2. TAX PLANNING WITH REFERENCE TO
The survival of a organization depends up on the
efficiency of its management.
Whatever decisions taken by the management
directly or indirectly affects all activities of an
3. Managerial decisions
• The general considerations which area
applicable in the case of Managerial decisions
• a. Expenses allowed as deduction
• b. Year in which it is allowable
• c. To what extend it is allowed
• d. To what extend it can be carried forward
5. Shut down or continue operations
. Fall in demand b. financial problems c. Change
in technology d. High rate of taxation e.
Mismanagement f. Pressure of commercial
6. Tax provisions
1. Treatment of losses and unabsorbed depreciation
2. if a part of a business is discontinued in the previous
year, it cannot be regarded as discontinuation of
business in the previous year.
3. The loss can be set-off by the same person who has
suffered the loss.
4. Withdrawal of certain deduction
5. Deemed Income
6. Sale of depreciable assets
7. Sale of other assets
7. II.. Retain, Replacement ,Renewal of
Replacement expenditure is capital expenditure—-
.It is not deductible
Repair and replacement of false ceiling in cinema building is revenue
Expenditure in repairs to car damaged during riots is deductible
Renewal Sometimes capital expenditure and sometimes revenue
Capital expenditure—-when capacity is increased due to renewal.
Revenue expenditure –capacity is not increased .
Expenses incurred to get capacity of asset back.
Routine Repair expenses are allowed as deduction.
8. Tax Planning With respect to make or
• You have to consider many costing considerations. You may decide
it on the basis of marginal cost .
• Basically, the decision to make or buy is a costing decision and is
influenced by many factors are as follows
• I. Availability of factors
• II. Investment required in fixed assets
• III. Availability of skilled and unskilled labour
• IV. Availability of suppliers
• V. Existence of idle capacity in organization
• With due considerations to above factors ,marginal costing and
differential costing techniques of cost accounting help a lot in
reaching at any conclusion
9. Tax provision
Buy decision in a surplus capacity condition forced to sell an
asset and attract capital gain tax
If a new industrial undertaking is established to make the
product, the following deductions are to be considered a.
Tax holiday-sec 10AA b.
Deductions U/S I.80 IAC II. 80IBA III. 80ID IV. 80IA V. 80IB VI.
80IC VII. 80IE
If the product is a consumable one, raw material is required to
replace a worn out part at the time of repair, its cost will be
treated as revenue expense and deductible in computing
10. Sale of Assets used for Scientific
Following are the important points related with Sale of Assets
used for Scientific Research
1. Selling the asset without using it for business purposes
There may be Two Incomes
a. Business Income—Cost of asset or Selling Price whichever
is less is deemed business income u/s 41
b. Long-term Capital gain/loss=Selling Price—-Indexed cost
of acquisition or Shot term capital gain or loss
c. Selling the asset after using it for business purposes Then
there will be no deemed business income u/s 41
The entire selling price should be the short-term capital gain
11. Own or Lease
OWNING/PURCHASING THE ASSETS
• BECOMES THE LEGAL OWNER
• CAN BE OFFERED AS SECURITY TO OUTSIDERS
• TO BEAR THE RISK OF OBSOLETENESS
• HAS TO MAKE THE FULL PAYMENT OR IN
• CAN CLAIM DEPRECIATION
• HAS THE OPTION OF SALE OR DISPOSE OF THE
• LEASE DECISIONS
• NO REQUIREMENT OF IMMEDIATE HUGE CASH
• LEASE RENTAL WILL BE PAID PERIODICALLY
• ACCOUNTING STANDARD-19, THE LEASE RENTAL ARE
TREATED AS ADMISSIBLE EXPENSE UNDER PROFIT
AND LOSS ACCOUNT
• HAS TO BE RETURNED TO LESSOR AT THE END OF THE
• FIXED ASSETS ARE FINANCED OUT OF SHORT TERM
13. Tax consideration
TAX EFFECT FOR BUYER IN CASE OF BUYING AN
• CAN CLAIM DEPRECIATION AT PRESCRIBED RATE
• CAN ALSO CHARGE EXPENSES INCURRED ON
REPAIRS, MAINTENANCE ETC. OF THE ASSETS.
• IF ASSET IS FINANCED WITH BORROWED FUND ,
CAN CLAIM INTEREST AS AN EXPENSE
• TAX CONSIDERATION
15. How to take the Decision
• HOW TO TAKE DECISION
• COMPARE THE PRESENT VALUE OF CASH OUTFLOWS IN
BOTH THE OPTIONS.
• SELECT THE OPTION WITH LESSER PRESENT VALUE OF
CASH OUT FLOW.
• PRESENT VALUE OF CASH OUTFLOWS IN CASE OF BUYING
THE ASSET WITH BORROWED FUND
• STEP 1: CALCULATE CASH OUTFLOW
CASH OUTFLOW =LOAN REPAYMENT + INTEREST ON LOAN
• · STEP 2 :TAX SAVING ON ACCOUNT OF DEPRECIATION
AND INTEREST ON LOAN
17. Own or Lease
Following calculations are to be made
Calculation of present value of post -tax cash outflows in case of borrowing
A. Cash out flows =loan repayment+ interest on loan.
B. Since both depreciation and interest on loan are tax deductible while calculating
business income, therefore there will be tax savings in payment of income tax
C. Tax savings= (interest+ depreciation) × P.V.Factor×Tax rate applicable to buyer
D. Post tax cash out flows A-B d.
E. Post Tax Cash flows ×Present value factor
II. Calculation of present value of post -tax cash outflows in case of lease
A. Cash outflows =Annual lease rent +other charges
B. Tax savings=A× Tax rate applicable to Lessee.
C. Post Tax Cash flows=A-B D. Post Tax Cash flows ×Present value factor Should
select the option which shows lesser present value of cash outflows
• A FIRM REQUIRE AN ASSET WHOSE COST PRICE IS RS.
• IT HAS TWO OPTIONS ; EITHER PURCHASING WITH
BORROWED FUND OR LEASING
• IN CASE OF PURCHASE WITH BORROWED FUND:-
LOAN IS TO BE PAID IN FIVE YEARS EQUAL INSTALLMENT
OF 20,000 ALONG WITH INTEREST @ 14% P.A
• IN CASE OF LEASING
ANNUAL LEASE RENT IS PAYABLE FOR 5 YEARS TO TUNE OF
RS, 30,000 EACH YEAR
TAX RATE IS ASSUMED TO BE 30.09% AND RATE OF DEP IS