Jun 122021
 

Between corporate form of business and other:

The advantage of the corporate form of business over traditional business is that it discriminates the executive wing from the investor of the fund. The corporate form of business is more flexible, transparent, and user-friendly. An investor may come in or go out as per his option and opportunities available without impacting the normal operation of the business. The advantages to the business to a corporate form of a business are:

  1. Expansion of business: Expansion of business in the case of the corporate form of business is easier as the introduction of and/or exit of a new investor or existing investor is done by simply transaction in shares. Any introduction of capital losses its individual identity and clubbed under the head “SHARE CAPITAL”. Thus, the opening of the new branch, new franchisee, or new department, or new line of business is done by expanding the capital base without impacting the existing operation of the business.
  2. Trademark and copyrights: In the case of a traditional form of the business name is co-exiting with the name of the owner. In the case of the corporate form, these rights are assets of a company tradable like any other form of business.
  3. Loans and other bank dealings: The risk appetite of the bank is different for a company than its owner. Owner liability is limited to the shares held and unpaid by him and thus in applying for a loan with banks and other financial institutions profit and loss of the company become significant and more relevant as the owner will take out any left after being paid as interest.
  4. Business life not impacted by investor: A corporate form of business is always more advantageous with features like perpetual succession. Therefore there is assurance that the business operations can be continued even after the passing of the owner and there is the ease of sale/transfer of business by way of transfer/sale of shares.
  5. Between LLP & company: There is no simple rule of thumb in deciding between the two forms. For example, the LLP form has the advantage with regard to lesser compliances as compared to a Company.
  6. However, w.e.f FY 2019-20, Companies now have the option of paying tax at 22%  as against the tax rate of 30% for LLPs. A cost-benefit analysis would need to be carried out on a case-to-case basis.

How the exiting proprietorship or partnership business may be transferred to a corporate form?

For Incorporating and running either form of business namely, LLPs or Private Limited Companies a minimum of two persons is required.

  • 2 Partners in case of LLPs and
  • 2 Directors and 2 Shareholders(Shareholders and directors can be the same persons).

There can be two possible solutions:

  1. a) The Dealer may include any of his/her family members/close friends to make up the number.
  2. b) Another alternative is including any of the employees as Director and the Shareholder. With regard to Shareholding, a majority of the shares may be held by the existing proprietor in his/her own name and a few (Insignificant number say 1%) shares may be held by the proprietor jointly with the employee.

How to proceed in case the existing name is not available in case of applying for company registration?

In such a case the suggested course of action could be as follows:

  • Apply for Trademark with Trademark Registry and local authorities for the desired name, let’s say – “ Swastik Enterprises”, to display on the premises.
  • Apply for a name with the ROC for some other name. This is permissible.
  • A live example of this is that the Company selling Dominos Pizza uses the Trade Name Dominos Pizza for display in its premises but is registered with the ROC with the name Jubilant Food Works Limited. In such a case “Dominos Pizza” become a trading name in the pizza industry which is also tradable like any other assets.
Jun 102021
 

Corporatization of business:

The conversion of a traditional form of business into neo corporate form is commonly known as corporatization. The concept of the corporate form of business can be explained as below:

Point Traditional business Cooperate form of business
Form of business ·         Proprietorship

·         Partnership

·         Firm

·         Hindu undivided family

·         Artificial judicial person

– Company

– LLP

– Society

– Trust

–  Association and /or body of individuals

Manner of doing business The person investing the fund is also doing the business. Thus, income is taxable directly on investors qua taxing the business. Income is taxed directly on the business as business is done by a group where investors may be a part or may not.

 

Transfer of assets and/or liabilities in case of corporatization:

  1. Manner of transfer of business (i.e. Business Transfer Agreement): A sale or transfer, as the case may be, the agreement may be entered into. You may transfer only those assets and liabilities. This may be done at book value as per the balance sheet prepared on the date of transfer. Stamp duty for this purpose differs from state to state and ranging between Rs.200/- to Rs.500/- for Business Transfer Agreement (BTA)
  2. Transfer of OD and/or loan a/c: The loan can be shifted from proprietor/Partnership to LLP/Company. In the case of family operated business, the same person/persons will become the person–in–charge of the new entity, this is administrative work may be communicated to the bank for fresh documentation. No stamp duty is required to an existing collateral mortgage if any. Only a guarantee deed in favor of a new entity would be enough to shift the loan. However, banks may negotiate the loan freshly if the risk factor in case of corporatization increases to the bank.
  3. Transfer of input tax credit: -We have to apply to the GST department in case of business transfer for transferring the input tax credit. This can be done by methods:
    1. Electronic Transfer (Form GST ITC-02): As per Section 18(3) of the CGST and SGST Acts, where there is a change in the constitution of a registered person on account of the sale, merger, demerger, amalgamation, lease, or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains un-utilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in the manner prescribed in the CGST / SGST Rules, 2017 by declaring the same, electronically, on the common portal in Form GST ITC-02.
    2. Transfer by invoice: Alternatively a tax invoice from the existing GSTIN can be made for the sale of the stock available with the dealer to the new GSTIN. This may do in case there is no specific provision of transfer of liabilities. This will be unfavorable in case of GST rates in recent times are revised downward as an invoice in the E-way portal is possible only with the latest applicable GST rates and not at the rates at which items are purchased with. However, this method may have some practical difficulties while preparing E way for the transfer of stock.
  4. Income tax calculation in case of corporatization:

As per Section 47(xiv) of the Income-tax Act, the following transaction is not regarded as transfer and hence not subject to capital gains:

Sole Proprietor converted to corporate business:

Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company :

Provided that—

(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 fifty percent of the total voting power in the company and his shareholding continues to remain as such for a period of five 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;

 

(xiii) Partnership Firm converted to the corporate organization:

Any transfer of a capital asset or intangible asset by a firm to a company as a result of a succession of the firm by a company in the business carried on by the firm,

Provided that—

(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 the 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 fifty percent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession;

Jun 082021
 

Facts of the case:

Measurement Consideration
Total area purchase in FY 2003-2004 36 Acres or

1559123 Sq Ft

Rs. 14,19,99,602/-
Transfer to Bangalore Development Authority in FY 2005-2006 326635.30 Sq Ft
Area retain by the assessee 1232771 Sq Ft

The assessee entered into a JDA (Joint Development Agreement) with M/s Brigade Enterprises Private Limited on 8-01-2004 and retained land measuring 1232771 Sq.ft which was put to development as per the covenants of JDA.

The cost of acquisition includes a sum of Rs. 1 crore paid to M/s Bentley Investment as commission. The Commission paid was with respect to the purchase of aforesaid land. The assessee though had an obligation to pay the commission amount immediately after the purchase of land, had to defer the payment due to negotiation differences. The assessee has paid the commission amount of Rs. 1 crore in the FY 2007-2008 and details of the same are under:-

(a) Rs. 83,30,000/-paid from Vijaya Bank Ch.No 674658 dtd 10-1-2008
(b) Rs. 16,70,000/- paid from Axis Bank Ch.No 462924 dtd 17-3-2008.

The assessee had a confirmation letter from M/s Bentley Investment for having acknowledged the commission amount.

Now the issue is whether the above commission ought to be paid after deduction of commission and/or the above commission is allowable in computing the cost of acquisition of property?

Analysis of facts:

Can commission paid to be treated as a cost of improvement? No, the commission claimed to have been paid for the services rendered in acquiring the property by the assessee, but not for anything done to improve the value of the property after its acquisition.
Can the above transaction be a business transaction? Assessee is not engaged in any business activity in real-estate but has only transferred his property to the Developer for the purpose of development and hence receipts arising out the transaction can not be treated as business receipts, but only as capital receipts; and

Also, he agreed to make certain payments as commission not at the time of the acquiring the property, but only after he starts receiving the fruits of his subsequent transfer to the Developer meaning thereby a capital transaction.

The commission is paid almost after 4 years? There is no time limit is prescribed by the provisions of section 48(1) and 55(1)(b) of the Income-tax Act, 1961.
Cash system or mercantile system of accounting? Method of accounting is relevant for computing profits and gains from business.
The written agreement of dealings? Even if the assessee does not have an agreement with the payee but payment has been made through the banking channel and the same was offered for tax in payee partnership profits also. Thus, it can not be said that that commission paid to a partnership firm is a means to reduce the tax bill.

 

The party who has received the commission payment confirmed that they have received the commission and payment has been made by cheque. Therefore, no one cannot doubt the genuineness of this payment.

Conclusion:

These payments are inextricably linked to the acquisition of the impugned property and it should be considered as the cost of acquisition while determining the capital gain on entering into JDA.

Jun 042021
 

Due dates for the Month of June 2021
7th
INCOME TAX
– TDS Payment for May.
10th
GST
– Return of authorities deducting tax at source – GSTR 7 for May.
– Details of supplies effected through e-commerce operator and the amount of tax collected – GSTR 8 for May.
11th
GST
– Details of outward supplies of taxable goods and/or services effected – GSTR 1 for May.
13th
GST
– Return for Input Service Distributor – GSTR 6 for May.
15th
Providend Fund
– PF Payment for May.
ESIC
– ESIC Payment for May.
20th
GST
– Monthly return on the basis of finalization of details of outward supplies and inward supplies along with the payment of the amount of tax – GSTR 3B for May.
– Return for Non-Resident foreign taxable person – GSTR 5 for May.
22nd
GST
– GSTR 3B for May if turnover below Rs. 5 Crore for Gujrat, Madhya Pradesh, Chattisgarh, Maharashtra, Telangana. Andhra Pradesh, Karnataka, Goa, Kerala, Tamil Nadu, Puducherry, Dadra & Nagar Haveli.
24th
GST
– GSTR 3B for May if turnover below Rs. 5 Crore for the Rest of India.
28th
GST
– Details of Inward Supplies to be furnished by a person having UIN and claiming refund – GSR 11 for May
.
30th
PROF. TAX
– Monthly Return for Tax Liability of Rs. 100,000 & above.
INCOME TAX
– TDS Quarterly Statements (Other than Government Deductor) for January to March
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Jun 032021
 

Meaning of non-for-profit entities:

Not-for-Profit entities and small educational, medical institutions or hospitals, etc. existing solely for educational and/or philanthropic intentions enjoy tax exemption subject to meeting certain conditions These organizations are highly dependent on donations, as it is the primary source of funding for their activities

Meaning of corpus fund:

The corpus is never meant to be utilized and remains parked separately. Income accruing on such corpus funds is generally utilized towards the organization’s activities.

Taxation of corpus fund in light of FB 2021 amendment:

Existing tax treatment: Donations earmarked as Corpus are excluded from income for the year without any further compliance requirement and/or conditions. There are restrictions regarding the utilization of such funds. It does not matter whether corpus funds are used for activities or for making investments.

The issue in existing treatment: The above treatment leads to double deduction in the case of such organizations. For instance, an NGO received a corpus fund and construct a building out of that fund. Now, NGO for monies expended in the construction of the building would claim deduction two times, firstly at the time of construction of building and utilization of corpus fund for construction of building as monies expended in the construction of the building and secondly, as depreciation on the so constructed building. The Finance Bill, 2021 (the ‘FB’) has proposed significant changes in the provisions governing such institutions to eliminate the possibility of unintended double deduction / double-counting while calculating application or accumulation of funds

Thus, due to the proposed amendment, Corpus contributions received after 1 April 2021 are to be mandatorily invested in a specified manner by such qualifying organizations. This is a pre-requisite to avail tax exemption in respect of Corpus contributions.

Some of the key features of the proposed changes are:

Corpus funds should be earmarked and invested separately. It should not be mixed with other general/ non-corpus funds.
Investment condition applies only in respect of corpus contributions which are claimed as tax-exempt. Corpus created at the time of formation of the institution or out of basic accumulation, anonymous donations, etc. would remain outside the purview of this.
Corpus contribution could be freely utilized by organizations for their incidental business activities, operational expenses, etc. so far. However, going forward, they may have limited flexibility in using corpus donations.
Corpus donations utilized towards the objects can be considered as the tax-deductible applications only in the year of re-investment in the corpus.
Such funds will no longer be available as a part of free cash. Means such funds can not be held as cash in hand in the institutions.
Investment in immovable property out of such corpus contribution is one of the permissible modes of investment provided the asset is used only for the advancement of charitable or religious objectives of the institution.
Any shortfall in investments out of the current corpus donations would be fully taxable. The advantage of tax exemption on minimum utilization (as applicable to other voluntary contributions) is not available to such corpus contributions.

These changes will affect corpus donations received after 1 April 2021. Thus, Corpus donations received up to 31 March 2021 are not required to be statutorily invested and can be used in any manner whatsoever.

Jun 012021
 

Facts:

Return filed on income         31.10.2010  

Rs. 6,24,900/-

Gross receipts More than Rs. 100,00,000/-
Expenses claimed

Freight

 

Rs. 6.46,472/-

Salaries and wages Rs. 68,34,073/-
Traveling expenses Rs. 5,05,981/-
Other expenses Rs. 7,82,700/-

 

Whether profits of the above taxpayer can be estimated @ 8% in the case supporting documents, i. e., books of accounts, bills, and vouchers, etc. for claiming the above expenses are not submitted?

Relevant rule section 44AD:

44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight percent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed :

Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.

(3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.

(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under subsection (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

Analysis & conclusion:

As per sec. 144 of the Act, if the assessee fails to comply with the terms of a notice issued under sub-sec. (1) of sec. 142 and if the assessee fails to provide the necessary information, the Assessing Officer had liberty to pass the order on the best judgment assessment.

Secondly, if the assessee produced the books of accounts where the Assessing Officer is not satisfied with the correctness or completeness of the accounts of the assessee, or where the method of accounting provides standards as notified under sub-sec. (2), have not been regularly followed by the assessee, the Assessing Officer may make the assessment in the manner provided in sec. 145 of the Act.

Thus, in case the assessee has not produced any evidence before the Assessing Officer, therefore Assessing Officer is justified in estimating the profit at 8% even in cases of gross receipts are more than Rs, 1 crore.