UNIT-III

Tax Planning with reference to Specific Management Decisions

3.1 Tax Planning with reference to specific management decisions; Make or buy; own or lease; repair or replace

Tax Planning with reference to specific management decisions-Make or Buy:

This applies to the industry where product assembly is done and the finished product is manufactured. Like car manufacturing, thousands of different parts and components are assembled to make a car.

It goes without saying that not all parts and parts of a car can be manufactured by one company. This is because manufacturing parts involves cost, time, energy, and different types of technology and expertise. Therefore, in such cases, the company purchases parts from an external agency. However, if the costs associated with purchasing from the outside market are high, the company may go into in-house production.

Apart from cost considerations, the following factors are also included in the decision-making process:

1. Utilization of capacity
2. Insufficient fund
3. Latest technology
4. Supplier dependency
5. Factory labor problems
6. How much does it cost to form a putt?
7. Fixed cost: Purchase of plants, etc.
8. Variable costs: raw materials, labor, electricity, etc.
9. How much does it cost to purchase parts from an external agency?
10. Purchase cos
11. Inventory cost

By comparing the two costs above, you need to determine the decisions your company will follow. However, keep in mind that general costs should not be taken into account when comparing costs.

It should also be noted that the costs of manufacturing and purchasing a product both involve revenue and expenditure. Therefore, the tax savings are the same in both cases. It becomes apparent only when a new unit needs to be expanded or established to manufacture that new component.

Tax considerations:

1. Establish a replacement unit: Consider when the choice to manufacture a neighbourhood or component involves fixing an industrial unit break away the tax incentives available at 10A, 10B, 32, 80IA, and 80IB. Is needed.

2. Export: If a "manufacture or purchase" decision is made regarding the export of goods, the tax incentives available at 80HHC are to export the goods manufactured by the taxpayer himself or manufactured by another person. It depends on whether the taxpayer exports the goods.

3. Sale of plants and machinery: If the purchase is cheaper than manufacturing and the evaluator decides to purchase the part or component over a long period of time, he may want to sell the existing plant and machinery tax implications specified by the SEC. 50 should be considered.

Tax Planning with reference to specific management decisions- Own or Lease

Assets can be purchased or leased. Apart from the tax angle, other factors are also important when making a lease or purchase decision, such as the rate of change in technology.

Benefits of the asset being acquired on a lease: Lease rentals can be claimed as a deduction as revenue expenditure. However, depreciation cannot be claimed because the asset is not owned by the assessed person.

Benefits of buying an Asset: Depreciation of a particular asset can be claimed as a deduction. 32. Assets can be purchased entirely or acquired with a loan. If the asset is acquired on loan interest, it can be billed as income expenditure or capitalized. However, if interest is paid after the asset is first used, the interest deduction shall be charged as revenue expenditure. That is, such interest cannot be capitalized.

Note:

>> Lease rentals and loans are repaid at the institution, so each year's cash outflow must be converted into the present value of today's costs, or cash inflows.

How to solve questions?

Where assets are purchased with a loan:

1. Calculate the repayment of a loan that will spread over the years.
2. Calculate interest on a loan that spreads over the years.
3. Calculate each outflow (interest + loan repayment) over several years.
4. Calculate the depreciation cost of an asset that spreads over the years.
5. The calculated tax saved on the invoiced deduction (interest + depreciation) has spread over the years.
6. Calculate adjusted cash outflows that are (3-5)
7. Calculate the present value of adjusted cash outflows.

Where the asset is leased:

1. Calculate the time processing fee for zero years.
2. Computer leasing rentals have spread over the years.
3. Calculate the cash outflow (processing fee + lease rental) that spreads over the years.
4. The calculated tax saved by the invoiced deduction (processing fee + lease rental) has spread over the years.
5. Calculate adjusted cash outflows that are (3-4)
6. Calculate the present value of adjusted cash outflows.

What is the present value (PV value)?

It's the obsolete value, and the opposite is the future value of the cash investment you make today. Simply put, what is the value of "zero year" cash if the cash spills in the fifth year or, in that regard, the nth year? There is a table called the pension table to discount the cash outflow that occurs in the fifth year. This is shown below as an example.

For example. Computer present value of cash outflow from the following information:

Cash outflow

1st Year               2nd Year                   3rd Year

Rs.80,000              Rs 40,000                     Rs 50,000

PV coefficient at 10% of internal rate of return

0.909 0.826 0.751

Solution:

Zero-year discounted value

Rs. 72,720                   Rs 33,040                              Rs 37,550

The value of Rs. 72,720 rupees 33,040 rupees 37,550 represents the discounted value for zero years.

Tax Planning with reference to specific management decisions -Repair or Replace

The main tax consideration to keep in mind is whether repair, replacement, or renewal spending can be deducted as 30, 31, or 37 (1) revenue spending. If expenditures are deductible as revenue expenditures based on these sections, the funding costs of such expenditures will be reduced to the extent of tax savings.

On the other hand, if such expenditure is not allowed as a deduction of 30, 31 or 37 (1), it may be capitalized and, if certain conditions are met, it is capitalized at that amount depreciation will be available.

"Repair" means that the presence of an object is out of order and can be set up correctly by performing a repair that involves the replacement of some parts, making the object as efficient or possible as before. It can be placed as close as possible. After the repair, you can continue to use the repaired one. Replacement is different from repair.

"Replacement" means the removal or disposal of used material by another or new one that can perform the same function with the same or more efficiency. Replacing a section of an interconnected series of machines is a segment of the production process that forms an integrated whole together, and in some circumstances is equivalent to repairing if the units in that segment do not work without such replacement may be considered. The logic cannot be extended to the entire manufacturing facility, from the raw material stage to the delivery of the final finished product.

"Current repair" means that spending must be incurred to "preserve and maintain" existing assets, and the purpose of the spending is to have new assets exist to gain new benefits it means not to be.

Change of secretariat:

Expenditures to move the secretariat from one city to another due to the merger of three companies with many activities in various centers are recognized as revenue expenditures.

Moving headquarters from one location to another is a capital investment.

Related to relocation if the Responsible Company relocates its headquarters from one location to another after the Board of Directors resolves that it is commercially wise to centralize the company's registered offices in one location. And if the lawyer was paid a certain amount, the costs incurred in this account could not be included in the revenue account.

Employee shift spending is income spending:

Expenditures incurred by the assessor for moving employees to another location as a result of moving the factory to another location due to labor insecurity were tolerated as income expenditures.

Hotel reception / dining hall decoration is an income expense:

The cost of installing decorative mirrors on the walls of the hotel reception / dining room, plastered roofs, plywood panels, etc. to deepen the fir and attract customers can be deducted as income.

Expenditures for modernizing the hotel premises are income expenditures.

The costs of repairing and modernizing a hotel and replacing existing components of buildings, furniture and fixtures to create a beautiful, conductive atmosphere for the purpose of operating the hotel fall into this category. It is income and expenditure only and is therefore deductible.

Wall-to-wall carpet spending for offices is capital spending:

Spending on the purchase of wall-mounted carpet for use in the office has nothing to do with increasing, maintaining, or protecting the sales or profits of the business, and therefore it is in the nature of capital investment.

Building repairs can be capital or profitable, depending on the nature of the changes that are brought about.

Expenditures should be considered income expenditures unless repairs create additional benefits or benefits of permanent nature or change the nature, nature, or identity of the building itself. On the other hand, if so, it becomes the nature of capital expenditure.

Replacing an entire asset is not a "repair":

When major repairs are made to use existing assets, it can be referred to as revenue expenditure. But if there is a "whole" replacement, it is a rebuild, not a repair. It is appropriate that old-style assets need to continue to exist in order to say that the expenditures associated with asset improvement are revenue expenditures. If a loss occurs and a new asset is created, the associated expenditure will be capital expenditure.

Repairs to convert Godown to a management office:

If the assessor incurs the cost of repairing the Godown used for business purposes to convert to the Secretariat, the cost will be Revenue expenditure because the business asset retains its nature, its use has changed only, and it is used both before and after the expenditure is related to the assessor's business without any additions. Allowed as an extension of the assessor to commercial equipment.

Refurbishing retail furniture is an income expense:

Expenditures incurred by the valuation company to modify furniture in various retail stores, which were required due to design changes, could be deducted as revenue expenditures.

Repairing and replacing temporary ceilings in cinema buildings is an income expense:

The cost of repairing the temporary ceiling of the movie theatre owned by the assessor was recognized as revenue because it was incurred for business continuity.

Replacing the electrical wiring in a movie theatre is a revenue expense because it occurred to keep the business going.

The cost of repairing a car damaged during a riot is deductible:

The cost of repairing damage to a car on a business trip by a director of the assessed company was allowed as a project cost.

Difference Between Revenue and Capital Expenditure

Key takeaways:

1. Manufacturing or purchasing decisions apply to the industry in which the product is assembled and the finished product is manufactured. Like car manufacturing, thousands of different parts and components are assembled to make a car.
2. It goes without saying that not all parts and parts of a car can be manufactured by one company.
3. This is because manufacturing parts involves cost, time, energy, and different types of technology and expertise.
4. Therefore, in such cases, the company purchases parts from an external agency.
5. However, if the costs associated with purchasing from the outside market are high, the company may go into in-house production.
6. The main tax consideration to keep in mind is whether repair, replacement, or renewal spending can be deducted as 30, 31, or 37 revenue spending.
7. Funding for such expenditures will be reduced to the extent of tax savings.
8. On the opposite hand, if such expenditures aren't allowed as a deduction of 30, 31, or 37, they'll be capitalized and, if certain conditions are met, depreciation capitalized at that amount will be available.

3.2 Tax planning with reference to Employees’ Remuneration

Section 15 of the law establishes the conditions under which income falls under the head of the “salary".’

1. Compensation, whether paid or not, is paid by the employer to the former employee (assessor) during the previous year's employment period.
2. Salary paid to the employee by the employer or former employer in the previous year, even though it was not due to him.
3. Salaries paid to employees by the employer or former employer in the previous year that was not charged under Income Tax in other previous years.

An important element of this head is that it mandates the relationship between the employer and the employee. If there is no relationship between the employer and the employee, then the income is not accessible under the head of the salary.

Section 17 of the Act refers to the term “salary."-

1. Wages;
2. Any pension or pension;
3. Any gratuity;
4. Fees, benefits or benefits in lieu of compensation or wages, or nevertheless;
5. Any advance on salary;
6. Any payment received by the worker with respect to any time of leave not benefited by him;
7. In accordance with Rule 6 of Part A of the fourth schedule may be assessed to a certain extent on pay, the annual savings to the balance of employees participating in the perceived Provident Fund.;
8. To some extent it is billable to be assessed under Rule 2 of the Fourth Schedule Part A Rule 11 sub-rule 4 of the employees participating in the perceived Provident Fund.、
9. Contributions made by the central government or other employer in the previous year to the employee's account under the pension plan listed in Section 80CCD

Allowances 

The employer pays the allowance to his employee to meet his personal expenses. Allowances can be taxed in full or partially.  Some tax allowances include rent allowances and special allowances under Sections 10(14)(i)and(ii). The allowances that are fully taxed are:

1. Dearness Allowance
2. Overtime allowance
3. Flat-rate medical allowance
4. Tiffin allowance
5. Servant allowance
6. Non-internship allowance
7. Hill allowance
8. Warden and Warden allowance
9. Request for refund of overpayment

Perquisites

In addition to their salary, employees are often given some other benefits that may not even be in the form of cash. For example, you can rent free accommodation or a car, which is given to the employee by the employer.

Reimbursement of invoices is not a perk. Perquisites are given only during the continuation of employment. The taxable conditions are

1. Rent free accommodation
2. Interest-free loans
3. Movable property
4. Education expenses
5. Premiums paid on behalf of employees

The exempted benefits include:

1. Medical benefits
2. Leaving a travel concession
3. Health insurance premiums
4. Car, laptop etc. For personal use.
5. Staff benefits system

Get a profit instead of a salary

Section 17(3) gives a comprehensive sense of profit instead of salary. Payments or unpaid payments that should be paid to employees by the employer. There are two essential features for the payment to be valid under Section 17 (3- )

1. There must be compensation received by the assessor from his employer or former employer;
2. It is received or in connection with the termination of his employment or adjustment of conditions.

Payments from unrecognized provident or retirement funds are taxable as “benefits instead of salaries “if the balance is an employer contribution or interest on employer contributions.

Exceptions to Article 17 (3) (exemptions under Article 10)

1. Death cum retirement gratuity;
2. Rent allowance;
3. Commuting value of pensions;
4. Reduced revenue received by employees;
5. Payments received from statutory or authorized reserves;
6. Payment from the approved old age fund;
7. Payment from the recognized Provident Fund.

Calculation of income tax on salaries

Let me give you an example. –

Individuals, for example, let Mr. A receive the following payments –

Basic salary-rupees. 2, 50,000 per year;

Dearness Allowance-Rs. 10,000 per year;

Entertainment Allowance-Rs. 3,000 per year;

Professional tax-Rs. 1,500 per year;

After that, how much money will be taxable from his salary?

When examining the total salary = basic salary + attendance allowance + entertainment allowance, etc., 2, 50,000 + 10,000 + 3,000 =2, 63,000

Under Section 16 (iii) =2, 63,000-1500=Rs per deduction. 2, 61,500

The rate of income tax on income Rs. 2, 61,500 is 5% and equals Rs. This amount of 13,075 is taxable.

Employees need to consider the following aspects when planning their payroll packages:

1. Employees must choose to split their salary into basic salaries. It is an allowance and you should not choose a consolidated salary. This will greatly minimize his tax return, for example, because some allowances are exempt from tax to some extent. Transportation allowance is exempted until 800 pm.
2. Under employment conditions, dear allowances must form part of the retirement benefit. This not only increases employee retirement benefits, but also reduces tax consequences for HRA, tips, commuting pensions, employer contributions to RPF, and more.
3. Commissions paid according to terms of employment must be based on sales in order to form part of the salary. This also reduces tax consequences for HRA, commuting pensions, interest credited to RPF, and more.
4. If an employee is permitted to use multiple vehicles for private purposes, the horsepower of such vehicles must not exceed 1.6 liter cubic capacity. Otherwise, one 1.6 cubic car is considered to have been provided. The liter capacity that leads to a higher rating of such a par suite.
5. Employer contributions to the RPF are exempt from this limit and must be 12% of salary.
6. Employees should opt for a refund of medical expenses (at a free medical facility) instead of medical expenses. These allowances are taxable, while refunds are not taxable up to $ 15,000. The same applies to entertainment allowances.
7. Requirements should take precedence over taxable allowances. Not only does this help lower the rating of requirements like rent-free homes, but employees are not categorized by any particular employee.
8. It can be noted that if furniture is provided without rent-free accommodation, it will not be taxed on the hands of unspecified employees.
9. Employees who resign before completing five years of continuous work at the organization confirm that the new organization they join maintains the RPF and transfer the cumulative balance of the fund to the new organization. Must be able to claim an exemption PP- ATLP-3 44
10. Upon retirement, employees are exempt from tax within certain limits and must choose a commuting pension up to the maximum permissible limit.
11. Monetization of leave should take place at the end of employment by retirement pension or otherwise. In that case, the tax is exempted within certain limits.

In addition to the above, employees should also plan to make the most of the relevant provisions under Article 80 of the Income Tax Act.

Deductions:

Keytakeaways:

1. An important element of this head is that it mandates the relationship between the employer and the employee.
2. If there is no relationship between the employer and the employee, then the income is not accessible under the head of the salary.
3. Employees must choose to split their salary into basic salaries. It is an allowance and you should not choose a consolidated salary.
4. This will greatly minimize his tax return, for example, because some allowances are exempt from tax to some extent.
5. Transportation allowance is exempted until 800 pm.
6. Under employment conditions, dear allowances must form part of the retirement benefit.

3.3 Tax Planning with reference to receipt of Insurance Compensation

The issues surrounding insurance receipt taxation are not new. However, they remain complex. Not only do you need to determine if the receipt is income or capital, but you also need to determine if the receipt is taxable. If your receipt is taxable, you need to determine when tax points will occur.

Income v capital

When deciding whether an insurance receipt is income or capital, the first thing to consider is what is insured and the nature of the loss covered by the insurance receipt. If the insurance policy provides insurance against lost income, the insurance receipt will be considered as a replacement for the lost income and will be taxed on the income account.

Examples of this type of insurance include income protection insurance, or part of a business continuity insurance policy related to loss of profits. Insurance receipts may also be treated as income to cover additional costs incurred as a result of the occurrence of a particular event. For example, insurance claims received in connection with the repair of accidental damage to assets.

In general, all other insurance receipts are considered capital in nature and you need to determine if there is a capital gains tax (CGT) event associated with that receipt.

Whether compensation and tax exemption apply.

Some insurance receipts, such as workers' accident compensation payments and personal injury claims, may be based on the insured's loss of income. However, it is more accurately characterized as compensation for loss of income capacity rather than actual loss of income. Therefore, these receipts are essentially capital.

Insurance receipts often consist of a combination of both income and capital items. If possible, you should split the receipt into various components and consider the correct component of the receipt individually. If it is not possible to reasonably divide the receipt between its components, then the entire amount is considered to be related to the main purpose of the receipt.

Taxation of insurance receipts on income accounts

When an insurance receipt is received as compensation for a loss of income, the receipt is typically taxed within the same way because the income it replaces. Section 15-30

The 1997 tax Assessment Act (Cth) (ITAA97) specifically includes insurance receipts received reciprocally for the loss of taxpayer's assessable income within the year during which the compensation is formed received.

The exception to this general rule is when insurance claims are received in the form of late payments. Sections 159ZR to 159ZRA of the 1936 tax Assessment Act (Cth) (ITAA36)

However, a natural person who receives a receipt for a lump sum payment made in arrears may be subject to rebate. This rebate is the tax rate that would have been applied if received in each relevant year and has the effect of taxing the lump sum payment for the current year.

To be eligible for this rebate, the lump sum payment for delinquency must be equal to at least 10% of the individual's normal taxable income (excluding delinquency) in the year in which it was received. It should also be possible to reasonably allocate delinquency to the relevant year.

Taxation on the collection of deductible costs is covered by Subdivision 20-A ITAA97, which includes all types of collection, not just those related to insurance receipts. Section 20-30ITAA97 contains a table showing the deductions for which collection is included in taxable income. Examples of costs included in this table are losses due to embezzlement, theft, or misappropriation, and expenditures that can be deducted under the capital deduction clause.

If the value is deductible in one year, s 20-35 (2) ITAA97 provides that the precious amount doesn't exceed the loss or expense. If expenses can be deducted for more than two years, such as the acquisition of depreciable assets or expenses incurred over several years, use the methodology included in 20-40 ITAA97 to determine the amount included in the taxpayer's taxable income. To do in the year of receipt.

If recovery can be captured by both subdivision 20-A and subdivision 40-DITAA97-based balancing adjustment rules, the s 20-45 ITAA97 will

Subdivision 20-A is reduced by an evaluable balance adjustment.

Section 20-50ITAA97 stipulates that if an expense is only partially deductible, the assessable recovery is limited to the deductible percentage of the expense.

Taxation of insurance receipts on capital accounts

ATO has issued TR95 / 35. This represents the Secretary's view on the application of the CGT to the compensation received, including insurance receipts. This ruling was issued prior to the introduction of ITAA97 and most of the relevant provisions of ITAA36 were abolished, but the transition of operational provisions from ITAA36 to ITAA97 is still relevant to the interpretation of the sections mentioned in the ruling means. ..

This ruling classifies compensation receipts, including insurance receipts, into four types of compensation:

1. Received at the actual disposal of the underlying asset (or part of the underlying asset).
2. Received for permanent damage to the underlying asset or permanent reduction in value without actual disposal;
3. Received in disposition of the right to seek compensation without the actual disposal of the underlying asset;
4. Received as a result of an act, transaction, or event that does not fall under any of the above.

Remuneration received for the actual disposal of the underlying asset

From an insurance perspective, the compensation received for the disposal of the underlying asset usually takes the form of a receipt related to the destruction or loss of the asset. This disposal

For an asset, a CGT event occurs in connection with that asset, and a receipt for the reward is included in the consideration for the event.

Normal CGT rules apply when determining the taxable capital gains or losses realized by the disposal of an asset. This includes applying a 50% discount if the asset has been held for more than 12 months and, if applicable, SME CGT concessions. CGT's regular tax exemptions also apply to the main building, personal assets under $ 10,000, pre-CGT assets, automobiles and depreciable assets.

If the insurance money is used to purchase an alternative asset, or if the insurer provides an alternative asset, the taxpayer may choose to apply a rollover of the alternative asset included in.

Subdivision 124-BITAA97. In this rollover, the replacement asset is considered to inherit the original cost base and the purchase date of the original asset. This includes pre-CGT status retention where the original asset was acquired before September 20, 1985.

Subdivision 124-B applies to various compensation receipts as well as insurance claims. Some of the events that generate some of these receipts may be predicted in advance. Therefore, rollovers may apply to alternative assets acquired prior to disposal of the original asset. If the taxpayer receives money in return for the disposal of the property, at least part of the cost of acquiring the replacement must be incurred within one year before the event and within two years ending one year after the event. Such additional time allowed by the Secretary in special circumstances. Insurance claims are usually received in connection with an unexpected event, so the relevant period in which spending occurs is usually the year beginning on the day of the event.

In addition, you need to bear only the cost of acquiring the alternative asset within this period, not actually acquiring the alternative asset. This is relevant if the original property is a destroyed building and an insured alternative building is in progress. In this case, the replacement building does not need to be completed within a year, provided that there are at least some costs associated with the replacement building.

If the insurance receipt exceeds the cost of the exchanged asset, the excess amount that leads to the realization of taxable capital gains. This realized capital gain is also not taxable if the original asset is not subject to CGT, for example if it is a primary residence or pre-CGT asset.

To be eligible for rollover under Subdivision 124-B, the exchange asset must also be used for the same or similar purposes as the original asset for a reasonable period of time after acquisition.

Disposal of depreciable assets does not result in taxable capital gains or losses, but is still subject to the balancing rules within the Div 40 ITAA 97 capital reserve clause. Insurance receipts are treated as income received from the disposal of assets for the purpose of calculating balance adjustments.

Section 40-365ITAA97 provides a rollover of alternative assets in which the alternative assets are acquired following the involuntary disposal of the original depreciable assets. Where taxpayers choose

To apply this rollover, the exchanged asset is treated as a continuation of the original asset with a capital deduction (depreciation). A deduction calculated based on the cost and validity of the original asset.

To apply this rollover, taxpayers must bear the costs associated with the acquisition of alternative assets or hold the assets for capital deduction purposes within the period one year before and one year after the event. You need to get started. Such additional time allowed by the Secretary at the event, or in special circumstances.

Compensation received for permanent damage to the underlying asset

If there is no disposal of the asset, but the asset is permanently damaged or its value is permanently reduced, the compensation received will reduce the cost base of the asset. This fee is treated as a recovery of the cost of acquiring the asset and is excluded from the asset's cost base in accordance with 110-45 (3) ITAA97. CGT event H2 can occur when an act, transaction, or event occurs in connection with a CGT asset, and this event does not adjust the cost base of the asset. TR 95/35 treats these receipts as a recovery of costs that reduce the cost base of the asset, so there are no CGT events and therefore taxable capital gains if the receipt exceeds the cost base of the asset. There is no.

Compensation received for disposition of the right to seek compensation

Paragraphs 183 to 187 of TR 95/35 discuss the compensation received under an insurance contract as being received within the disposition of the proper to hunt compensation. The specific examples in these paragraphs deal with insurance policies for liability arising from negligence. For the purposes of the CGT, the right to compensation under the insurance policy is deemed to have been acquired at the time of the event causing the negligence claim. The cost base includes the amount the insured must pay the claimant, as well as other costs associated with the claim.

Insurers typically cover only the amount paid to the claimant, so revenue is typically equal to the cost base and there are no taxable capital gains or losses.

If the insured needs to pay the claimant an excess or other uninsured amount, this amount will lead to capital loss as the cost base (the amount payable to the claimant) will be less than the revenue. .. (Amount paid by the insurance company).

Rewards received in connection with other acts, transactions, or events

TR 95/35 does not provide details regarding the handling of receipts that do not fall under the other three types of compensation. Therefore, general principles should be considered when deciding on the tax treatment of such receipts.

Taxation Section 118-300ITAA97 of Personal Injury or Life Insurance Receipts provides for exemption from CGT rules for insurance claims received in connection with life insurance contracts or insurance receipts arising from either illness or accident insurance. Increase. This is consistent with the principle that an individual's life and health is not itself a CGT asset and is not used to generate taxable income.

Receipts from personal injury or the income protection portion of a life insurance policy are taxed as income as described above.

Conclusion

When deciding on the correct tax treatment for the insurance coverage you receive, it is essential to check both the insurance policy and all documents attached to the receipt. This not only allows taxpayers to correctly identify the nature of the indemnification, but also allows the indemnification to divide the receipt into the correct components associated with two or more different types of losses.

Key takeaways:

1. The issues surrounding insurance receipt taxation are not new. However, they remain complex.
2. Not only do you need to determine if the receipt is income or capital, but you also need to determine if the receipt is taxable.
3. When deciding on the correct tax treatment for the insurance coverage you receive, it is essential to check both the insurance policy and all documents attached to the receipt.
4. Insurers typically cover only the amount paid to the claimant, so revenue is typically equal to the cost base and there are no taxable capital gains or losses.
5. When an insurance receipt is received as compensation for a loss of income, the receipt is typically taxed within the same way because the income it replaces. Section 15-30.
6. Some insurance receipts, such as workers' accident compensation payments and personal injury claims, may be based on the insured's loss of income.

3.4 Tax planning with reference to distribution of assets at the time of liquidation

It's time for the limited company to decide to close its business. In this case, the employer may consider liquidating the company and converting the company's assets into cash. People generally assume that they will only enter the liquidation process when the company officially goes bankrupt. However, that is not the case. The clearing process works for both payable and insolvent companies. There are three main categories of a company's liquidation process: solvents, bankruptcy, and forced liquidation.

What is solvent clearing?

A company whose assets exceed its liabilities and which can be paid to all creditors within 12 months of the debt being repaid is considered a solvent company. However, even solvent companies may decide to liquidate their business in order to personally transfer their assets or cash. Solvent clearing is known as member voluntary clearing (MVL). Some of the situations in which a company director chooses to liquidate a company are as follows:

1. If the company has no plans to continue its business or has no purpose left
2. A company director or shareholder decides to retire and transfer assets and cash to them.
3. When a director decides to start a new business, acquire assets and monetize the liquidation.

What is Bankruptcy Liquidation?

A company whose debt exceeds its assets and is unable to pay its creditors due is considered a bankrupt company. Bankruptcy liquidation is known as creditor voluntary liquidation (CVL). CVL is a formal liquidation process used to close the operations of a bankrupt company. It is initiated by a director or shareholder of the company and sells the company's assets and returns them to the creditors in a timely manner. This liquidation process requires a bankruptcy practitioner to be appointed as the liquidator in order to properly manage the entire process.

What is forced clearing?

Creditors typically initiate this clearing process through a court order known as Winding Up Petition (WUP). This petition notifies us of a petition for closure of business and liquidation of assets.

The role of the liquidator in the company's liquidation process

The liquidator's main role is to manage the company's liquidation process. Liquidator investigates all operations of the company and looks for assets that the company has sold at a price lower than the actual market price. The liquidator was free to cancel these transactions, which caused a loss to the company.

Tax impact on company liquidity

Various tax issues arise during our liquidation process. If the employer decides to sell the company's assets, it may be taxable. In such cases, the liquidator must pay the tax included in the amount obtained during the liquidation process. This tax must be paid before distributing cash or assets to shareholders or creditors.

Conclusion

Liquidation of a company brings great benefits to shareholders. However, distributions to shareholders are taxable if the funds are not properly managed during and before liquidation. The company's liquidation process has many benefits, including significant tax incentives and ongoing reductions in compliance costs.

Income from the sale of liquidated assets shall be distributed in the following order of priority:

1. The bankruptcy resolution process and clearing costs will be paid in full.
2. Debts that are equally ranked among:
3. Membership fees for workers 24 months before the settlement start date.
4. Debt to the secured creditor when the secured creditor waives the collateral
5. Wages and unpaid membership fees payable to non-workers for the 12 months prior to the liquidation start date.
6. Financial debt owed to unsecured creditors.
7. Remaining debt and membership fees.
8. Preferred stockholders (if any).
9. In some cases, stock shareholders or partners
10. The following membership fees shall be ranked equally among the following:

1. The amount payable to the central and state governments, including the amount received for the Indian and State Endowments, for all or part of the two-year period. Before the settlement start date.
2. Debt to be paid to the secured creditor for the unpaid amount after exercising the security interest

If the business of the corporation is completely terminated and the assets are completely liquidated, the liquidator shall apply to the arbitration body (NCLT) for the dissolution of the corporation.

The arbitration body shall pass the order to dissolve the corporate debtor based on the application submitted by the liquidator.The date of the order and the corporate debtor shall be dissolved accordingly

A copy of the dissolution order shall be forwarded to the authority (ROC) where the legal entity is registered within 14 days from the date of the order.

If a company's assets are distributed to shareholders at the time of liquidation, such distribution shall not be considered a transfer by the company. Therefore, the company has no capital gains.

However, if the shareholders involved in the liquidation of the company receive money or other assets from the company in lieu of the shares they own, such shareholders shall be subject to income tax under the heading "Capital Gains". .. Money and assets received so. In this case, the consideration for the purpose of capital gains shall be, within the meaning of Section 2 (22) (c), the market value of the money received and / or other assets on the distribution date minus the deemed dividend. Increase.

Sale of assets received at the time of liquidation:

When the assets (other than cash) acquired by the shareholders at the time of liquidation are subsequently transferred by the shareholders in accordance with Article 55 (2) (b) (iii). Then, in order to calculate the capital gains of such a transfer, the acquisition cost of such an asset must be the market value of the asset on the distribution date. In this case, the deemed dividend will not be deducted.

Key takeaways:

1. It's time for the limited company to decide to close its business.
2. In this case, the employer may consider liquidating the company and converting the company's assets into cash.
3. People generally assume that they will only enter the liquidation process when the company officially goes bankrupt. However, that is not the case.
4. When the assets (other than cash) acquired by the shareholders at the time of liquidation are subsequently transferred by the shareholders in accordance with Article 55 (2) (b) (iii).
5. A copy of the dissolution order shall be forwarded to the authority (ROC) where the legal entity is registered within 14 days from the date of the order.

References:

1. Singhania, Vinod K. And Monica Singhania. Corporate Tax Planning. Taxmann Publications Pvt. Ltd., New Delhi.
2. Ahuja, Girish. And Ravi Gupta. Corporate Tax Planning and Management. Bharat Law House, Delhi.98
3. Acharya, Shuklendra and M.G. Gurha. Tax Planning under Direct Taxes. Modern Law Publication, Allahabad.
4. Mittal, D.P. Law of Transfer Pricing. Taxmann Publications Pvt. Ltd., New Delhi.
5. IAS – 12 and AS – 22.
6. T.P. Ghosh. IFRSs.Taxmann Publications Pvt. Ltd. New Delhi.