Tax Planning in Profits & Gains From Business

8/8/2019 Tax Planning in Profits & Gains From Business

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Tax Planning in Profits &Gains from Business


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Section 30 : Own or Lease

Where business premises are ownedby the assessee, no deduction isallowed in respect of rent whilecomputing taxable profits orprofession. (Sec.30)

The assessee may claim depreciation(under Sec.32) on the building at theprescribed rate- residential building5% and factory building 10%.


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Own or Lease If business premises are taken on

lease, the lease rent is deductible in

computing taxable profits of businessor profession


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Depreciation ( u/32)

Counter balancing the short termcapital gain by purchasing anasset:

Where short-term capital gain ariseson the transfer of a depreciable asset,

the assessee is advised to purchaseanother asset to counter- balance theshort term capital gain.


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Depreciation

Purchase timing of an asset:

If it is possible, asset may be

purchased at a time where it couldbe used at least for 180 days duringthe year of purchase.

If it is purchased at a time where it

could not be used for 180 days,depreciation would be available at50% of the permissible rate.


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Owing vs. Leasing: Depreciation is allowed in respect of such

assets as are owned by the assesses.Acquisition of assets will cause cash out-

flow. The assessee also bears the risk ofobsolescence

Where the assets are acquired under lease,the assessee cannot claim depreciation but

lease rent may be allowed in computingtaxable profits of business under Section 37(1). Risk of obsolescence is also avoided.


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AdditionalD

epreciation From the assessment year 2006-207 and

subsequent years, 20% additionaldepreciation has been allowed on

acquisition of new plant and machinery byan undertaking. Existing industrialundertaking can also claim additionaldepreciation on the acquisition of new

plant and machinery. The incentive willhelp modernization and expansionprogrammes of the industrial undertaking.


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Expenditure on Scientific

Research (Section 35) Expenditure on in- house research is

deducted if research is related tobusiness.

If research not related to business,the assesssee is advised tocontribute to an approved researchassociation to take up suchresearch. Such contribution is fullydeducted.


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Scientific Research

Purchase of land is disallowed after 29February 1984.

If land is taken on lease, the lease rentmay be deducted either as revenueexpenditure on scientific research underSection 35 or under general deductionsunder Section 37 (1).

It would also reduce cash out- flow toincrease the rate of return on internalinvestment


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Expenditure ofScientific Research U/s 35

Any Expenditure (other than Cost of Land)expended on scientific research related to thebusiness.

Contribution to i) Association, university, college for the purpose of

Scientific Research, research in social sciences orstatistical research

ii) National Laboratory

eligible for 175 % Deduction

In House Research in specified industries eligiblefor 200 % Deduction


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Amortisation of certain

PreliminaryEx

penses. Legal expense/ engineering expenses

may be claimed as deduction underSection 35D or be capitalized underSection 32 for purpose of claimingdepreciation.

If the ceiling limit under Section 35Dhas been exhausted it is better tocapitalize them and claimdepreciation


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BadD

ebts The bad debt is deducted where debt

was taken into account while

computing taxable income [Section36(1)(i)(a)]


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Employers Contribution to PF

The employers contribution shouldbe paid on or before due date date

of furnishing return underSection139(1) to avoid its disallowance in

that year. This provision also appliesto other statutory liabilities under

Section 43B.


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Expenditure on Advertisement

[Section 37(2B)] The assessee is advised not to insert

any advertisement in the souvenir

published by a political party to avoidthe forfeiture of deduction.


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Investment in Capital

Assets.

Where no amortization is permissiblein respect of any capital assets, it isadvisable not to purchase such asset.Instead, the assessee may acquire aright to use such asset.

The consideration for the use of suchright is deductible under generaldeductions. [Devidas Vitaldas and Co.v. CIT [1972]84 ITR 227(SC)].


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Compensation for Breach of anAgreement relating to the

Purchase of anA

sset. Any payment of compensation for the

breach of an agreement relating to thepurchase of a capital asset is not deductible

under Section 37 (1) because it is capitalexpenditure.

The assessee is advised to acquire thecapital asset and then to sell it. If hesuffers any loss, such capital loss may beset-off against capital gain or it may becarried forward for 8 years for future set-off.


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Expenses on Borrowing.

Expenses on borrowing, thats stamp duty, lawyersfees, registration charges, brokerage or commissionfor raising loans or for issuing debentures aredeductible under Section 37(1),provided the

borrowing is made after the setting up of thebusiness.

If the borrowing is made prior to the setting up of thebusiness , such expenses neither can be deductedunder Section 37(1) nor, they can be amortised underSection 35D.

Accordingly, borrowing should be made after settingup of the business.


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However, if the borrowing is topurchase a depreciable assets, such

expenses may be capitalized for thepurposes of depreciation even if theborrowing is made before thecommencement of business.


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TaxAudit [Section 44AB]

Requirement of compulsory auditshould be strictly compiled with to

avoid penalty underSection 271B.


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Compulsory Maintenance ofA

ccounts [ Section 44AA

] An assessee is required to maintain

the book of account prescribed under

Rule 6F for the prescribed period toavoid imposition of penalty underSection 271A.


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TDS from certain Payments

[Section 40(a)(i) or (ia)] Where any interest, royalty, fees for technical services

is payable outside India to an non resident in India,and tax is deductible at source on such payment, itsshould be deducted at the prescribed rate and

deposited within the prescribed period under Section200(1) to avoid any disallowance for such payment inthat year.

Section 40(a)(ia) contains similar provision inrespect of interest, commission, or brokerage , rent ,royalty fees for professional services or technical

services payable to a resident or amounts payable toa resident contractor of sub- contractor for carryingany work(including supply for labour for carrying outany work).


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Payment exceeding Rs. 20,000 to be made

byA

ccount Payee Cheque

Payments in excess of Rs 20,000should be made by account cheque or

account payee bank draft to avoid itsdisallowance under Section 40A (2).


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TeaD

evelopment Account u/s 33 AB Applicable only for Assessee carrying on

business of growing and Manufacture of tea inIndia

Condition :

Deposit of amount in NABAR

Daccount within 6 months or due date of Filing

Return which ever is earlier.

Deduction : 40 % of Profit of such business

OR Amount Deposited

whichever is less


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Site Restoration Fund u/s 33 ABA

Applicable only for Assessee carrying onbusiness of prospecting, extraction of,petroleum or natural gas or both

Condition :

Deposit of amount in

SBI accountwithin 6 months or due date of Filing Return

which ever is earlier.

Deduction : 20 % of Profit of such business

OR Amount Deposited

whichever is less


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Expenditure for Obtaining License to operate

TelecommunicationServices U/s 35ABB

Conditions:

The Expenditure is capital in nature.

It is incurred for acquiring the right to

operate Telecommunication services. The expenditure is incurred either before

the commencement of business orthereafter at any time during the previous

year. The Payment for which has actually been

made to obtain licence


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Expenditure for Obtaining License to operate

TelecommunicationServices U/s 35ABB

Amount ofDeduction :

Payment will be allowed as Deduction

in equal instalments starting fromthe year in which payment has beenand ending in the year in whichlicence comes to an end.


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Profit/ Loss on sale of Telecom

Licences Situations

A) Entire Licence istransferred

i)When Sale considerationis less than WDV

ii) When Sale

consideration is morethan the WDV

Tax Treatment

WDV Minus Saleconsideration is allowedas deduction u/s 35ABBin the year of sale

Excess is taxable asBusiness Income in theyear of sale

(Restricted to thededuction allowed taken)


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Profit/ Loss on sale of Telecom

Licences Situations

B) Part of the Licence istransferred

i)When Sale consideration

is less than WDV

ii) When Saleconsideration is more

than the WD

V

Tax Treatment

WDV Minus Saleconsideration is allowed

as deduction u/s 35ABBover the unexpiredperiod

Excess is taxable asBusiness Income in theyear of sale

(Restricted to thededuction allowed taken)


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Section 44AD : Profits on

Presumptive BasisConditions :1. The assessee should be an Individual, HUF

or partnership firm (other than LLP)

2. The assessee has not claimed anydeduction under section 10A, 10AA, 10B10BA 80HH to 80RRB

3. The assessee should be engaged in anybusiness except the business of plying,

hiring or leasing goods carriages4. The Total Turnover/ gross receipt in theyear should not exceeds Rs 60 Lacs


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Presumptive BasisIf the conditions are fulfilled :

8 % of the Gross Receipts or Total Turnoverwill be deemed to be Income of the

AssesseeAll Deduction under Section 30 to 38

including depreciation are deemed to beallowed

Assesee is exempted from Paying Advance TaxAssesee is also exempted from Maintenance of

Books of Accounts relating to the Business


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Presumptive Basis If the Tax payer declares Lower

Income then

i) Tax Payer will have to maintainBooks of Accounts

ii) Tax payer will have to get hisbooks of accounts audited under

Section 44AB (Tax Audit)


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Section 44AE : Profits on

Presumptive BasisConditions :

1. Applicable to all the assessee

2. The tax payer is engaged in businessof plying, hiring or leasing goodscarriages

3. The tax payer owns not more than10 goods carriages at any time of theyear. (including vehicles on lease)


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Section 44AE : Profits onPresumptive Basis

If the conditions are fulfilled :

Income is to be calculated as follows

i) Heavy Goods Vehicle : Rs 5,000 p.m. will be

estimated Income

ii) Other than Heavy goods Vehicle : Rs 4,500 p.m. will

be estimated income.

All Deduction under Section 30 to 38 includingdepreciation are deemed to be allowed

Assesee is exempted from Paying Advance TaxAssesee is also exempted from Maintenance of Books ofAccounts relating to the Business

Tax Planning in Profits & Gains From Business

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