SOME TAX PLANNING ASPECTS THEORY
SALE OF ASSETS USED FOR SCIENTIFIC RESEARCH
If an assessee purchases an asset for scientific research related to its business, the expenditure incurred is deductible during the previous year in which it is incurred. If such asset ceases to be of any use for scientific research purposes, the assessee can sell it or use it in the business for some other purposes.
From tax planning point of view, we should consider whether it is beneficial to sell such asset immediately or it should be sold after using it for some time in the business for some other purposes.
(1) Selling the asset without using it for business purposes : The selling price upto the cost of asset is deemed business income u/s 41(3).
If selling price exceeds the cost, the excess shall be capital gain which can be computed keeping in view the provisions of Sec. 50A.
For example, a capital asset was purchased at a cost of Rs. 2,00,000 in June, 2003 for scientific research related to the business. The deduction of Rs. 2,00,000 was allowed inn 2003-04. During the previous year 2010-11 the asset is sold for Rs. 2,50,000 without using it in the business for any other purpose. The taxable income/loss shall be computed as under :
|Cost inflation index for 2003-04, (463) and 2010-11, (711).|
|1.||Business income||Rs. 2,00,000|
|(Cost of asset or selling price, whichever is less)|
|2.||Long-term capital gain/loss Selling price|
|Less : Indexed cost (Rs. 2,00,000 x 711 ÷ 463)||3,07,127|
(2) Selling the asset after using it for business purposes : If an asset used for scientific research related to the business of assessee is used in business for some time and then sold, the selling price of such asset is not treated as deemed income u/s 41(3) but the selling price is deducted from the W.D.V. of the block of asset. This will reduce the tax liability for that year and more cash will be in hand. However, the tax liability will increase in future. (See Illustration 1).
From tax planning point of view, it is better to sell such asset without using it for business purposes of the assessee. (See Illustrations 2 and 3).
RECEIPT OF INSURANCE COMPENSATION
Where any person receives at any time during the previous year any money or other asset under any insurance from an insurer on account of damage to or destruction of, any capital asset, as a result of:
(i) lood, typhoon, hurricane, cyclone, earthquake, or other convulsion of nature; or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or .
(iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war),
Then, any profits or gains arising from receipt of such money or other asset shall be chargeable to tax under the head "Capital Gains".
The income shall be deemed to be the income of the previous year in which such money or other asset is received.
For computing capital gains, the value of any money or the fair market value of asset received on the date of receipt shall be deemed to be the full value of consideration received or accruing as a result of the transfer of damaged asset.
Points to note :
(1) The capital asset should be insured.
(2) The asset should be damaged or destroyed due to any reason mentioned in (i) to (iv) above.
(3) Capital gain shall be deemed to be the income/loss of the previous year in which compensation (money or other asset) is received. It means if the asset was destroyed in 2009-10 but the compensation is received in 2010-11, the capital gain shall be computed in previous year 2010-11. However, indexation of cost of acquisition will be based on the index of the year in which the asset was damaged or destroyed.
(4) Full value of consideration shall be the money received or the fair market value of asset received from the insurer.
(5) If an asset is not a capital asset u/s 2(14), (e.g. stock-in-trade), the compensation for loss of it, shall not be liable to tax u/s 45(1A). It will be treated as normal trading receipt.
(6) If an insured capital asset is destroyed and compensation is received from the insurer, there will be capital gain even if no capital asset has ben transferred.
(7) If an uninsured capital asset is destroyed, the loss cannot be deducted under the head 'Capital Gains' since there is no transfer of an asset.
DISTRIBUTION OF ASSETS AT THE TIME OF LIQUIDATION OF COMPANY
Exemption to Company regarding distribution of assets at the time of Liquidation [Sec. 46(1)]
Where the assets of a company are distributed to its shareholders on its liquidation, such a distribution is not regarded as a transfer of a capital asset by the company for purposes of taxation. However, the exemption is available subject to the following conditions :
(i) Transfer of capital asset in specie. If the capital assets are first sold by the liquidator of the company and then the sale proceeds-are distributed to the shareholders, there is no exemption available to the company in respect of capital gains.
(ii) Distribution in the course of liquidation of the company. The distribution of assets must be in the course of liquidation or winding up of the company. If the distribution is otherwise than on liquidation, e.g under amalgamation or merger to the dissentient shareholders, on such distribution no exemption is available.
(iii) Distribution to the shareholders. The distribution must be made to the registered shareholders of the company. If the distribution is made to any person other than the registered shareholders, the benefit of exemption is not available.
Liability of company for payment of tax regarding distribution out of accumulated profits
Whatever is distributed by the company at the time of its liquidation out of accumulated profits, it is treated as dividend u/s 2(22)(c) and the company is liable to pay tax on it u/s 115-0. For the financial years 2010-11 the rate of tax on distributed dividends is 16.60875% (15% Income tax + 7.5% surcharge + 3% Education cess) and for the financial year 2011-12 the rate of tax on distributed dividends is 16.2225% (15% Income tax 5% surcharge + 3% Education cess).
Taxation of Capital Gains in the hands of the Shareholders in case of Liquidation of Company [Sec. 46(2)]
A shareholder is liable to tax on capital gains if he receives any money or other assets from the company on its liquidation. The income chargeable in the hands of the shareholders under the head 'Capital Gains' would be in respect of the money so received or the market value of the assets on the date of distribution as reduced by the amount of notional dividends u/s 2(22)(c) (the proportion of distribution attributable to the accumulated profits) and the amount so arrived at would be further reduced by the cost of acquisition of the share. The amount, thus, ascertained would be chargeable to tax as capital gains.
Where the payment is made by the liquidator in instalments to registered shareholders, the entire cost of the shares is deductible from the first instalment of the amount received and not on proportionate basis at the time of receiving each instalment.
The value of asset [even not an asset u/s 2( 14)] received on liquidation of a company by a shareholder is assessable u/s 46(2).
Extinguishment of the right of a shareholder amounts to transfer for the purposes of Sec. 48. Hence, where the receipt is 'nil' on the date of distribution on the liquidation of the company, the case of such shareholder would fall u/s 46(2). The deemed full value of consideration for the purpose of Sec. 48 would be regarded as 'nil' and on that basis the income chargeable to tax (in this case loss) under the head 'capital gains' would have to be computed u/s 48.
Note : The capital gains on transfer of shares in case of liquidation of company shall not be exempt u/s 10(38), as the shareholder will not pay Securities Transaction Tax in case of liquidation of the company.
Exemption of Deemed Dividends in the hands of Shareholders
Whatever is received by a shareholder at the time of liquidation of a company out of accumulated profits of the company, it is treated as dividend and exempt u/s 10(34). However, the company is liable to pay tax on such dividend u/s 115-0.
Cost of acquisition of asset acquired on distribution of capital assets of a company on its liquidation.
(A) Where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income tax under the head 'Capital Gains' in respect of that asset under section 46(2), the cost of acquisition to him shall be the fair market value of the asset on the date of distribution. [Sec. 55(2)(b)(iii)]
(B) Where the assessee was not charged to tax u/s 46(2) on the basis of market value of the asset received at the time of liquidation of the company the cost of acquisition to the assessee will be the cost to the previous owner for computation of capital gains at the time of transfer of such asset. [Sec. 49(l)(iii)(c)]