The document discusses tax planning considerations for owning or leasing assets, repairing vs replacing assets, decisions to make or buy products, and tax provisions related to shutting down a business. It provides guidance on comparing the present value of cash outflows for owning vs leasing, when it is preferable to lease vs own, and how to treat the sale of former research assets. It also outlines tax treatments and deductions allowed for repairs, and considerations for shut down like set-off of losses and depreciation.
1. Tax Planning in respect of Own or Lease
• If a business house/ company wants to acquire an asset
(Plant, Machinery, land etc.), following two options are
available
– To own/ purchase the asset
– To take the asset on lease
• Asset purchased: Through own funds or borrowed funds
• Effects of owning/ purchasing
– The buyer becomes the legal owner of the asset
– The buyer has to pay the price either in lumpsum or in installments
together with interest
– Asset can be offered as security
– Depreciation on asset can be claimed
– Asset can be purchased using owned capital or borrowed capital
2. • Asset on Lease: Lease is a contract between the owner of the
asset and the user of the asset whereby the owner gives the
right to use the asset to other party for an agreed period of
time in consideration of regular pre-decided lease rentals.
• Effects of Leasing
– Asset on lease does not provide ownership right to lessee
– Asset can not be offered as security to financial institutions
– Needed fresh arrangements for assets when provided back to the
Leasing company (Lessor)
3. Important Tax considerations in Buy or Lease
• Tax implications in case of buying an asset
– The buyer can claim depreciation at prescribed rats as an expense
while calculating business income for Income Tax purposes
– The buyer can also charge expenses incurred on repairs, maintenance
of the asset
– If asset is purchased on loan then interest on loan can also be claimed
as expense while calculating business income
• Tax implications for lessee
– Lessee can claim lease rentals as expense while calculating business
income for Income Tax purposes
4. Decision Making: Own or Lease
• As Cash Inflows in both the options are same therefore, for
making a decision, the present value of total post-tax cash
outflows in both the options should be compared and the
option having lesser present value of cash outflows should be
preferred.
5. (A) Calculation of present value of cash outflows in case of
owning an asset with borrowing
• Step1: Calculate Cash Outflows
Cash outflow = Loan repayment + Interest on Loan
• Step2: Tax Saving on account of depreciation and interest on loan
Tax Saving = (Interest + Depreciation) X Tax rate applicable to buyer
• Step3: Calculate Post-tax Cash outflow
Post tax Cash outflows = Out-flows in Step1 – Tax saving as per Step2
• Step4: Calculating present value of post-tax cash outflow
PV of Post-tax cash outflow = Post tax cash outflows X Present value of
Rs1 at specified rate
6. (B) Calculation of present value of cash outflows in case of Lease
• Step1: Calculate Cash Outflows
Cash outflow = Annual Lease rent + Other charges to be paid
• Step2: Tax Saving on account of lease rent
Tax Saving =Annual lease rent X Tax rate applicable to lessee
• Step3: Calculate Post-tax Cash outflow
Post tax Cash outflows = Out-flows in Step1 – Tax saving as per Step2
• Step4: Calculating present value of post-tax cash outflow
PV of Post-tax cash outflow = Post tax cash outflows X Present value of
Rs1 at specified rate
7. Tax Planning suggestions in respect of
own or lease decisions
• It is preferable to acquire non-depreciable assets, like land, on lease basis
• In case of assets required for short duration, it is better to acquire the
asset on lease because if any asset has been acquired and sold in the same
financial year then no depreciation can be charged on that asset.
• It is better bargain lease rentals in line with changing profit scenerio.
• Owning the asset is beneficial in so many ways as it brings a sense of pride
and goodwill to business; can be offered as security against a loan; incase
of immovable property value may appreciate as per passage of time;
Depreciation, Interest on loan and expenditure on current repairs can also
be claimed in books of accounts.
8. Sale of Assets of Scientific Research
• It is possible that an asset purchased for scientific research may not
remain useful for scientific research at a later stage. Thus business
house stops using such asset for the above mentioned purpose.
There are two alternatives:
– Alternative I: To dispose off/ sell the asset
– Alternative II: To use the asset for business purpose, later on sale the same
• Alternative I: In such a case, the sale price to the extent it is equal
to the amount of deduction allowed under section 35 (of Income
Tax Act, 1961) is treated as the taxable business income u/s 41(3) of
the previous year in which such asset is sold.
– This provision is applicable even if business is not in existence in the year of
sale of such asset
– Capital gain on sale = Sales Consideration – Cost/ indexed cost of acquisition
9. • Alternative II: If asset of scientific research is put to use for any
other purpose of business, then the said asset will be included in
the relevant block of asset.
– Cost at which asset will be included: section 43(1) provides that cost of
acquisition of asset shall be actual cost of the asset to the assessee as
reduced by the amount of any deduction allowed under section 35(2)
– Thus where the whole amount spent on purchase of asset for scientific
research was claimed as deduction in the year of purchase, the cost of
such asset to be included in block of assets shall be nil. In this case no
benefit of depreciation on such asset is available
– Later on when such asset is sold, section 41(3) shall be applicable and
the said sale will be treated in the similar manner as is done in case of
sale of any depreciable asset out of any block of asset ‘block’ u/s 50.
10. • Therefore, in case of sale of any asset out of block, the value of
block will be reduced by the value of sale proceeds. In case such
sale proceeds exceed the Written Down Value (W.D.V.) of the block
then Block will not exist any more and any excess over and above
the value of block will be treated as STCG.
• If there is no block (belonging to same depreciation rate), then in
case of sale of asset (which was earlier transferred from research to
business), such sale proceeds over and above the WDV of the asset
(if any) will be treated as STCG.
11. Make or Buy Decisions
• This topic deals with problems related to decision making of a business
unit (especially manufacturing unit) in relation to buying a needed product
or to manufacture the same product.
• Such type of problems are more common in case of such manufacturing
units where assembling of parts/ components takes place.
• This decision is generally taken on basis of cost and is also influenced by
many other factors:
– Availability of financial resources
– Investment required in fixed assets
– Availability of skilled and unskilled labour
– Availability of suppliers
– Competition among suppliers
– Existence of idle capacity in organization
– Price at which the product is available in the market
12. • Situation 1: Where Idle capacity exists in the existing undertaking:
a) If no extra fixed cost is required
i. If Variable cost > Price; Decision is to buy the asset
ii. If Variable cost <=Price; Decision is to make the product
b) If some extra fixed cost is required
i. If Variable cost + Fixed Cost > Price; Decision is to buy the asset
ii. If Variable cost + Fixed Cost <= Price; Decision is to make the product
• Situation 2: Where Idle capacity does not exists in the existing
undertaking:
– Besides variable cost an obvious expenditure in form of fixed cost will be needed in
this situation. Moreover if organization wishes to stop producing some other product
or arranges funds; In both the ways some opportunity will be lost, therefore
opportunity cost will also play its role in decision making
i. If Variable cost + Fixed Cost + Opp Cost > Price; Decision is to buy the asset
ii. If Variable cost + Fixed Cost + Opp Cost <= Price; Decision is to buy the asset
13. • In case of situation II as new unit (or expansion) will take place
plenty of other tax planning related provisions may come into
picture. For Ex- Depreciation; Interest on loan; Exemption u/s
10 A (FTZs), 10 AA (SEZs for entrepreneurs), 10 B (EOUs),
Deductions u/s 80 IA (undertaking established in
infrastructure, telecom, power, industrial parks etc.) and 80 IB
(Development of SEZs).
14. Repairs, Replace, Renewal or Renovation
• While calculating income under the head Profits and Gains of Business or
profession many expenses are allowed as deduction u/s 30 to 37.
• Section 30-36 are specific sections whereas Section 37 is general section and
provides for allowability of any revenue expenditure incurred on business or
profession provided it is not covered u/s 30 to 36.
• Section 30: Repairs expenses related to business premises
• Section 31: Repairs expenses related to plant, machinery and furniture
15. • Meaning of Repair: Restoration of an asset to its original and
normal condition by incurring certain expenditure without
increasing the efficiency beyond its original efficiency.
• Allowance of repairs to tenant u/s 30 (a) (i)-
– Cost of repairs is allowed as deduction (not necessarily current repairs)
– Lease agreement/ rent agreement must contain provision regarding
repair expenses to be incurred by tenant or agreement provides
statement like ‘Tenant has to keep the building in the good condition’
– Girdhari Das and Sons Vs. CIT (1976); (Allahabad High Court): “ Repairs
of building in ordinary parlance means making good the wear and tear
and may involve replacement of minor nature. However, any
expenditure incurred in reconstruction or remodeling of a building of a
building or on renovation of refurnishing it, shall be outside the
purview of repairs. The term repair may involve cumulative repairs of
several years.
16. • Allowance of repairs to owner u/s 30 (a) (ii)-
– The amount paid for Current Repairs is allowed as expenditure
– Current Repairs : According to Bombay High Court (New Shorrock
Spinning & Manufacturing Company Ltd. Vs CT, 1956) Expenditure on
building, machinery, plant and furniture which is only for the purpose
of preserving or maintaining an already existing asset, which does not
bring a new asset into existence or does not give the assessee a new
or different advantage and they must be repairs which are attended to
as and when the need for them arises.
– In Modi spinning and Weaving Mills Co Ltd. Vs. CIT (1993), Delhi High
Court stated that “………..If there has been wear and tear on an item
"over a number of years ultimately it is replaced, then such
replacement can not be regarded as current repairs.”
– In other words current repairs means only such repairs as are
necessitated by the day to day wear and tear during the relevant
previous year only.
19. Tax Provisions during discontinuance
• Applicable to all businesses
i. Income of assessment year taxable in the same year.
ii. Income of previous year/ previous years is taxable in the year of
business closure
iii. Notice should be given to the Assessment Officer with in 15 day
time period
iv. Any income after complete closure procedure will be treated as
income of the recipient
v. Similar provisions (as above mentioned) in case of profession
closure
vi. Notice of Assessment as well as Furnishing the return related to
income should be given to Assessment Officer under section 142(1),
if needed by the later
20. • Set-off business losses up to eight years from year of loss
• Set-off unabsorbed depreciation from future profits of the business
• Set-off STCL from present or future STCG or LTCG
• Set-off LTCL from present or future LTCG
• Tax on Sale of assets
– In case of Depreciable assets:
• Written Down Value (WDV) in the books become the basis of STCG or
LTCG
– In case of Non-depreciable assets:
• LTCG = Sale Proceeds-Indexed cost of acquisition
• STCG = Sale Proceeds-Cost of acquisition
• Withdrawals of available incentives
Tax Provisions after Shutdown
21. Tax Planning Suggestions
• Profitable business: Never advisable to shut down
• In case of past losses & unabsorbed depreciation; continue till set-off of
the same against the future profits
• In case of loss generating businesses
– Short term business losses- continue the business
– Heavy business losses & rare possibility of profit-shut down the business as
early as possible
• In case of selling the business as Slump sale
– Capital Gain on slump sale = Sale Proceeds – Net Worth*
(* Net Worth means Aggregate value of assets over liabilities)
• Option to sell the assets individually
22. Tax Provisions related to Companies
• Liquidator should inform to Assessing Officer with in 30 days of
appointment
• AO should inform to the liquidator with in 3 months from the date of his
appointment, about the payable tax (if any)
• After ensuring payment of tax rest of the assets can be used for other
payments
• In case of failure, liquidator will be personally liable for the part of default
made by himself
