A

Project on
TAX PLANNING WITH REFRENCE TO LOCATION, NATURE &
FORM OF ORGANISATION

Presented to the Faculty of the

School of Management & Entrepreneurship
AURO University
Surat

In Partial Fulfilment
Of the Requirements for the Degree of
Master of Business Administration

Submitted by
KAYZAD MADAN
PRACHI DALAL

Submitted to
PROF. C.A. DHARNA RATHOD
January 2015

TAX PLANNING

CONCEPT OF TAX PLANNING

Tax Planning is an exercise undertaken to minimize tax liability through the best use of all
available allowances, deductions, exclusions, exemptions, etc., to reduce income and/or
capital gains.
Tax planning can be defined as an arrangement of ones financial and business affairs by
taking legitimately in full benefit of all deductions, exemptions, allowances and rebates so
that tax liability reduces to minimum. In other words, all arrangements by which the tax is
saved by ways and means which comply with the legal obligations and requirements and are
not colourable devices or tactics to meet the letters of law but not the spirit behind these,
would constitute tax planning.
Tax Planning: It means arranging the financial activities in such a way that maximum tax
benefits are enjoyed by making use of all beneficial provisions in the tax laws which entitle
the assesse to get certain rebates and reliefs. This is permitted and not frowned upon by law.
Thus, tax planning would imply compliance with the taxation provisions in such a manner
that full advantage is taken of all tax exemptions, deductions, concessions, rebates and reliefs
permissible under the Income Tax Act so that the incidence of tax is the least. Tax planning
can neither be equated to tax evasion nor to tax avoidance with reference to a company, it is
the scientific planning of the companys operations in such a way so as to attract minimum
liability to tax or postponement or for that matter deferment of the tax liability for the
subsequent period by availing various incentives, concessions, allowances, rebates and
reliefs provided for in the tax laws. They are meant to be availed of and they have certain
clear objectives to achieve. Tax planning may, therefore, be regarded as a method of
intelligent application of expert knowledge of planning corporate affairs with a view to
securing consciously provided tax benefits on the basis of the national priorities in
consonance with the interests of the State and the public.

OBJECTIVES OF TAX PLANNING:

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Tax planning, in fact, is an honest and rightful approach to the attainment of maximum
benefits of the taxation laws within their framework. Therefore, the objectives of tax planning
cannot be regarded as offending any concept of the taxation laws and subjected to
reprehension of reducing the inflow of revenue to the Governments coffers, so long as the
tax planning measures are in conformity with the statute laws and the judicial expositions
thereof. The basic objectives of tax planning are:
(a) Reduction of tax liability
(b) Minimisation of litigation
(c) Productive investment
(d) Healthy growth of economy
(e) Economic stability
(a) Reduction of tax liability: In this context, a tax payer can derive the maximum savings
by arranging his affairs in accordance with the requirements of law, as contained in the fiscal
statutes. In many a cases, a taxpayer may suffer heavy taxation not on account of the dosage
of tax administered by the Act, but, because of his lack of awareness of the legal
requirements. Since every taxpayer wishes to retain a maximum part of his earnings, rather
than parting with it and facing the resource crunch, it would be to his benefit to plan his tax
affairs properly and avail the deductions and exemption admissible under the Act (s). He can
succeed in doing so by keeping an awareness of the implications of the various business/other
transactions as well as updating of his knowledge about the various concessions for which he
is eligible.
(b) Minimisation of litigation: A general visualisation of the tax administration scenario
depicts a tug-of-war the tax payers trying their maximum to pay the least tax and the tax
administrator attempting to extract the maximum. This also results in, sometimes, protracted
litigations. It is in this context that a sound tax planning pays dividends. Where a proper tax
planning is adopted by the tax payer in conformity with the provisions of the taxation laws,
the incidence of litigation is minimised. This saves him from the hardships and
inconveniences caused by the unnecessary litigations, which at times even stretch up to the
High/Supreme Court levels

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TAX PLANNING

(c) Productive Investment: Channelization, by a tax payer, of his otherwise taxable income
to the various investment schemes too is one of the prime objectives of tax planning as it is
aimed to attain twin-objectives : (i) to harness the resources for socially productive projects,
and, (ii) to relieve the tax payer not only from the initial brunt of taxation, but also to convert
the earnings so made into means of further earnings. Legal awareness of the avenues so
provided by the Government, from time to time, negates the imperative avoidance/evasion
and lend authenticity to the investments made.
(d) Healthy Growth of Economy: The growth of a nations economy is synonymous with
the growth and prosperity of its citizens. In this context, a saving of earnings by legally
sanctioned devices fosters the growth of both, because savings by dubious means lead to
generation of black money, the evils of which are obvious. Conversely, tax-planning
measures are aimed at generating white money having a free flow and generation without
reservations for the overall progress of the nation. Tax planning assumes a great significance
in this context.
(e) Economic Stability: In the context of the case, M.V.Valliapan v. ITO, (1988) 170 ITR
238 (Mad.), by a proper tax planning, a smooth tax flow from the tax payer to the tax
administrator, without recriminations, is ensured. This results in economic stability by way
of: (i) availing of avenues for productive investments by the tax payers and, (ii) harnessing of
resources for national projects aimed at general prosperity of the national economy and
reaping of benefits even by those not liable to pay tax on their incomes. Therefore,
notwithstanding the legal rulings in cases like McDowell and its English parallels, real and
genuine transactions aimed at a valid tax planning cannot be turned down merely on grounds
of reduction of the tax burden.
While planning a scheme relating to tax affairs, what needs to be assured is that tax planning
device does not lose its efficiency due to changes in law. It would be a shortsighted
perspective to think of a planning device that is in conformity with the law as it exists, but
gets nullified by a subsequent change in law specially where the change is of a retrospective
nature. Hence, the tax plan has to be flexible in nature. Flexibility has to be considered as a
practical feature in a tax system. Hence, a planner has to comprehend about the future
scenario too while devising a plan to save tax.

AURO UNIVERSITY

TAX PLANNING

TYPES OF TAX PLANNING

The tax planning exercise ranges from devising a model for specific transaction as well as for
systematic corporate planning. These are:
(a) Short-range and long-range tax planning.
(b) Permissive tax planning.
(c) Purposive tax planning.

(a) Short-range planning refers to year to year planning to achieve some specific or limited
objective. For example, an individual assesse whose income is likely to register unusual
growth in particular year as compared to the preceding year, may plan to subscribe to the
PPF/NSCs within the prescribed limits in order to enjoy substantive tax relief. By investing
in such a way, he is not making permanent commitment but is substantially saving in the tax.
It is one of the examples of short-range planning. Long-range planning on the other hand,
involves entering into activities, which may not pay-off immediately. For example, when an
assesse transfers his equity shares to his minor son he knows that the Income from the shares
will be clubbed with his own income. But clubbing would also cease after minor attains
majority.
(b) Permissive tax planning is tax planning under the express provisions of tax laws. Tax
laws of our country offer many exemptions and incentives.
(c) Purposive tax planning is based on the measures which circumvent the law. The
permissive tax planning has the express sanction of the Statute while the purposive tax
planning does not carry such sanction. For example, under Sections 60 to 65 of the Incometax Act, 1961 the income of the other persons is clubbed in the income of the assesse. If the
assesse is in a position to plan in such a way that these provisions do not get attracted, such a
plan would work in favour of the tax payer because it would increase his disposable
resources. Such a tax plan could be termed as Purposive Tax Planning

AURO UNIVERSITY

TAX PLANNING

AREAS OF TAX PLANNING IN THE CONTEXT OF INCOME TAX ACT, 1961:

Some of the important areas where planning can be attempted in an organised manner are as
under:
(a) Locational aspects;
(b) Nature of business.
(c) Form of organisation/ownership pattern;
(d) Tax planning in respect of corporate restructuring;
(e) Tax planning in respect of financial management;
(f) Tax planning in respect of employees remunerations;
(g) Tax planning in respect of specific managerial decisions;
(h) Tax planning in respect of Non-Residents.

(A) LOCATIONAL ASPECTS

Tax planning is relevant from location point of view. There are certain locations which are
given special tax treatment. Some of these are as under:
Section 10 of Income Tax Act has given a long list of incomes which are totally exempt from
tax and so these incomes are not included in the gross total income of the assesse. In other
words, such incomes are totally Tax-Free.
While calculating Total Income in any previous year of any person, any income coming under
Sec. 10(1) to Sec. 10(23) shall be exempted.
1.

Free Trade Zone (FTZ) [Section 10A] Special Provision in respect of Newly

Established Undertaking in Free Trade Zone.

1. Conditions to be satisfied
2. Amount of Deduction-General Provisions
3. Period and Rate of Deduction
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4. Transfer under a Scheme of Amalgamation or Demerger

1. Conditions to be satisfied
In order to get deduction, an undertaking must satisfy the following conditions:
Condition 1: It must begin manufacture or production in free trade zone:
It has begun or begins to manufacture or produce during the previous year relevant to the
assessment year
(a) Commencing on or after 1-4-1981, in any free trade zone; or
(b) Commencing on or after 1-04-1994, in any software technology park or electronic
hardware technology park or;
(c) Commencing on or after the 1-04-2001 in any special economic zone;
Conditions 2: It should not be formed by splitting / reconstruction of business.
Conditions 3: It should not be formed by transfer of old machinery:
It is not formed by the transfer to a new business of machinery or plant previously used for
any purpose.
1. 20% of second value machinery allowed: Where in the case of an undertaking, any
machinery or plant or any part thereof previously used for any purpose is transferred
to a new business and the total value of the machinery or plant or part so transferred
does not exceed 20% of the total value of the machinery or plant used in the business,
then, the condition specified therein shall be deemed to have been complied with.
2. Imported Machinery allowed: Any machinery or plant which was used outside India
by any person other than the assesse shall not be regarded as machinery or plant
previously used for any purpose, if the following conditions are fulfilled, namely :
i.) Such machinery or plant was not previously used in India
ii.) Such machinery or plant is imported into India from any county outside India ; and
iii.) No deduction on account of depreciation in respect of such machinery or plant has
been allowed or it allowable under the provisions of the Act in computing the total
income of any person for any period prior to the date of the installation of machinery
or plant by the assesse.
(Value of imported machine can exceed 20% of the Total Value of Machine)
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Conditions 4: Sale construction should be remitted to India in convertible foreign

exchange.:
Sale consideration should be remitted to India in convertible foreign exchange, within a
period of six months from the end of the previous year or, within such further period as the
competent authority may allow in this behalf.
Condition 5: Report of Chartered Accountant:
The deduction under [this section] shall not be admissible for any assessment year beginning
on or after the 1st day of April, 2001, unless the assesse furnishes in the prescribed Form 56 ,
along with the return of income, the report of an Chartered Accountant, as defined in the
Explanation below sub-section (2) of section 288, certifying that the deduction has been
correctly claimed in accordance with the provisions of this section.
Condition 6 : Return of income should be submitted in time.

2. Amount of Deduction-General Provisions

If the aforesaid conditions are satisfied, the deduction u/s 10A may be computed as under:

Export Turnover of eligible undertaking

Profits of the business of eligible undertaking = __________________________________
Total Turnover of eligible undertaking

'Export Turnover'':

means the consideration of articles or things or computer software

received in, or brought into India by the assesse in convertible foreign exchange in
accordance with sub-section (3), but does not include
i.)
ii.)
iii.)

Freight,
telecommunication charges or
insurance attributable to the delivery of the articles or things or computer software

iv.)

outside India or
expenses, if any, incurred in foreign exchange in providing the technical services
outside India

3. Period and Rate of Deduction

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TAX PLANNING

Out of the total income of an assesse a deduction of 90% of such profits and gains as are
derived by an undertaking from the export of articles, or things or computer software shall be
allowed.
Rate of deduction for unit set up in Special Economic Zone on or after 1-4-2003 shall be as
follows for first 10 assessment years:
First 5 Years 100 % of profits and gains derived from the export of such articles or
things or computer software for a period of five consecutive assessment years
beginning with the assessment year relevant to the previous year in which the
undertaking begins to manufacture or produce such articles or things or computer
software, as the case may be, and thereafter,
Next 2 Years: 50% of such Profit and Gains is deductible for further 2 assessment
years.
Next 3 Years: for the next three consecutive assessment years, so much of the amount
not exceeding 50% of the profit as is debited to the profit and loss account of the
previous year in respect of which the deduction is to be allowed and credited to a
reserve account (to be called the ''Special Economic Zone Re-investment Allowance
Reserve Account'') to be created and utilised for the purposes of the business of the
assesse.
4. Transfer under a Scheme of Amalgamation or Demerger
In case an undertaking eligible for deduction under this section is transferred, before the
expiry of the specified period, to another Indian company in a scheme of amalgamation or
demerger
(a) No deduction shall be admissible under this section to the amalgamating or the demerged
company for the previous year in which the amalgamation or demerger takes place; and
(b) The provisions of this section shall apply to the amalgamated or the resulting company as
if the amalgamation or demerger had not taken place.

2. Special Economic Zone (SEZ) [Section 10AA] - Special Provisions in

respect of newly established units in special economic zone.
1. Conditions to be satisfied
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2. Amount of Deduction
3. Consequence for mercer and demerger.
1. Conditions to be satisfied
The following conditions should be satisfied to claim deduction u/s 10AA:
Condition 1: Assesse, being an entrepreneur as referred to in clause (j) of section 2 of the
Special Economic Zones Act, 2005. Entrepreneur is a person who has been granted a letter of
approval by the Development Commissioner to set a unit in a Special Economic Zone.
Conditions 2: The Unit in Special Economic Zone who begins to manufacture or produce
articles or things or provide any services during the previous year relevant to any assessment
year commencing on or after the 1st day of April, 2006.
Conditions 3: It is not formed by the splitting up, or reconstruction, of a business already an
existence.
Conditions 4: It not formed by the transfer to a new business, of old plant and machinery.
However, it can be formed by transfer of old plant or machinery to the extent of 20%.
Condition 5: The assesse has income from export of articles or thing or from services from
such unit. In other words, the assesse has exported goods or provided services out of India
from the Special Economic Zone by land, sea, air, or by any other mode, whether physical or
otherwise.
Conditions 6: Books of Accounts of the taxpayer should be audited. The Tax payer should
submit Audit Report in Form No.56F along with the return of income.
2. Amount Of Deduction:
Deduction depends upon quantum of Profit derived from Export of Articles or things or
services (including computer software). It is calculated as under-

Profit of the Business of the undertaking X Export turnover

___________________________________________________
Total Turnover of the business

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Deduction for First 5 Assessment Years 100% of Profits and Gains derived for a
period of five consecutive assessment years beginning with the assessment year
relevant to the previous year in which the Unit begins to manufacture or produce such
articles or things or provide services.
Deduction for 6th Assessment Year to 10th Assessment Years : 50% of such Profits
and Gains for further five assessment years and thereafter;
Deduction for 11th Assessment Year to 15th Assessment Year: Amount not exceeding
50% of the profit as is debited to the profit and loss account of the previous year in
respect of which the deduction is to be allowed and credited to a reserve account (to
be called the Special Economic Zone Re-investment Reserve Account) to be created
and utilized for the purposes of the business of the assesse.
3. Consequences For Merger And Demerger:
Where any undertaking is transferred, before the expiry of the period specified in this section,
to another undertaking, under a scheme of amalgamation or demerger No deduction shall be admissible under this section to the amalgamating or the
demerged Unit for the previous year in which the amalgamation or the demerger
takes place.

3. 100% EXPORT ORIENTED UNDERTAKINS (100% E.O.U.) [Sec 10B]

A deduction of such profits and gains as are derived by a hundred per cent. Export-oriented
undertaking from the export of articles or things or computer software for a period of ten
consecutive assessment years beginning with the assessment year relevant to the previous
year in which the undertaking begins to manufacture or produce articles or things or
computer software, as the case may be, shall be allowed from the total income of the assesse:
1. Conditions to be satisfied
2. Amount of Deduction
3. Period of Deduction
4. Transfer under a Scheme of Amalgamation or Demerger
1. Conditions to be Satisfied
This section applies to any undertaking which fulfils all the following conditions, namely:-

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Conditions 1: It manufactures or produces any articles or things or computer software;

Conditions 2: It is not formed by the splitting up, or the reconstruction, of a business already
in existence.
Conditions 3: No deduction under this section shall be allowed to an assessee who does not
furnish a Return of his Income on or before the due date specified under sub-section (1) of
section 139.
Conditions 4: Should not be formed as a result of the re-establishment, reconstruction or
revival by the assesse of the business of any such undertaking
Conditions 5: it is not formed by the transfer to a new business of machinery or plant
previously used for any purpose.
Conditions 6 This section applies to the undertaking, if the sale proceeds of articles or things
or computer software exported out of India are received in, or brought into India by the
assesse in convertible foreign exchange, within a period of six months from the end of the
previous year or, within such further period as the competent authority may allow in this
behalf.
Conditions 7: Audit Report should be submitted in Form No. 56G.
2. Amount Of Deduction:
If the aforesaid conditions are satisfied, the deduction u/s 10B may be computed as under:
Profit of the Business of the undertaking X Export turnover
_____________________________________________________
Total Turnover of the business
For the assessment year beginning on the 1st day of April, 2003, the deduction under this subsection shall be 90% of the profits and gains derived from the export of such articles or things
or computer software
3. Period Of Deduction:
This deduction shall be allowed for a period of 10 consecutive Assessment Years beginning
with the assessment year relevant to the previous year in which the undertaking begins to
manufacture or produce such articles, or things or computer software.

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No deduction under section 10B shall be allowed to any undertaking from the assessment
year beginning on the 1st day of April, 2010 and subsequent years.
For the removal of doubts, it is hereby declared that the profits and gains derived from on site
development of computer software (including services for development of software) outside
India shall be deemed to be the profits and gains derived from the export of computer
software outside India.
4. Transfer Under A Scheme Of Amalgamation Or Demerger:
In case an undertaking eligible for deduction under this section is transferred, before the
expiry of the specified period, to another Indian company in a scheme of amalgamation or
demerger
(a) No deduction shall be admissible under this section to the amalgamating or the demerged
company for the previous year in which the amalgamation or demerger takes place; and
(b) The provisions of this section shall apply to the amalgamated or the resulting company as
if the amalgamation or demerger had not taken place.

4. Deductions In Respect Of Profits And Gains From Industrial

Undertakings Or Enterprises Engaged In Infrastructure Development.
[Sec. 80-IA]
1. Conditions to be satisfied
2. Amount & Period of Deduction

1. Conditions to be satisfied
This section applies to any undertaking which fulfils all the following conditions, namely:Deduction under section 80-IA is available only to the following businesses carried on by an
undertaking:Conditions 1: An enterprise carrying on the business of (i) developing or (ii) operating and
maintaining any infrastructure facility.

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Conditions 2: Any undertaking providing telecommunication services, including radio

paging, domestic satellite service, network of trunking, broadband network and internet
services on or after the 1-04-1995, but on or before the 31-03- 2005.
Conditions 3: Any undertaking which develops, develops and operates or maintains and
operates an industrial park notified by the Central Government for the period beginning on
the 1st day of April, 1997 and ending on the 31st day of March, 2006:
Conditions 4: An [undertaking] which,
(a) Is set up in any part of India for the generation or generation and distribution of power if it
begins to generate power at any time during the period beginning on the 1st day of April,
1993 and ending on the 31st day of March, 2010;
(b) Starts transmission or distribution by laying a network of new transmission or distribution
lines at any time during the period beginning on the 1st day of April, 1999 and ending on the
31st day of March, 2010.
(c) Undertakes substantial renovation and modernisation of the existing network of
transmission or distribution lines at any time during the period beginning on the 1st day of
April, 2004 and ending on the 31st day of March, 2010.
Conditions 5: An undertaking owned by an Indian company and set up for reconstruction or
revival of a power generating plant, if
(a) Such Indian company is formed before the 30-11-2005 with majority equity participation
by public sector companies for the purposes of enforcing the security interest of the lenders to
the company owning the power generating plant and such Indian company is notified before
the 31-12-2005 by the Central Government for the purposes of this clause;
(b) Such undertaking begins to generate or transmit or distribute power before the 31-032008
Conditions 6: Any undertaking carrying on the business of laying and operating a crosscountry natural gas distribution network, including pipelines and storage facilities being an
integral part of such network, which fulfils the following conditions, namely:
(a) It is owned by a company registered in India or by a consortium of such companies or by
an authority or a board or a corporation established or constituted under any Central or State
Act;
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(b) It has been approved by the Petroleum and Natural Gas Regulatory Board and notified by
the Central Government in the Official Gazette;
(c) One-third of its total pipeline capacity is available for use on common carrier basis by any
person other than the assesse or an associated person;
(d) It has started or starts operating on or after the 1st day of April, 2007; and
(e) Any other condition which may be prescribed.

2. Amount & Period Of Deduction:

Note: Deductions allowed is 100% or 30% of profits from such eligible business. The profits
from such business shall be computed as if such eligible business were the only source of
income of the assesse.
Nature of Industry

Assessee

Period of
commencement of
business

Deductions

Infrastructure facility(ne
w undertaking;
agreement with the
Central Govt.)

Indian Company

On or after 1-4-1995

100% for 10 years out

of 20 years. In case of
Port out of 15 years.

Telecommunication
(New undertaking: new
Plant)

Any undertaking . In
case of domestic
satellite Indian
Company

1-4-95 to 31-3-2005

100% for first 5

years; 30% for next 5
years.

IP- 1-4-97 to 31-32006

Industrial Park or SEZ

Any undertaking

SEZ- on or after 1-42001 to 31-3-2006

New netword 1-499 to 31-3-2006
Power ( New undertaking
: New Plant)

Any undertaking

100% for 10 years out

of 5 years

Substantial renova.
1-4-2004 to 31-32006.

It means AY specified by the assesse at his option to be initial year not falling beyond 15 AY
starting from the AY in which the enterprise begins to generate power; or commences
transmission or distribution of power. However, deduction can be claimed only for 10
consecutive AY falling within a period of 15 AY beginning with the AY in which an assessed
begins business.
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5. Deductions In Respect Of Profits And Gains By An Undertaking Or

Enterprise Engaged In Development Of Special Economic Zone [Sec. 80IAB]
1. Conditions to be satisfied
2. Amount & Period of Deduction
Section 80-IAB provides deduction to the developers of special economic zone form the
assessment year 2006-2007.
1. Conditions To Be Satisfied:
This section applies to any undertaking which fulfils all the following conditions, namely:Conditions 1: The taxpayers is a developer of a Special Economic Zone.
Conditions 2: The Gross Total Income of the taxpayer includes profits and gains derived by
an undertaking from any business of developing a special economic zone.
Conditions 3: Such Special economic zone is notified on or after April 1, 2005.
Conditions 4: The Books of Accounts of the taxpayer are audited.
Conditions 5: Return of Income should be submitted on or before the due date of submission
of Return of Income given by Section 139(1).
2. Amount & Period Of Deduction:
Amount of Deduction:
If the above conditions are satisfied, the taxpayer can claim 100% deduction in respect of the
aforesaid profit.
Period of Deductions:
The deduction may be claimed, at the option of the taxpayer, for any 10 consecutive
assessment years. The Deduction may be claimed, at the option of the taxpayer, for any 10
consecutive assessment years out of 15 years beginning from the year in which the special
economic zone has been notified by the Central Government.

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6. Deduction In Respect Of Profits And Gains From Certain Industrial

Undertakings Other Than Infrastructure Development Undertaking. [Sec.
80-IB]
1. Conditions to be satisfied
2. Amount & Period of Deduction
Where the Gross Total Income of an assesse includes any profits and gains derived from any
business of an Industrial undertaking or a Hotel or operation of a Ship, or developing,
maintaining and operating any infra structural facility or scientific and industrial research and
development assesse shall be allowed a deduction while computing total income.
1. Conditions To Be Satisfied:
This section applies to any undertaking which fulfils all the following conditions, namely:Condition 1: It is not formed by splitting up, or the reconstruction, of a business already in
existence
Conditions 2: It is not formed by the transfer to a new business of machinery or plant
previously used for any purpose
Conditions 3: It manufactures or produces any article or thing, not being any article or thing
specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or
plants, in any part of India:
Conditions 4: Manufacture or production should be started within a stipulated time limit.
Conditions 5: It should employ 10/20 workers.
Conditions 6: Return of Income should be submitted on or before due date of submission of
return of income.
2. Amount Of Deduction:
If the aforesaid conditions are satisfied, the deduction u/s 80 IB may be computed as under
RATES OF DEDUCTION U/S 80-IB
Undertaking

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When Set up

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Rate

Period

TAX PLANNING

Compan
y

Others

I. Industrial Undertaking [ Section 80-IB(2)]

100%

100%

For first 5 years

30%

25%

For next 5 years

100%

100%

For first 5 years

30%

25%

For next 5 years

1.10.94 to 31.3.2004

100%

100%

For first 5 years

1.10.94 to 31.3.2002

30%

25%

For next 5 years

1.10.94 to 31.3.2004

100%

100%

For first 5 years

1.10.94 to 31.3.2002

30%

25%

For next 5 years

A. in small sector co-op.

1.4.91 to 31.3.2002

30%

25%

12 years for co
op. other 10
years

B. any other in priority

sector

1.4.91 to 31.3.1995

30%

25%

----do----

II. Production of Mineral

oilin North Eastern region
From 1.4.97 onwards
or any where in India
[
80-IB(4E)]

100%

100%

First 7 years

III. Refining of mineral

oil in North Eastern region
or any where in India
[80-IB(4E)]

From 1.10.98
onwards

100%

100%

First 7 years

IV. Construction and

development of housing
project of residential units
whose area does not exceed
1,000 sq. feet.

From 1.10.98 ,
Project must be
completed by
31.3.2003

100%

100%

100%

100%

For first 5 years

30%

25%

For next 5 years

(a) Industry set up in

Industrial backward state.

1-4-93 to 31-3-2004

(b) Industry set up in North

Eastern States

1.10.93 to 31.3.2004

(c) Industry set up in

A. category backward distric
t

B. category backward distric

t

(d) Other Industries

V. Profit from an
undertaking engaged in the
integrated business of
handling, storage and
transportation of food
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grains [ 80-IB(11A)]
VI. Setting up of multiplex
theaters.

1.4.2002 to 31.3.2005

50%

50%

For first 5 years

VII. Setting up of
convention center

1.4.2002 to 31.3.2005

50%

50%

For first 5 years

1.4.90 to 31.3.1994
and

50%

Nil

For first 10 years

50%

Nil

For first 10 years

VIII. Hotel :
(a) in hilly area or in rural
areas outside municipal
limits.

1.4.97 to 31.3.2001

(b) at place other than

Clacutta, Chennai, Mumbai
& Delhi

1.4.97 to 31.3.2001

50%

Nil

For first 10 years

(c) Any where in India

1.4.91 to 31.3.1995

30%

Nil

For first 10 years

7. Special Provisions In Respect Of Certain Undertakings Or Enterprises

In Certain Special Category States- How To Find Out [Sec. 80-IC]
1. Conditions to be satisfied
2. Industrial Zones given u/s 80-IC(2).
3. Amount & Period of Deduction
Section 80-IC has been inserted form the assessment year 2004-2005.
1. Conditions To Be Satisfied:
This section applies to any undertaking which fulfils all the following conditions, namely:Condition 1: It is not formed by splitting up, or the reconstruction, of a business already in
existence.
Conditions 2: It is not formed by the transfer to a new business of machinery or plant
previously used for any purpose
Conditions 3: Industrial Undertaking should be set up in certain special category of States.
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Conditions 4: The Industrial Undertaking should manufacture / produce specified goods /

articles.
Conditions 5: Manufacture or production should be started within a stipulated time limit.
Conditions 6: Return of Income should be submitted on or before due date of submission of
return of income.
Conditions 7: The Books of Accounts of taxpayer should be audited and the Audit Report in
Form No-10CCB should be submitted along with the Return of Income.
2. Industrial Zones Given Under Section 80-IC(2):
Following are the Industrial Zones notified by the Board for the relevant State (i) Industrial Area means such areas, which the Board, may, by notification in the Official
Gazette, specify in accordance with the scheme framed and notified by the Central
Government;
(ii) Industrial Estate means such estates, which the Board, may, by notification in the
Official Gazette, specify in accordance with the scheme framed and notified by the Central
Government;
(iii) Industrial Growth Centre means such centres, which the Board, may, by notification in
the Official Gazette, specify in accordance with the scheme framed and notified by the
Central Government;
(iv) Industrial Park means such parks, which the Board, may, by notification in the Official
Gazette, specify in accordance with the scheme framed and notified by the Central
Government;
(v) Integrated Infrastructure Development Centre means such centres, which the Board,
may, by notification in the Official Gazette, specify in accordance with the scheme framed
and notified by the Central Government;
(vi) North-Eastern States means the States of Arunachal Pradesh, Assam, Manipur,
Meghalaya, Mizoram, Nagaland and Tripura;
(vii) Software Technology Park means any park set up in accordance with the Software
Technology Park Scheme notified by the Government of India in the Ministry of Commerce
and Industry;
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(viii) Substantial expansion means increase in the investment in the plant and machinery by
at least fifty per cent of the book value of plant and machinery (before taking depreciation in
any year), as on the first day of the previous year in which the substantial expansion is
undertaken;
(ix) Theme Park means such parks, which the Board, may, by notification in the Official
Gazette, specify in accordance with the scheme framed and notified by the Central
Government.
3. Amount & Period Of Deduction:
If the aforesaid conditions are satisfied, the deduction u/s 80 IC may be computed as under:

Name of States

Nature of article

Period of
commencement of
Business
Amount of Deduction

Sikkim
In
Any other
notified
area
area
Any
article
Article
other than
specified
the article
in
specified
Schedule
in
XIV
Schedule
XIII

HP or Uttaranchal
In
Any other
notified
area
area
Any
article
Article
other than
specified
the article
in
specified
Schedule
in
XIV
Schedule
XIII

North-Eastern States
In
Any other
notified
area
area
Any
article
Article
other than
specified
the article
in
specified
Schedule
in
XIV
Schedule
XIII

23-12-2002 to 31-32012

7-1-2003 to 31-32012

24-12-1997 to 31-32007

100% for 10 years

100% for 5 years ;

25% for next 5 years
( in case of company
take 30%)

100% for 10 years

Section 80-ID of income tax act

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(1) Where the gross total income of an assessee includes any profits and gains derived by an
undertaking from any business referred to in sub-section (2) (such business being hereinafter
referred to as the eligible business), there shall, in accordance with and subject to the
provisions of this section, be allowed, in computing the total income of the assessee, a
deduction of an amount equal to hundred per cent of the profits and gains derived from such
business for five consecutive assessment years beginning from the initial assessment year.
(2) This section applies to any undertaking,
(i) Engaged in the business of hotel located in the specified area, if such hotel is
constructed and has started or starts functioning at any time during the period beginning on
the 1st day of April, 2007 and ending on [the 31st day of March, 2010]; or
(ii) Engaged in the business of building, owning and operating a convention centre,
located in the specified area, if such convention centre is constructed at any time during the
period beginning on the 1st day of April, 2007 and ending on [the 31st day of March, 2010];
(iii) Engaged in the business of hotel located in the specified district having a World
Heritage Site, if such hotel is constructed and has started or starts functioning at any time
during the period beginning on the 1st day of April, 2008 and ending on the[31st day of
March, 2013.]
(3) The deduction under sub-section (1) shall be available only if
(i) The eligible business is not formed by the splitting up, or the reconstruction, of a
business already in existence;
(ii) The eligible business is not formed by the transfer to a new business of a building
previously used as a hotel or a convention centre, as the case may be;
(iii) The eligible business is not formed by the transfer to a new business of machinery or
plant previously used for any purpose.
Explanation: The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA
shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of
clause (ii) of that sub-section;
(iv) The assesse furnishes along with the return of income, the report of an audit in such
form and containing such particulars as may be prescribed, and duly signed and verified by
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an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying
that the deduction has been correctly claimed.
(4) Notwithstanding anything contained in any other provision of this Act, in computing the
total income of the assessee, no deduction shall be allowed under any other section contained
in Chapter VIA or section 10AA, in relation to the profits and gains of the undertaking.
(5) The provisions contained in sub-section (5) and sub-sections (8) to (11) of section 80-IA
shall, so far as may be, apply to the eligible business under this section.
(6) For the purposes of this section,
(a) Convention centre means a building of a prescribed area comprising of convention halls
to be used for the purpose of holding conferences and seminars, being of such size and
number and having such other facilities and amenities, as may be prescribed;
(b) Hotel means a hotel of two-star, three-star or four-star category as classified by the
Central Government;
(c) Initial assessment year
(i) In the case of a hotel, means the assessment year relevant to the previous year in
which the business of the hotel starts functioning;
(ii) In the case of a convention centre, means the assessment year relevant to the previous
year in which the convention centre starts operating on a commercial basis;
(d) Specified area means the National Capital Territory of Delhi and the districts of
Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad.

(C) TAX PLANNING WITH REFERENCE TO NEW BUSINESS FORM

OF ORGANISATION
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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.
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:
If there is a partnership firm then computation of tax is:
Particular

Case 1

Case 2

Number of partners

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

Tax on firm

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Income of firm

6,00,000

12,00,000

Less: salary

Rs. 10,500 per month

3,78,000

Rs. 14,625 per month

Interest

7,02,000

1,20,000

1,80,000

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

Salary

1,26,000

1,75,500

Interest

40,000

45,000

Income from other sources

60,000

50,000

1,46,000

2,20,500

Net income

Tax on partners

Net income ( after section 80C deduction)

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Tax on net income (b)

Nil

6,232

Total liability of each partners [a+b]

10,506

30,798

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

Income earned by Individual

2,00,000

3,00,000

Income from other sources

60,000

50,000

Net Income (after section 80C

1,80,000

3,00,000

Tax on each individual

2,060

14,420

Tax Saving when income is

8,446

16,378

deduction)

earned as a sole proprietor

To avoid high tax incidence on firms, firms may be converted into sole proprietorship.

Partnership firm
The following basic assumptions have been made
a.) There are two partners X and Y with an equal share of profit.
26

AURO UNIVERSITY

TAX PLANNING

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.

The table given below compares tax benefits available to a firm, LLP (Limited Liability
Partnership) and Company:

Firm

LLP

Tax rates

30.9% for the A.Y. 2011-12

30.9% for the A.Y. 2011-12

Applicability of surcharge

Not applicable for the A.Y.

Not applicable for the A.Y.

2011-12

2011-12

Minimum alternate tax

Not applicable

Not applicable

Dividend tax

Not applicable

Not applicable

Firm

LLP

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Tax treatment in the hands of

Share of profit in firm is not

Share of profit in firm is not

shareholders or partners

taxable

taxable

in

the

hands

of

in

the

hands

of

partners.

partners.

Interest on capital to partners

Deductible if permitted by

Deductible if permitted by the

or shareholders

the partnership deed and rate

partnership deed and rate of

of interest does not exceed

interest does not exceed 12%

12% conditions of section 184

conditions of section 184 should

should be satisfied.

be satisfied.

Firm

LLP

Remuneration to partners or

Deductible if conditions of

Deductible

shareholders

sections 40(b) and 184 are

sections 40(b) and 184 are

satisfied. Aggregate amount

satisfied.

deductible cannot, however,

deductible

exceed 90% of first Rs. 3 lakh

exceed 90% of first Rs. 3 lakh of

of book profit and 60% of the

book profit and 60% of the

balance.

balance.

Section 78 is applicable

Section 78 is applicable

Firm

LLP

Not taxable as income

Not taxable as income

Applicability of sections 78 and

if

conditions

Aggregate

amount

cannot,

however,

79 in case there is a change in

constitution of the firm or
change

in

the

list

of

shareholders of a company

Loan to partners/ shareholders

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of

TAX PLANNING

Applicability of presumptive tax

Applicable

Applicable

Firm

LLP

Applicable

Not applicable

schemes under section 44AD,

44AE and 44AF up to the A.Y.
2010-11

Applicability of presumptive tax

scheme under section 44AD
from the A.Y. 2010-11
Whether expenditure for family

Cannot

be

claimed

as

Cannot be claimed as deduction

planning for the benefit of

deduction under section 36(1)

under

employees is deductible under

(ix). However, deduction can

However, deduction

section 36(1)(iX)

be claimed under section 32

claimed under section 32 and 37

section

and 37
Whether weighted deduction
under

section

35(2AB)

Not applicable

Not applicable

is

available

Referencing:
Books:
Dr. Monica Singhania Dr. V. K. Singhania, 2011. Corporate Tax Planning &
Business Tax Procedures. Edition. Taxmann Publications Pvt. Ltd..

Websites:
2015. . [ONLINE] Available at: http://www.icsi.edu/. [Accessed 19 January 2015].
Tax Management - Tax Ready Reckoner, Tax Planning & Saving, HUF Formation,
Management & Tax Planning, Income Tax Act,, Laws & Rules - Direct Tax - Indirect
Tax - Gift Tax - Wealth Tax - Sales Tax. 2015. Tax Management - Tax Ready
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AURO UNIVERSITY

36(1)(ix).
can

be

TAX PLANNING

Reckoner, Tax Planning & Saving, HUF Formation, Management & Tax Planning,
Income Tax Act,, Laws & Rules - Direct Tax - Indirect Tax - Gift Tax - Wealth Tax Sales Tax. [ONLINE] Available at: http://incometaxmanagement.com/. [Accessed 20
January 2015].
Vakilno1.com -

India

Law, Online

Legal

Advice,

Legal

Documents

2015.Vakilno1.com - India Law, Online Legal Advice, Legal Documents . [ONLINE]

Available at: http://www.vakilno1.com/. [Accessed 20 January 2015].
2015. . [ONLINE] Available at: http://www.cainindia.org/. [Accessed 21 January
2015].

Section 44BB: 59[Special provision for computing profits and gains in

connection with the business of exploration, etc., of mineral oils.

(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43

and 43A, in the case of an assessee 60[, being a non-resident,] engaged in the business of
providing services or facilities in connection with, or supplying plant and machinery on hire
used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum
equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be
deemed to be the profits and gains of such business chargeable to tax under the head Profits
and gains of business or profession :

Provided that this sub-section shall not apply in a case where the provisions of section 42 or
section 44D or 61[section 44DA or] section 115A or section 293A apply for the purposes of
computing profits or gains or any other income referred to in those sections.

(2) The amounts referred to in sub-section (1) shall be the following, namely :

(a) The amount paid or payable (whether in or out of India) to the assessee or to any person
on his behalf on account of the provision of services and facilities in connection with, or
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supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction
or production of, mineral oils in India; and

(b) The amount received or deemed to be received in India by or on behalf of the assessee on
account of the provision of services and facilities in connection with, or supply of plant and
machinery on hire used, or to be used, in the prospecting for, or extraction or production of,
mineral oils outside India.

(3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower
profits and gains than the profits and gains specified in that sub-section, if he keeps and
maintains such books of account and other documents as required under sub-section (2) of
section 44AA and gets his accounts audited and furnishes a report of such audit as required
under section 44AB, and thereupon the Assessing Officer shall proceed to make an
assessment of the total income or loss of the assessee under sub-section (3) of section 143 and
determine the sum payable by, or refundable to, the assessee.

Explanation.For the purposes of this section,

(i) plant includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment,
used for the purposes of the said business;

(ii) mineral oil includes petroleum and natural gas.

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