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Presentation on topic :- shut down or
continue decision.
Presented by :-
Sangeeta Saini
M.com
(final)
Tax planning may be defined as an arrangement
of one’s financial affairs in such a way that
without violating in any way the legal provisions
of an Act, full advantage is taken of all
exemptions, deductions , rebates and reliefs
permitted under the act , so that the burden of
the taxation on an assessee , as far as possible , is
the least.
SHUT DOWN OR CONTINUE DECISION
Loss co- exist with profit in a business . A business may suffer loss due to one or more of the
following reasons:
1. Fall in demand :- the demand of product may fall due to availability of new products in
the market , change in fashion, or increase in the number of producers /competitors.
2. Financial problems :- A firm may not have sufficient finance of its own nor further
credit is available from bank or financial institutions due to government restrictions.
3. Change in technology:- Where the growth of technology is rapid and if it is not
possible to keep pace with it the net result may be a loss of profit.
4. High rate of taxes :-high rate of taxes – import duty , excise , sales tax , octroi etc. ;
increase the price of the product . Due to this demand of the product may fall and
business may suffer losses.
5. Mismanagement
When a business suffer continuously , whatever the reason of loss may be , the management
has to decide whether the business should be shut down or continue . While taking this
decision , the impact of income tax provisions should not be overlooked.
A. Treatment of losses and unabsorbed depreciation
Business loss :- If
the business or
profession has been
discontinued loss can
be carried forward
and set off against
profits and gains of
business and
profession.
Unabsorbed depreciation :- If the
business or profession has been
discontinued , unabsorbed
depreciation :
1) Can be set off against income
from business or profession or
income under any other head;
2) Can be carried forward and set
off for indefinite period ,
whether business is carried on
or discontinued.
1.Where a part of business (unit, department, or activity) is
discontinued or the business is continued with the reduced
level of activity it is not a discontinuation of business.
2. Where the business of the assessee
has been shifted from one premises
to another or from one market to
another or from one city to another.
3. Where one or the other
department of the
business had been closed
down.
4. Where the business of an industrial undertaking carried on in india is discontinued
in the previous year by reason of extensive damage to , or destruction of any building
, plant , machinery or furniture owned by the assessee and used for the purpose of
such business is re- established , re constructed or revived by the assessee within
three years from the end of previous year in which the business was discontinued ,
the losses of such a business shall be carried forward or set off against the profits
and gains of business or any other business carried on by him.
1. Where succession takes place by inheritance , the loss incurred by the father in
the course of carrying on his business can be carried forward and set off by his
son , if he succeeds to the business of his father on account of his death.
2. Where an assessee transfers his business to his spouse and / or minor child
and the income from such business is to be included in his total income u/s 64
(1) ,the assessee is entitled to set off of his loss carried forward from the
previous year against the income of the wife and minor child included in his
income.
The loss can be set off by the same
person who has suffered the loss. In this
connection the following points are worth
noting:-
3. Where two or more companies amalgamate and form a new company , the assessee
(amalgamating companies and amalgamated companies )and the business are not the same
and losses sustained by amalgamating companies cannot be carried forward and set off by the
amalgamated company. Section 72 A provides exceptions to this general rule .
Section
72 A
Conditions for set off :
(1) The amalgamating company fulfills the following
conditions:
(A)It has been engaged in the business , in which the
accumulated loss occurred or depreciation remains
unabsorbed , for three or more years.
(B)It has held continuously as on the date of
amalgamation at least ¾ of the book value of fixed
assets held by it two years prior to the date of
amalgamation.
(2)The amalgamated comp[any fulfills the following
conditions :
(A)The amalgamated company holds at least ¾ of book
value of fixed assets, of the amalgamating company
acquired as a result of amalgamation , for five years
from the effective date of amalgamation .
(B)The amalgamated company continues the business of
the amalgamating company for at least five years from
the date of amalgamation.
4. Where there has been a demerger of an undertaking , the
accumulated loss and the unabsorbed depreciation directly
relatable to the undertaking transferred by the demerged
company to the resulting company shall be allowed to be
carried forward and set off in the hands of resulting company.
If the accumulated loss or unabsorbed depreciation is not
directly relatable to the undertaking , the same will be
apportioned between the demerged company and the resulting
company in the same proportion in which the value of the
assets have been transferred.
5. Where the business is
carried on by a H.U.F. is
transferred to the members
of the family on partition
there is a change in the
persons carrying on the
business. Hence , the losses
suffered by the family in its
business cannot be set off
by the members after
partition of the family.
6. Where a partner
leaves a firm
(retirement or death)
his share of loss cannot
be carried forward and
set off by the
reconstituted firm.
Exceptions
Where the change in the said voting
power takes place in the previous year due
to the death of the shareholder or on
account of transfer of shares by way of gift
to any relative of the shareholders making
such gift.
Any change in the shareholding of the
Indian company which is the subsidiary of
the foreign company , arising as result of
amalgamation or demerger of a foreign
company subject to the condition that
51% of the shareholders of the
amalgamating or demerged foreign
company continue to remain the
shareholders of the amalgamated or
resulting foreign company.
7. A closely held company shall not be allowed to carry forward and set off its losses against
the income of previous year unless on the last day of the previous year the shares of the
company carrying not less than 51% of the voting power were beneficially held by the persons
who beneficially held shares of the company carrying not less than 51% of the voting power
on the last day of the year in which loss was incurred.
Speculation loss
Speculation loss can be set off against
speculation income either in same year or in
subsequent 4 years.
The loss from an illegal speculation business
neither can be set off against income from
any lawful speculation business nor it can be
carried forward for being set off in the
subsequent year against income even from
an illegal speculation business because the
law assumes that any illegal business dies
B. Withdrawal of certain deductions:- the benefits of deductions under section 33AB (
tea development account/ coffee development account / rubber development account )
and 115VT (reserve for shipping business )may be withdrawn and liable to tax for the
year in which business is discontinued.
C. Deemed income :- if the business is discontinued and asset used for scientific research
and family planning are sold , the selling price to the extend of the deduction claimed
shall be deemed as profits of the previous year in which such assets are sold.
D. Sale of depreciable assets :- the assessee has claimed depreciation are sold in the
event of discontinuance of business the difference between the net consideration and
W.D.V. shall be treated as short term capital gain / loss. If there is a gain , it will be liable
to tax . In case of loss it can be set off only against the capital gains , if any.
E. Sale of other assets :-when other assets except mentioned in (3) and (4) ] are sold
,there may be long term or short term capital gain/ loss , as the case may be. Such gain is
liable to tax. In case of loss it can be set off only against the capital gains , if any.
If a person is running more than one business the loss making
business should not be discontinued but operated at a low key for
some time to claim the following losses and expenses against the
income of profit making business:
1.Retrenchment
compensation to staff. If
the business is closed and
retrenchment
compensation is paid , the
expenditure would be
disallowed as not incurred
for “carrying on business”.
2. Interest on borrowed
funds and bad debts in
relation to discontinued
business.
3. In case of closely held
company it may be taken
care that there may not be
change in the shareholding
exceeding 49 % of the
shareholding. If there is a
change in shareholding
exceeding 49% and
transferor/s and
transferee/s are relatives ,
they may transfer some
percentage of shares as gift
rather than sale so that
condition for set off losses
are complied with.
4. If the assessee is a
company , it may
amalgamate / demerger
with other company after
satisfying the conditions
laid down in section 72 A.
Illustration
X Ltd. A domestic company has two businesses A and B
. For last two years business A has been running at a
loss wiping out the entire profits of business B. At the
end of financial year 2016-17 there are brought
forward losses of Rs. 8,00,000 and unabsorbed
depreciation Rs. 5,00,000.
In a financial year 2017-18 onwards it is expected
that business B will earn a profit of Rs. 5,00,000
annually and if business A is continued at minimum
level there will be an annual loss of Rs. 1,00,000 and
rate of tax will be 30.9 % .
Please suggest to the management of company :
1. Whether business A should be continued or shut
down.
Solution
Business A continued
I II III IV
Rs. Rs. Rs. Rs.
Profits of business B 5,00,000 5,00,000 5,00,000 5,00,000
Less : C.Y. loss of business A 1,00,000 1,00,000 1,00,000 1,00,000
(a) 4,00,000 4,00,000 4,00,000 4,00,000
Less: B/F loss of business A 4,00,000 4,00,000 ------------- -----------
Less unabsorbed
depreciation
------------ ------------- 4,00,000 1,00,000
Profits of business B ------------- -------------- -------------- 3,00,000
Tax @ 30.9 % (b) -------------- -------------- --------------- 92,700
Cash in hand after meeting
C.Y. loss and tax (a-b)
4,00,000 4,00,000 4,00,000 3,07,300
years
I II III IV
Rs. Rs. Rs. Rs.
Profits of business B 5,00,000 5,00,000 5,00,000 5,00,000
Less: B/F loss of business A 5,00,000 3,00,000 ------------- -----------
Less unabsorbed depreciation ------------ 2,00,000 3,00,000 -----------
Profits of business B ------------- -------------- 2,00,000 5,00,000
Tax @ 30.9 % -------------- -------------- 61,800 1,54,500
Cash in hand 5,00,000 5,00,000 4,38,200 3,45,500
years
Business A discontinued
If business A is continued there is loss every year. Hence , business A should be
discontinued in the previous year 2017-18.
Thank you
Any
questions

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shut down or continue decision

  • 1. Presentation on topic :- shut down or continue decision. Presented by :- Sangeeta Saini M.com (final)
  • 2. Tax planning may be defined as an arrangement of one’s financial affairs in such a way that without violating in any way the legal provisions of an Act, full advantage is taken of all exemptions, deductions , rebates and reliefs permitted under the act , so that the burden of the taxation on an assessee , as far as possible , is the least.
  • 3. SHUT DOWN OR CONTINUE DECISION Loss co- exist with profit in a business . A business may suffer loss due to one or more of the following reasons: 1. Fall in demand :- the demand of product may fall due to availability of new products in the market , change in fashion, or increase in the number of producers /competitors. 2. Financial problems :- A firm may not have sufficient finance of its own nor further credit is available from bank or financial institutions due to government restrictions. 3. Change in technology:- Where the growth of technology is rapid and if it is not possible to keep pace with it the net result may be a loss of profit. 4. High rate of taxes :-high rate of taxes – import duty , excise , sales tax , octroi etc. ; increase the price of the product . Due to this demand of the product may fall and business may suffer losses. 5. Mismanagement
  • 4. When a business suffer continuously , whatever the reason of loss may be , the management has to decide whether the business should be shut down or continue . While taking this decision , the impact of income tax provisions should not be overlooked. A. Treatment of losses and unabsorbed depreciation Business loss :- If the business or profession has been discontinued loss can be carried forward and set off against profits and gains of business and profession. Unabsorbed depreciation :- If the business or profession has been discontinued , unabsorbed depreciation : 1) Can be set off against income from business or profession or income under any other head; 2) Can be carried forward and set off for indefinite period , whether business is carried on or discontinued.
  • 5. 1.Where a part of business (unit, department, or activity) is discontinued or the business is continued with the reduced level of activity it is not a discontinuation of business. 2. Where the business of the assessee has been shifted from one premises to another or from one market to another or from one city to another. 3. Where one or the other department of the business had been closed down. 4. Where the business of an industrial undertaking carried on in india is discontinued in the previous year by reason of extensive damage to , or destruction of any building , plant , machinery or furniture owned by the assessee and used for the purpose of such business is re- established , re constructed or revived by the assessee within three years from the end of previous year in which the business was discontinued , the losses of such a business shall be carried forward or set off against the profits and gains of business or any other business carried on by him.
  • 6. 1. Where succession takes place by inheritance , the loss incurred by the father in the course of carrying on his business can be carried forward and set off by his son , if he succeeds to the business of his father on account of his death. 2. Where an assessee transfers his business to his spouse and / or minor child and the income from such business is to be included in his total income u/s 64 (1) ,the assessee is entitled to set off of his loss carried forward from the previous year against the income of the wife and minor child included in his income. The loss can be set off by the same person who has suffered the loss. In this connection the following points are worth noting:-
  • 7. 3. Where two or more companies amalgamate and form a new company , the assessee (amalgamating companies and amalgamated companies )and the business are not the same and losses sustained by amalgamating companies cannot be carried forward and set off by the amalgamated company. Section 72 A provides exceptions to this general rule . Section 72 A Conditions for set off : (1) The amalgamating company fulfills the following conditions: (A)It has been engaged in the business , in which the accumulated loss occurred or depreciation remains unabsorbed , for three or more years. (B)It has held continuously as on the date of amalgamation at least ¾ of the book value of fixed assets held by it two years prior to the date of amalgamation. (2)The amalgamated comp[any fulfills the following conditions : (A)The amalgamated company holds at least ¾ of book value of fixed assets, of the amalgamating company acquired as a result of amalgamation , for five years from the effective date of amalgamation . (B)The amalgamated company continues the business of the amalgamating company for at least five years from the date of amalgamation.
  • 8. 4. Where there has been a demerger of an undertaking , the accumulated loss and the unabsorbed depreciation directly relatable to the undertaking transferred by the demerged company to the resulting company shall be allowed to be carried forward and set off in the hands of resulting company. If the accumulated loss or unabsorbed depreciation is not directly relatable to the undertaking , the same will be apportioned between the demerged company and the resulting company in the same proportion in which the value of the assets have been transferred.
  • 9. 5. Where the business is carried on by a H.U.F. is transferred to the members of the family on partition there is a change in the persons carrying on the business. Hence , the losses suffered by the family in its business cannot be set off by the members after partition of the family. 6. Where a partner leaves a firm (retirement or death) his share of loss cannot be carried forward and set off by the reconstituted firm.
  • 10. Exceptions Where the change in the said voting power takes place in the previous year due to the death of the shareholder or on account of transfer of shares by way of gift to any relative of the shareholders making such gift. Any change in the shareholding of the Indian company which is the subsidiary of the foreign company , arising as result of amalgamation or demerger of a foreign company subject to the condition that 51% of the shareholders of the amalgamating or demerged foreign company continue to remain the shareholders of the amalgamated or resulting foreign company. 7. A closely held company shall not be allowed to carry forward and set off its losses against the income of previous year unless on the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by the persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year in which loss was incurred.
  • 11. Speculation loss Speculation loss can be set off against speculation income either in same year or in subsequent 4 years. The loss from an illegal speculation business neither can be set off against income from any lawful speculation business nor it can be carried forward for being set off in the subsequent year against income even from an illegal speculation business because the law assumes that any illegal business dies
  • 12. B. Withdrawal of certain deductions:- the benefits of deductions under section 33AB ( tea development account/ coffee development account / rubber development account ) and 115VT (reserve for shipping business )may be withdrawn and liable to tax for the year in which business is discontinued. C. Deemed income :- if the business is discontinued and asset used for scientific research and family planning are sold , the selling price to the extend of the deduction claimed shall be deemed as profits of the previous year in which such assets are sold. D. Sale of depreciable assets :- the assessee has claimed depreciation are sold in the event of discontinuance of business the difference between the net consideration and W.D.V. shall be treated as short term capital gain / loss. If there is a gain , it will be liable to tax . In case of loss it can be set off only against the capital gains , if any. E. Sale of other assets :-when other assets except mentioned in (3) and (4) ] are sold ,there may be long term or short term capital gain/ loss , as the case may be. Such gain is liable to tax. In case of loss it can be set off only against the capital gains , if any.
  • 13. If a person is running more than one business the loss making business should not be discontinued but operated at a low key for some time to claim the following losses and expenses against the income of profit making business: 1.Retrenchment compensation to staff. If the business is closed and retrenchment compensation is paid , the expenditure would be disallowed as not incurred for “carrying on business”. 2. Interest on borrowed funds and bad debts in relation to discontinued business. 3. In case of closely held company it may be taken care that there may not be change in the shareholding exceeding 49 % of the shareholding. If there is a change in shareholding exceeding 49% and transferor/s and transferee/s are relatives , they may transfer some percentage of shares as gift rather than sale so that condition for set off losses are complied with. 4. If the assessee is a company , it may amalgamate / demerger with other company after satisfying the conditions laid down in section 72 A.
  • 14. Illustration X Ltd. A domestic company has two businesses A and B . For last two years business A has been running at a loss wiping out the entire profits of business B. At the end of financial year 2016-17 there are brought forward losses of Rs. 8,00,000 and unabsorbed depreciation Rs. 5,00,000. In a financial year 2017-18 onwards it is expected that business B will earn a profit of Rs. 5,00,000 annually and if business A is continued at minimum level there will be an annual loss of Rs. 1,00,000 and rate of tax will be 30.9 % . Please suggest to the management of company : 1. Whether business A should be continued or shut down.
  • 15. Solution Business A continued I II III IV Rs. Rs. Rs. Rs. Profits of business B 5,00,000 5,00,000 5,00,000 5,00,000 Less : C.Y. loss of business A 1,00,000 1,00,000 1,00,000 1,00,000 (a) 4,00,000 4,00,000 4,00,000 4,00,000 Less: B/F loss of business A 4,00,000 4,00,000 ------------- ----------- Less unabsorbed depreciation ------------ ------------- 4,00,000 1,00,000 Profits of business B ------------- -------------- -------------- 3,00,000 Tax @ 30.9 % (b) -------------- -------------- --------------- 92,700 Cash in hand after meeting C.Y. loss and tax (a-b) 4,00,000 4,00,000 4,00,000 3,07,300 years
  • 16. I II III IV Rs. Rs. Rs. Rs. Profits of business B 5,00,000 5,00,000 5,00,000 5,00,000 Less: B/F loss of business A 5,00,000 3,00,000 ------------- ----------- Less unabsorbed depreciation ------------ 2,00,000 3,00,000 ----------- Profits of business B ------------- -------------- 2,00,000 5,00,000 Tax @ 30.9 % -------------- -------------- 61,800 1,54,500 Cash in hand 5,00,000 5,00,000 4,38,200 3,45,500 years Business A discontinued If business A is continued there is loss every year. Hence , business A should be discontinued in the previous year 2017-18.