FORM OF ORGANISATION

Q.1. There is two members A and B in a joint Hindu Family having a capital of Rs. 12.50,000. They can run a business as business of an individual joining the other as an employee and money-lender or as H.U.F.
(i) If the business is run as of an individual, the other member will received salary of Rs. 1, 25,000 and interest @ 12% on Rs.25, 000.
(ii) If the business is run is run as H.U.F. each member will receive salary Rs. 75,000. Suggest which form of business organization should be adopted from tax point of view, if the expected business income is Rs. 4, 00,000 for previous year 2011-12.

Ans. Tax liability of A & B is 15,300 each, Tax liability of H U F 25, 500.

Q.2. A, B and C have decided to set-up a business. For this purpose A, B and c are having. 6, 00,000, Rs, 3, 00,000 and Rs. 3, 00,000 respectively. They wish
(i) To charge interest on their capital/loan @ 12% p.a. Salary A Rs.15,000 p.m. B Rs. 7,500 p.m. C Rs. 7,500 p.m. and share profits in the ratio 2:1:1, or
(ii) B and C to receive half the income as salary nominating A as the sole owner of the business.

They expect the income of Rs.6, 00,000 (before charging interest on capital/loan) during the relevant year.
As an income tax expert you are approached by A,B and C for considered opinion as to whether they should have a firm or a sole proprietary concern of A, while B and C becoming employees and money-lenders to the concern so that they can reduce their tax liability ? What is your advice and what arguments would you give in support of your advice?

Ans. Tax liability of Firm is Rs.74, 422.

Q.3. A firm consists of three partners A, B and C with equal profit sharing ratio. They have contributed Rs.1, 00,000 each as capital. The profits of the business before interest on capital and remuneration to partners are Rs. 5, 10,000. Form tax point of view suggests them whether they should pay:

(a) interest on capital @ 10% p.a. and remuneration to each partner RS.60,000 ; or
(b) Interest on capital @ 12% and remuneration to each partner Rs.90, 000, which is not disallowable u/s 40A (2).

Ans. Tax liability of firm in case (a) Rs.1,00,980 and in case of (b) Rs.78,058.

Q.4. The business profits of a firm after paying (i) interest to partners A Rs. 30,000 and B Rs. 40,000 at the prescribed rate u/s 40(b) and (ii) remuneration to A Rs. 80,000 and to B Rs. 70,000; Rs. 1,00,000. The firm is entitled to deduction from its gross total income @ 100% of the profits of business u/s 80IB. Form the tax point of view suggest to firm whether the firm should pay interest and remuneration to the partners or not.

Ans. When firm paid salary and interest tax liability of firm and partner is Rs. 2,040 and if does not paid then tax liability of firm and partner is Nil.

Q.5. Ravi and Mohan Propose to setup busyness, either as a partnership or as a Partnership or as a Private limited company, with capital contribution of Rs. 10, 00,000 each. Profits of the business, before charging interest @ 12% on their capital and remuneration at Rs. 6,000 p.m. each, are estimation at Rs.5, 00,000. Profits after tax are proposed to be distributed equally as profits/divided. Advise them, with appropriate workings, about the form of organization they should choose from the point of view of tax implications involved in each case, assuming that they have no income other than that from the proposed business.

Q.6. A partnership firm is engaged in the business of retail trade. It has two partners, X and Y, who share business profits equally. In Previous year 2003-04 its annual turnover is Es. 40 lakh and it have opted to be assessed in terms of section 44AF. During the year, it has paid salary to each partner @ Rs. 5,000 per month in accordance with terms of the partnership deed. Compute tax liability of the partnership firm and its partners, assuming that X has other income of Res. 25,000 by way of interest on debentures of a company, and Y has paid Rs. 5,000 as contribution to his public provident fund account.

Q.7. A and B want to start a business. They have two options for selection a form of organization. Partnership firms a private company. The estimated profits of which, before the following deductions, are expected at Rs. 3, 72,000.
(i) Remuneration Rs. 6,000 p.m. each
(ii) Medical facility of Rs. 10,000 p.a. each.
(iii) Car facility from resident to office and back, estimated cost Rs.10, 000 p.a. each.
(iv) Rent free house valued at Rs. 15,000 each.
(v) Each will give a loan to the business of Rs. 1, 00,000 @ 24%p.a.
(vi) Contribution as capital Rs. 1, 00,000 each. On this, interest will be paid @ 24% p.a. However, the company cannot pay any interest on it.
(vii) The profit after tax will be distributed equally as profits/ dividends.
Suggest whether they should form a partnership firm or a private company.

Q.8. Mr. Kapil and Sachin proposed to set up a business either as a partnership or as a private limited company, with capital contribution of Rs. 10, 00,000 each. Profit of the business before changing their remuneration at Rs. 15,000 per month each and interest @ 12% p.a. is estimated at Rs. 18, 00,000. Profits after tax are proposed to be distributed equally as profit/dividend. Advice them with appropriate working about the form of organization they should choose from the point of view of tax implication involved in each case, assuming that they have no income other than form the proposed business.

Q.9. A and B want to start a business, the estimate profits of which for the year are Rs. 5,00, 000. They have two options for selection a form of organization:
(a) Partnership firm:
     (i) 12% interest on capital of Rs. 5, 00,000 each.
     (ii) Salary Rs. 1, 00,000 p.a. e
     (iii) Equal distribution of remaining profits.
(b) Company:
     a) Rs.2,50,000 each as share capital and Rs.2,50,000 each as loan @ 15%
     b) Salary Rs. 1,00,000 p.a. each
     c) Distribution of remaining profit as dividends equally.
Which option is better from tax point of view .

Ans. Partnership firm should be formed.

Q.10. A and B want to start a business. They have two options for selection a form of organization, partnership firm or a private company. The estimated profits of which, before the following deductions, are expected at Rs. 7, 44,000:
(i) Remuneration Rs. 12,000 per month each.
(ii) Medical facility Rs. 20,000 per annum each.
(iii) Car facility from residence to office and back, estimated cost Rs. 20,00 per annum each.
     (i) Rent free house value at Rs.30,000 each
     (ii) Each will give loan to the business of Rs. 2, 00,000 @ 12% per annum.
     (iii) Contribution as capital Rs.2, 00,000 each. On this, interest will be paid @ 12% per annum; however,
           the company cannot pay any interest on it.
     (iv) The profit after tax will be distributed equally as profits / dividends.
Suggest whether they should form a partnership firm or a private company.