TAX PLANNING FOR SHUT DOWN OR CONTINUE Introduction
Ups and downs are a part and parcel of business life. In an up situation, a business flourishes, earns profits and brings cheers c heers to businessman. A number of factors play an important role in placing a business in such a situation. Some of these factors are as follows : (1) (!) ($) (&)
igh demand of product product "ost effecti# effecti#eness eness %o#t. %o#t. suppo support rt 'a incenti#es incenti#es a#ailable a#ailable etc.
In a down situation, a business shrins, generates losses and causes tension to owners. Such a situation occurs when any* some* all of the abo#e factors go against the business. i.e. (i) +ow demand* demand* fallin falling g demand demand of product product (ii) alling alling profit margin margin (iii (iii)) -ithd ithdra rawl wl of go#e go#ern rnme ment nt suppo upport rt (i#)o encouraging future prospects etc. Such situations are normally described as industrial sicness. %enerally under such a situation, a business bu siness house faces a problem whether the business should be continued or shut down. Meaning o ! S"ut do#n$ or !di%continuance o &u%ine%% or Inco'e ta( )ur)o%e%
It refers to a complete cessation or closing down o f the business. It in#ol#es :/
o buying or selling o manufacturing Assets to be sold or disposed off 0eturning capital to owners etc.
Po%t %"utdo#n ta( eect%
efore deciding for closing a business, two aspects should be understood clearly :/ (A)#arious ta pro#isions to be complied with after deciding to shut down a business () ta implications of shut down decision *+, Deci%ion re-ating re-ating to Proit.Earni Proit.Earning ng /u%ine%%0 /u%ine%%0
earning business with no past losses and unabsorbed depreciation. depreciation. +1 Profit earning Solution: It i% ne2er ad2i%a&-e to %"ut do#n or di%continue %uc" a &u%ine%%1
31 Profit earning business with past losses and unabsorbed depreciation.
Solution: If possible, such a business should be continued till the past losses and unabsorbed depreciation are not fully set off. *3, Lo%% generating &u%ine%%0 If the occurrence of loss is a te')orar4 )"eno'enon and financial position of the
business allows the &u%ine%% "ou%e to &ear %uc" -o%%e% or %o'e 4ear% then such a business should be continued. 'he business, in this case, can be continued at reduced le#el of acti#ity. +ater on, when the business re%tart% earning )roit5 t"en )a%t &u%ine%% -o%%e% and una&%or&ed de)reciation can &e %et o1
owe#er, if the occurrence% o -o%%e% is epected to be or a -ong )eriod then business should be di%continued at the earliest. *6, Ho# tea7coee7ru&&er &u%ine%% "ou%e can a2oid t"e #it"dra#a- o deduction c-ai'ed u7% 66A/ 8
ollowing ta planning can a#oid withdrawal of deduction claimed u*s $$A:/ Meaning 0 Section $$A Income 'a Act 2eduction is a#ailable for assessees engaged
in the de#elopment of 'ea, "offee and 0ubber. Section $$A was introduced to encourage the growth of commercial crops in India. Important point to be noted here is that, the assessee must be growing and also manufacturing these crops to a#ail the deduction under section $$A of Income 'a Act. La#0
A sum e3ual amount deposited( before 4month) or &67 of 8rofit of such business(before maing $$A deduction) Wit"dra#a- i% )o%%i&-e on-4
(a) closure of business9 (b) death of an assessee9 (c) partition of a .U.. (d) dissolution of a firm9 (e) li3uidation of a company.
-5+
(i)
If assets ac3uired by withdrawing amount from Special Account; are to be sold before the epiry of stipulated period of < years then, if possible, such assets should be sold to any of the following persons :/ (a) %o#ernment ("entral or state) (b) +ocal Authority (c) A corporation established by or under a "entral, State or 8ro#incial Act (d) A go#ernment company as defined in Sec 41= of the "ompanies Act, 1>?4
If this is done, then the incenti#e deduction shall not be withdrawn and hence assessee shall not be liable to pay ta on deemed business profits. (ii)
In case of firm :/ If assets ac3uired u*s $$A are re3uired to be sold before the epiry of < years then such a firm is ad#ised to sell* transfer such assets to a company in connections with succession of firm by company arrangement sub@ect to fulfillment of prescribed conditions gi#en for this. 'hese conditions are : (a) All the properties of the firm relating to the business or profession immediately before the succession become the properties of the company9 (b) All the liabilities of the firm relating to the business or profession immediately before the succession become the liabilities of the company9 (c) All the partners of the firm before succession become all the shareholders of company.
*9, Ho# )etro-eu' or natura- ga% &u%ine%% "ou%e% can a2oid t"e #it"dra#a- o deduction c-ai'ed u7% 66A/ Same as suggested for 'ea*"offee*0ubber business in pt($) *:, A%%e%%e% engaged in %"i))ing &u%ine%% cannot a2oid t"e #it"dra#a- o deduction c-ai'ed u7% 66AC &4 rre%orting to an4 ta( )-anning *;, W"i-e di%continuing a co')an45 the management is ad#ised to see the possibility of
its amalgamation with some other company *<, W"et"er %e--ing &u%ine%% a% !S-u') %a-e$ i% &eneicia- or not8 In case of slump sale, the entire business is sold*transferred for a lump sum price without assigning #alues to indi#idual assets Sec ?6/ of income 'a Act pro#ide the method of computation of capital gain arising from slump sale. "apital gain on slump sale Sale proceeds/et worth Meaning o net#ort" 0. etworth shall be the aggregate #alue of total assets of the undertaing*di#ision as reduced by the #alue of liabilities of such undertaing as appearing in the boos of account. Aggregate 2a-ue o tota- a%%et% 0.
(a) In case of appreciable assets, the -.2.B off the bloc (b) In case of other assets, the boo #alue of such assets.'hus management of discontinued business has two options to sell assets i.e. (i) 'o sell the entire undertaing as slump sale or (ii) 'o sell assets indi#idually or otherwise So, it is ad#ised that ta incidence under the two options should be analysed before hand. If undertaing is being sold after ha#ing continued for more than three years then the entire capital gain will be long term capital gain which is put to taC!67 (concessional rate)
