Tax Planning with Reference to Managerial Decisions_NC.pdf

Corporate Tax Planning
• Unit-IV: Tax Planning with Reference to Managerial Decisions
• Financial Decisions: Capital Structure Decisions; Dividend Policy; Bonus
Shares and Capital Gains; Bond Washing Transactions; Own or Lease of
an Asset, Installment or Hire Purchase, Make or Buy Decisions, Buying
an Asset with Own Fund or Borrowed Fund and Repair, Replace,
Renewal or Renovation; Shutdown or Continue: Tax Planning in respect
of Amalgamation or De-Merger of Companies, Conversion of a Firm into
a Company; Conversion of Sole Proprietorship into Company,
Conversion of Company into Limited Liability Partnership.
Conversion of Company into Limited Liability Partnership.
Prepared by
Mr. Dayananda Huded M.Com NET, KSET
Teaching Assistant,
Rani Channamma University, P. G. Centre, Jamkhandi
E-Mail: dayanandcg65@gmail.com
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Mr. Dayananda Huded

TP with Reference to Capital Structure Decisions
• Cost of Capital and also expenditure incurred in raising of such
capital. Expectation of shareholders by way of dividend, growth etc.
Expansion need of the business i.e. the rate by which profits of the
business shall be again ploughed back in the business.
• If the return on investment > rate of interest , maximum debt funds may
be used, since is shall increase the rate of return on equity . However, cost
of raising debt fund should be kept in mind.
• if rate of return on investment < rate of interest, minimum debt funds
• if rate of return on investment < rate of interest, minimum debt funds
should be used.
• Where assessee enjoys tax holidays under various provisions of Income-
Tax in such case minimum debt fund should be used, since the profit
arising from business is fully exempt from tax which increase the rate of
return of equity capital. But the borrowed funds reduces the profits (
profits less interest) before tax and to the extent exemption is reduce.
• https://incometaxmanagement.com/Pages/Tax-Management-Managerial-
Financial-Decisions/7-Tax-Management-Capital-Structure.html
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Mr. Dayananda Huded

TP with Reference to Dividend Policy
• No Dividend Distribution Tax (Amendment to Sections 115O,
115R, 10(34),10(35).
• The decision to remove the concept of dividend distribution tax
under section 115O ( For companies and 115R (From Mutual
Funds). The amendment applies to the dividend that is received
after 01/04/2020. Now the dividend is taxable in the hands of the
recipients. The dividend is not exempt in the hands of the recipient
u/s 10(34) & 10(35). The initial ceiling was Rs. 10 lakh, Deduction
u/s 10(34) & 10(35). The initial ceiling was Rs. 10 lakh, Deduction
u/s 57 can be claimed maximum of up to 20% of such dividend.
• TDS u/s 194
• TDS u/s 194 to be deducted by the companies on the dividend that
is exceeding the limit of Rs.5000 per payee. The TDS needs to be
deducted from the amount of such dividend, income tax, at 10%.
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Mr. Dayananda Huded

TP with Reference to Bonus Shares and Capital Gains
• When Bonus Shares are issued to the equity shareholders, the value
of the shares is not taxed as dividend distributed. However, where
redeemable preference shares are issued as Bonus shares, on their
redemption, the amount shall be taxed as dividend distributed.
• Where Bonus Shares are issued to the Preference Shareholders, on
their issue it is deemed to be dividend and liable to tax.
• Expenses on issue of Bonus Shares is not allowed as deduction
• Expenses on issue of Bonus Shares is not allowed as deduction
since capital expenditure.
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TP with Reference to Bonus Shares and Capital Gains
• Dividends received are an exempted income in the hands of the
customer
• Sec 115 BBDA of the Income-tax Act 1961, If the person resident in India
is receiving the dividends in aggregate exceeding ten lakh rupees from a
domestic company or companies then he will be liable to the taxes as
follows:
• 10% on exceeding ten lakh rupees plus surcharge
• 4 % as health and education cess.
• Bonus shares
• Issuance of bonus shares to the equity shareholders, companies can avoid
the tax under section 115-O on the dividend distributed.
• When redeemable preference shares are issued as a bonus on the
redemption the amount shall be taxed as dividend distributed.
• When bonus shares are issued to the preference shareholders on their
issue it is deemed to be a dividend and liable to tax when the shareholder
sells the bonus shares, the cost of bonus share is taken as nil
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Mr. Dayananda Huded

Bond Washing Transactions
• bond washing transaction can be defined as a transaction where
some securities are sold sometime before the due date of
Interest and reacquired after the due date is over. In order to
discourage such transactions section 94 was introduced.
• Where the owner of any securities (in this subsection and in
subsection (2) referred to as" the owner") sells or transfers those
securities, and buys back or reacquires the securities, then, if the
result of the transaction is that any interest becoming payable in
result of the transaction is that any interest becoming payable in
respect of the securities is receivable otherwise.
• Bond washing is the practice of selling a bond just before it pays a
coupon payment and then buying it back once the coupon has been
paid. Bond washing previously could result in apparently tax-free
capital gains because after the coupon has been paid, the bond will
often sell for less. However, the practice has been banned in most
major jurisdictions.
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Own or Lease of an Asset
• Assets may purchased or taken on lease. Apart from tax
angle other factors also are important in taking lease or buy
decisions like rate of change in technology.
• Advantages when Assets are taken on Lease: Lease Rental
can be claimed as deduction as revenue expenditure.
However Depreciation cannot be claimed since assets are
not owned by the assessee.
• Advantage when Assets are Purchased: Depreciation on
• Advantage when Assets are Purchased: Depreciation on
specified assets can be claimed as deduction u/s 32. the
Assets may be purchased outrightly or may be taken on
loan. Where the asset is taken on loan interest amount can
either be claimed as revenue expenditure or can be
capitalized. But where interest is paid after the asset is first
put us use, the deduction on account of interest shall be
claimed as revenue expenditure, i.e. such interest cannot
be capitalized.
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• Where the Asset is Purchased on Loan:
• 1. Compute Repayment of Loan spread over a number of years.
• 2. Compute Interest on Loan spread over a number of years.
• 3. Compute each Outflow ( Interest + repayment of Loan) spread over a
number of years.
• 4. Compute Depreciation on Assets spread over a number of years.
• 5. Compute Tax saved on deduction claimed ( Interest + depreciation)
spread over a number of years.
• 6. Compute adjusted cash outflow which is ( 3 – 5 )
• 7. Compute present value of adjusted cash outflow.
• Where the Asset is Leased:
• Where the Asset is Leased:
• 1. Compute the time processing fees in zero year.
• 2. Computer Lease Rental spread over a number of years.
• 3. Compute Cash Outflow (processing fees + lease rental) spread over a
number of years.
• 4. Compute Tax saved on deduction claimed ( processing fees + lease
rental) spread over a number of years.
• 5. Compute adjusted cash Outflow which is ( 3 – 4 )
• 6. Compute present value of adjusted cash outflow.
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Installment or Hire Purchase
• Under hire purchase system, the seller agrees to sell the article on the
condition that the buyer shall pay the purchase price through
installments.The article is not legally sold to the buyer in hire purchase
system.
• The buyer/hirer makes an initial payment called ‘down payment‘ and the
balance amount due to the vendor (seller) in installments together with
interest. Ownership in the goods is transferred from seller to the buyer
only on the payment of last installment. So, if the buyer defaults to pay
the installment amount, the goods will be repossessed by the seller.
• Installment System
• Installment System
• The Installment system is almost similar to the hire purchase system. The
main difference between the two is that in installment system, the buyer
gets the ownership rights as soon as the contract is signed with the seller.
If he makes any default in payment of any installment, the seller can
repossess the article only with the help of the Court.
• Hire purchase and installment systems facilitate brisk sale of consumer
durable. Commodities like two wheeler, television sets, radios,
refrigerators, cycle, furniture etc., are sold in large volumes under hire
purchase and installment system.
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Advantages of Hire Purchase and Installments systems
• 1. The hire purchase and installment schemes enable the buyers to buy
goods which are beyond their reach.
• 2.It also enables the business to find buyers for their products. A business
cannot always look for cash parties for products that are expensive in
nature.
• 3. It widens the market.
• 4. Middlemen are eliminated
• 5. It has helped the finance companies to develop their business. Now-a-
days finance companies finance several articles widely under hire
• 6. Price is stabilized.
• 7. As convenience and luxury goods are sold under hire purchase and
installment system, the standard of living of the people increases.
• 8. Sellers can increase their sales. Moreover, sales under the hire purchase
and installment system are more profitable.
• 9. These days, most business houses come out with a number of offers,
like free gifts, exclusively for hire-purchase customers.
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Disadvantages of Hire Purchase and Installment systems
• 1. Hire purchase and installment system tempt the buyers to buy goods which are
beyond their means. So, it becomes extravagant.
• 2. The buyer pays a very high price fro the article under such schemes. This is
because, he has to pay interest on the outstanding balance.
• 3. The need of the hour is savings. Schemes like hire-purchase make the people
spendthrifts.
• 4. Hire purchase price is higher than the cash price. Buyers under hire purchase
system are charged interest. The rate of interest is often higher.
• 5. If buyers default in payment, goods sold under hire purchase system are
repossessed by the hire vendor. The purchaser suffers a huge loss on repossessed
goods.
goods.
• 6. Hire purchase and installment transactions are cumbersome. An agreement has
to be entered into and guarantee is to be given. More legal formalities are to be
gone through.
• 7. The rate of default under hire purchase and installment system is higher. It is
because only people with inadequate means buy under this system.
• 8. A number of legal formalities will have to be fulfilled by the buyer. He may
have to find a guarantor. The agreement must be prepared and signed by both the
seller and the buyer and it must be witnessed. The document of title will vest with
the vendor/financier till the dues are cleared by the hirer.
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Make or Buy Decisions
• This applies to industries where assembly of products takes place to make a
finished product. Like a manufacturing of car, where thousands of different
parts or components are assembled to make a car.
• It is quite natural every components or part of a car cannot be manufactured by
one company. Since part manufacture involves cost, time, energy, and different
kinds of technology and expertise. Therefore, in such cases company purchases
parts from outside agencies. But where the cost involved in purchasing from
outside market is high, then the company might go in for in house production.
• Apart from costing consideration following factors also go in decision-making
• Apart from costing consideration following factors also go in decision-making
process :
– Utilizations of Capacity
– Inadequacy Fund
– Latest Technology
– Dependence of supplier
– Labor problem in the factory
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• What are the cost involved in making of a Pat.
– Fixed Cost : Purchased of Plant etc.
– Variable Cost : Raw Materials, Labour, Electricity etc.
• What are the cost involved in buying of a part from outside agency :
– Buying Cost
– Inventory Cost
• Tax Consideration:
• 1. Establishing a new Unit: If the decision to manufacture a part or
component involves a setting up a separate industrial unit than tax
incentives available u/s 10A, 10B, 32, 80IA and 80IB should be
considered.
considered.
• 2. Export: If‘Make or Buy’ decision is taken for exporting goods then tax
incentives available u/s 80HHC depends upon whether goods
manufactured by taxpayer himself are exported or goods manufactured by
others are exported by the taxpayers.
• 3. Sale of Plant & Machinery: If buying is cheaper than manufacturing
and the assessee decides to buy parts or components for along period of
time, he may like to sell the existing plant and machinery. Tax implication
as specified by Sec. 50 has to considered.
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Buying an Asset with Own Fund or Borrowed Fund
• Owner’s Funds
• The Owner’s Funds are the total amount invested by the owner of an enterprise and the accumulated
profits that they have reinvested in the business. This money remains invested in the business till the
company winds up its operations. It is the primary source of funds, without which it is difficult for
any organisation to survive in the market. The owner may be an individual, a group of partners or
shareholders in the business. The capital invested by the owner/s allows them control over their
business. Some entrepreneurs may prefer to keep the control of the company to themselves, while
others may opt for sharing the control and risk of a business by bringing in other investors.
• Borrowed Funds
• The Borrowed Funds are the funds that a business raises through loans or borrowings from other
parties. They are the most common sources of capital for any enterprise. Some of the methods of
parties. They are the most common sources of capital for any enterprise. Some of the methods of
raising Borrowed Funds are as follows:
– Raising loans from commercial banks or other financial institutions
– Issuing of debentures and bonds
– Public deposits
– Trade Credit
• The creditors provide these funds only for a specified period of time, and they have to return after the
expiry of that period. A business can avail these funds only under certain terms and conditions, which
they need to fulfil at all costs. The borrowers must also pay a fixed amount of interest on these funds
to the lenders, irrespective of whether the firm is making a profit or not. The creditors give these
funds on the security of assets of the firm in most cases.
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Repair, Replace, Renewal or Renovation
• “Repair” implies the existence of a thing has malfunctioned and can be set right
by effecting repairs which may involve replacement of some parts, thereby
making the thing as efficient as it was before or close to it as possible. After
repair the thing to which the repair was carried out continues to be available for
use. Replacement is different from repair.
• “Replacement” implies the removal or discarding of the things that was in use,
by a different or new thing capable of performing the same function with the
same or greater efficiency. The replacement of a section in a series of machines
which are interconnected , in a segment of the production process which together
which are interconnected , in a segment of the production process which together
form an integrated whole may in some circumstances , be regarded as amounting
to repair when without such replacement that unit in that segment will not
function. That logic cannot be extended to the entire manufacturing facility from
the stage of Raw Material to the delivery of the final finished product.
• “Current Repair” implies the expenditure must have been incurred to ‘preserve
and maintain’ an already existing asset and the object of the expenditure must not
be to bring a new asset into existence of for obtaining a new advantage.
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• Replacement of Assets as a whole is not ‘Repair’ : Where substantial repairs are carried out in order
to put to use an existing asset, the same could be termed as Revenue Expenditure. But where there is
replacement ‘As a Whole’, it amounts to reconstruction and not repairs. It is pertinent that the asset in
its old form must continue to exist to say that the expenditure involved in improving the assets is
Revenue Expenditure. Where effacement takes place and a new asset comes into being, then
expenditure involved would become a Capital Expenditure.
Difference Between Capital and Revenue Expenditure
Capital Expenditure Revenue Expenditure
Cost of acquisition and installment charges
of a fixed asset is a capital expenditure.
Purchase price of a current asset for resale
or manufacture is a revenue expenditure.
Expenditure incurred to free oneself from a Expenditure incurred to free oneself from a
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Expenditure incurred to free oneself from a
capital liability is a capital expenditure.
Expenditure incurred to free oneself from a
revenue liability is a revenue expenditure.
Expenditure incurred towards acquisition of
a source of income is a capital expenditure.
Expenditure incurred towards an income is
a revenue expenditure.
Expenditure incurred to increase the
operating capacity of fixed assets is capital
expenditure.
Expenditure incurred to maintain the fixed
assets is a revenue expenditure
Expenditure incurred for obtaining capital
by issue of shares is a capital expenditure
Expenditure incurred towards raising loans
or issue of debentures is a revenue
expenditure.

Shut Down or Continue
• A shut-down decision means that the company is stopping
production for a short period. It means that the firm will resume
its production in future.
• The shutdown decision depends on Shut Down Point. The
shutdown point denotes the exact moment when a company’s
revenue is equal to its variable costs.
• What is Shut Down Point?
• A Shutdown point is a position of operation at which a company
• A Shutdown point is a position of operation at which a company
is receiving no advantage for continuing operations Thus,
decides to shut down temporarily or in some cases permanently.
• The shutdown point denotes the exact moment when a
company’s revenue is equal to its variable costs. Variable costs
such as wages, production supplies, etc.
• It results from the combination of output and price where the
company earns just enough revenue to cover its total variable
costs.
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Reasons of shut down production as well Business
• Loss co- exist with profit in a business. A business may suffer loss due to
one or more of the following reasons:
• 1. Fall in demand :- the demand of product may fall due to availability of
new products in the market , change in fashion, or increase in the number
of producers /competitors.
• 2. Financial problems :- A firm may not have sufficient finance of its own
nor further credit is available from bank or financial institutions due to
government restrictions.
• 3. Change in technology:- Where the growth of technology is rapid and if
it is not possible to keep pace with it the net result may be a loss of profit.
it is not possible to keep pace with it the net result may be a loss of profit.
• 4. High rate of taxes :-high rate of taxes – import duty , excise , sales tax ,
octroi etc. ; increase the price of the product . Due to this demand of the
product may fall and business may suffer losses.
• 5. Mismanagement
• 6. Inadequate availability of raw material
• 7. Recession in market
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• 1. Short run rule for shutdown or continue decision with example
• In the short-run shutdown, we only consider the variable cost. Short-run is
for a limited period of time like quarterly, half-yearly, or yearly depending
upon the company.
• It means we check whether the company is able to cover or not the
variable cost for the short period of its sales. If not, the Firm needs to shut
down.
• For example: If the revenue of a company is Rs. 100 and its variable cost
is Rs. 80. then the contribution will be Rs 20. In this, there is no need to
shut down the product. but if the variable cost is greater than the sales,
then the company has to shut down that product.
• 2. Long-run rule for Shutdown with example
• The Long Run period is basically the future of the company. The long run
can be yearly or more than yearly depending upon the type of company.
• In the long run shutdown, we consider total cost i.e. fixed cost and
variable cost. For example: If the sale of a company is Rs. 100 and its
variable cost is Rs. 80 and fixed cost is Rs. 40. Then there is a loss of Rs.
20.
• It means that the company will not survive in the long run but still can
survive in the short run.
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Continue of Part of Business
• 1.Where a part of business (unit, department, or activity) is discontinued
or the business is continued with the reduced level of activity it is not a
discontinuation of business.
• 2. Where the business of the assessee has been shifted from one premises
to another or from one market to another or from one city to another.
• 3. Where one or the other department of the business had been closed
down.
• 4. Where the business of an industrial undertaking carried on in india is
• 4. Where the business of an industrial undertaking carried on in india is
discontinued in the previous year by reason of extensive damage to , or
destruction of any building , plant , machinery or furniture owned by the
assessee and used for the purpose of such business is re- established , re
constructed or revived by the assessee within three years from the end of
previous year in which the business was discontinued , the losses of such
a business shall be carried forward or set off against the profits and gains
of business or any other business carried on by him.
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Tax Planning in Respect of Amalgamation
• Under Income Tax Act, 1961 Section 2(1B) of Income Tax Act defines
‘amalgamation’ as merger of one or more companies with another company or
merger of two or more companies to from one company in such a manner that:-
• 1. All the property of the amalgamating company or companies immediately
before the amalgamation becomes the property of the amalgamated company by
virtue of the amalgamation.
• 2. All the liabilities of the amalgamating company or companies immediately
before the amalgamation becomes the liabilities of the amalgamated company by
virtue of the amalgamation.
• 3. Shareholders holding at least three-fourths in value of the shares in the
amalgamating company or companies (other than shares already held therein
amalgamating company or companies (other than shares already held therein
immediately before the amalgamated company or its nominee) becomes the
shareholders of the amalgamated company by virtue of the amalgamation.
• (Example: Say, X Ltd merges with Y Ltd in a scheme of amalgamation and
immediately before the amalgamation, Y Ltd held 20% of shares in X Ltd, the
above mentioned condition will be satisfied if shareholders holding not less than
75% in the value of remaining 80% of shares in X Ltd i.e. 60% thereof, become
shareholders in Y Ltd by virtue of amalgamation)
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Tax Relief’s and Benefits in case of Amalgamation
• 1. Tax Relief to the Amalgamating Company:
• A. Exemption from Capital Gains Tax [Sec. 47(vi)]: Under section 47(vi)
of the Income-tax Act, capital gain arising from the transfer of assets by
the amalgamating companies to the Indian Amalgamated Company is
exempt from tax as such transfer will not be regarded as a transfer for the
purpose of Capital Gain.
• B. Exemption from Capital Gains Tax in case of International
Restructuring [Sec. 47(via)]: Under Section 47(via), in case of
Restructuring [Sec. 47(via)]: Under Section 47(via), in case of
amalgamation of foreign companies, transfer of shares held in Indian
company by amalgamating foreign company to amalgamated foreign
company is exempt from tax, if the following two conditions are satisfied:
– At least twenty-five per cent of the shareholders of the amalgamating foreign
company continue to remain shareholders of the amalgamated foreign company, and
– Such transfer does not attract tax on capital gains in the country, in which the
amalgamating company is incorporated.
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• 2. Tax Relief to the shareholders of an Amalgamating
Company:
• Exemption from Capital Gains Tax [Sec 47(vii)]: Under
section 47(vii) of the Income-tax Act, capital gains arising
from the transfer of shares by a shareholder of the
amalgamating companies are exempt from tax as such
transactions will not be regarded as a transfer for capital gain
purpose, if:
purpose, if:
– The transfer is made in consideration of the allotment to
him of shares in the amalgamated company; and
– Amalgamated company is an Indian company.
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• 3. Tax Relief to the Amalgamated Company:
• Carry Forward and Set Off of Accumulated loss and unabsorbed
depreciation of the amalgamating company [Sec. 72A]: Section
72A of the Income Tax Act, 1961 deals with the mergers of the sick
companies with healthy companies and to take advantage of the
carry forward of accumulated losses and unabsorbed depreciation
of the amalgamating company. But the benefits under this section
with respect to unabsorbed depreciation and carry forward losses
are available only if the followings conditions are fulfilled:-
• There should be an amalgamation of –
• There should be an amalgamation of –
– (a) a company owning an industrial undertaking (Note 1) or ship or a hotel
with another company, or
– (b) a banking company referred in section 5(c) of the Banking Regulation
Act, 1949 with a specified bank (Note 2), or
– (c) one or more public sector company or companies engaged in the business
of operation of aircraft with one or more public sector company or companies
engaged in similar business.
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• Amortization of expenditure in case of Amalgamation [Sec.
35DD]: Under Sec 35DD for expenditure incurred in connection
with the amalgamation the assessee shall be allowed a deduction of
an amount equal to one-fifth of such expenditure for each of the
five successive previous years beginning with the previous year in
which the amalgamation takes place.
• Treatment of preliminary expenses [Sec. 35D(5)]: When and
amalgamating company merges with an amalgamated company
amalgamating company merges with an amalgamated company
under a scheme of amalgamation, the amount of preliminary
expenses of the amalgamating company to the extend not yet
written off shall be allowed as deduction to the amalgamated
company in the same manner as would have been allowed to the
amalgamating company.
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Tax Planning in Respect of Demerger
• Demerger (Section 2(19AA)): means the transfer of one or
more undertakings to any resulting company pursuant to a
scheme of arrangement under Sections 391 to 394 of the
Companies Act, 1956 in such a manner that :
– All the property/liability of the undertaking becomes the
property/liability of the resulting company.
– All the property/liabilities are transferred at book value (excluding
increase in value due to revaluation).
– The resulting company issues shares to the share holders of demerged
– The resulting company issues shares to the share holders of demerged
company on a proportionate basis, except where resulting company is
a share holder of the demerged company.
– Share holders holding minimum 75% of the value of shares become
share holders of the resulting company (other than shares already held
therein immediately before the demerger by, or by a nominee for, the
resulting company or its subsidiary).
– The transfer of an undertaking is on a going concern basis.
– The demerger is in accordance with the conditions notified under
Section 72A(5) of IT Act, 1961.
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• Undertaking : includes any part of an undertaking or a unit or
division of an undertaking or a business activity taken as a whole,
but excludes individual assets or liabilities or combination of both
not constituting a business activity.
• Demerged Company : means the company whose undertaking is
transferred to a resulting company pursuant to a demerger.
• Resulting Company : means one or more companies (including
• Resulting Company : means one or more companies (including
wholly owned subsidiary thereof) to which the undertaking of the
demerged company is transferred in a demerger and the resulting
company in consideration of such transfer of undertaking, issues
shares to the share holders of the demerged company and includes
any authority or body or local authority or public sector company or
a company established, constituted or formed as a result of
demerger.
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Provisions applicable to company
• Capital Gains (Sections 47(vi) and 47(vid))
• Gains arising on transfer of a capital asset in a scheme of amalgamation/demerger to the
amalgamated/resulting company being an Indian Company is exempt.
• Carry forward of accumulated loss and/or unabsorbed depreciation (Section 72A)
• Accumulated loss and unabsorbed depreciation of an amalgamating company can be
carried forward by the amalgamated company for set off against its profits; in case of;
– Amalgamation of company owning an industrial undertaking or a ship or a hotel with another
company; or
– Amalgamation of a public sector company or a company engaged in the business of operating aircraft
with another public sector company or company engaged in similar business; or
– Amalgamation of a banking company with a specified bank
1. Amalgamated company has to fulfill the following conditions to avail the benefit:
1. Amalgamated company has to fulfill the following conditions to avail the benefit:
– It continuously holds 3/4th of the book value of the fixed assets acquired in a scheme of amalgamation
for at least five years from the date of amalgamation
– It continues to carry on business of amalgamating company for at least five years from the date of
amalgamation
– It achieves at least the level of 50% of the installed capacity before the end of 4 years from the date of
amalgamation and maintains that level till the 5th year
• 2. Amalgamating company has to fulfill the following conditions:
– It was engaged in the business in which the accumulated loss has occurred or the unabsorbed
depreciation remains unabsorbed for three or more years.
– It has continuously held 3/4th of the book value of fixed assets held by it two years prior to
amalgamation.
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Conversion of Firm into Company [Section 47 (iii)]
• Transfer of a capital asset or intangible asset on conversion of Firm into a
Company is not treated as Transfer if following conditions are satisfied and hence
not Capital Gain arises. Conditions are:
• (a) all the assets and liabilities of the firm [or of the association of persons or
body of individuals] relating to the business immediately before the succession
become the assets and liabilities of the company;
• (b) all the partners of the firm immediately before the succession become the
shareholders of the company in the same proportion in which their capital
accounts stood in the books of the firm on the date of succession;
• (c) the partners of the firm do not receive any consideration or benefit, directly or
indirectly, in any form or manner, other than by way of allotment of shares in the
company; and
• (d) the aggregate of the shareholding in the company of the partners of the firm is
not less than 50% , of the total voting power in the company and their
shareholding continues to be as such for a period of 5 years from the date of the
succession;
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Mr. Dayananda Huded

Procedure of Conversion of a Firm into a Company
• Step 1-Conducting a meeting of the partners for the Conversion of the
Firm into a Company
• Step -2 Obtain name Approval in the RUN form.
• Step -3 File Form URC-1 (Uniform Rules for Collections)
• Step - 4 Publish an advertisement in Two Newspaper
• Step – 5 Draft MOA and AOA
• Step -6 Issue of Certificate of Incorporation
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Mr. Dayananda Huded

Conversion of Sole Proprietorship into Company
• Transfer of a capital asset or intangible asset on conversion of sole
Proprietorship Concern into a Company is not treated as Transfer if
following conditions are satisfied and hence not Capital Gain arises.
Conditions are:
• (a) all the assets and liabilities of the sole proprietary concern relating to the
business immediately before the succession become the assets and liabilities
of the company;
• (b) the shareholding of the sole proprietor in the company is not less than
50% of the total voting power in the company and his shareholding continues
to so remain as such for a period of 5 years from the date of the succession;
and
• (c) the sole proprietor does not receive any consideration or benefit, directly
or indirectly, in any form or manner, other than by way of allotment of shares
in the company;
• (d) all the partners of the firm immediately before the succession become the
shareholders of the company in the same proportion in which their capital
32
Mr. Dayananda Huded

Conversion of Company into LLP
• The LLP is a separate legal entity, is liable to the full
extent of its assets but liability of the partners is limited to
their agreed contribution in the LLP. The LLP can
continue its existence irrespective of changes in partners.
It is capable of entering into contracts and holding
property in its own name.
• Need of Conversion from Company into LLP?
• Need of Conversion from Company into LLP?
– LLP will have more flexibility as compared to a company.
– LLP will have lesser compliance requirements as compared to a
company.
– LLP does not have to have its accounts audited if the annual
turnover of the LLP is less than Rs. 40 lakhs and the capital
contribution is less than Rs. 25 lakhs.
33
Mr. Dayananda Huded

Pursuant to Income Tax Act
• The finance Act, 2010 has inserted a new Clause (xiiib) in
section-47 and a new sub-section (4) in section 47A of the Act
with effect from assessment year-2011-12.
• If the following conditions are satisfied, then the transfer of
capital asset or intangible asset to LLP or any transfer of share or
shares held in Company by a share-holder on conversion of
Company into LLP shall not be regarded as transfer:
– If All The Above Conditions (I) To (Vi) Are Complied With, The
Conversion Shall Not Attract capital gains tax either for the Company
Conversion Shall Not Attract capital gains tax either for the Company
or the Successor LLP or for the shareholders of the Company, who
became partner in the successor LLP and get share of profits and
capital in the LLP in lieu of their shares in the Company.
– If any of the above conditions (i) to (vi) is not complied with, then as
per provisions of Section 47 A (4) such transfer of Capital Assets &
Intangible assets deemed to be liable to Capital gains of the successor
LLP or the Shareholders of the predecessor Company in the previous
year in which such non-compliance took place.
34
Mr. Dayananda Huded

• Benefits under Income Tax Act:
• > Saving of Dividend Distribution Tax. (There is no provision of
Dividend Distribution Tax in LLP)
• > Saving of MAT. (Because LLP don’t give credit of MAT)
• > Saving of Income Tax due to Interest and remuneration
payable to partners as salary payable to directors.
• Detail Provisions:
• The Finance Act, 2009 amended the Income-tax Act, 1961 to
clarify that LLPs will be taxed on the same lines as general/
traditional partnership firms. However, the Tax implications
traditional partnership firms. However, the Tax implications
upon the conversion of a Private Company or an unlisted
Company into LLP were not clear by The Finance Act, 2009 and
leaves doubts;
• > The levy of Capital Gain Tax on Transfer of assets to LLP on
conversion.
• > Availability of carry forward of losses and of unabsorbed
depreciation to the successor LLP.
• > Availability of MAT credit to the successor LLP.
35
Mr. Dayananda Huded

Procedure for Conversion of Company into LLP
• Step 1: Meeting of Board of Directors of Company
> Call a meeting of the Board of Directors.
> Pass requisite Board Resolution for Conversion of Company into LLP.
> Requisite resolution to authorize any director to file all the necessary
forms with MCA.
• Step 2: Application for Name Availability
> The company will have to apply for reservation of name in form RUN-
LLP of LLP and Get Name Approval Certificate from ROC.
• Step 3: Filing of Incorporation Form with Required Documents
• Step 3: Filing of Incorporation Form with Required Documents
> File e-Form FiLLiP with ROC along with following Attachments:
> Address proof of the registered office of LLP. (for eg.: utility bill, NOC
and proof of ownership)
> The subscription sheets.
> Consent to act as a designated partners and partners
> Identity and Resident proofs of designated partners and partners
> Detail of LLP(s) and/ or company(s) in which partner/ designated
partner is a director/ designated partner.
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Mr. Dayananda Huded

• Step 4: Filing of Application for Conversion into LLP
File E-FORM- 18 with ROC along with following ATTACHMENTS:
> Statement of the consent of shareholders (Mandatory)
> Statement of accounts of the company certified as true and correct by
the independent auditor
> List of all the secured creditors along with their consent
> Copy of acknowledgement of latest income tax return (Mandatory)
• Step 5: Certificate of Incorporation as LLP from ROC:
> After complying to all the formalities by the company and approved by
the Ministry, ROC to issues a COI as to the conversion of LLP.
• Step 6: Drafting of Limited Liability Partnership Agreement
• Step 6: Drafting of Limited Liability Partnership Agreement
– 1. Filing of E-Form-3
– > This form provides information about the LLP Agreement entered into
between the partners. This form is to be filed in 30 days from the date of
conversion of the company into an LLP.
– > Attachment Required: LLP Agreement
– 2. Filing of E-Form -14 (Intimation to ROC)
37
Mr. Dayananda Huded

38
Mr. Dayananda Huded
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