TAX PLANNING FOR SHUT DOWN OR CONTINUE

Introduction

Ups and downs are a part and parcel of business life. In an up situation, a business flourishes,
earns profits and brings cheers to businessman. A number of factors play an important role in
placing a business in such a situation. Some of these factors are as follows :

(1) High demand of product

(2) Cost effectiveness
(3) Govt. support
(4) Tax incentives available etc.

In a down situation, a business shrinks, generates losses and causes tension to owners. Such a
situation occurs when any/ some/ all of the above factors go against the business. i.e.

(i) Low demand/ falling demand of product

(ii) Falling profit margin
(iii) Withdrawl of government support
(iv)No encouraging future prospects etc.

Such situations are normally described as industrial sickness.

Generally under such a situation, a business house faces a problem whether the business should
be continued or shut down.

Meaning of ‘ Shut down’ or ‘discontinuance of business for Income tax purposes

It refers to a complete cessation or closing down of the business. It involves :-

 No buying or selling
 No manufacturing
 Assets to be sold or disposed off
 Returning capital to owners etc.

Post shutdown tax effects

Before deciding for closing a business, two aspects should be understood clearly :-

(A) various tax provisions to be complied with after deciding to shut down a business
(B) tax implications of shut down decision

(1) Decision relating to Profit-Earning Business:

1. Profit earning business with no past losses and unabsorbed depreciation.

Solution: It is never advisable to shut down or discontinue such a business.
 2. Profit earning business with past losses and unabsorbed depreciation.
Solution: If possible, such a business should be continued till the past losses and
unabsorbed depreciation are not fully set off.
(2) Loss generating business:
If the occurrence of loss is a temporary phenomenon and financial position of the
business allows the business house to bear such losses for some years then such a
business should be continued. The business, in this case, can be continued at reduced
level of activity. Later on, when the business restarts earning profit, then past business
losses and unabsorbed depreciation can be set off.
However, if the occurrences of losses is expected to be for a long period then business
should be discontinued at the earliest.
(3) How tea/coffee/rubber business house can avoid the withdrawal of deduction
claimed u/s 33AB ?

Following tax planning can avoid withdrawal of deduction claimed u/s 33AB:-

Meaning : Section 33AB Income Tax Act Deduction is available for assessees engaged
in the development of Tea, Coffee and Rubber. Section 33AB was introduced to
encourage the growth of commercial crops in India. Important point to be noted here is
that, the assessee must be growing and also manufacturing these crops to avail the
deduction under section 33AB of Income Tax Act.

Law: A sum equal amount deposited( before 6month) or WEL

40% of Profit of such business(before making 33AB deduction)
Withdrawal is possible only
(a) closure of business;
(b) death of an assessee;
(c) partition of a H.U.F.
(d) dissolution of a firm;
(e) liquidation of a company.
(i) If assets acquired by withdrawing amount from ‘Special Account’ are to be sold
before the expiry of stipulated period of 8 years then, if possible, such assets
should be sold to any of the following persons :-
(a) Government (Central or state)
(b) Local Authority
(c) A corporation established by or under a Central, State or Provincial Act
(d) A government company as defined in Sec 617 of the Companies Act, 1956

If this is done, then the incentive deduction shall not be withdrawn and hence assessee
shall not be liable to pay tax on deemed business profits.

(ii) In case of firm :- If assets acquired u/s 33AB are required to be sold before the
expiry of 8 years then such a firm is advised to sell/ transfer such assets to a
company in connections with succession of firm by company arrangement subject
to fulfillment of prescribed conditions given for this. These conditions are :
(a) All the properties of the firm relating to the business or profession
immediately before the succession become the properties of the company;
(b) All the liabilities of the firm relating to the business or profession immediately
before the succession become the liabilities of the company;
(c) All the partners of the firm before succession become all the shareholders of
company.
(4) How petroleum or natural gas business houses can avoid the withdrawal of
deduction claimed u/s 33AB
Same as suggested for Tea/Coffee/Rubber business in pt(3)
(5) Assesses engaged in shipping business cannot avoid the withdrawal of deduction
claimed u/s 33AC by rresorting to any tax planning
(6) While discontinuing a company, the management is advised to see the possibility of
its amalgamation with some other company
(7) Whether selling business as ‘Slump sale’ is beneficial or not?
In case of slump sale, the entire business is sold/transferred for a lump sum price
without assigning values to individual assets Sec 50-B of income Tax Act provide the
method of computation of capital gain arising from slump sale.
Capital gain on slump sale = Sale proceeds-Net worth
Meaning of networth :- Networth shall be the aggregate value of total assets of the
undertaking/division as reduced by the value of liabilities of such undertaking as
appearing in the books of account.
Aggregate value of total assets :-
(a) In case of appreciable assets, the W.D.V off the block
(b) In case of other assets, the book value of such assets.Thus management of
discontinued business has two options to sell assets i.e.
(i) To sell the entire undertaking as slump sale or
(ii) To sell assets individually or otherwise

So, it is advised that tax incidence under the two options should be analysed before
hand.

If undertaking is being sold after having continued for more than three years then the
entire capital gain will be long term capital gain which is put to tax@20%
(concessional rate)