Shut-Down or Continue

By Shivakumargouda P Patil

Shut-Down or Continue
Loss co-exist with profit in a business. A business may suffer loss due to one or more of the following reasons Fall in Demand Financial problems Change in Technology High rates of taxes Mismanagement

 Fall in Demand:- The demand of the product may fall due to availability of new products in the market, change in fashion or increase in number of producers/competitors Financial problems:- A firm may not have sufficient finance of its own nor further credit is available from banks or financial institutions due to government restrictions.

 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 High rates 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 the business may suffer losses Mismanagement:- Efficient management is an important factor for success of business. If it is lax, the result may be disastrous.

 When a business suffers loss 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

 Treatment of Losses and Unabsorbed Depreciation:When a business as a whole is discontinued or closed down, the brought forward business losses and unabsorbed depreciation shall be delt with as under:
Business loss: If the business or profession has been discontinued loss can be carried forward and set-off against profits and gains of business or profession Unabsorbed Depreciation: If the business or profession has been discontinued, unabsorbed depreciation:

1. Can be set-off against income from business or income under any other head. 2. Can be carried forward and set-off for indefinite period, whether business is carried on or discontinued

 Withdrawal of certain deductions:- The benefit of deductions under section 33AB (Tea development a/c, Rubber development a/c,coffee development a/c) may be withdrawn and liable to tax for the year in which business is discontinued. Deemed Income:- If the business is discontinued and the assets used for scientific research and family planning are sold, the selling price to the extent of deduction claimed shall be deemed as profits of the previous year in which such assets are sold. Sale of depreciable asset:- The assets on which 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 or 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.

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