TAX PLANNING AND SPECIFIC MANAGEMENT … PLANNING AND SPECIFIC MANAGEMENT DECISIONS ... in nature of...

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UNIT 3

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

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:

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i. On first Rs. 3,00,000 of the book profits or in case of loss, @ 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 2017-18, resident individuals, HUFs and firms receiving dividend in excess

of Rs. 10 lakhs per annum have to pay tax @ 10% on gross amount of dividend + Surcharge (if

any) + Cess @ 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 tax @ 20.358% [17.647% + 12% (surcharge) + 3% (cess)]

for the assessment year 2016-17 as well as assessment year 2017-18.

Limited Liability Partnership (LLP)

A limited partnership is governed by the Limited Liability Partnership Act, 2008. 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 income @ 30% + Surcharge (if applicable) + Cess @ 3% for

assessment year 2016-17 as well as assessment year 2017-18.

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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 interest @ 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 2017-18 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: Cess @ 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


NTI 5,50,000

Tax on Rs. 5,50,000 35,000


35,000

Add: Cess @ 3% 1,050


Total tax liability if business is run as an individual is Rs. 72,100 (36,050 + 36,050)

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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


NTI 5,00,000

Tax on Rs. 5,00,000 25,000


25,000

Add: Cess @ 3% 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: Cess @ 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 loan @ 15%

Salary Rs. 2,00,000 p.a. each

Distribution of remaining profits as dividends equally.

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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 2017-18 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 liability @ 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: Cess @3% 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:

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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 liability @ 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 (3,62,775/120.358* 100) = 3,01,413

Dividend tax will be (3,62,775/120.358* 20.358) = 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 (1,62,225 + 61,362 + Nil + Nil)

Note –

W.e.f. assessment year 2017-18, new manufacturing companies which are incorporated on or after

1.3.2016 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]

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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 2005-06 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 2005-06 and 2019-20, 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.

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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, 1995.

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, 2017.

"Infrastructure facility" means –

a. a road including toll road, a bridge or a rail system;

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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, 2005.

3. 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, 2006.

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, 2011.

4. 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, 2017.

5. 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, 2011.


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.


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

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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, 2005.


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, 2017.

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 non-

priority 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, 2007.

3. Business of Mineral Oils –

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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, 2017.

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 2004-05); 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, 2005.

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,

2008.

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.


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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

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

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

Time period for

commencement

of production or

substantial

expansion

Amount of

deduction

Sikkim Any article or

thing (except the

article or thing

specified in the

Thirteenth

Schedule)

Any article or

thing, specified

in the Fourteenth

Schedule

During

December 23,

2002 and March

31, 2007

100% profits for

10 years

commencing

from the initial

assessment year

Himachal

Pradesh or

Uttaranchal

----do---- ----do---- During January

7, 2003 and

March 2012

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

North-Eastern

States (i.e.,

----do---- ----do---- During

December 24,

100% profits for

10 years

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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, 2013.

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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.


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]


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)

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3. The undertaking has begun (or begins) aforesaid work, during the period April 1, 2007 and

March 31, 2017.

4. 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 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;

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vii. manufacturing of information technology hardware; and

viii. 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]


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]


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.

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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.


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]


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

Any person Not required On or after April 1,

2009

2. Setting up and

operating a

warehousing facility

for storage of

agricultural produce


2009

3. Laying and

operating a cross-

country natural gas or

crude or petroleum

oil pipeline network

for distribution,

including storage

facilities being an

integral part of such

network

An Indian

company or a

consortium of

Indian

companies or

an authority/

Board/

corporation

established

under any

Central or

State Act

Should be approved by

Petroleum and Natural Gas

Regulatory Board and

notified by the Central

Government

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]

4. Building and

operating anywhere

Any person No approval required;

however, hotel should be


2010

89

in India, a hotel of 2

star or above category

classified by the Central

Government as 2 star or

above category

5. Building and

operating anywhere

in India, any hospital

with at least 100 beds

for patients

Any person No approval required On or after April 1,

2010

6. Developing and

building a housing

project

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


2010

7. Developing and

building a housing

project

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


2011

8. Production of

fertilizer in India


2011

9. Setting up and

operating an inland

container depot or a

container freight

station

Any person As notified or approved

under the Customs Act


2012

10. Bee-keeping and

production of honey

and beeswax

Any person No approval On or after April 1,

2012


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]


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Expenditure incurred for skill development [Sec. 35CCD]


Deduction for expenditure on prospecting, etc., for certain minerals [Sec. 35E]


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.


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.


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

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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 income @ 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.

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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 basis @ 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 non-

residents [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;

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ii. 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

iii. 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



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



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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 from

any place 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 carriage of passengers, livestock, mail or goods from any place

outside India.

Note –

Provisions of sections 28 to 43A does not apply.

Special provision for computing profits and gains of foreign companies engaged in the

business of civil construction, etc., in certain turnkey power projects [Sec. 44BBB]

This section is applicable for a foreign company which is engaged in the business of civil

construction or the business of erection of plant or machinery or testing or commissioning thereof,

in connection with a turnkey power project approved by the Central Government in this behalf.

Under this section, a sum equal to 10% of the amount paid or payable (whether in or out of India)

to the said assessee or to any person on his behalf on account of such civil construction, erection,

testing or commissioning 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".]

Note –

Provisions of sections 28 to 44AA does not 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.

Deductions in respect of profits and gains from industrial undertakings or enterprises

engaged in infrastructure development, etc. [Sec. 80-IA]

Discussed in the above section

Deductions in respect of profits and gains by an undertaking or enterprise engaged in

development of Special Economic Zone [Sec. 80-IAB]


Deduction in respect of profits and gains from certain industrial undertakings other than

infrastructure development undertakings [Sec. 80-IB]


Special provisions in respect of certain undertakings or enterprises in certain special

category States [Sec. 80-IC]


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Deduction in respect of profits and gains from business of hotels and convention centres in

specified area [Sec. 80-ID] Discussed in the above section

Special provisions in respect of certain undertakings in North-Eastern States [Sec. 80-IE]


Deduction in respect of profits and gains from business of collecting and processing of bio-

degradable waste [Sec. 80JJA]


3.5 SUMMARY

This lesson has discussed various sections of Income-tax Act, 1961 where various incentives are

available to the assessees for establishing the businesses in various locations of the country. Those

sections are also discussed above where various incentives are available for establishing the

business with respect to different category of goods.

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