. Maintenance expenses of the car for private use

ofJ&R [Sec.37()] 50,000

4 Salary of J and R, to be treated later 8,00,000
9,88,000 9,88,000

Book-profits 19,88,000

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 TAXPLANNING
Less: (a) Remuneration
8,00,000, or
(b) Statutony limit:
75,000 90%
75,000
67,500
60% 45,000
18,38,000 40% 7,35,200

whichever is less, is to be deducted: 8,47,700

Business profits or total income 8,00,000
(b) Tax liablity of FAS 30.9% ofRs 11,88,000
11,88,000 and rounded off (Sec. 3,67,090
(c)Computation of the income of the partners: 2888)
Particulars
J R Total
Rs Rs Rs
Business income Sec. 28(v)
Add: 1. Intereston capital [Sec. 28(v)]
48,000 48,000 96,000
2 Interest on loan (Sec.
28( 48,000 48,000 96,000
96,000 96,000 1,92,000
Less: Disallowance under Sec.
40(b) 24,000 24,000 48,000
72,000 72,000 1,44,000
Add: 1. Salary [Sec. 28(V)] 4,00,000 4,00,000 8,00,000
2. Rent of house [Sec. 28(v)] 30,000 30,000 60,000
3. Free motor car [Sec. 28(iv) 25,000 25,000 50,000
4. Free medical treatment [Sec. 28(iv)] 15,000 15,000 30,000
5,42,000 5,42,000 10,84,000
Rs Rs
(d) Tax liability of the partners 69,628 69,628
Tax payable rounded offto the nearest multiple of
Rs 10 (Sec. 2888) 69,630 69,630
(e) Combined incidence of FAS and its partners

() Tax liability of firm 3,67,090

(i) Tax liability of partners: J
69,630
R
69,630
Total tax liability
5,06,350
Option l1-Whereitis treated as Pvt. Ltd.
(a) Total taxable income of Pvt. Ltd. 10,00,000
(b) Tax liability of Pvt. Ltd. 30.9% of Rs 10,00,000
3,09,000

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.Com. IV Sem
UNIT
(c) Distrbution of post-tax profits by way of dividend to
Jand R: Rs 10,00,000-Rs 3,09,000
6,91,000
Dividend tax payable by the company under Sec. 115-0 and

rounded off (Sec. 16.995

288B): 6116.995 6,91,000
x

1,00,380
Distribution of post-tax profit to J&R: 6,91,000-1,00,380+2 J
2,95,310
R
(d) Computation of the personal income of the Managing Directors Jand R:
2,95,310
Income from salary
J
R
) Salary 4,00,000 4,00,000
(i) Rent-free unfurnished house 15% of
salary (60,000) or
rent paid (30,000) which ever is less, is the value of 30,000 30,000
house
Free medical treatment
exempt up to Rs 15,000
(iv) Free conveyance facility

4,30,000 4,30,000
Income from other sources:

() Interest on loan deposit

48,000 48,000
) Dividends from company: Exempt
Nil Nil
Sec.10(34)1total income
4,78,000 4,78,000
(d) Tax liability of the directors and rounded off
(Sec. 2888) 52,120 52,120
(e) Combined tax incidence of the company and directors
Taxiability of the company 3,09,000+1,03,380
4,12,380
i) Tax liability of the directors:J
52,120
R 52,120
Total tax liability
5,16,620
Tax savings:

Pvt. Ltd 5,16,620

FAS 5,06,350
FAS is better: Tax savings 10,270

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 TAX PLANNING

4.1.3 Tax
Planning with Reference to Industrial EstabisT
New nent
1 Newly established industrial
undertaking in free trade zones (sec. 10
2 Newly established hundred percernt export oriented undertakings. 10B)
3. Venture capital (Se
companies (Sec. 10 (23FB)1.
44. Ifrastructure capital
companies [Sec. 10(23G)]
5. Tea development account (Sec. 33AB)
b. Site restoration fund
(Sec. 33 ABA)
7. Telecommunication Services (Sec. 35ABB)
8. Reserves forshipping business (Sec. 33 AC)
9 Amortisation of certain
preliminary expenses (Sec. 35D)
10. Deduction for expenditure on
prospecting for certain minerals (Sec. 39E
11. Deduction for special reserve created
by a financial corporation under secuo
36(1) (vii).
12. Special provision for deduction in the case of business for prospecting for mineral
oil (Secs. 42 and 44BB).
13. Special provisions for computing profits & gains of business of civil construction
(Sec. 44 AD)
14. Speical provisions in the case of business of plying hiring or leasing goods
cariages(sec. 44 AE)
15. Special provisions for computing profits & gains of retail business (Sec. 44AF)
16. Special provisions in the case of shipping business (Sec. 44B)
17. Special provisions in the case of business of operation of aircraft (sec. 44BBA)
18. Special provisions in the case of certain turmkey power projects (Sec. 44BBB)
19
19. Special provisions in the case of royalty income of foreign companies (Sec. 44D)
20 Profits& Gains from certain inducstrial undertakings engaged in infrastructure,
etc (Sec. 80 - IA)

21. Profits & gains from certain industrial undertaking other than infrastructure
development undertaking (Sec. 80-1B)
22 Profits from industial undertakings situated in certain states (Sec. 80-1C)

23
23. Profits & gains from the business of collecting & processing of bio-degradable
waste (Sec. 80 JJA)

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24
24. Employment of new
workmen (Sec. 80JJAA)
25. Special tax
provision under sections 115A, 115AB, 115AC, 115AD,
115BB, 115BBA and 115D. 115B,
Special Provisions in Respect of Newly Established
Free Trade Zone, etc. Undertakings in
(Sec. 10A) (or) Export-Processing Zones (EPZ)
The provisions of Sec. 10A are
given below:
Condition to be Satisfied
In order to get
deduction,
undertaking must satisfy the following
an
conditions.
1 Must begin manufacture or
production in free trade zone
2 Should not be formed by
spliting/ Reconstruction of business
3 Should not be formed by transfer of
old machinery.
There must be
repatriation of sale proceeds into India.
The assessee should furnish audit
report in form No. 56F along with the return of
income.
Return of inocme should be submitted on or before the due date of submission of
return of income given by sec. 139(1). If return is not submitted or submitted
belatedly, deduction under this section is not available.
Amount of Deduction
If the a fore said conditions are satisfied, the deduction U/S 10A may be computed
as under:
Profits of the business of the
undertaking x

Export turnover
Total turnover of the bu sin ess caried on
by the undertaking
The following points should be considered
1. Sale of software by one STP to another STP within the
as deemed
country cannot be treated
export for the purpose of exemption U/S 10 A.
2 On site development of computer software outside India shall be
deemed to be
export of computer software outside Inida.

d US 10A has to be allowed in

respect of profit on account of foreign exchange
gain.
Royalty earned from export of software is entitled to relief U/S 10 A.
Int. Income eamed by assesse on bank fixed deposits is ineligible for d U/S 10A.

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6. Profits for the business of

& unabsorbed
undertaking shall be calculated without adjusting losses
dep. of other undertaking
dUS 10A will be available in
respect of profit of an eligible undertaking without
setting off of brought forward lossess.
Ifthe aforesaid conditions are satisfied, the assessee can claimd US 10A
his total income, for a To
period of 10 consecutive assessment years beginning wiu
the assessment year relevant to the previous year in which the undertaking begins
to manutacture or produce such articles or things or computer software.
2. Newly Established Hundred Percent export Oriented Undertakings
(Sec 10b) (or) Export Oriented units (EOU's)
Sec. 10B has been inserted with a view to providing incentive to hundred percent
export oriented units.
Ihe porovisions applicable from the assessment year 2001-02 are given below.
Conditions
An undertaking must satisfy the following conditions in order to avail d US 10B.

1. It must be an approved hundred percent export-oriented undertaking.

2. It must produce or manufacture articles or things or computer soítware

3 It should not be formed by splitting or reconstruction of business.

44 It should not be formed by transfer of old machinery
5. There must be repatriation of sale proceeds into India.

6 Audit report should be submitted in form No. 56 G.

Amount of Deduction
If the above conditions are satisfied, the d US 10B may be computed as under:
Profits of the business of the undertakingx
Export turnover
Total turnover of the bu sin ess camied on by the undertaking

Export Turnover
It means the consideration in respect of export by the undertaking of articles or

computer software received in, or brougnt into India by the assessee in

things or
but does not include the
Convertible foreign exchange within the prescribed period,
following.
a) Fright

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M.Com. IV Sem
UNIT-IV

(b) Telecommunication charges

(c) Insurance atributable to the
delivery of the articles.
d Expenses, if my incured in foreign exchange in providing the technical services
outside India.
3. Venture Capital Companies ([Sec.10 (23FB)]
Sec.10(23FB) has been inserted with effect frorn the assessment year 2001-02.
Exemption under this section is available if the foll.
conditions are satisfied
1. There is a venture
capital company or venture capital funds.
A venture
capital co. means a co. which:
(a) Has been granted a certificate of
regulations made there under.
registration under the SEBI Act, &

b) Fulfils the conditions as may be

official Gazette.
specified by the SEBI by notification in the
Venture capital fund means a fund
a) Which operates under a trust
deed-registered under the provisions of the
registration Act or
operates as a venture capital scheme made by UTI.
(b) Which has been granted a certificate of
registration under the SEBI Act&
regulations made there under.
(c) Which fulfils the conditions as may be
the official GAZETTE.
specified by SEBI by notification in
2 The venture capital Co. or venture
capital fund has been set up to raise funds for
investment in a venture capital undertaking i.e., a
company.
(a) Whcih is a domestic company
(b) Whose shares are not listed in a recognised stock
exchange in India &
(c) Which is engaged in the business for providing
services, production or
manugacture of an article.
Consequetces When the above Conditions are Satisfied
If the above two conditions are
satisfied, then any income of such venture capital
fund or company is exempt from tax U/S
10/2BFB). The income of a venture capital
company or fund shall continue to be exempt even if the shares of
the venture
undertaking which the venture capital company or fund has made the capital
in
initial
investment, are subsequently listed in a recognised stock
exchange in India.
4. Income of an Infrastructure Capital fund/Company [Sec. 10(23G)]
Exemption U/S 10(23G) is available upto the assessment year 2006-07.

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 TAX PLANNING

5 TeaCoffee/Nurpber Development Account (Sec. 33AB)

An assessee can claimd U/S 33AB as follows:
Conditions
The assessee must
satisfy the following condition.
1. The assessee must be
engaged in tea, coffee or Rubber plantation.
2. It must make a deposit in
'special account' i.e., deposit with NABARD or deposIt
any amount in the deposit account opened by the asscess in accordance with an
approved scheme framed by the tea or coffee or qulnber board with the previous
approval of central govt.
3. The deposit
should be made within specified time-limit, i.e., within 6 months
from the end of the previous year or before the due date of furnishing the return
of income, which ever is parlier)
4 The accounts of the assessee should be audited
Amount of deduction The amount of deduction is
(a) A sum equal to amounts deposited in special account or
(b) 40% of theprofit of such business computed under the head "profits&
gains of business or profession "before making any u/s 33AB& before
adjusting brought forward business loss US 72. Which ever is less.
The following points should also be kept in mind:
1. Where any dedudtion is claimed under this section no deduction shall be
allowed in respect of such amount in mopther previous year.
2 Where a deduction is claimed & allowed under this section to an association
of persons or body of individual, no deduction shall be allowed to any member
of the association or body in respect of the same deposit.

3 Any excess deposit in special account made during a previous year is not
treated as deposit made in the next year or my other year.

6. Site Restoration Fund (Sec. 33ABA)

An assessee can claim d U/S 33ABA as follows.

Conditions
The assessee must satisfy the following condtitons.

1 The assèssee must be engaged in production of petroBteum/natural gas in India.

323
M.Com. V Sem UNIT-IV

2 The assessee has an agreement with the central government.

ft must make a deposit in Special account i..e deposit with SBI any amount in
an account opened by the assessee in accordance with, in a scheme framed by

the ministry of petroleum & Natrual gas.

4.The deposit should be made within specified time-limit i.e., before the end of the

previous year.
The accounts of the assessee should be audited.
Amount of Deduction

Amount of deduction is

a) A sum equal to amounts deposited in special account or

(b) 20% of profit of such business computed under the head "Profits & gains of
business or profession" before making any d US 33ABA & before adjusting
brought forward business loss US 72 whichever is less.
7. Amortization of Telecom License fees (SEC. 35ABB)
The provisions of Sec. 35ABB are given below

Conditons
dUS 35ABB is availableif the following conditions are satisfied:
T h e expenditure is capital in nature.

2 It is incured for acquiring any right to operate telecommunication services.

The expenditure is incuTTed either before the commencement of business or there

after at rny time during my previous year.
4The payment for which has actually been made.
Amount of Deduction

The payment will be allowed as deduction in equal instalments over the

period
starting from the year in which such payment has been made & ending in the year in
which the license cormes to an end. It may be noted that the deduction starts from the
year in which actuai payment of expenditure is add irrespective of the previous year in
which the liability for the expenditure is incurred according to the method regularly
employed by the assessee.
 TAX PLANNING

Profit or Loss Sale of Telecom License

on

Any protit or loss on sale of telecom

license is taken into consideration wniie
computing business income. WDV is the value of the first of the
telecom license is transferred. previous year in whicn
Difference situations Tax Treatment
I) Entire Telecom License is transferred
1. When sale consideration is less
WDV(-) sale consideration is allowed as
than WDV
d US 35ABB in the year of sale.
2. When sale consideration is more The excess of sale consieration over WDV is
than WDV taxable as business income in the year of sale
II) When a part of telecom license is
transferred
1. When sale consideration is less than WDV (-) sale consideration will be allowed as
WDV deduction over the un-expired period.
2. When sale consideration is more than The excess of sale consideration over WDV
WDV is taxableas B.I in the year of sale.

8. Reserves for shipping business (Sec.33AC)

du/s 33AC is not available from the assessment year 2005-2006 onwards.

9 Amortisation of preliminary expenses (Sec.35D)

Certain prelimiaary expenses are deductible U/S 35D
Who can claim Deduction
d u/s 35D is available in the case of in Indian Company or a resident non-
corporate assessee. A foreign company even if it is resident in India, cannot claim anv
d u/s 35D.

Time and Purpose of Preliminary Expenses

Expenses incured at the foll two stages are qualitied for d U's 35D:

When expenses are incured Why expenses are incurred

1. Before commencement of business For seting up any undertaking or business.
2. After commencement of business In connection with extention of an under-
taking or in connection with setting up a
new unit.

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 M.Com. IV Sem

Qualifying Expenditure
The heads of qualifying expenditure specified
for this purpose are the following:

The work can be carried on by the assessee

The work should be caried on by the
assessee itself or by a concern approved itself or by any concem
by the board. approved or not approved)

Expenditure in connection with 1. Legal charges for drafting any agreement

preparation of feasibility report, between the assessee and any other
of the
project report, conducting a market person relating to the setting up
business of the assesse.
Survey, or engineening services
relating to the business of the
assessee, provided the work is
2. Legal charges for drafting the
caried on by the assessee himself memorandum and articles of
or by a concern which is for the association if the taxpayer is company.
time being approved in this behalf
by the board. 3. Printing expenses of the memorandum
& AOA if the taxpayer is a Co.

4. Registration fees ofa co. under the

provisions of the companies Act.
5. Expenses in connection with the
public issue of shaes or debentures
of a co., under writing commission,
brokerage and charges tor drafting
typing, printing and advertisement
of the prospectus.
6. Any other expenditure which is

prescrnbed.

Amount of Deduction

One-fifth of the qualifying expenditure is allowable as deduction in each of the

five successive years beginning with the year in which the business commences, or as

the case may be, the previous year in which the extension of the industrial under taking
is completed or the new-industrial unit commences production or operation.

10. Deduction fro expenditure on prospecting for certain minerals (Sec.35E)

Sec. 35E provides for the amortization of expenditure incurred wholly and
exclusively on any operation relating to prospecting for the minerals or group of
associated minerals or on the development of a mine or other natural deposit of my
such minerals or group of assOciated minerals.

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Rahut Puhlications
Who can claim deduction:
d u/s 35E is allowed only in the case of Indian companies and resident asseSsees
other than companies. The benefit of amortisation is
not available to a foreign company
even if such company declares its dividends in India.
Ihe
qualiftying expenditure should be incured during the "year of commercial
production" and four years
immediately preceding that year.
The foll
are not
included in qualifying expenditure
1. Expenditure which is met directly or indirectly by any
person or authority.
2. Any proceeds realised by the assessee from sale,
salvage, compensation etc.
3 Expenditure on the acquisition of the site of the source and on the acquisition of
the deposits.
4 Expenditure ofcapital nature in respect of any building, machinery, plant
a
or
furniture for which deposit is admissible u/s 32.
Amount and Period of Deduction
The amortisation of
qualifying expenditure is allowed in equal instalments over a
period of 10 years.
a one-tenth of qualifying expenditure or
b) Income of the previous year arising from
commercial
deposit of minerals of any other nature. Whichever isexploitation
of any mine or
less.
11. Deduction for special reserve
created by a financial
36(1)(vii): corporation u/s
The scheme of sec. 36(1)(ii) is given below :
Who can claim deduction: du/s
36(1)(vii) is available to the foll.
a) a financial corporation (including a
public co, and a govt. co.) which is
in providing
long-term finance for industrial or agricultural engaged
development of infrastructure facility in India or development or
b) a public
company formed and registered in India with the
on the business of main object of carrying
providing long-term finance for construction or purchase of
residential houses in India.
Amount of Deduction
An amount of d u/s 36(1)(vii) is as follows
a the amount transferred during the previous year to the
special reserve account
created for the purpose of sec.36(1)(vii) or

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20% (40% upto the assessment year 2007-08) of the profits derived from the
b business activities which is computed u/s 28 but before claiming d /s 36(1)(vii)

or

c) 200% of (paid up share capital and general reserve as on the last day of the
previous year) minus the balance of the special reserve account of the first day of
the previous year.
whichever is lower.
12. Special provision for deduction in the case of business for prospecting
for mineral oil (Sec. 42)
Sec.42 is applicableifthe foil. Conditions are satistied
1 The taxpayer may be a resident or non-resident.
2 The taxpayer has a business consisting of the prospecting for or extraction or
production of mineral oils. For this purpose "mineral oil" includes petroleum and
natural gas.
3. In relation to the above business, the central govt. hasenteredintoanagreement
with the taxpayer for the association or participation of the cental govt in such
business
The agreement has been laid on the table of each house of parliament.
If the above conditions are satisfied, then the foll deduction shall be allowed as
arespecified in the agreement.

a) expenditure by way of infrastuous or abortive exploration expenses in respect of

any area sumendered prior to the beginning of commercial production.

bb) after the beginning of commercial production, expenditure incumed by the assessee
in respect of drilling or exploration activities or services or in respect of physical
assets used in that connection.
c)allowances in relation to the depletion of mineral oil in the mining area in respect
c)
of the assessment year relevant to the previous year in which commercial
production is begun and for such succeeding year or years as may be specitied
in the agreement.
income from activities connected with
b) Computation of taxable
exploration of mineral oils (Sec.44BB):
The provisions of sec.44BB are given below

applicable if the foll. conditions satisfied

Conditions : Sec.44BB is are

The assessee is non-resident. He may be an Indian citizen or a foreign citizen.

1.

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 TAXPLANNING

2 Ine assessee is
engaged in the business of providing services
connection with, ör and tacilities In

the exploration
supplying plant and machinery on hire, used or to be used in
for, and exploitation of mineral oils.
Consequences if the above
conditions are satisfied The foll provisions
applicable, if the above are

1. The
conditions are satisfied
provisions of sections 28 to 41, 43 and 43A are not
2. Income is calculated at the applicable.
rate of 10% of the amounts
3 The amounts in
given below:
respect of which the provisions to the tax
on his behalf payer or to any perso
whether in or out of India. On account of the
services or facilities or provision of atoresaid
supplying plant and machinery for the aforesaid purposes.
This amount also includes the amouns received or deemed to be received in
India on account of such services or facilities or
supply of plant and machinery.
4 The aforesaid
provision shall not, however, apply to any income to which the
provisions of sec. 42, 44D, 115A or 293A apply.
13. Special provisions for computing profits and gains of business of
civil construction (Sec. 44AD) : The
provisions of sec.44AD are given
below:
Conditions : Sec.44AD is applicable only if the foll conditions are satisfied
1. The tax payer may be an
individual, HUF; AOP BOI, firm, company co-operative
society or any other person. He or it may be a resident non-resident.
or a

2 The taxpayer is engaged in the business of

civil construction or supply of labour
for civil construction work.
3 Gross receipts from the above business do not exceed Rs. 40 lakh. Gross
receipts
are the amount received from the clients tor the contract and will
not include the
value of material supplied bý the cient.
Consequences: The foll are the consequences if sec. 44AD is applicable.
1. The income from the above mentioned business is estimated at 8% of the gross
receipts paid or payable to a taxpayer. A taxpayer can voluntarily declare a

higher income in his return.

2 Rate of 8% is comprehensive
The following are the priveleges applicable to a taxpayer who declares his incomo
from the aforesaid business at the rate of 8% of gross receipts or at a higher rate

1. He is not required to maintain booKS OF account according to the provisions

of sec.44AA in respect of the aforesaid business.

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M.Com. IV Sem UNIT-IV

2. He is not required to get his books of account audited u/s 44AB in respect of
the aforesaid business.
14. Special provisions in the case of business of plying. hiring or leasing
goods carriages (Sec. 44AE)
The provisions of Sec.44AE are given below
Conditions Sec.44AE applicable only if the foll. conditions are satisfied:
is
1 The taxpayer may be in
individual, HUF, AOP BOI, firm, cormpany, co-operative
sOCXiety or any other person. He or it may be a resident or a
non-residept.
Tax payer is engaged in the business of
plying, hiring or leasing goods carriages.
3. The taxpayer runs not more than 10 goods carriages at anytime during the
previous year. For this purpose, a taxpayer who is in possession of a goods
carriage, whether taken on hire purchase or on instalments and for which the
whole or part of the anount payable is still due, shall be deemed to be the owner
of such goods caiage.
Consequences : The following are the consequences if Sec.44AE is applicable.
1 Income to be calculated on estimated basis as follows
Types of Goods carriage Estimated Income
Heavy goods vehicle Rs.3,500 for every month (or part of a month)
during which the goods carriage is owned by
the taxpayer.
Other than heavy goods vehicle Rs. 3,150 for everymonth (or part of a month)
during which the goods carriage is owned by
the taxpayer.

2. Estimated incorne is comprehensive

3. Provisions for maintenance of books of account/compulsory audit - not
applicabkle.
15. Special provisions for computing profits & gains of retail business
(Sec. 44AF) :
The provisions of Sec. 44AE are given below
Conditions: Sec.44AF is applicable only if the following conditons are satisfied.
The taxpayer may be in individual, HUF AOP BOI, firm, company, co-operative
Society or any other person. He or it mnay be a resident or a non-resident.

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 TAX PLANNING

2 The taxpayer is engaged in the business of retail trade in any goou

merchandise.
3. Total turnover from the above business does not exceed Rs.40 lakh.
Consequences: The following are the consequences if Sec.44AF is applicabie
1. Income to be calculated on estimated basis at 5% of the total turnover
2. Rate of 5% is comprehensive.
3. Some previleges are applicable to a taxpayer who declares his income at ine i a
3
rate. These provisions are similar to tne
of 5o of gross receipts or at a higher
provisions given u/s 44AD.
16. Special provisions in the case of shipping business (Sec.44B) :

The provisions ofsec.44B are given below:

satisfied
Conditions : Sec.44B is applicable if the following conditions are

1. The assessee is non-resident in India.

The assessee is engaged in the business of operation of ships.
2.
Consequences :
1 The provisions of sec.28 to 43A are not applicable.
of of the following:
2 Income shall be calculated at the rate of 7.5% the aggregate
in or out of India) to the assessee or to
a) the amount paid or payable (whether
any person on his behalf on account of
carriage of passengers, livestock,
and
mail
or shipped at any part in India
goods
the received or deemed to be received in lIndia by or on behalf of
b amount
passengers, livestock, mail or
the assessee on account of the carriage of
goods shipped at any part outside India.
in the case of business of operating of aircraft
17. Special provisions
(sedc.44BBA):
and consequently secs. 28 to 43A are not
This section is a non-obstant provision
in the business of operation of
applicable in the case of a non-resident engaged
5% of the following:
aircraft. Income from such business is calculated at a flat rate of
amount received (in or out ot Indiaj by_the taxpayer or on his behalf on
a
account of carraige of passenger, livestock, mail or goods from any place in
. India and
amount received or deemed to be received in India by or on behalf of the
b)
taxpayer on accournt of carriage ot passenger, livestock mail, or goods from

place outside India.

any

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18. Special provisions in the case of certain turn key power projects
(sec.44BBB)
Sec.44BBB is applicable if the following conditions are satistied

1 The taxpayer is a foreign company

the business of
2 The taxpayer is engaged in the business of civil construction or
in connection
erection ot plant o machineTy or testing or commissioning thereot,
with a tum key poweT project
3 The aforesaid project is approved by the central govt
,
The above project is financed under wn international aid programme, with eftect
from the assessment year 2003-04. sed.44BBB will be applicable even in respect
of those turmkey power projects which are not financed under any international
id programme
f ali the above conditions are satisfied. provisions of secs. 28 to 44AA are not
apphcabie and 10% of the amount paid or payable to the said assessee an account of
uch civil construction, erection etc. shall be deemed to be the profits and gains of such
buzsiness chargeable to tax under the head "profits and gain of business or protession.
19. Special provisions in the case of royalty income of foreign companies
(sec.44D)
Sec 44D has been inserted to hamonise the provisions relating to the income
hom toyalty or fecs for technical services attributable to a fixed place of profession or a
3etiarient establishment in India with similar provisions in the various doublt taxation
vHance ngreements. The provisions of sec.44DA are given below :

Conditions
The taxpayer is a foreign company or non-resident non-corporate asessee.
The taxpayer carries on a business in India through a permanent establishment
situeted in india.
The taxpayer gets income by way of royalty orfees for technical services.
ihe above royalty or technical fees is received from -

(oveminent (i.e., central or state govt). or

banindianconcem
The ncOTe mentioned in condition(3) is
received in pursuance of an agreemnent
made by the taxpayer with the govt. or the Indian concern after march 31, 2003.
f stuch agreement is made before April 31, 2003. If such
agreement is made
before April 1, 20A3, then sec. 44D is applicable (not sec.44DA)

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6 The right, property or contract in respect of which the royalties or fees for technical
services are paid to the taxpaver is effectively connected Witn
pi
establishment or fixed place of profession.
20. Profits and gains from industrial
etc. (sec. 801A) :
undertakings.engaged in infrastructure
d u/s 801A is available only to the following undertakings
1. provision of infrastructure facility
2. Telecommunication services
3. Industrial parks
Power generation, transmission and distriution or substantial renovation and
4.
modernisation of existing distribution lines.
5 Undertaking setup for reconstruction of a power unit.
6 (From the assessment year 2008-09 onwards) a cross-countey natural gas
distribution network.
The provision of Sec.80IA are given below:
the following
Conditions : An undertking providing infrastructure facility must satisty
conditions
1. It should provide infrastructure facility

2 It should be owned by an Indian company

3. There should be an agreement with the central govt.

4. It should start operation on or after April 1, 1995.

submitted before due date of submission of
Income should be
on or
5 Return of
return of Income.

Amount of Deduction
If all the above conditions
are satistied, then 100% of the profit is deductible for
the first 10 years.
other than
21. Profits and gains from certain industrial under-takings
infrastructure development undertakings
(sec.801B) :
to difterent industrial undertakings as follows
d u/s 80 IB is available
industrial undertaking
1. Business of an

2. Operation of ship
3. Hotels

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M.Com. IV Sem

4. Industrial research
5. Production of mineral oil

6. Developing and building housing projects

of fruits or vegetables or
T. Business of processing, preservation and packaging
of food grains units.
integrated handling, storage and transportation
8. Multiplex theatres
9. Convention center

10. Operating and maintaining a hospital in rural area.

assessment year 2009-

l1. Hospital located in certain areas (applicable from the
10)
Conditions: To claim du/s 801B, an individual undertaking must satisfy the following

conditons
1. It should be a new undertaking

2. It should not be formed by transfer of old plant and machinery.

It should manufacture or produce articles rather than non-priority sector items
3
given in the eleventh schedule.
4 Manufacture or production should be started within a stipulated timelimit.

5. It should employ 10/20 workers.

6 Return of income should be submitted on or before due date of submission of

return of income.
22.
22. Profits from industrial undertakings situated in certain states
(sec.801C)
Sec.801C has been inserted from the assessment year 2004-2005.
Conditions : One has to satisfy the following conditions to claim deduction u/s 80IC

1 Not formed by splitting or reconstruction of existing business.

2 Not formed by transfer of old plant and machines.

3 Industrial undertaking should be set up in certain special category of states.

4. Manufacture or production of specified goods.

334
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 TAX PLANNING

Amount of Deduction
State
Amount deductible
1. Sikkim, North-eastem
U0% of profit& gains of the industrial undertaking for 10
states i.e., Arunachal years commencing from the initial assessment year
pradesh, Assam,
Manipur, Meghalaya
Mizoram, Nagaland
&Tripura)
2. Himachal pradeshor undertaking for the
uttaranchal. OU% of profit & grains of the industrial
irst years commencing with the initial assessment year&
25%(30% in the case of a company) for the next 5 years.
28. Profits & gains from the business of collecting and processing ot b i o

degradable waste (sec. 80JJA) : Sec. 80JJA is applicable where the gross
TOal income of an assessee includes any profits and gains derived from the

business of collecting, processing or treating of bio-degradable waste for generating

or 1or
power producing bio-fertilizers, bio-pesticides or other biological ågents
or

producing bio-gas or making pellets or briquettes for fuel or organic

manure.

activities
Amount of Deduction : The whole of the profits and gains of the above
with the
shall be deductible for a period of 5 consequtive asessment years beginning
assessment year relevant to the previous year in which such business commences.

received by from the agriculture department of the state

the assessee
Subsidy
manufactured by the assess is an income derived from the
against sale of bio-fertilizer
in business income for the purpose of allowing
assessee's business and shall be included
d u/s 80JJA.
Workmen (Sec.80JJAA) :
24. Employment of New
be satisfied to avail d u/s 80JJAA.
Conditions The following conditions should

1. The taxpayer is an Indian company

includes any profits & gains derived from any industrial

2 Income of the taxpayer
the manutacture or production of article or thing.
undertaking engaged in

The industrial undertaking notformed by

is splitting up or reconstruction of an
3.
or amalgamation with another industrial undertaking.
existing undertaking

4. The assessee furnishes along with

the return of income the repart of an chartered
in form no. 10DA.
accountant

335
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Amount of Deduction
The amount of deduction is equal to 30% of additional wages paid to the new

regular workmen employed by the assessee in the previous year. The

is deduction
available for 3 assessment years including the assessment year relevant for the previous
year in which such employment is provided.
Bonus Issues Bonus shares to equity shareholders
The table given below highlights the tax consequences :
Situations Tax treatment in the Tax treat1ment in the hands of
hands of company share holders
issuing bonus shares
1. At the time of issue of No tax liability No tax liability
bonus shares..
2. At the time of sale of No tax liability
bonus share by share-
holder
3. A the time of redemption u/s2(22)(a) or 2(22)(c) Out of the amount received at
or bonus share or it will be treated as the time of redemption or
liquidation of the dividend distribution to liquidation, amount treated as
Company. the extent of accumulated "dividend" us 2(22)(a)(c) will be
profits& consequently, exempt in the hands of share
the payer company will holders, balance will be sale
pay dividend tax. consideration to compute capital
gain.

4.2 NATURE OF CAPITAL STrucTURE

Capital structure refers to the various sources through which a project can be
financed. The financing can be done either through own funds or through
loan fund or
through a combination of both. Thus, capital structure comprises either of debt or
equity or a combination of the two.

Capital structure decisions are required to be made either at the time of

commencement of business or at the time of major expansion of a project.
While deciding the capital structure, the following factors may be taken into
account:

1 Risk: In case of debt, repayment of principal and interest have to be made as

per the loan agreement, irrespective of profits/losses. Failure to make these
contractual payments may lead to bankruptcy and closure of the business.

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 TAX PLANNING

On the other
hand, no such contractual oavments are if
the project Is tinanced required to be
Tna
e

through equity. Thus, debt carries more risk

to equity
as
compa
2 Control Financing through equity may lead to a decrease in the oter's
control over the
company as other shareholders would also participate in e
decision-making process
On the other
hand, financing through debt would not dilute promoter s bl
over the company as the banks/financial institutions are not entitled to
co
in the decision-making. partiepa
3. Gestation period: Debt
servicing would be difficult in a long gestation period
ACcordingly, financing through equity may be preferred as compared to debt m
such a case.

4. Shareholders' satisfaction : In order to keep the shareholders safistied, the

company should ensure that the capital structure does not adversely affect the (i)
earning per share, (ii) dividend pay out, and (ii) market price of the share
5. Debt equity ratio: Generally, debt equity ratio of 2:1 is regarded as an ideal
ratio. In case the existing D-E ratio is 1:1 (say), debt may be preferred.
On the other hand, where D-E ratio is 3:1 (say), equity route may be preferred.

6. Marketability of shares: Finance can be raised through equity route, only if

the shares are marketable, that is, there are people who are willing to purchase
the shares.

If shares are not marketable, finance can be arranged through debt.

7. Future rate of return (after tax): The effect of the proposed capital structure
on the future rate of return (after tax) on equity should also be kept in mind while
making the capital structure decision.

Capital structure decision is basically a subiect of financial management.

However, in the context of tax planning, the discussion has, to be limited only to
implication of tax factor in capital structure decision. The following tax considerations
context:
may be taken into account in this
The return on equity capital, that is, "dividend is not deductible in computing
i)
the taxable business profits. Thus, it is à charge on profits after tax.

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M.Com. lV Sem UNIT-IV

The return on borowed capital, that is, "interest' is deductible in taxable

profits of the business. Thus, it is a chargeon profitsbeforetax. This may increase
the rate ofreturn on owner's equity. Interest on own capital is disallowed as there
is no borrowing. However, interest paid to partners is deductible in accördance
with the provisions of Sec. 40(b).

) The cost of raising owner'sequity is treated as capitalexpenditure. It cannot be

deducted in comput-ing taxable profits. However, such cost can be amortised
subject to the provisions of Sec.35D.

The cost of raising borrowed capital, that is, stamp duty, registration fees, legal
expenses, etc., is deductible in computing taxable profits

ii)Owner's equity may be preferred in cases where the assessee is entitled to

incentives exemption or deduction like exemption under Sec. 1OA/Sec. 10B or
deduction under Sec. 80-1A/80-1B, etc.

iv Debt equity may not be preferred in cases where gestation period is quite long.
The liability to pay interest and repayment of the loan instalment will be a burden
on the resources of the concern. Unabsorbed interest will increase business loss
which cannot be caried forward for more than 8 years.

vv) Where interest on debt equity is payable outside India, or it is payable to a non-
resident in India, no deduction is allowed unless the tax has been deducted at
source and paid within the prescribed time under Sec. 200(1). To avoid
disallowance of interest, tax should be deducted and paid within the prescribed
period.
vi) Rate of internal returm on investment should also be taken into account in deciding
debt equity ratio. Where rate of internal return is less than the rate of interest,
owner's equity should be preferred instead of debt equity.

Problem1
Z Ltd., needs an investment of Rs 6 crore for a project during the previous year
2008-2009. Rate of tax is 33.99%. Rate of interest is 20%. Determine a suitable
combination of owner's equity and debt equity if the rate of return is expected at ()
25%; (i) 15%. Equity will be divided into shares of Rs 100 each.

Solution
Selecting optimum combination of debt equity and owner equity: 6,00,00,000

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 TAX PLANNING

a) When rate of return is 25%

Particulars
OptionI Option II Option I
Rs. Rs. Rs.
Equity share capilta (divided into shares of Rs 100 each) 2,00,00,000
6,00,00,000 3,00,00,000
Debt capital
3,00,00,000 4,00,00,000
6,00.00,000 6,00,00,000 6,00,00,000
EBIT (Earning before interest and tax)
1,50,00,000 1,50,00,000 1,50,00,000
Less: Interest |Sec. 36(|)l)]
60,00,000 80,00,000
Profit before tax
1,50,00,000 90,00,000 70,00,00
Less: Tax@ 33.99% and rounded off under Sec.
288B 50,98,500 30,59,100 23,79,300
Profit after tax
90,01,500 59,40,100 46,20,700
Less:
Less: Dividend
Dividend tax: 16995
tax:15995 On post-tax profits and rounded off
under Sec. 2888 8,62,990 6,71,220
14,38,320
Distibutable profits 84,63,180 50,77,910 39,49,480
Return on equity 19.7474%
14.1055% 16.9264%

Conclusion: Option Il is better,

b) When rate of return is 15%
Particulars Option I Option II Option II
Rs. Rs. Rs.
EBIT 90,00,000 90,00,000 90,00,000
Less: Interest 60,00,000 80,00,000
Profit before tax 90,00,000 30,00,000 10,00,000
Less: Tax@33.99% and rounded offunder Sec. 288B 30,59,100 10,19,300 3,39,900
Profit after tax 59,40,900 19,80,700 6,60,100
Less: Dividend tax: 169 of post-tax profit and rounded off 8,62,990 .2,87,660 95,890
under Sec.288B
Distributable profits
50,77.91016.92640 5,64,210
Return on equity 8.4632% 5.6421% 2.82105%
Conclusion: Option I should be preferred.

4.3 DIVIDEND PoLICY

Dividend from an Indian company is not taxable in the hands of shareholders
(company declaring dividend will have to pay dividend tax u/s 115-0). However, deemed
dividend u/s 2(22)(e) from an Indian company or any dividend from a foreign company
339
M,Gom. IV Sem
UNIT V

is taxable in the hands of shareholders under

the head "Income from other sources"
regardless of the fact whether shares are held by the assessee as
investment or as stock-
in-trade.
Dividend in Common Parlance : Dividend in its ordinary connotation means
the
amount paid to or received by a shareholder in proportion to his shareholding in a
company, out of the total sum so distributed.
Dividend under the Income Tax Act
Sec.2(22) gives the definition of 'dividend'. The definition is not exhaustive.
therefore a particular distribution is not
regarded as dividend within the extended
meaning the expression in sec.2(22), it may still be dividend provided, it is "dividend"
of
under the ordinary meaning of the
expression.
Under section 2(22), the following
shareholders are deemed as
payments or distributions by a company to its

dividends to the extent of accumulated profits of the

company.
1 any distribution entailing the release of
company's assets.
2 any distribution of debenture, debenture-stock,
deposit certificates and bonus to
preference shareholders.
3 Distribution on liquidation of companyy
4. Distribution on reduction of capital
5 Any payment by way of loan or advance by
closely-held company to a
a

shareholderholding substantial interest provided the loan should not have been
made in the ordinary course of
business and money-lending should not be a
substantial of
part the company's business.
If dividend comes
under(1)(4),
tax u/s 115-0 & in the hands of
then the
payer-company will pay dividend
receipent shareholders, it is not chargeable
to tax.

If dividend under (5), then it is taxablein the

comes
such case, the
hands of shareholder. In
payer-company will not pay dividend tax.
When the additional tax should be
paid:
The tax ondisributed profit shall be paid within 14 days from the
date of
a) declaration of any dividend or
b) distribution of any dividend or
cc) payment of any dividend whichever is the earliest.

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