INTRODUCTION TO CORPORATE TAX PLANNING

The Indian law of Income Tax is contained in the Income Tax Act, 1961 and the Income Tax
Rules, 1962 as amended from time to time. This law is applicable to the whole of India and it
came into force on 1st April 1962. Income tax is a central levy. However the proceeds are
shared between both centre and the states. Income tax plays a very important role in the
national economy and it is a very effective tool in achieving socio-economic objectives of the
country. For the purpose of tax planning it is important to understand the basic framework
and the fundamental concepts of Income Tax Act.
BASIC DEFINITIONS
1. Assessee Under Section 2(7):
An assessee is a person who is liable to pay any sum under the Income Tax Act or a
person for whom the proceedings have been initiated under this act. It is not necessary
that the income in respect of which a person is liable to be considered an assessee
should be his own. In other words, a person can also be a deemed assessee on some
other persons income.
2. Deemed assessee Under Section 2(7)(b):
Deemed assessee is a person who has been treated as an assessee only by law. The
deemed assessee is assessed for the income or loss of any other person. For example:
the legal representative of a dead person, the guardian of a minor, the agent of a nonresident trustee of a trust etc are termed as deemed assessee.
3. Person Under Section 2(31):
Definition of a person under Income Tax Act is very comprehensive and includes a
natural as well as an artificial or a judicial person. The incidence of tax rest on a
person and only a person can be an assessee as per law. The term person includes
following:
a)
Individuals
b)
Hindu undivided family
c)
Company
d)
Partnership firm
e)
Association of persons
f)
Body of individuals
g)
Local authority and
h)
Other artificial judicial person.
4. Individual Under Section 2(31)(i):
An individual is a natural person including male, female, major, minor or even a
lunatic. However the income of a minor or a lunatic can only be assessed in the hands
of legal guardian or a manager acting as a deemed assessee.
5. Hindu undivided family Under Section 2(31)(ii):

The term Hindu undivided family is not defined by the Income Tax Act. However a
joint Hindu family consists of the entire people who have descended from a common
ancestor including their wives and unmarried daughters. As per law a single person
does not constitute a family. All those who are governed by the provisions of Hindu
Code are included in the term Hindu even though their religions may be different. It
means Jains, Buddhists, Sikh are also Hindus for the purpose of Income Tax Act.
6. Company Under Section 2(31)(iii):
A company means an Indian company incorporated under the Companies Act, 1956 or
a corporation established under central, state or provincial act or any corporate
registered under the laws of a foreign country.
7. Association of persons Under Section 2(31)(v):
An association of persons is an association in which two or more persons join for a
common purpose with a view to produce income, profits or gains. The association
need not near necessary or the basis of a contract. It may be assume an association of
person from the consent and circumstances of the case.
8. Body of individuals Under Section 2(31)(v):
It means a conglomeration of individuals who carry on some activity which the object
of earning income. However a body of individuals is not the same as the expression
used for association of persons. An association of persons may consists of no
individuals also but a body of individuals can only consists of individuals i.e. human
beings.
TAX PLANNING, TAX EVASION AND TAX AVOIDANCE
In India, the taxation rates are very high. Moreover, the taxation system is very complicated.
Therefore it becomes very important that the tax payers should plan its financial affairs in
such a way that he does not fall into the tax bracket. It means he should make every effort to
minimize his tax liability. This is possible only if he takes due advantage of tax planning
methods.
Tax Planning:
Tax planning simply means keeping the burden of taxes at the lowest possible level in
a legal manner. The term tax planning is neither tax avoidance nor tax evasion. Tax
planning minimizes the incidence of tax in a legal manner by taking the full advantage
of various tax exemptions, deductions, rebates, reliefs and judicial rulings declared
from time to time.
Tax planning is the arrangement of financial affairs in such a way that the tax planner
either reduce the tax liability fully or partially to the maximum possible extent. This
implies that tax planning requires proper understanding of taxation laws also it is an

act of prudence and foresightedness on the part of tax payer. Tax planning ensures not
only the accrual of tax benefits within the boundaries of law. It also ensures the tax
obligations are properly discharge to avoid penal provisions. Hence, the term tax
planning should be distinguished from tax avoidance and tax evasion.
Tax Avoidance:
In simple words, tax avoidance is a device which technically fulfils the requirements
of the law. But the legal intend will be missing. It is an attempt to reduce burden of
taxes by taking advantage of loop holes in tax laws. Tax avoidance is not a
dependable method for the tax payer as it cannot work in the long run. Whenever the
loop holes in the tax laws will become public the legislation action can be initiated
against the persons who are indulging in such devices. Moreover it is highly risky and
may harm the reputation of the corporate assessee once known in the market. Thus it
is not advisable for a tax payer to adopt tax avoidance measures. Tax avoidance is
against the spirit of law where as tax planning follows legislative intentions.
Tax Evasion:
Tax evasion is simply evading or reducing tax liability by fraudulent methods such as
suppression or omission of receipts, inflating the expenses and claiming bogus
deductions or losses in fictitious transactions. It is illegal, immoral and highly risky. If
caught a tax evader has not only to pay monetary plenty bears the risk of prosecution
proceedings initiated against him. For example: minimum plenty is 100% and
maximum plenty may extend up to 300% of the amount tax evaded. Besides this he
may also be prosecuted in case the amount of the tax evasion exceeds Rs. 100000. He
may be prosecuted for a minimum period of 6 months and maximum prosecution may
extend to 7yrs along with fine under section 276 (c)(1). Thus tax evasion is not tax
planning as simply it is a breach of law whereas tax planning is devised within the
legal framework by following legal intentions.
QUESTION:
PLANNING?

DISCUSS

THE

SUBJECT

MATTER

OF CORPORATE

TAX

or

DISCUSS THE VARIOUS METHODS OR TECHNOLOGIES OF TAX PLANNING?

DISCUSS THE NATURE AND SCOPE OF TAX PLANNING?
DISCUSS THE VARIOUS REBATES, TAX HOLIDAYS OR PROVISIONS FOR TAX
PLANNING?
ANSWER:
An assessee may reduce his tax liability remaining within the boundaries of law through
various tax planning techniques. There are a large number of methods or tools of tax planning

which are helpful to an assessee in reducing his tax burden. Some of the major tax planning
methods is as follows:1. Agricultural Income Under Section 10(1):
The income derived from land which is located in India and is used for agricultural
purposes is exempted from tax. Therefore an assessee who wants to avoid his tax
liability fully should engage himself in agricultural operations and occupations.
Where a corporate assessee is wholly engaged in agricultural operations it is neither
liable to pay income tax nor liable to pay Minimum Alternate Tax under section 115
JB. Therefore it can plan zero tax liability through agriculture.
2. Investment Income Under Section 10(15):
The income by way of interest from the following deposits or saving certificates is
wholly exempted from tax:
i.
12-year national saving annuity certificates
ii.
Treasury savings deposits certificates (10 years)
iii.
Post office cash certificates (5 years)
iv. National plan savings certificates (12 years)
v. National plan certificates (10 years)
vi.
Post office national savings certificates (12 years/7 years)
vii.
Post office savings bank accounts
viii.
Post office time deposits rules 1981
ix.
Scheme of fixed deposits by post office rules 1968
x.
Special deposits schemes 1981
xi.
Notified relief bond
3. Investment In A Venture Capital Undertaking Under Section 10 (23FB):
Any income from a venture capital undertaking is fully exempted from tax. Where a
company invest money to raise a venture capital undertaking the income from such
undertaking is exempted from tax.
4. Profits From Newly Established Undertaking In Free Trade Zone Under Section
10 (A):
Where a newly established undertaking is located in free trade zone the profits and
gains of such undertaking from the export of articles or things or computer software is
deducted from total income from 10 consecutive assessment years beginning with
year in which the operations has started. This incentive is available upto assessment
year 2009-10.
5. Profits From Newly Established 100% Export Oriented Units Under Section 10
(B):
90% profits and gains of a 100% export oriented unit from the export of articles or
things or computer software is deducted from total income for 10 consecutive

assessment years beginning with year in which the operations has started. This
incentive is available upto assessment year 2009-10.
6. Profits From An Undertaking Established In Special Economic Zone Under
Section 10 (AA):
Where an undertaking is located in Special Economic Zone 100% profits derived
from the export of its articles or things or computer software is deducted from 5
consecutive assessment years and 50% deduction is allowed for further 2 assessment
years. 50% deduction is further allowed for 3 years provided the profits are debited to
profit and loss account and credited to Special Economic Zone Reinvestment
Allowance Reserve Account. This incentive is operative from the assessment year
2003-04.
From the assessment year 2006-07, 15 years tax holiday is available to an
entrepreneur for the profits from the export of articles manufactured in Special
Economic Zone undertaking. Section 10 (AA) provides 100% deduction for such
profits for the first 5 consecutive years. For the next 5 consecutive years 50%
deduction is allowed and in the last 5 consecutive years 50% deduction is allowed if
the profits are transferred to Special Economic Zone Reinvestment Allowance
Reserve Account by debiting to the profit and loss account provided the reserve is
utilised in the next 3 years for setting up machinery or plant.
7. Profits From A Company Engaged In Infrastructure Facility Under Section 80IA:
Where the company is engaged in the business of providing infrastructure facility,
100% deduction is allowed for 10 consecutive assessment years out of 15 years
beginning from the year in which it has started operations. Therefore, an assessee may
achieve, zero tax planning for 10 assessment years.
8. Profits And Gains From Industrial Parks Under Section 80-IA:
Where the gross total income of a company includes the profit from notified industrial
parks which have started functioning after 31st March 1997, but before 31st March
2009. 100% deduction is allowed for 10 assessment years out of 15 years starting
from the year in which, the industrial park is developed.
9. Profits From Generation Or Distribution Of Power Under Section 80-IA:
Where the gross total income includes the profits from an undertaking which has been
set up on or after 1st April 1993 but before 1st April 2010 for the generation or
distribution of power 100% deduction is allowed for 10 consecutive assessment years
out of 15 years starting from the year in which it has started generation or distribution
of power.
10. Profits From Repairs Etc Of Transmission Lines Under Section 80-IA:

An undertaking which has been set up before 31st March 2010 for renovation, repairs
or modernization of existing network of transmission or distribution is allowed. 100%
deduction for 10 consecutive years out of 15 years starting from the year in which the
process of modernization has started.
11. Profits From A Cross Country Natural Gas Distribution Network Undertaking
Under Section 80-IA:
An Indian undertaking which is carrying on the business of operating or laying a cross
country natural gas distribution network and which has started functioning on or after
1st April 2007 is allowed to claim 100% deduction for 10 consecutive years out of 15
years beginning from the year in which it has started operations.
12. Profits From Mineral Oil Under Section 80-IB:
Where the gross total income of an assessee includes profits from the production of
mineral oils commencing on or after 1st April 1997, 100% deduction is allowed for 7
consecutive years commencing from the year in which it has started commercial
operations.
13. Profits From An Undertaking Engaged In Handling Storage And Transportation
Of Foods Grains Under Section 80-IB:
Where the gross total income of an assessee includes the profits from assessee
includes the profits from the business of processing, preservation and packing of fruits
or vegetables or from the business of handling storage and transportation of food
grains and provided such business has started on or after 1 st April 2001 specified
deduction will be allowed for 10 consecutive years beginning from the year in which
it has started operations. The scheme of deduction is as follows:
100% deduction is allowed for first 5 years.
30% deduction is allowed for next 5 years.
30% deduction is for a corporate assessee.
25% deduction will be allowed for any other assessee.
14. Profits Of Certain Undertaking Established In Special Category States Under
Section 80-IC:
100% deduction is allowed for 10 assessment years in respect of the profits from the
undertakings which have been set up in certain notified special category before 1st
April 2012.
15. Profits From Undertakings Established In North Eastern States 80-IE:
100% deduction is allowed for 10 consecutive assessment years for the profits from
undertaking set up north eastern states on or after 1 st April 2007 but before 1April
2017.
16. Profits From The Business Of Collecting And Processing Bio-Degradable Waste
Under Section 80-JJA:

Where the gross total income includes the profit from the business of collecting and
processing or treating bio-degradable waste for generating power or producing biofertilizers, bio-pesticides or other biological agents or producing biogers or making
pallets for fuel or organic manure, the whole of such profits are tax deductible for 5
consecutive assessment years beginning from the in which such business has
commenced. This incentive is open ended.
17. Profits From The Business Of Hotels In Specified Area Under Section 80-ID:An
undertaking which is engaged in the business of construction and operating new
hotels or convention centres at anytime during the financial year 2007-08 to 2009-10
in Delhi and the districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad
is allowed 100% deduction of its profits from such hotels for first 5 years.
18. Income Of A Cooperative Society Under Section 80 P:
Where the gross total income of a cooperative society includes the profit from
specified activities, 100% profit from such activities are tax deductible. Specific
activities are listed below:
i.
Banking business or providing credit facilities to its members.
ii.
Activities related to cottage industry.
iii.
Marketing of agricultural products.
iv. Purchasing agricultural implements or seeds or livestock intended for
v.
vi.
vii.
viii.

agriculture.
Processing agricultural produce for the members without the aid of power.
Collective disposal of the labour.
Fishing or allied activities.
Supply of milk, oilseeds, fruits, vegetables raised by its members to supply to
government or local authority or to a government company.

Now from the assessment year 2007-08 no deduction is allowed under section 80 P to a
cooperative bank other than a primary agricultural credit society or a rural development.
Q 3 Discuss the tax consideration for setting up a new business ?
Or
How would you plan for taxes while setting up a new business / industrial undertaking
or company ?
Or
Discuss the major tax consideration for location of a new business / location and nature
of new business ?

Ans. While setting up new business the decision of location of new business as well as
nature of new business is very important particularly with reference

to income tax .

following are the major tax considerations in setting up a new business

Location of the business
Following are the tax considerations with reference to new locations
1 New industrial units situated in FTZ under section 10(A)
Where a newly established undertaking is located in free trade zone the profits and gains of
such undertaking from the export of articles or things or computer software is deducted from
total income from 10 consecutive assessment years beginning with year in which the
operations has started. This incentive is available upto assessment year 2009-10.
2 Industrial parks or Special Economic Zones under section 80 I (A)Where an undertaking is located in Special Economic Zone 100% profits derived from the
export of its articles or things or computer software is deducted from 5 consecutive
assessment years and 50% deduction is allowed for further 2 assessment years. 50%
deduction is further allowed for 3 years provided the profits are debited to profit and loss
account and credited to Special Economic Zone Reinvestment Allowance Reserve Account.
This incentive is operative from the assessment year 2003-04.
From the assessment year 2006-07, 15 years tax holiday is available to an entrepreneur for
the profits from the export of articles manufactured in Special Economic Zone undertaking.
Section 10 (AA) provides 100% deduction for such profits for the first 5 consecutive years.
For the next 5 consecutive years 50% deduction is allowed and in the last 5 consecutive years
50% deduction is allowed if the profits are transferred to Special Economic Zone
Reinvestment Allowance Reserve Account by debiting to the profit and loss account provided
the reserve is utilised in the next 3 years for setting up machinery or plant.
3 Industrial undertaking located in Jammu and Kashmir
100 % deduction is allowed in respect of the profits from industrial undertaking which is
located in the state of jammu and Kashmir for the first five years and therefore for the next 5
years @ 30 % for a company assesse / corporate assesse and at 25 % for non-corporate
assesse, this incentive is available upto 31st March 2010.
4 Business in certain special category states under section 80 I (c)
100 % deduction is allowed for the profits from certain undertakings set up by the end of
March 2012 in certain special category states for 10 assessment years.
5 Business of hotels and conventional centres under section 80 I ( D ) An undertaking which is engaged in the business of construction and operating new hotels or
convention centres at anytime during the financial year 2007-08 to 2009-10 in Delhi and the

districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad is allowed 100%
deduction of its profits from such hotels for first 5 years.
6 Undertakings in North Eastern States under section 80 I ( E ) 100% deduction is allowed for 10 consecutive assessment years for the profits from
undertaking set up north eastern states on or after 1st April 2007 but before 1April 2017.
Nature of the business
Following are the points
1 Agriculture income under section 10 ( 1 )
India is primarily an agro-grarian economy. A large chunk of population is dependent on
agriculture for their livelihood .Indian income tax considers agricultural activity as business
activity. Therefore to promote agricultural activity as business activity the laws provide to
incentives and benefits. Agricultural income is fully exempted from taxes.
2 100 % export oriented undertaking under section 10 (B)90% profits and gains of a 100% export oriented unit from the export of articles or things or
computer software is deducted from total income for 10 consecutive assessment years
beginning with year in which the operations has started. This incentive is available upto
assessment year 2009-10.
3 Industrial units in Free Trade Zones under section 10 A
Where a newly established undertaking is located in free trade zone the profits and gains of
such undertaking from the export of articles or things or computer software is deducted from
total income from 10 consecutive assessment years beginning with year in which the
operations has started. This incentive is available upto assessment year 2009-10.
4 Tea Development A/c
Where a business is involved in growing and manufacturing tea in india and has made a
deposit within specified time limit with the prescribed institution the business is allowed the
following deduction
a) Deposit made
or
b) 40 % of the profits from such business whichever is less will be allowed as deduction.
5 Profits from certain minerals under section 35 ( E ) Where a business is engaged in locating and prospecting mineral deposits which are listed in
7th schedule, expenditure incurred in this connection in the year of commercial production
and 4 years prior to this is allowed as deduction for 10 years.
6 Telecom Licence fee
Every business is entitled to claim deduction for the expenditure incurred for acquiring the
licence to operate telecommunication service. The deduction will be allowed in the year in
which the licence fee is actually paid.
7 Special reserve created by financial corporation undr section 36 ( I ) (viii) -

Where any reserve is created and maintained by a business for specified purpose with the
prescribed institution it is entitled for deduction as follows
a) Reserve so created
or
b) 20 % of the profits derived from such long term finance whichever is less.
8 Business of civil construction under section 44 ( A ) (D)
Where the receipts of the business which is primarily engaged in business of civil
construction upto Rs 40,00,000 income will be calculated on deemed basis . in other words 8
% of such income will be the tax. The assesse is not required to maintain any formal A/cs.
9 Business of goods carriage under section 44 ( A ) (E)
Where a business is engaged in the activity of hiring or leasing of goods carriage and where
the business does not possess more than 10 trucks the taxable income will be calculated on
deemed basis. In other words Rs. 3500 per month for each heavy truck or Rs. 3150 for any
other truck will be taxable income. The assesse is not required to maintain any formal A/cs.
10 Income of retail business under section 44 ( A )(F)
Where an business in engaged in retail trading of goods and the gross receipts from such
business does not exceed Rs. 40 lakh, tax will be calculated on deemed basis, i.e. 5 % of total
turnover. The assesse is not required to maintain any formal A/cs.
11 Profits from undertakings engaged in infrastructural development under section 80 (
I )(A)
Where the company is engaged in the business of providing infrastructure facility, 100%
deduction is allowed for 10 consecutive assessment years out of 15 years beginning from the
year in which it has started operations. Therefore, an assessee may achieve, zero tax planning
for 10 assessment years.
12 Profits from generation and distribution of power under section 80 ( I ) (A)
Where the gross total income includes the profits from an undertaking which has been set up
on or after 1st April 1993 but before 1st April 2010 for the generation or distribution of power
100% deduction is allowed for 10 consecutive assessment years out of 15 years starting from
the year in which it has started generation or distribution of power.
13 Profits from business of processing, preservation and packaging of fruits, vegetables
or from the business of handling storage and transportation of food grains under section
80 ( I )(B)
Where the gross total income of an assesse includes the profits from assesse includes the
profits from the business of processing, preservation and packing of fruits or vegetables or

from the business of handling storage and transportation of food grains and provided such
business has started on or after 1 st April 2001 specified deduction will be allowed for 10
consecutive years beginning from the year in which it has started operations. The scheme of
deduction is as follows:
100% deduction is allowed for first 5 years.
30% deduction is allowed for next 5 years.
30% deduction is for a corporate assesse.
25% deduction will be allowed for any other assesse.
14 Profits from cross country natural gas distribution networks under section 80 (I)(A)An Indian undertaking which is carrying on the business of operating or laying a cross
country natural gas distribution network and which has started functioning on or after 1 st
April 2007 is allowed to claim 100% deduction for 10 consecutive years out of 15 years
beginning from the year in which it has started operations.
15 Profits from undertakings engaged in the development of SEZ under section 80
( I ) ( A )( B )
Where an undertaking is located in Special Economic Zone 100% profits derived from
the export of its articles or things or computer software is deducted from 5 consecutive
assessment years and 50% deduction is allowed for further 2 assessment years. 50%
deduction is further allowed for 3 years provided the profits are debited to profit and loss
account and credited to Special Economic Zone Reinvestment Allowance Reserve
Account. This incentive is operative from the assessment year
16 2003-04.
From the assessment year 2006-07, 15 years tax holiday is available to an entrepreneur
for the profits from the export of articles manufactured in Special Economic Zone
undertaking. Section 10 (AA) provides 100% deduction for such profits for the first 5
consecutive years. For the next 5 consecutive years 50% deduction is allowed and in the
last 5 consecutive years 50% deduction is allowed if the profits are transferred to Special
Economic Zone Reinvestment Allowance Reserve Account by debiting to the profit and
loss account provided the reserve is utilised in the next 3 years for setting up machinery
or plant
16 Profits From The Business Of Collecting And Processing Bio-Degradable Waste
Under Section 80-JJA:
Where the gross total income includes the profit from the business of collecting and
processing or treating bio-degradable waste for generating power or producing biofertilizers, bio-pesticides or other biological agents or producing biogers or making
pallets for fuel or organic manure, the whole of such profits are tax deductible for 5

consecutive assessment years beginning from the in which such business has
commenced. This incentive is open ended.

Q4:- Discuss the major tax consideration for employee remuneration

Answer: - While deciding the remuneration and the salary of an employee, the tax planner
must consider the interest of an employee and the interest of an employer, the interest of
employer will be served better if the remuneration of the employee is allowed as a deduction
from his business income and where the remuneration is disallowed by tax laws the burden of
tax will go up for the employer. Therefor while planning the taxes for the employer, one must
be very careful about the disallowance of the remuneration whether wholly or partly.
Similarly an employee would also like to reduce his tax liability on the remuneration received
from the employer. Therefor an employer should always keep in view of interest of employee
while deciding the salary structure. Efforts should be made to pay the remuneration in the
form of allowance and the perquisites which are wholly or partly exempted from the tax so as
to minimize the tax burden on employee. Following are the details for the tax planning for
employee remuneration.
Tax consideration for the employer
1. Remuneration for the scientific research under section 35(1)(1):- any
remuneration prior to 3 years before the commencement of the business is not tax
deductible. Remuneration during 3 years before the commencement the business is
allowed only when it is on salary excluding perquisites, moreover such remuneration
should be certified by the prescribed component authority. Remuneration for in-house
research is deductible provided the research is directly related to business. All the
points must be considered while deciding the remuneration for employees
2. Premium paid under health insurance scheme under section 36(1):- premium paid
for health insurance is tax deductible. However it must be notable the premium paid
must not be in cash, otherwise it will be an disallowed expense
3. Contribution to provident fund under section 36(1) :- employees contribution to
P.F should be in accordance with the provisions applicable to such funds. For e.g.
Employer contribution to the approved gratuity fund should not exceed 8.33% of the
salary to each employee. Therefor any contribution in excess of such contribution
should be disallowed. Thus it is important for the every employer heaving clarity
about the basic provision related to P.F

4. Bonus and commission to employees under section 36(1)(II):- bonus or

commission should be paid on or before the due date fixed for furnishing the return of
income, after that it would be a disallowed expense.
5. Salary payable outside India under section 40(a)(III):- no deduction is allowed for
salaries payable outside India if the tax has not been paid or deducted from the
salaries.
6. Salary payable to N.R.I under section 40(a):- no deduction is allowed for salaries
payable to N.R.I. if the tax has not been paid or deducted from the salaries.
7. Payment of salaries to relatives under section 40(a)(2):- any salary to relative
should be reasonable keeping in view the qualification experience and market rates,
otherwise it would be a disallowed expense.
8. Payment of salaries in excess of rs. 20000 under section 40(a)(3):- any salary
which is more than 20000 should be paid through either account payee cheque or
bank draft, otherwise it would be a disallowed expense.
9. Deduction of tax at source under section 192:-provision of deduction of tax at
source from salaries should be properly compiled with to avoid the imposition of
penalty and also to avoid the prosecution under section 276(b) .
10. expenditure on family planning under section 36(1)(IX):- a corporate assesse can
claim deduction in respect of expenditure incurred to promote family planning among
its employers, however the capital expenditure is deductible in five equal instalments.
11. General deductions under section 37(1):- remuneration paid to employees is
deductible under section 37(1) under general deductions. Therefor all the conditions
and provisions of section 37(1) should be satisfied to avoid any disallowance
All the above set provisions concerning employees remuneration should be taken care of
by the employer to take the full advantage of tax planning.
Tax consideration for employees
1. Bifurcation of salary:- an employer may devise a suitable salary structure splitting it
into perquisites and allowance which are wholly or partly exempted to minimise the
tax burden on employees. Therefore a part of salary can be paid in form of an
allowance which exempted from tax or which is valued at concessional rates. HRA is
such an example.

2. D.A as a part of basic pay:- the tax planner should ensure that dearness allowance or
dearness pay is a part of basic pay under the terms of employment. This will reduce
tax liability on gratuity and commuted pension on the hands of employer.
3. Salaries earned outside India under section 5&6:- where an employee has earned
remuneration outside India, he should avoid receiving that remuneration in India.
Moreover he should plan his residential status in that year either to be non-resident or
not ordinarily resident to avoid the tax liability in India.
4. Claim for exemption under section 10:- where any remuneration is exempted from
tax the employee is advised to claim exemption to avoid or reduce his tax burden.
Similarly remuneration of a diplomatic personnel is exempted under section 10(6)(II).
Therefore in such cases employee should claim the exemption.
5. The deduction from salaries under section 16:- an employee should claim the
permissible deduction under section 16 from salaries to reduce the tax liabilities.
There are large no. of deductions available for employees. For example an employee
may invest in approved savings under section 80 (c) to reduce tax liabilities. Similarly
if he has contributed toward pension funds, he should also claim deduction under
section 80(ccc). In the same way if he had paid medical insurance premium he should
make a claim for deduction under section 80(d). Repayment of loan for higher
education should be claimed under section 80(e).if an employee had incurred medical
expenditure on treatment of handicap relative is deductible as per the provision of
under section 80 (dd). In short the employee should take the advantage of all
deduction for which he is entitled.
6. Medical facilities:- medical allowance is fully taxable but medical facility including
reimbursement of medical expenses may be an example subject to the fulfilment of
certain conditions, moreover interest free of concessional loan of rs. 20000. For the
treatment of specified disease is an exempted perquisite.
7. Retirement benefit:- in order to avoid tax on pension an employee may consider its
commutation and seek exemption for the committed value.

Q 5 Tax planning and financial management?

Or
Discuss the tax consideration for management decisions ?

Ans The important corporate decision are influenced by a number of factor. Usually they will
not be always influenced by tax consideration, however it could be best instead of the
company. If the tax factor is also considered before making such decision.
Following are the major tax consideration for important management decisions
Tax consideration for capital structure Capital structure refers to the values of long term source of finance from which a project can
be financed. The financing can be done either through own funds or loan funds or through
mixture of both. Thus capital structure composes either of debt or equity or a combination of
two capital structure. Decision is required

to measure either at the commencement of

business or at the major expenses of the business. Following are the major point which must
be consider into account.
1) In case of the debt Capital repayment of principal and interest have to be period as per
the loan agreement respective of the profit or losses failure to make such payments
may lead to insolvency and closing of the business. On the other hand no such
contractual are to be made if the funding is done through equity, therefore debt carries
more risk as compared to equity.
2) Financing through equity may lead to decrease in the promoter control over the
company. On the other hand financing through debt will not value promoters control
as the debt holders are not entitled to participate in decision making.
3) Debt servicing will be a problem in case the company is involved in long generation
period, therefore equity should be preferred in those cases.
4) The company should always try to keep their shareholder satisfied particularly it
should ensure that capital structure should not adversely affect EPS, dividend payout
ratio and market price of share.
5) The proportion of debt in comparison of equity should be carefully analysed while
deciding the capital structure. In case the existing ratio is 1:1 than debt should be
preferred. On the other hand if it is more than 3:1 equity should be preferred.
6) Market condition also play an important role in deciding the capital structure. Equity
should be preferred only in case where the share are easily marketable.
From the above mentioned points we can say capital structure decision is
basically a subject matter of financial management.
However in terms of tax planning following points should be taken into mind-

1) The return on equity ( dividend ) is not deductible expense while calculating

business income. This is a charge on profit after taxes. Whereas interest payment
to debt holders is the tax deductible. This means it may increase rate of return on
owners equity.
2) The cost of raising equity is treated as capital expenditure. Therefore it cannot be
deducted in calculating taxable profits. On the other hand the cost of raising debt
capital e.g. - stamp duty, registration fee, legal expenses etc. are deductible in
calculating taxable profits.
3) Equity may be preferred in cases where the assesse is entitled to claim exemption
or deduction such as exemption under section 10 ( A ) , 10 ( B ).
4) As discussed earlier debt should not be preferred. Where the detention period is
quit long. This will increase the company liabilities to pay interest. Unabsorbed
interest will increase business losses which cannot be carried forward for more
than 8 years.
5)

In case the interest on debt is payable outside India or it is payable to a nonresident in India, no deduction is allowed in such cases, provided the tax has been
deducted at source and paid within the prescribed time.

6) Rate of interest, return on investment should also be considered before deciding

debt equity ratio. Where the internal return is less than the rate of return equity
should be preferred in such cases
Lease v/s own decision
1) Cost of purchasing an asset is not deducible expense in calculating business
income because it is a capital expenditure. On the other hand cost of leasing
that means lease rental are deductible in calculating taxable profits as it is
revenue expense.
2) Purchasing an asset bears obsolescence risk if the asset become obsolete
earlier than its working life , it has to be replaced which will increase cash
outflows. Whereas in case of leasing there is no risk of obsolescence , as the
asset can be replaced with new asset on lease
QUES-6 Discuss the major tax considerations or role of tax planning in dividend policy?
OR

How taxes are related with dividend policies?

With effect from 1 april 2003, the reintroduction of taxes on dividends has changed the corporate
scenario. As per section115 every domestic company is liable to pay dividend tax on amount declared,
distributed or paid by way of dividend on or after the said/declared daate. Dividend tax has to be paid
within 14 days from the date of declaration or distribution or payment of any dividend. If the dividend
tax is not paidas per the provisions of sec 115, the company will be treated as an assessee in default &
the recovery proceedings may be started against the company as per Sec 115 Q. For the purpose of
dividend tax the term dividend has the same meaning as defined u/s 2(22). However any loan given
out of profits by a closely held company to a shareholder who has a shareholding of 10% or more will
not be treated as dividend for the purpose of tax.

Apart from this buyback of shares out of profits in accordance with the provisions of sec 77 A of
Indian Companies Act 1956 will not be treated as dividend. Similarly dividend does not include any
distribution of shares resulting from a demerger.

From 1 April 2003, no shareholder is liable to pay tax on dividends which is subject to dividend tax
u/s 115.

From 1 April 2003, the UTI & other mutual funds are also liable to pay income tax on the amount of
any income distributed or paid to its unit holders. Such tax is to be paid within 14 days from thre date
of payment and distribution. The unit holder will not pay tax on dividend income.
1. Position of cash with the company
Before the company decides its dividend policy it should analyse it cash position first of all. The
company has to pay dividend tax within 14 days from the declaration of dividend whether dividend
has been paid of not. Therefore the cash position is very important while declaring the dividends.
2. Deduction of tax at source u/s 194
A company os required to deduct tax at source on dividend income which is not subject to dividend
tax u/s 115. therefore a closely held company should also deduct tax at source on the amount of loan
granted to a substantially interested shareholder out of profits u/s 2(22). If it fails to deductsuch tax it
is liable to pay penalty u/s 271 C.
3. distribution or redemption of bonus shares to equity shareholder u/s 2 (22)(a)
As per Section 2 (22)(a) the capitalisation of accumulated profits by issuing bonus share is not
considered as dividend. Therefore , an Indian company is not liable to pay tax on bonus shares.
However redemption of such shares is considered as dividend. Thus from the view point off tax
planning an Indian company should avoid redemption of such shares to save dividend tax. But
buyback of shares as per the provisions of Section 77A of Companies Act is not termed as dividend.
Therefore companies not required to pay additional tax.
4. Distribution of bonus shares to preference shareholders u/s 2 (22)(b)

As per provisions of sec 2(22)(b), distribution of accumulated profits by issuing bonus shares to
preference shareholders is considered as dividend. Any such capitalisation of profits by an Indian
company on or after 1 April 2003 will be liable to dividend tax.
5. Distribution of debenturs or debenture stock u/s 2(22)(c)
As per sec 2(22)(c), distribution of accumulated profits by the way of debentures or debenture stock
or debenture certificates to shareholders is termed as dividend. Therefore any such issue on or after 1
April 2003will result into :A) Dividend tax for the Indian company
B) Capital gain tax for the shareholders
The shareholders will not pay any tax on such deemed dividend as it is exemptes u/s10(34).
6, Distribution at the time of liquidation u/s 2 (22)(c)
At the time of liquidation & where other corporation owned by Govt.compulsory aquires the
company,if the company distributes its profits immediately before this acquisition it will be treated as
dividend & hence liable for dividend tax. Therefore such company should distribute its accumulated
profits earned prior to the 3 year preceeding rhe year in which such acquisition is taking place. This
will reduce the tax liability.
7. Loans by a closely held company by its shareholder u/s 2(22)(e)
The loans and advances by aclosely held company to a shareholder having 10% or more voting power
are deemed to be dividends. However , company is not liable to pay tax on such deemed dividend u/s
115 Q.
QUES-7 Discuss the major areas of tax planning for the different forms of business
organisation?

The selection and choice of a suitable form of business organisation may attract or may save taxes for
the undertaking , therefore long term planning should be done while selecting a form of business
organisation. The joint stock company may be suitable form of organisation if huge financial
investment is required . therefore a comparative analysis of various forms of organisations from the
view point of tax should be done carefully. Following are the major tax considerations with reference
to forms of organisation:1.Sole Proprietorship
a) In sole trading company the owner cannot charge for his own salary. Therefore any remuneration
payable to him for his labour is disallowed in calculating taxable income. A sole proprieter is not
required to pay any tax if his total income does not exceed the exemption limit i.e. Rs 180000 from
the assessment year 2011-12.
b) a sole proprietor is assessed under slab rate of tax.
c) a proprietor is entitled to certain special tax benefits such as deductions u/s 80C, 80CCC, 80D,
80DD, 80DDB, 80E, 80G, 80GG, 80GGC etc.
2.HINDU UNDIVIDED FAMILY

a) the salaries of members including karta associated with HUF business is deductable in calculating
the business income.
b) The HUF is taxed under slab rate of taxation & it is not required to pay any tax if the income does
not exceed the exemption limit.
c) An HUF is also entitled to certain special benefits like deductions u/s 80C, 80D, 80DD, 80DDB,
80G, 80GGC etc.
3.PARTNERSHIP FIRM
a) The remuneration paid to a partner is taxed as his business income u/s 28 in his personal
assessment.
b) Interest due or paid to a partner is also treated as his business income u/s 28.
From the viewpoint of tax planning the major advantages accrues to joint stock company form of
organisation. However joint stock company form of organisation is suitable onle where the size of
business is very big & requires huge outlay of funds.
Moreover this form requires a large number of legal & statutory requirements to be complied with.
Moreover location & nature of the business of the company also attracts or distracts taxation
exemptions and rebates. Therefore a joint stock company provides the biggest tax shelter only if the
size & the complexity of the business justifies it.

Q 8 Discuss the major tax considerations for merger, amalgamation and acquisition ?
Ans Merger and acquisition can become effective instrument in reducing the tax
incidence if properly planned, e.g a merger between loss making company and a
profit making company may reduce income tax
Following are the major tax considerations with regards to merger and
acquisition.
Amalgamation -amalgamation may be carried out by merging one or more
companies with another company. Therefore a smaller company may merge with
company which called amalgamated company. The another company in which they
merge is called amalgamated company. Amalgamation may also be carried out by
merging two or more companies to form a new company.
Necessary condition of amalgamation under section 2 (I)(B) An amalgamation
can take place if the following 2 condition are satisfied
1 All the asset and liability of the amalgamated company or companies
immediately before the amalgamation should be taken over by the amalgamated
company.

2 Shareholder holding not less than 3/4 th of the share in the amalgamated
company immediately before amalgamation should become shareholder of the
amalgamates company.
Tax planning for amalgamation Where the amalgamated company is an indian
company the following tax benefits can be obtained
1 ) Exemption from capital gain under section 47 (vi),47 (vii) There is no liability
of capital gain either for the company or for the shareholder. If the amalgamated
company is an Indian company as per section 47 (vi) transfer of asset in a scheme of
amalgamation to an Indian amalgamated company is not treated as transfer. Hence
there is no liability of capital gain, similarly as per section 47 (vii) there is no capital
gain liability for the shareholder.
2 ) Unabsorbed capital expenditure of scientific research When a company is
amalgamated before claiming all deduction in respect of company expenditure on
scientific research unabsorbed amount can be deducted by the amalgamated company.
A condition is that it should be an indian company.
3 ) Amortisation of telecom licence fee under section 35ABB Where an
amalgamated company is amalgamated before accumulating the complete capital cost
of operating telecom services, licence fees, the amalgamated company is entitled to
claim deduction in respect of unaccumulated capital costs. The condition is that it is
an amalgamated Indian company.
4 ) Amortisation of preliminary expenses under section 35 ( D ) Certain
preliminary expenses can be deducted in 5 equal annual instalments starting from the
year in which the business has started. If an Indian company is amalgamated with
another Indian company without the expire of 5 year the unrecovered expenditure of
preliminary expenses can be deducted by the amalgamated company.
5 ) Expenditure on prospecting certain minerals under section 35 ( E ) Certain
expenditure incurred by an Indian company for exploring and locating certain
minerals, deposits can be deducted in 10 equal instalments starting from the year in
which the commercial production has started. If the Indian company which is
amalgamated with another Indian company before expire of 10 years the unrecovered
expenditure can be deducted by amalgamated company.
6 ) Unabsorbed capital expenditure on family planning under section 36(2)(ix)-

Capital expenditure incurred by a company to promote family planning among its

employee is deducted in five annual instalments. Where a company is amalgamated
before claiming full deduction in respect of such expenditure the unabsorbed amount
can be deducted by the amalgamated company.
7 ) Amortisation of amalgamation expenditure under section 35 DD Where an
Indian company incurred expenses on or after 1st April 1999 wholly and exclusively
for the purpose of amalgamation it can claim deduction for such expenditure in 5
equal annual instalments starting from the year in which amalgamation take place.
Unabsorbed depreciation or accumulated losses of amalgamating company
The right to setoff and carry forward of losses is available to the same assesse who
bear them. Once the amalgamates results is different identify the benefits of setting of
an carry forward of losses is lost. Therefore the unabsorbed depreciation and
accumulated past losses of the amalgamated company cannot be setoff and carry
forward by the amalgamated company. Therefore from the viewpoint of the tax
planning following alternatives should be carefully examined