Corporate Tax Planning

A
PRESENTATION
ON
TAX PLANNING SETTING UP OF NEW
BUSINESS

PRESENTED BY : GROUP NO.8
GROUP MEMBERS
JALPESH BAVISHI(09015)
MAYUR PATADIA(09075)
BHAVESH PATEL(09080)
MAHESH SOLANKI(09101)
MAYUR THACKER(09107)
MILAN VADHER(09114)
PINTU VAISHNAV(09115)
JAY VIDHANI(09119)

Location of The New Business
1. Tax Holiday for New Industrial Unit Situated in
Free Trade zone(Sec.10A)

100% of the profit, derived from the industrial undertaking are allowed
as to be deduction. available up to assessment year 2009-2010.

From the assessment year 2003-2004 an industrial undertaking set up in
Special Economic Zone is entitled to claim 100% deduction in respect for
the first 5 year and 50% for the next 2 year.

50% deduction is further continued for the 3 year but amount as does
not exceed 50% of is debited to profit and loss account and credited to
Special Economic Zone Re-investment Allowance Reserve Account
used within specified purpose.

Tolani Institute of Management Studies
2

From the AY 2006-2007 tax holiday for profits derived
from the export of articles or things manufacturing in
units set in SEZ is available for 15 year.

100% deduction during first 5 year.
50% deduction during next consecutive 5 year

last 5 year percentage of profit not exceeding
50% as is transferred to SEZ Re- investment A/c to be
utilised for purchasing machinery and plant during the
immediately succeeding to 3 year

3
2. Profit derived From Operating Industrial
Park or Special Economic Zone(Sec. 80IA)

100% deduction allowed of its respect of its profit for 10
assessment year subject to certain condition.

4
3.Profit From Industrial Undertaking located in
the State of Jammu and Kashmir

100% deduction allowed for the first 5 year

The next 5 year 30% for Company assessee
25% non Company assessee

5
4.Profit from the certain Undertakings or enterprises
in certain Special Category States(Sec. 80-IC)

100% deduction allowed in respect of the profit derive from
the certain enterprises set up by end of the march 2012 in
certain special category State for 10 assessment year.
6
5.Profit and Gain from Business of Hotel and
Convention Centers.
100% deduction is allowed for consecutive 5 years and profit
set up during financial year 2007-2008 to 2009-2010 in the
National Capital Territory of Delhi, districts of Faridabad,
Gurgaon, Gautam Budh Nager and Ghaziabad.

6. Profit and Gain from certain Undertaking in
North-Eastern States(Sec. 80-IE)

100 % deduction is allowed and profit set up during the
financial year 2007-2008 to 2016-2017
7
Nature of the Business
1. Agricultural income [Sec.10(1)]

fully exempt from tax.

2. Dividends and Long term Capital Gain accruing to
Venture Capital Fund or a Venture
Company[sec.10(23)FB]

exempt from the tax.
8
3. Tax holiday for 100% Export oriented
Undertaking (Sec. 10b)

100% of the profit derived from 100% export-
oriented undertaking is deducted in computing its
taxable income.

Deduction is allowed up to the assessment year
2009-2010
9
4.Tax holiday for Industrial Units situation in
Free Trade zone(sec.10A)

100% profit is deducted .

Tax holiday period is available up to the
assessment year 2009-2010
10
5.Amortisation of Telecom Licence
Fees(Sec.35ABB)

Every assessee is entitled to claim deduction
in respect of capital expenditure incurred for
acquiring the licence of operate
telecommunication services.
11
6.Special Reserve created by Financial
Corporation [Sec.36(1)(viii)]
Where any reserve is created and maintained by a
specified entity for specified objects, it is entitled
to deduction
(i) reserve so created
(ii) 20% of the profits derived from such long
term finance
which ever is less.
12
7.Business of civil Construction(Sec.44AD)
Where receipt does not exceed Rs.40 lakh the
taxable income from such business is computed on
deeming basis-8% of the receipts from such
business.
assessee does not require maintain any account
13
8. Business of Plying, Hiring or Leasing Goods
carriage[Sec. 44AE]

Where an assessee is does not possess more
than 10 trucks, taxable profit from carriage
will be computed on deeming basis.
14
9. Income of Retail Business [Sec.44AF]
Where an assessee is engaged in the business of
retail trading of goods or merchandise and the gross
receipts from such business does not exceed RS.60
lakh, his income is computed on deeming basis 8%
of the total turnover.

He is not require to maintain the books of account.
15
10.Profit from industrial Undertakings or
Enterprises engaged in Infrastructure
Development[Sec.80-1A]
100% deduction is allowed
Started on or after1 April 1995 for 10 consecutive
assessments year out of 15 year in which facility starts
operating.
11.Profit from the Generation/distribution of
Power[Sec.80-IA(4)]

100% deduction is allowed
Substantial renovation and modernisation of the existing
network of transmission of distribution line for 10
assessment year undertaking, set up to31 March 2010.
16
12.Profit from the business of processing,
Preservation and Packing of Fruits or Vegetables of
from Integrated business of Handling, Storage and
Transportation of Food Gains[Sec.80-IB(11A)
100% of such profit are allowed to be deducted for
first 5 assessment years and thereafter a Company
assessee is allowed 30% of such profits
A non company assessee 25% of such profit for next
5 assessment year
17
13.Profit from operation Cross-country natural Gas
Distribution Network [Sec.80-IA(4)(Vi)

100% deduction is allowed for 10 consecutive
assessment year out of 15 year for undertakings set
up on April 2007.
18
14.Profit from a Undertaking /Enterprise engaged in
Development of Special Economic Zone [Sec.80IAB]

100% deduction is allowed for 10 consecutive
assessment years out of 15 years. from the year in
which SEZ has been notified.

19
SEC.33AB
TEA/COFFEE/RUBBER DEVELOPMENT ACCOUNT

20
CONDITIONS
CONDITION
ONE
The assessee must be engaged in tea, coffee or
rubber plantation.
CONDITION
TWO
It must make a deposit in special account.
CONDITION
THREE
The deposit should be made within specified
time limit.
CONDITION
FOUR
The accounts of the assessee should be
audited.
21
Engaged in tea, coffee or rubber plantation in India.
Deposit: Following deposits in special accounts-
a) deposit with NABARD any amount in an
maintained by the assessee with the bank in
accordance with and for the purpose specified in a
scheme approved by the tea board or coffee board or
rubber board; or
b) deposit any amount in the deposit account
opened by the assessee in accordance with and for the
purposes specified in, a scheme framed by the tea
board or coffee board or rubber board with the
previous approval of the central government.
22
Time limit: amount shall be deposited within 6
months from the end of previous year or before the
due date of furnishing the return of income,
whichever is earlier.
Audit: should be audited by Chartered Accountant
and report of the auditor in form no.3AC is to be filed
along with the return of the relevant assessment
year.
23
AMOUNTS OF DEDUCTIONS
A sum equal to amount deposited in special account.
40% of the profit of such business computed under
the head profits and gains from business and
profession before making any deduction u/s 33AB
and before adjusting brought forward business loss
u/s 72.
24
IMPORTANT POINTS
Where any deduction is claimed under this section,
no deduction shall be allowed in respect of such
amount in any other previous year.
Where a deduction is claimed and allowed under this
section to an association of person or body of
individual, no deduction shall be allowed to any
member of the association or body in respect of the
same deposit.
Any excess deposit in special account made during a
previous year is not treated as deposit made in the
next year or any other year.

25
The amount standing to the credit of the special
account may be withdrawn only for the purpose
specified in approved scheme. Except in the
circumstances: if the amount released from the
special account in a year is not utilized in the same
previous year for the purpose for which it is released,
the amount not so utilized will be treated as taxable
profits of the year and taxed accordingly.
26
CASE
X LTD. is engaged in the business of growing and manu.
Tea in India. During the pre. Year 08-09, it deposits
Rs.100 lakh in special account and claims the same as
deduction u/s33AB (i.e., 40% of the business profit Rs.
250 lakh). During 09-10 the company withdraws Rs. 35
lakh from the special account and details are as under;
a) Rs. 25 lakh on 31/12/2009 for the purpose of the
scheme framed by the tea board,
b) Rs. 4 Lakh for other purposes on 27/01/2010.
Rs. 6 lakh is not utilized up to 31/03/2010.
Find the amount chargeable for the tax for the year
2010-11.
27
SOLUTION
For the year 2010-11 Rs. 10 lakh is treated as
business income (i.e. Rs 4 lakh, being the amount
misutilised by the company + Rs. 6 lakh, being the
amount which is not utilized by the company during
09-10). Out of Rs. 10 lakh 40% (i.e. Rs. 4 lakh) is
taken as non agricultural income and 60% (i.e. Rs. 6
lakh) is deemed as agricultural income.
28
AMOUNT ALLOWED TO BE WITHDRAWN FROM
SPECIAL ACCOUNT IN FOLLOWING CIRCUMSTANCES:
When the amount can
be withdrawn and it is
treated as taxable
profit
When the amount can
be withdrawn and it is
not treated as taxable
profit

1) Closure of business 1) Death of taxpayer
2) Dissolution of firm 2) Partition of HUF
-----------
3) Liquidation of company
29
The amount withdrawn from the special account
cannot be utilized for the purpose of purchase of any
machinery or plant to be installed in any office
premises or residential accommodation including
guest houses; any office appliance (other than
computers); any other plant or machinery which
either is installed in an undertaking producing low
priority items specified in the eleventh schedule in
the income tax act or is an item of plant and
machinery entitled to 100% write off by way of
depreciation or for any other reason in any one year.
30
The deduction is allowed under this section shall be
withdrawn if the asset acquired out of the money withdrawn
from the special account is sold or otherwise transferred.
Provisions are;

To whom it is
transferred
Transfer within 8 year
from the end of the
previous year in which
the asset is acquired.
Transfer
after 8 years
Transfer to the central government,
a state government, a local
authority, a statutory corporation or
a govt. company
Deduction will not be
withdrawn
withdrawn

Transfer in a scheme of succession
of a firm by company (NOTE)
withdrawn

withdrawn

Transfer in any other cases Deduction will be
withdrawn

withdrawn

31
NOTE: TRANSFER IN A SCHEME OF SUCCESSION
OF A FIRM BY COMPANY
The scheme continues to apply to the company in
the manner applicable to the firm;
The successor company takes over all the properties
and the liabilities of the firm;
All the shareholders of the company were partners of
the firm before the succession.
32
CASE 1
Business profit of X Ltd., a tea growing and
manufacturing company, is Rs.70 lakh for the A.Y 09-10.
it deposits Rs.25 lakh in the special account for claiming
deduction u/s 33AB. It wants to claim set off of brought
forward business loss of Rs.12 lakh.
find the tax consequences .
33
SOLUTION
Amount deductible for A.Y 09-10 is;
a) Rs.28 lakh (i.e. 40% of Rs.70 lakh); or
b) Rs.25 lakh (being the deposit in special a/c)
whichever is lower.
so, Rs.25 lakh is deductible
Business income Rs.70 lakh
Less: deduction u/s 33AB Rs.25 lakh
Net income Rs.45 lakh

Non agricultural income (40% of Rs.45 lakh) Rs.18 lakh
Less: brought forward loss Rs.12 lakh
Net income Rs.6 lakh

34
CASE 2
By withdrawing Rs.20 lakh on 20/01/2010 from the
special account X Ltd. Purchased a non depreciable
asset for Rs.18 lakh according to the scheme framed
by the tea board. The remaining amount of Rs.2 lakh
is not utilized up to 31/03/2010.
SOLUTION:
Rs.2 lakh being not utilized upto31/03/2010 will be
business income (40% of which will be taxable as non
agriculture income) for the A.Y 2010-11.
35
CASE 3
The asset which is purchased for Rs.18 lakh is sold for
Rs.31 lakh on 03/12/2012.
SOLUTION:
The new asset is transfer within 8 years so the
taxable income will be;
Business income(40% of non agri. income) Rs.18 lakh
Short term capital gain (31-18) Rs.13 lakh
Taxable income Rs.31 lakh

36
When any amount standing to the credit of the
assessee in the special account is utilized by the
assessee for the purpose of any expenditure in
accordance with the scheme, such exp. shall not be
allowed in computing the income chargeable under
the head Profits and gains of business or
profession.
37
THE PROVISION OF
SECTION 35ABB
TELECOME LICENSE FEES
______________________________________________________________________________
______________________________________________________________________________
Deduction under section 35ABB is available
if following conditions are satisfied
condition one The expenditure is capital in
nature
Condition two It is incurred for acquiring any
right to operate telecommunication
services.
Condition three The expenditure is incurred either
before the commencement of
business or there after at any time
during previous year.
Condition four The payment for which has
actually been made to obtain
licence.
Cont
The payment will allowed as deduction in equal
installment over the period starting from the year in
which such payment has been made and ending in
the year in which the license comes to an end. It may
be noted that the deduction starts from the year in
which actual payment of expenditure is made
irrespective of the pervious year in which the liability
for the expenditure is incurred according to the
method of accounting regularly employed by the
assesses.
Cont
Any profit or loss on sale of telecom license
is taken into consideration while computing
business income. The relevant rules are
given below. In the table given below, WDV
is the written down of value on the first of
the previous year in which telecom license
in transferred
Situations and Tax treatment
Different situations Tax treatment
1. Entire telecom license is transferred
1.1 when sale consideration is less than
WDV
WDV sales consideration is allowed as
deduction under section 35 ABB in the
year of sale.
1.2 when sale consideration is more than
WDV
The excess of the sales consideration over
WDV is taxable as business income in the
year of sale.
2. When a part of telecom license is
transferred
2.1 when sale consideration is less than
WDV
WDV sales consideration will be allowed
as deduction over the unexpired period
2.2 when sale consideration is more than
WDV
Same tax treatment as is given in .12
CASE
X ltd., a company providing telecommunication
service, obtains a telecom license on April 20, 2009 for a
period of 10 years which ends on march 31 ,2019 (license
fee being Rs. 18 lakh). Find out the amount of deduction
under section 35ABB
1. The entire amount is paid on may , 2009
2. The entire amount is paid on April 1, 2010
3. The entire amount is paid in three equal installments on April
30, 2009, April 30, 2010 and April 30, 2011
SITUATION 1.

The payment of Rs. 18 lakh is deductible in
10 installments over a period of 10 years
from the previous years 2009-10 to 2018-
19 (The amount deductible each year being
Rs 1.8 lakh)

SITUATION 2.

The payment is deductible in 9 years
starting from the year of payment, I.e., the
previous year 2010-11 and ending with the
previous year 2018-19 (The amount
deductible each year being Rs 2 lakh)
SITUATION 3.
The entire payment is made in three installments.
Deduction under section 35ABB is available as under-
First installment Second
installment
Third
installment
Total
Date of payment April 30, 2010 April 30, 2010 April 30, 2011

Period during which
deduction is available
10 years
(2010-11 to 2018-
19)
9 years
(2010-11 to 2018-
19)
8 years
(2011-12 to 2018-
19)
Amount of payment

RS. 6 lakh Rs. 6 lakh

Rs. 6 lakh
Amount deductible in
previous year
RS. RS. RS. RS.
2009-10 60,000 - - 60,000
2010-11 60,000 66,667 - 1,26,667
2011-12 to 2018-19 60,000 66,667 75,000 2,01,667
EXPENDITURE ON SPECIFIED
BUSINESS [SEC. 35AD]
Section 35AD has been inserted (with effect from the assessment
year 2010-11) to provide for investment- linked tax incentive.

______________________________________________________________________________
______________________________________________________________________________
The following conditions should be satisfied to avail of the benefit of deduction under section 35AD
Specified business Who should own the
business
Approval (if any) Date of
commencement of
business
Cold chain facility Any person Not required On or after April 1, 2009
Warehousing facility
for storage of
agricultural produce
Any person Not required On or after April 1, 2009
Natural gas or crude or
petroleum oil pipeline
network for
distribution, including
storage
An Indian companies or
an
authority/board/corporat
ion established under ay
central or state Act.
Should be approved by
petroleum and natural
gas regulatory board and
notified by the central
government
1.On or after April 1,
2007, in the case of laying
and operating a cross-
country natural gas
pipeline network for
distribution or storage
2. in other cases, on or
after April 1, 2009.
Hotel of 2 star or
above category
Any person Not required On or after April 1, 2010
Hospital with 100 beds
for patients
Any person Not required On after April 1, 2010
Developing and
building a housing
project
Any person Under scheme for slum
redevelopment
On or after April 1, 2010
More conditions
The specified business should not be set up by
splitting up, or the reconstruction, of a business
already in existence. Moreover, it should not be
set up by the transfer of old plant and machinery.

20% old machinery is permitted if the value of
the transferred assets does not exceed 20% of
the total value of the machinery or plant used in
the business, this condition is deemed to satisfied
Cont
Second hand imported machinery is treated as new
any machinery or plant which was used outside India by
any person shall not be regarded as machinery or plant
previously used for any purpose, if the following
conditions are fulfilled-
Such machinery or plant was not, at any time previous to the
date of the installation by the assesses, used in India
Such machinery or plant is imported into India from any country
outside India.
No deduction on account of depreciation in respect of such
machinery or plant has been allowed or is allowable under the
act in computing the total income of any person for any period
prior to the date of the installation of the machinery or plant by
the assesses.
Cont
Book of account of the assesses should be audited.
100% of capital expenditure incurred wholly and exclusively for the purpose of
specified business carried on by an assesses is deductible in the previous year in
which the expenditure is incurred. However, this is subject to the following
propositions-
Expenditure incurred on the acquisition of any land or goodwill or financial
instrument is not eligible for any deduction under section 35AD
Expenditure incurred prior to the commencement of operation, wholly and
exclusively, for the purpose of any specified business, shall be allowed as
deduction during the previous year in which the assesses commences the
operation of his specified business, if the amount is capitalized in the books
of account of the assesses on the date of commencement of operation.
If operation of the business of laying and operating a cross-country natural
gas distribution network is commenced during April 1, 2007 and march 31,
2009, the capital expenditure incurred before April 1,2009 will be allowed as
additional deduction under section 35AD for the assessment year 2010-11.
Section 80JJAA
This section provide deduction in respect
of employment of New workmen.
52
The following conditions should be satisfied to
avail deduction under section 80JJAA
Condition 1 The taxpayer is an Indian company.
Condition 2 Income of the taxpayer includes any profits and
gains derived from any industrial undertaking
engaged in the manufacture or production of
article or thing.
Condition 3 The industrial undertaking is not formed by
splitting up or reconstruction of an existing
undertaking or amalgamation with another
industrial undertaking.
Condition 4 The assesse furnishes along with the return of
income the report of a chartered accountant in
Form No.10DA
53
The amount of deduction is equal to 30
percent of additional wages paid to the
new "regular workmen employed by the
assessee in the previous year.
The deduction is available for three
assessment years including the assessment
year relevant for the previous year in which
such employment is provided.
54
Meaning of workman
Workman means any person employed in an
industry to do an manual, unskilled, technical,
clerical or supervisory work but does not include
the following,
a) a person who is in air force, Military or Navy, or
who is in Police service; or
b) a person who is employed in managerial or
administrative capacity; or
c) a person who is employed in a supervisory capacity
and draws wages exceeding Rs. 1600 per month.

55
Meaning of regular workman
Regular workman does not include the
following
a) a casual workman; or
b) workman employed for contract labour; or
c) any other workman employed for a period
of less than 300 days during the previous year.
56
Meaning of additional wages
New undertaking Existing undertaking
It means the wages paid to new
regular workmen in excess of
100 workmen employed during
the year.
It means the wages paid to new
regular workmen in excess of
100 workmen employed during
the year
Additional wages shall be nil if he
increase in number of regular
workmen employed during the
year is less than 10per cent of the
existing number of workmen
employed in the undertaking as
on the last day of the preceding
year.
57
The following points should be noted
Deduction under section 80JJAA is available for three
assessment years only. For the first time it is available
in the year in which new regular workmen are
employed and then it is available in the next two
assessment years. Deduction is, however, available only
if the relevant conditions are satisfied.
Deduction is available under section 80JJAA on the
basis of number of workmen and regular workmen.
Hereinafter all employees in an undertaking are
grouped in categories (categories has been done only
for the purpose of discussing the impact of section
80JJAA)
58
Categories
Category Nature of employment
A Employees employed in managerial of administrative
capacity. It also include employees employed in
supervisory capacity and drawing salary exceeding
Rs.1,600 per month
B It include casual workmen and workmen employed
through contract labour(but not coming under category
A)
C Other workmen (not coming under categories A and B) if
employed for less than 300 days during he previous year.
D Other workmen (not coming under categories A and B) if
employed for 300 days or more than 300 days during the
previous year.
59
Regular workmen are those employees
who come under category D. Employees
under categories B,C and D are workmen.
In other words, categories B and C employees
are workmen but they are not regular
workmen.
60
Deduction under section 80JJAA in the case of
new undertaking is available as follows_
1. First find out whether number of workmen
(category B+C+D) employed during the previous
year is more than 100.
2. If yes, then find out wages paid to new regular
workmen in excess of 100 workmen employed
during the year.
3. 30 per cent of the wages determined, is the
amount of deduction under section 80JJAA
61
Deduction under section 80JJAA in the case of
an existing undertaking is available as follows_
1. First find out whether number of workmen (category
B+C+D) employed during the previous year is more than 100.
2. If yes, then find out number of regular workmen(category
D) newly employed during the year and whether it is equal to
or more than 10 per cent of the existing number of workmen
(category B+C+D) employed in the undertaking on the last day
of the preceding year.
3. If yes, then find out wages paid to new regular workmen
in excess of 100 workmen employed during the year.
4. 30 per cent of the wages determined, is the amount of
deduction under section 80JJAA.
62
Case
X Ltd. Is an Indian company. It owns an
industrial undertaking which starts production
on April 1, 2009. On the same day, it appoints
94 casual workmen. On may 1, 2009, it
appoints 10 regular workmen (salary being Rs.
3000 per month). Find out the amount of
deduction under section 80JJAA for the
assessment year 2010-2011.
63
No deduction is admissible under section 80JJAA in
respect of employment of initial 100 workmen
(casual and /or regular coming under category B,C
and D).
30 per cent of wages payable to new regular
workmen in excess of initial 100 workmen would be
the amount of deduction under section 80JJAA.
64
Calculation of deduction

Rs.3,000*11 months*4 regular workmen
=Rs.132000
= 30% of Rs.1,32,000
=Rs.39,600
The amount deductible is Rs.39,600.

94 casual workmen appointed on
April 1, 2009
No deduction under section
80JJAA
6 regular workmen appoint on
May 1, 2009
No deduction under section
80JJAA
4 regular workmen appoint on
May 1, 2009
Deduction would be available
under section 80JJAA
65
Tonnage Tax Scheme (Section 115V)
It is a scheme of presumptive taxation whereby the
notional income arising from the operation of a ship
is determined based on the tonnage of the ship.
The notional income is taxed at the normal
corporate rate applicable for the year.
Tax is payable even if there is a loss in an year.
A company may opt for the scheme and once such
option is exercised, there is a lock-in-period of 10
years. If a company opts out, it is debarred from re-
entry for ten years.
66
The salient features of the scheme
A company owning at least one qualifying ship
may join. A qualifying ship is one with a
minimum tonnage of 15 tons and having a valid
certificate.
The company has to opt for the scheme within 3
months.(any time between October 1, 2004 to
December 31,2004)by making an application in
the prescribed form to the concerned joint
commissioner who may pass an appropriate
order.
67
A new company can make application within
three months of the date of its incorporation
or the date on which it became a qualifying
company.
Certain type of ships like fishing vessels,
pleasure crafts, harbour and river ferries,
etc., are excluded in terms of section 115VD
which gives details of as to what ships will
qualify for the scheme.
68
Section 115VG gives the manner of computation
of the daily tonnage income as follows.
Qualifying ship having net tonnage Amount of daily tonnage income
Up to 1,000 Rs. 46 for each 100 tons
Exceeding 1,000 but not more than
10,000
Rs. 460 plus Rs. 35 for each 100 tons
exceeding 1000 tons.
Exceeding 10,000 but not more than
25,000
Rs. 3,610 plus Rs.28 for each 100 tons
exceeding 10,000 tons.
Exceeding 25,000 Rs. 7,810 plus Rs.19 for each 100 tons
exceeding 25,000 tons.
The daily tonnage income shall be multiplied by the number
of days the ship operated.
The resulting amount would be the annual tonnage income
from the ship
69
TAX PLANNING WITH REFERENCE
TO NEW BUSINESS FORM OF
ORGANISATION
Among other considerations (like
requirement of finance, resources,
personal liability of owner, level of
operation, quantum of profit, specified
requirement of technical expertise), tax
incentives play important role while
selecting a suitable form of organization
for a new business. One can take a
decision while comparing tax liability
under different organization forms.
71
Aggregate amount of tax liability on firm and
partners is generally higher than that of the
case when the same amount of income is
generated through sole proprietorship. One
should, therefore, consider the possibility of
converting firms into sole proprietorships.
The same is evident from the case studies
given below:
72
If there is a partnership firm then
computation of tax is:
Particular Case 1 Case 2
Number of partners 3 4
Profit-sharing ratio Equal Equal
Total capital contribution of partners
(each contributing identical amount)
10,00,000 15,00,000
Profit of the previous year 2010-11 6,00,000 12,00,000
Other income of each partner 60,000 50,000
Life insurance premium paid by each
partner
80,000 50,000
73
Tax on firm
Income of firm 6,00,000 12,00,000
Less: salary
Rs. 10,500 per month 3,78,000
Rs. 14,625 per month 7,02,000
Interest 1,20,000 1,80,000
Net income 1,02,000 3,18,000
Tax on firm @ 30.9% 31,518 98,262
Tax liability of each partner (a) 10,506 24,566
Tax on partners
Salary 1,26,000 1,75,500
Interest 40,000 45,000
Income from other sources 60,000 50,000
Net income ( after section 80C deduction) 1,46,000 2,20,500
Tax on net income (b) Nil 6,232
Total liability of each partners [a+b] 10,506 30,798
74
Tax Liability when the same income is
earned as a SOLE PROPRIETOR
Case 1 Case 2
Total income of the
firm
6,00,000 12,00,000
Number of partners 3 4
Income earned by
Individual
2,00,000 3,00,000
Income from other
sources
60,000 50,000
Net Income (after
section 80C
deduction)
1,80,000 3,00,000
Tax on each
individual
2,060 14,420
Tax Saving when
income is earned as a
sole proprietor
8,446 16,378

To avoid high tax incidence on firms, firms may be converted into
sole proprietorship.
75
Partnership firm
The following basic assumptions have been made
a. There are two partners X and Y with an equal share of
profit.
b. They want to draw the maximum permissible amount
as salary. Both the partners will draw equal salary.
c. Income is from business (not from profession)
d. They are entitled to simple interest at the rate of 12
per cent on the capital contribution of RS.10,00,000.
e. Partners do not have any income.
76
Taxable
income
before
deduction
of salary
and
interest
Interest on
capital to
partners
Salary
payable to
X and Y
Taxable
income of
firm after
salary and
interest
Tax
liability of
the firm
Tax
liability of
the
partners
Total tax
as
percentag
e of
income
(5+6) as %
of (1)
(1)
Rs.
(2)
Rs.
(3)
Rs.
(4)
Rs.
(5)
Rs.
(6)
Rs.
(7)
5,00,000 1,20,000 3,18,000 62,000 19,158 12,154 6.26%
10,00,000 1,20,000 6,18,000 2,62,000 80,958 43,054 12.40%
15,00,000 1,20,000 9,18,000 4,62,000 1,42,758 77,868 14.71%
20,00,000 1,20,000 12,18,000 6,62,000 2,04,558 1,39,668 17.21%
25,00,000 1,20,000 15,18,000 8,62,000 2,66,358 2,05,382 18.87%
30,00,000 1,20,000 18,18,000 10,62,000 3,28,158 2,98,082 20.87%
Tax incidence in Firm and Partners
77
Private limited company
On the same data tax incidence is computed in
the case of private limited company, the
following assumptions have been made:
1. X and Y will be the two shareholder and
directors of the company.
2. they will draw salary, as there is no maximum
limit under the income tax act. They will draw
salary @ 90% of profit up to Rs. 3,00,000 of
profit and 60% of balance it is assumed that
provision of section 40A(2) are not attracted.

78
Taxable
income
before
payment
of salary
to
directors
Salary to
directors
X and Y
Taxable
income
of the
company
Tax
liability
of the
company
Taxable
income
of X
Tax
liability
of X
Total tax
of the
company
X and Y
(7) as% of
(1)
(1)
Rs.
(2)
Rs.
(3)
Rs.
(4)
Rs.
(5)
Rs.
(6)
Rs.
(7)
Rs.
(8)
5,00,000 3,90,000 1,10,000 33,990 1,95,000 3,605 41,200 8.24%
10,00,000 6,90,000 3,10,000 95,790 3,45,000 19,055 1,33,900 13.39%
15,00,000 9,90,000 5,10,000 1,57,590 4,95,000 34,505 2,26,600 15.11%
20,00,000 12,90,000 7,10,000 2,19,190 6,45,000 64,890 3,49,170 17.46%
25,00,000 15,90,000 9,10,000 2,81,190 7,95,000 95,790 4,72,770 18.91%
30,00,000 18,90,000 11,10,000 3,42,990 9,45,000 1,41,625 6,26,240 20.87%
79
firm Private limited company
Partners are increased to five Directors are increased to five
Total salary payable to partner
remains the same (maximum
permissible)
Total salary payable to
directors is increased to 90 per
cent of total income of the
company. (there is no
maximum limit on
remuneration payable to
directors)
80
Tax incidence on Firm and Partners
Taxable
income
before
deduction
of salary
and
interest
Interest
on capital
to
partners
Salary
payable to
5 Partners
Taxable
income of
firm after
salary and
interest
Tax
liability of
the firm
Tax
liability of
the
partners
Total tax
as
percentag
e of
income
(5+6) as %
of (1)
(1) Rs. (2) Rs. (3) Rs. (4) Rs. (5) Rs. (6) Rs. (7) Rs.
5,00,000 1,20,000 3,18,000 62,000 19,158 Nil 3.83%
10,00,000 1,20,000

6,18,000 2,62,000 80,958 Nil 8.10%
15,00,000 1,20,000

9,18,000 4,62,000 1,42,758 24,518 11.1%5
20,00,000 1,20,000

12,18,000 6,62,000 2,04,558 55,414 13%
25,00,000 1,20,000

15,18,000 8,62,000 2,66,358 86,314 14.11%
30,00,000 1,20,000

18,18,000 10,62,000 3,28,158 1,17,214 14.85%
81
Tax incidence on company and five directors
Taxable
income
before
payment
of salary
to
directors
Salary to
five
directors
Taxable
income
of the
company
Taxable
liability
of the
company
Taxable
income
of one
directors
Tax of
one
directors
Total tax
of the
company
and five
directors
(7) as% of
(1)
(1) Rs. (2) Rs. (3) Rs. (4) Rs. (5) Rs. (6) Rs. (7) Rs. (8) Rs.
5,00,000 4,50,000 50,000 15,450 90,000 Nil 15,450 3.09%
10,00,000 9,00,000 1,00,000 30,900 1,80,000 2,060 41,200 4.12%
15,00,000 13,50,000 1,50,000 46,350 2,70,000 11,330 1,03,000 6.87%
20,00,000 18,00,000 2,00,000 61,800 3,60,000 20,600 1,64,800 8.24%
25,00,000 22,50,000 2,50,000 77,250 4,50,000 29,870 2,26,600 9.06%
30,00,000 27,00,000 3,00,000 92,700 5,40,000 43,260 3,09,000 10.3%
82
The aforesaid proposition is examined
in the following case study:
Firm Privet Company
Number of partners : 4 Number of partners : 4
Taxable income before
interest\remuneration: Rs. 14,00,000
Taxable income before
interest\remuneration: Rs. 14,00,000
Interest on capital to partners on
total capital contribution of Rs.
15,00,000 @ 12% : Rs. 1,80,000
Remuneration payable to directors :
Rs.12,00,000 salary to each being Rs.
3,00,000 payable in cash.
Remuneration payable to partners at
the maximum level : Rs. 8,22,000
(salary to each partner being
Rs.2,02,500 payable in cash )
83
Basic pay 1,20,000
Education allowance 2,400
Free residential house at Delhi ( rent paid by employer is Rs. 1,68,000) 168,000
Transport allowance 9,600
Firm income 14,00,000
Less: Interest on capital 1,80,000
book profit 12,20,000
Less : remuneration to partners 8,22,000
Net income of firm 3,98,000
Tax liability of firm (rounded off) 1,22,980
Partner salary 2,05,500
Interest 45,000
Net income 2,50,500
Tax (rounded off) 9,320
Tax liability of firm and four partners 1,60,260
Tax incidence as percentage of income 11.45%
84
Private Limited Company
Income 14,00,000
Less: salary and perquisites to four directors 12,00,000
Net Income 2,00,000
Tax @ 30.9% (rounded off) 61,800
Director
Basic salary 1,20,000
Education allowance (not taxable under section 10 (14) NIL
Valuation of rent free house at Delhi (as per rule 3) 18,000
Gross salary 1,38,000
Less: Standard deduction Nil
Salaries 1,38,000
Net income 1,38,000
Tax on net income Nil
Tax Liability of company and four directors 61,800
Tax incidence as percentage of income 4.41%
85
Firm LLP Company
Tax rates 30.9% for the A.Y.
2011-12
30.9% for the A.Y.
2011-12
30.9% , if income does
not exceed Rs. 1 crore
or 33.2175%, if income
exceed Rs. 1 crore for
A.Y. 2011-12
Applicability of
surcharge
Not applicable for
the A.Y. 2011-12
Not applicable for the
A.Y. 2011-12
Applicable for the A.Y.
2011-12, if net income
exceeds Rs. 1 crore
Minimum alternate
tax
Not applicable Not applicable Applicable if normal tax
liability is lower then
18.54% (19.9305%
book profit exceeds Rs.
1 crore) of book profit
Dividend tax Not applicable

Not applicable

Dividend declared,
distributed or paid is
liable for dividend tax
at the rate of
16.60875%. However,
deemed dividend
under section 2(22)(e)
is an exception.
86
firm LLP Company
Tax treatment in the
hands of
shareholders or
partners
Share of profit in firm
is not taxable in the
hands of partners.
Share of profit in firm
is not taxable in the
hands of partners.
Dividend in the
hands of
shareholders is not
taxable. However,
deemed dividend
under section
2(22)(e) is an
exception
Interest on capital to
partners or
shareholders
Deductible if
permitted by the
partnership deed and
rate of interest does
not exceed 12%
conditions of section
184 should be
satisfied.
Deductible if
permitted by the
partnership deed and
rate of interest does
not exceed 12%
conditions of section
184 should be
satisfied.

Shareholder cannot
be paid interest on
share capital.
Shareholders get
dividend on shares,
dividend payment is
not a deductible
expenditure.
87
Firm LLP Company

Remuneration to
partners or
shareholders
Deductible if
conditions of
sections 40(b) and
184 are satisfied.
Aggregate amount
deductible cannot,
however, exceed
90% of first Rs. 3
lakh of book profit
and 60% of the
balance.
Deductible if
conditions of
sections 40(b) and
184 are satisfied.
Aggregate amount
deductible cannot,
however, exceed
90% of first Rs. 3
lakh of book profit
and 60% of the
balance.

Shareholders can
join the company as
employees.
Remuneration can
be paid. There is no
maximum ceiling .
However, section
40A(2) is applicable.
Applicability of
sections 78 and 79 in
case there is a
change in
constitution of the
firm or change in the
list of shareholders
of a company
Section 78 is
applicable
Section 78 is
applicable
Section 79 is
applicable, if the
company is a
company in which
the public are not
substantially
interested
88
firm LLP company
Loan to partners/
shareholders
Not taxable as
income
Not taxable as
income
Treated as deemed
dividend in the hands
of shareholders
under section
2(22)(e), if a few
conditions are
satisfied and the
company is a
company in which
the public are not
substantially
interested.
Applicability of
presumptive tax
schemes under
section 44AD, 44AE
and 44AF up to the
A.Y. 2010-11
Applicable Applicable Applicable
89
Firm LLP Company
Applicability of
presumptive tax
scheme under
section 44AD from
the A.Y. 2010-11
Applicable Not applicable Not applicable
Whether expenditure
for family planning
for the benefit of
employees is
deductible under
section 36(1)(iX)
Cannot be claimed as
deduction under
section 36(1)(ix).
However, deduction
can be claimed under
section 32 and 37
Cannot be claimed as
deduction under
section 36(1)(ix).
However, deduction
can be claimed under
section 32 and 37
Can be claimed as
deduction under
section 36(1)(ix).
Whether weighted
deduction under
section 35(2AB) is
available
Not applicable Not applicable Applicable
90

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