Pooja Nahar

Capital Gains-Short Term & Long Term Capital Assets

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Introduction:- Any profits or gains arising from the transfer of capital asset in the previous year shall be chargeable to income tax under the head ‘Capital Gains‘.

Short Term Capital Asset

Short term capital asset means a capital assets held by an assessee for not more than 36 months immediately the date of its transfer.

Exception:-

The following shall be treated as short term capital asset if capital asset held by an assessee for not more than 12 months.

  1. A Security (other than a unit ) listed in a recognized stock exchange in India or
  2. Unit of Unit Trust of India or a unit of an equity oriented fund or Zero Coupon Bonds.

Exception:

The following shall be treated as short term capital asset if capital asset held by an assessee for not more than 24 months.

  1. A share of a company [not listed in a recognized stock exchange or
  2. An immovable property.

Long Term Capital Asset

Capital asset which not a short-term capital asset.

Derivatives | Cash Vs Derivative Market | Forward Vs Futures Contract

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What is derivative?

Derivative is a product whose value is derived from underlying assets, index or reference rate.

Examples of underlying assets: – Equity, commodity and Forex.

Users of Derivatives: –

  • Individual Investors.
  • Dealers
  • Institutional investor.
  • Corporation

Cash Vs Derivative Market

CashDerivative
Tangible assets are traded.Contract based on tangible or intangibles.
Can purchase even one share.Minimum lots are fixed
Risky Risk is limited
for investmentfor hedging, speculation
Requires trading account with depository participantsrequires future trading account.
Purchase shares of the company and get ownership.does not happen as in cash market.

Difference between Forward and Future Contract

Sr. NoForwardFuture
1. A forward contract is an agreement between two parties [buyer & a seller] that obligates the seller to deliver a specified asset of specified quality and quantity to the buyer on a specified date at a specified place and buyer as well, in turn, to pay a pre negotiated price at the time of delivery. A future contract is an agreement between two parties in which both parties agree to buy and sell a particular underlying financial instrument [stock, bond or currency] or commodity [gold or natural gas] at a predetermined price at a future date.
2. Example: -A and B agree to do a trade in 50 tolas of gold on 31.12.2023 at 15000/tola [forward price] here the buyer A is in long position and the seller B is in short position.Example: – Buyer A and B enter into a 2500 kgs Corn future contract at 4 per kg.
3. Forward contracts are traded on personal telephonic basis or otherwise.Future contracts are traded in a competitive arena.
4.Forward contracts have no standard size.Future contracts are standardized in terms of quantity or amount.
5. Forward contracts are traded in an over the counter market. Future contracts are traded on exchanges with a physical location.
6Settlement takes place on agreement date.Settlements are on daily basis.
7Actual Delivery.There is no actual delivery.
8Forward contracts is based on bid-asked spread.Future contracts entails brakeage fees.
9Margins are not required.Margins are required.
10.Credit riskNo credit risk.

Capital and Revenue Expenditures | Difference between Capital and Revenue Expenditures

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Capital Expenditure: – Capital expenditure is that expenditure which incurs to increases the revenue earning capacity of a business.

Example: –

  • Purchase of land, buildings, furniture and machinery etc.

Revenue Expenditure: – Revenue expenditure is that expenditure which incurs to generate revenue for a particular accounting period.

Example: –

  • Salaries, Rent, wages, carriage of goods, repair, insurance etc.

Difference Between Capital And Revenue Expenditure :-

Sr. NoCapital ExpenditureRevenue Expenditure
1.This expenditure is incurred to provide a benefit over a long period of time.This expenditure is incurred to provide a benefit during the current period.
2. This increases the earning capacity of the business. This maintains the earning capacity of business.
3. This is normally a non-recurring.This is usually a recurring features.
4. It appears in the balance sheet and small part is charged as depreciation to income statement. It doesn’t appear in balance sheet but charged against profit and appears in income statement.
5.Purchase of land, building, machine, car, furniture etc.Salary, wages, repairs and maintenance, interest, insurance etc.

Accounting Concepts, Principles and Conventions

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Accounting: -Accounting is a language of business by which financial statements communicate to the various stakeholders for decision making purpose.

Accounting Concepts: – Accounting concepts are the basic assumptions and conditions which work as the basis of recording of business transactions and preparing accounts.

The following are the widely accepted accounting concepts: –

Entity Concept: -According to this concept, business enterprise is a separate entity from its owners. All the business transactions are recorded in the books of business from the point of view of business.

In addition to this, entity concepts help to identify how much amount of money is due to the owner in form of his capital and share of profits.

For example: – Mr. Ram started business investing ₹ 5,00,000, out of this he purchased machinery for ₹ 3,00,000 and maintained the balance in the hand. The financial position will be as under:

Capital₹ 5,00,000
Machinery₹ 3,00,000
Cash₹ 2,00,000
As a result,

The business owes to Mr. Ram ₹ 5,00,000 but if Mr. Ram spends ₹ 5,000 to meet his personal expenses from the business fund then it should not be taken as business expenses and would be charged to his capital account [investment would be reduced by ₹ 5,000].

Here, the entity concept will revise the financial position. This would be as under:-

Liability₹₹
Capital
Less : Drawings		5,00,000
5000		4,95,000
Machinery 3,00,000
Cash1,95,000

Going Concern Concept: –

It means the business will have an indefinite life [ it will continue for a long time]. The valuation of assets of a business is based on this assumption.

It is because of this concept that fixed assets are valued on the basis of cost less proper depreciation by considering expected useful life ignoring fluctuations in the prices of these assets.

Money Measurement Concept: –

According to money measurement, transactions and events which can be expressed in terms of money are recorded in the books of account. Consequently, events which cannot be expressed in terms of money do not find place in the books of account.

For example: – employees of the organization are the assets of the organizations but they cannot measure in monetary terms.

Accounting Period Concept: –

As per this concept, accounts should be prepared after every period [usually period is calendar year]. We generally follow 1st April to 31st March.

Moreover, period of one year takes up for the performance measurement and appraisal of financial position.

Cost Concept: –

Under this concept, assets are to be recorded at historical cost or at acquisition cost [purchase price + all expenses incurred to put the asset to use].

for example, if an enterprise buys a machine for ₹ 2,00,000, the asset [machine] would be recorded in the books of account at ₹ 2,00,000 even if its market value at that time happens to be ₹ 2,50,000.

The cost concept does not mean that the assets will always be shown at cost. The fixed asset will be recorded at cost at the time of its purchase but it may systematically be reduced in its value by charging depreciation.

Dual Aspect Concept: –

it means every transaction has two aspects. For every debit there is a corresponding and equal credit. This concept is based on double entry system.

Matching Concept: –

According to this concept, all expenses matched with revenue of that relevant period should only be taken into consideration. This concept states that if any revenue recognizes then expenses related to earn that revenue should also be recognized.

Further, this concept is based on accrual concept as it considers the occurrence of expenses and income. Accounting period concept or periodicity concept has also been followed while applying matching concept.

As per this concept, various adjustments should be made for outstanding expenses, accrued incomes, unexpired expenses and unearned incomes etc.

Realisation Concept: –

According to this concept, normally, revenue is recognized when it is realized i.e., when the ownership of goods passes to the buyer and the buyer becomes legally liable to pay.

It covers all the probable losses but do not consider probable gain until it is realized.

Accrual Concept: –

Under this concept, all the transactions and events are recognized on the basis of their occurrence [i.e., mercantile basis] not on the basis of cash received or paid.

As per Accrual Concept:-

Profit = Revenue–Expenses

Accounting Conventions: –

  1. Consistency: – This implies that same accounting policies should be followed from one period to another. A change in accounting policy is made only in exceptional circumstances. For example, methods of depreciation, methods of valuation of inventories.
    • Note:- As per consistency, enterprise should follow consistently same method of depreciation and valuation of inventories which is chosen by the enterprise.
  2. Materiality: – According to this convention, all the material information should disclosed in the books of account. All the items have significant economic effect on business enterprise should be disclosed and ignored the insignificant items and should not be disclosed.
  3. Conservatism :- Convention of conservatism is the policy of “playing safe“. As per this, accountant should not anticipate any future income but should take all possible losses while recording business transaction in the books of account.

Fundamental Accounting Assumptions: –

There are three fundamental accounting assumptions: –

  1. Going Concern
  2. Consistency
  3. Accrual.

National Income | Circular Flow of National Income | Methods of Measuring National Income

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Meaning of National Income: – Value of all final goods and services that are produced by residents in the country within an accounting year.

Example: – Value of final goods such as mobile, LED + value of final services such has telecom, health, insurance.

Note:- National income shows the performance of our economy and growth of our nation.

Circular flow of National Income

Mainly, the business sector and household sector play a vital role in the flow of national income.

The business sector produces goods and services by using the factors of production i.e., land, labour, capital and entrepreneurship.

Thereafter, provides these goods and services to the household sector for consumption.

Household sector receives the factor payment in the form of rent, wages, interest and profit and spend on consumption and investment.

Again payment for consumption goes to business sector.

Different Concepts of National Income

Gross Domestic Product (GDP) or GDPMP : -GDP is the value of final goods and services produced within the domestic territory of a country during an accounting year.

GDPMP : – Value of final goods + value of final services [value = market price].

GDPMP : -GNPMP – Net Factor Income from Abroad [NFIA].

NFIA :- NFIA is the difference between the aggregate amount that a country’s citizen and company earn from abroad – aggregate amount that foreign citizens and overseas companies earn in that country.

In other words: – factor income earned by domestic factors of production from abroad – factor income earned by factors of production of abroad.

Note: – The basis of difference between gross and net is depreciation or consumption of fixed capital.

Note: -The basis of difference between market price and factor cost is net indirect taxes [indirect taxes – subsidies].

Gross Domestic Product at Factor Cost (GDPFC)

GDPFC : – GDPMP – Net Indirect Taxes

Net Indirect Taxes : – Indirect Taxes – Subsidies

Factor Cost : – Market Price – Indirect taxes + Subsidies

Market price : – Factor Cost + Indirect taxes – Subsidies

Gross National product or GNPMP :- GNP is the market value of all final goods and services produced within the domestic territory of a country by normal residents during an accounting year including net factor income from abroad (NFIA).

GNPMP : – GDPMP + Net factor Income from Abroad

Note: – If Net Factor Income from Abroad (NFIA) is positive, then GNPMP will be greater than GDPMP

Net National Product at Market Prices or NNPMP : -NNPMP is the net market value of all final goods and services produced within the domestic territory of a country by normal residents during an accounting year including net factor income from abroad (NFIA) excluding depreciation.

In other words,

NNPMP : – GNPMP – Depreciation

NNPMP : – NDPMP + Net factor Income from Abroad (NFIA).

NNPMP : – GDPMP + Net factor Income from Abroad (NFIA) – Depreciation

Further,

Net Domestic Product at Factor Cost or NDPFC : – NDPFC is the net market value of all final goods and services produced within the domestic territory of a country by normal residents during an accounting year excluding net factor income from abroad (NFIA) and depreciation.

or It is sum of domestic factor incomes excluding depreciation.

NDPFC = GDPMP – Net Indirect taxes – Depreciation

NDPFC = NDPMP – Net Indirect taxes

Net National Product at Factor Cost or NNPFC  : –

NNPFC is the net market value of all final goods and services produced within the domestic territory of a country by normal residents during an accounting year.

or It is sum of domestic factor income and net factor income from abroad .

NNPFC = National Income = factor income earned in domestic territory + NFIA

In addition to,

Note: – Per Capita Income : – National income/total population

Note: – Personal Income = income earned by factor of production or income received by household sector.

Further,

Methods of Measuring National Income: –

  1. Value Added Method or Product method: – Under this method, we calculate the aggregate annual value of goods and services.
    • In other words, Value addition means net contribution made by enterprise
    • Value addition : – value of production of the enterprise – value of intermediate goods used by the enterprise.

Example: –

ParticularFarmerBaker
Total production200400
Intermediate goods used0100
Value added200300
Furthermore, all the producing enterprises fall under 3 main category i.e., primary sector, secondary sector, service sector.

In addition,

2. Income Method : – production sector makes payment to factors for their services. National income is the sum total of factor incomes .

production unit pays rent for land, wages and salaried for labour, interest for capital and lastly, profit for entrepreneurship.

3. Expenditure Method: – National income is the aggregate final expenditure in an economy during an accounting year.

Enterprise can make final expenditure on the following accounts: –

  1. final consumption expenditure on the goods and services produced.
  2. final investment expenditure
  3. expenditure that the government makes on the final goods and services produced.
  4. export revenues that enterprise earns by selling its goods and services abroad.

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Advance Rulings

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Advance Rulings:-

Ruling means statement in writing by the tax authority to a taxpayer. Advance rulings given are binding on the tax authorities and application who had applied for such ruling.

Example: -ABC Ltd. a German company wants to do a technical collaboration with Indian company and ABC Ltd. wants to know the tax incidence in India, the answer of this problem will be given by authority for advance ruling .

As per section 245N(a) of Income-tax Act, 1961, Advance rulings means: –

Decision or Determination by the Authority :

  • in relation to a transaction and tax liability which has been undertaken or is proposed to be undertaken by a non–resident applicant and in case of tax liability, determination shall include the determination of any question of law or of fact specified in the application.
  • in respect of an issue relating to computation of total income :-
    • which is pending before any income-tax authority or the Appellate Tribunal and such determination and
    • decision shall include the determination or decision of any question of law or of fact
    • relating to such computation of total income specified in the application.
  • or decision by the Authority whether an arrangement, which is proposed to be undertaken
    • by any person being a resident or a non-resident,
    • is an impermissible avoidance arrangement as referred to in Chapter X-A or not

Applicant [Section 245N(b)] means any person who is: –

  • a non-resident
  • a resident
  • a resident who has undertaken or propose to undertake one or more transactions of value of 100 crores or more in total
  • a public sector company

Authority for Advance Rulings [Section 245-O]

Authority for advance rulings shall constitute by the Central Government.

Composition: – The Authority shall consist of a Chairman and such number of Vice-chairmen, revenue Members and law Members as the Central Government may, by notification, appoint.

Qualification:-

  • Chairman: – a person who has been a Judge of the Supreme Court or the Chief Justice of a High Court or for at least 7 years a Judge of a High Court.
  • Vice-chairman: – a person who has been Judge of a High Court.
  • A revenue Member from the Indian Revenue Service: – a person who is who is (or is qualified to be), a Member of the Board.
  • A revenue Member from the Indian Customs and Central Excise Service: -a person who is (or is qualified to be),
    • a Member of the Central Board of Excise and Customs, on the date of occurrence of vacancy.
  • A law Member from the Indian Legal Service: –
    • who is (or is qualified to be), an Additional Secretary to the Government of India on the date of occurrence of vacancy.
Section 184 of Finance Act, 2017
  • By notification, the Central Government may make rules regarding
    • qualifications, appointment, salaries and allowances, term of office, resignation, removal and
    • the other terms and conditions of service of the Chairman, Vice-chairman or member of the Authority.
  • Term of Chairman, Vice-Chairman or Member of the Authority:-
    • Not exceeding 5 years from the date on which he enters upon his office and shall be eligible for reappointment.
  • Age :-
In case of Age
Chairman70 years
Vice-Chairman or any other Member67 Years

Application for Advance Rulings : – As per section 245Q(2), the applicant shall make application in quadruplicate along with with a fee of ₹ 10,000 or prescribed, whichever is higher.

Rule 44 prescribes the fees: –
Category of applicantCategory of caseFee
A non-resident/ resident
Amount of transaction up to ₹ 100 crore ₹ 2,00,000
> ₹ 100 crore < ₹ 300 crore₹ 5,00,000
> ₹ 300 crore₹ 10,00,000
Any other in all cases₹ 10,000
Procedure on Receipt of Application: –
  • on receipt of an application, the authority will send a copy to the Principal Commissioner or Commissioner concerned if necessary.
  • Call upon the Principal Commissioner or Commissioner to furnish relevant records
  • The Authority may allow or reject the application.

Constitution of Board for Advance Rulings [section 245-OB]: –

The Central Government vide Notification No.96/2021 dated 01.09.2021 constituted 3 boards for Advance Rulings.

  1. Board for Advance Rulings-I – headquarters in Delhi
  2. Board for Advance Rulings-II – headquarters in Delhi
  3. Board for Advance Rulings-III – headquarters in Mumbai

Section 245Q(1) : – Applicant may make an application

Section 245Q(2) : – Application has to be made in Quadruplicate along with fee of ₹ 10,000 or prescribed whichever is higher.

Restriction on Appellate Authority: -According to section 245RR, Income-tax and Tribunal shall not take any decision in respect of issue which is for decision of Board for Advance Rulings.

Note:- a resident assessee cannot pursue both the remedies i.e., appeal or revision.

Note: – The Board shall not allow an application where question raised in the application is pending with income-tax/tribunal/court, determination of fair market value and transaction designed for avoidance of income-tax.

Time Limit for Pronouncement of Advance Ruling: – 6 months from the receipt of application.

Note: – Copy of advance ruling has to be sent to applicant and PCIT/CIT.

Power of the Board for Advance Rulings: – [Section 245U] – All the power of Civil Court.

Note: – Applicant may appeal to High Court against ruling or order of the Board for Advance Rulings within 60 days from the date of the communication of ruling order.

Suggestion for Readers: – for detailed study please refer any book.

Special Tax Provisions

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Deduction in respect of inter-corporate dividends: – As per section 80M of Income-tax Act, 1961, a domestic company is allowed to get deduction from gross total income if it receives any dividend income from any domestic company or a foreign company, or a business trust.

Least of the following would be deduction: –

  1. Dividend received.
    • OR
  2. Dividend distributed by domestic company before the due date.

Example:- XYZ Ltd. a domestic company received dividend of ₹ 12 Lakhs from ABC Ltd., a domestic company [100% subsidiary of XYZ Ltd.] during the previous year 2022-23. on 15th may, 2023, XYZ Ltd. declares and distributed dividend of ₹ 6 lakhs.

In above example, XYZ Ltd. would receive deduction under Section 80M in respect of dividend received from ABC Ltd. to the extent ₹ 6 lakhs.

Note: – No deduction will get by domestic company in any other previous year, if domestic company has already received deduction under this section in any previous year.

Note: – Meaning of due date– Due date means the date which comes prior to the date for furnishing the return of income under section 139(1).

Deduction in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone Section 80-IAB

As per section 80-IAB of Income-tax Act, 1961, a developer whose gross total income includes any profits and gains derived by an undertaking or an enterprise from any business of developing a Special Economic Zone, notified on or after 01.04.2005 under the SEZ Act, 2005.

Further, the eligible assessee is the developer.

In addition, Developer means a person who has been granted a letter of approval by the Central Government or a State Government which has been granted a letter of approval by the Central Government under SEZ Act, 2005.

And, a developer includes an authority and a Co-developer [a person or State Government who has a letter of approval of Central Government under SEZ Act, 2005].

Deduction: – 100 % of the profits and gains derived from any business of developing a Special Economic Zone for 10 consecutive assessment years.

Lastly, Important note:- The assessee has option to claim deduction for any ten consecutive assessment years out of fifteen years beginning from the year in which a Special Economic Zone has been notified by the Central Government. And, If the developer transfers the operation and maintenance of such Special Economic Zone to another developer, then deduction shall allow to transferee developer for the remaining period in the 10 consecutive assessment years.

Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. [Section 80-IA]

As per Section 80-IA of the Income-tax Act,1961, an assessee whose gross total income includes any profits and gains derived by an undertaking or an enterprise from the business mentioned below is eligible to avail the deduction of 100% of profits and gains from the gross total income for 10 consecutive assessment years

Infrastructure facility: – Any enterprise carrying on the business of: –

  1. developing or
  2. operates and maintains or
  3. develops, operates and maintains any infrastructure facility.

However, the enterprise must fulfill the following conditions: –

  1.  it is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act.
  2.  it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i)developing or (ii)operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility.
  3.  it has started or starts operating and maintaining the infrastructure facility on or after the 1st day of April, 1995

Provided that where an infrastructure facility is transferred on or after 01.04.1999 by an enterprise which developed such infrastructure facility to another enterprise in accordance with  the agreement with the Central Government, State Government, local authority or statutory body, then transferee company can avail deduction for remaining period.

Further, Infrastructure facility means: –

(a) a road including toll road, a bridge or a rail system.

(b) a highway project including housing or other activities being an integral part of the highway project.

(c) a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system.

(d) a port, airport, inland waterway, inland port or navigational channel in the sea.

Note: – Lastly, no deduction to any enterprise which starts the development or operation and maintenance of the infrastructure facility on or after the 01.04.2017.

Industrial Parks: –

Any undertaking which which develops, develops and operates or maintains and operates an industrial park after 31.03.1997 but before 01.04.2011 or special economic zone notified by the Central Government in accordance with the scheme framed and notified after 31.03.1997 but before 01.04.2006.

Further, where an undertaking develops an industrial park on or after 01.04.1999 or a special economic zone on or after 01.04.2001 and transfers the operation and maintenance of such industrial park or such special economic zone to another undertaking, then the transferee will get deduction for remaining period.

Generation and distribution of power: –

An undertaking which: –

(1) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power after 31.03.1993 but before 01.04.2017.

(2) starts transmission or distribution by laying a network of new transmission or distribution lines after 31.03.1999 but before 01.04.2017

(3) undertakes substantial renovation and modernization of the existing network of transmission or distribution lines after 31.03.2004 but before 01.04.2017.

Furthermore, substantial renovation and modernization” means an increase in the plant and machinery in the network of transmission or distribution lines by at least 50% of the book value of such plant and machinery as on 01.04.2004.

an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant is eligible for deduction if: –

  1. The Indian company forms before 30.11.2005 with majority equity participation by public sector companies for the purposes of enforcing the security interest of the lenders to the company owning the power generating plant and notified by the Central Government before 31.12.2005.
  2. The undertaking begins to generate transmit or distribute power before 31.03.2011
Quantum of deduction and period: – 100% of profits and gains for 10 consecutive assessment years and option to claim such deduction for 10 consecutive assessment years out of 15 years [20 years in case of infrastructure facility].

The deduction from profits and gains is allowed in respect of housing and other activities which are integral part of a highway project but the following conditions should be fulfilled.

  1. The profits has transferred to special reserve account.
  2. The profit is utilized for the highway project excluding housing and other activities before the expiry of 3 years from the year in which amount transferred to reserve account.
  3. The amount remaining unutilized is chargeable to tax as income.

Moreover,

Audit of accounts: – The undertaking is eligible to avail deduction only if accounts have audited by a chartered accountant and assessee furnishes the audit report in the prescribed form duly signed and verified one month prior to due date for filing return of income under section 139(1).

Lastly, the Central Government has power to deny any class of industrial undertaking or enterprise for deduction under this section.

Buy-back of Securities

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Buy-back of securities/Buy-back of shares:-

What is buy-back of shares?

Buy-back of shares means purchase of its own shares by the company from existing shareholders.

Buy-back represents cancellation of shares and decrease of share capital. It means when company buy back of its own shares then, the purpose is to cancel the already issued shares and decrease the share capital and company can not buy its own shares for the purpose of investment.

Advantages/Objectives of Buy-back

  1. To increase the earnings per share.
  2. To reduce the capital.
  3. To increase promoters holding.
  4. To enhance consolidation of stake in the company.
  5. To prevents others to make bid for take over the company.
  6. To support the share price on stock exchange.
  7. To improve return on capital and return on net worth.
  8. To return surplus cash to shareholders.
  9. To achieve optimum capital structure.
  10. To enhance the long-term value for shareholders.

According to section 68(1) of the Companies Act 2013, companies are allowed to buy-back their own shares and other specified securities out of: –

  1. Its free reserves: or
  2. the securities premium account; or
  3. the proceeds of the issue of any shares or other specified securities.

Note: – No buy-back of any kind of shares or other specified securities shall be made out of the proceeds
of an earlier issue of the same kind of shares or same kind of other specified securities.

The important conditions for buy back

According to section 68(2) of the Companies Act, 2013, following conditions must be satisfied if the companies purchase its own shares or other specified securities:

(a). The buy back must be authorized by its articles of association.

(b). A special resolution has been passed at a general meeting relating to the buy back.

however, the above conditions do not apply when the buy back is 10% or less of the paid up equity capital and free reserves and authorized by a board resolution.

(c). The buy back must be ≤ 25% of total paid up capital and free reserves of the company.

(d). The buy back must not be >25% of total paid up capital and free reserves in any financial year.

(e). After buy back, the debt equity ratio should be 2:1, it means the debt should not be more than twice of its equity [paid up capital and its free reserves].

(f). All the shares or other specified securities for buy-back are fully paid-up.

(g). The buy back of listed shares or other specified securities will be in accordance with the regulations made by the Securities and Exchange Board of India.

(h). Buy back in respect of shares or other specified securities other than those specified specified in (f) will be in accordance with the guidelines as may be prescribed.

Note: -The buy back can not be more than in one year.

Explanatory Statement

As per section 68(3), additional requirements are as follows: –

The notice of meeting at which the special resolution is supposed to be passed must be accompanied by an explanatory statement stating: –

  • (a) a full and complete disclosure of all material facts.
  • (b) the necessity for the buy-back
  • (c) the class of shares or securities intended to be purchased under the buy-back.
  • (d) the amount to be invested under the buy-back.
  • (e) the time-limit for completion of buy-back.

3. Every buy back shall be completed within 12 months from the date of passing the special resolution.

4. The buy back may be:

(a) from the existing shareholders or security holders on a proportionate basis; or

(b) from the open market; or

(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock
option or sweat equity.

5. Solvency declaration– Before making such buy-back, it has to be filed with the Registrar a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, if any, and Form as may be prescribed and verified by an affidavit to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company, as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of declaration adopted by the Board of Directors.

Note: – Company whose shares are not listed on any recognized stock exchange shall not be filled declaration of solvency with Securities and Exchange Board of India.

6. When a company buys-back its own securities, it shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.

7. When a company completes a buy-back of its shares or other specified securities, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares or other specified securities within a period of six months except by way of:

a. issue of bonus ; or

b. in discharging of subsisting obligations, such as conversion of warrants, stock option schemes, sweat
equity or conversion of preference shares or debentures into equity shares.

8. When company buys-back its securities, company shall maintain a register of the shares or securities
so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares
or securities, the date of extinguishing and physically destroying the shares or securities.

9. A company shall, after the completion of the buy-back under this section, file with the Registrar a return containing such particulars relating to the buyback within thirty days of such completion.

Note: – Companies whose shares are not listed on any recognized stock exchange, no return shall be filled.

10. If a company makes a default in complying with the provisions of this section, company shall be punishable with a fine which shall not be less than one lakh rupees and which may extend to three lakh rupees and every officer of the company who defaults shall be punishable with imprisonment for a term which may extend to three years or with a fine which shall not be less than one lakh rupees and which may extend to three lakh rupees, or with both.

11. Where a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserves account and details of such transfer shall be disclosed in the balance sheet.

12. Buy-back shares must be fully paid-up.

13. The capital redemption reserve account may be applied by the company, in paying up unissued
shares of the company to be issued to its members as fully paid bonus shares.

Default Tax Regime | Optional Tax Regime

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Tax rates under default tax regime: –

The slab rates for Assessment Year 2024-25 under default tax regime under section 115BAC of Income-tax Act, 1961

Note:- The basic exemption limit is ₹ 3,00,000 under the default tax regime.

Sr. No.Total income [in ₹]Rate of tax
1Up to ₹ 3,00,000Nil
2From ₹ 3,00,001 to ₹ 6,00,0005%
3From ₹ 6,00,001 to ₹ 9,00,00010%
4From ₹ 9,00,001 to ₹ 12,00,00015%
5From ₹ 12,00,001 to ₹ 15,00,00020%
6Above ₹ 15,00,00030%
Surcharge and Rebate under section 87A: –

Surcharge is an additional tax levied on income-tax.

The rates of surcharge for the Assessment Year 2024-25 for individual who pays tax under default tax regime under section 115BAC are as follows: –

Rates of Surcharge: –

Sr. No.ParticularsSurcharge
1.Total income >₹ 50 lakhs but ≤ ₹ 1 crore 10%
2. Total income >₹ 1 crore but ≤ ₹ 2 crore 15%
3. Total income >₹ 2 crore [including dividend income & capital gains taxable u/s 111A, 112 and 112A].15%
4. Total income >₹ 2 crore [excluding dividend income & capital gains taxable u/s 111A, 112 and 112A].25%
Note:- Rate of surcharge on the income-tax on portion of dividend income and capital gains chargeable u/s 111A, 112 and 112A would be 15% even if total income exceeds ₹ 2 crore in both regime.

Note:- Marginal relief would be available.
Rebate

Rebate under section 87A under default tax regime u/s 115BAC

An individual resident in India whose total income ≤ ₹ 7 lakhs, assessee shall be entitled to a deduction from the amount of income tax.

Least of the following would be rebate –

  1. Amount of income-tax
    • OR
  2. ₹ 25,000

If the total income of such individual >₹ 7 lakhs and income tax payable on such total income exceeds the amount by which total income is in excess of ₹ 7 lakhs, assessee shall be entitled to a deduction from the amount of income tax.

steps to calculate deduction :-

  1. Compute income-tax payable on total income [A]
  2. Total income (–) ₹ 7 lakhs [B]
  3. if A>B, then, rebate would be A-B.

Tax rates under optional tax regime: –

The slab rates for Assessment Year 2024-25 under optional tax regime under regular provisions of Income-tax Act, 1961

Sr. No.Total income [in ₹]Rate of tax
1Up to ₹ 2,50,000 [if age is below 60 years]
Up to ₹ 3,00,000 [ if age is 60 years or above but less than 80 years and resident in India]
Up to ₹ 5,00,000 [ if age is 80 years or above and resident in India]		Nil
2From ₹ 2,50,001 to ₹ 5,00,000 5%
3From ₹ 5,00,001 to ₹ 10,00,00020%
4Above ₹ 10,00,00030%
Rates of Surcharge: –
Sr. No.ParticularsSurcharge
1.Total income >₹ 50 lakhs but ≤ ₹ 1 crore10%
2.Total income >₹ 1 crore but ≤ ₹ 2 crore15%
3.Total income >₹ 2 crore [including dividend income & capital gains taxable u/s 111A, 112 and 112A].15%
4.Total income >₹ 2 crore but ≤ ₹ 5 crore25%
5.Total income >₹ 5 crore 37%
Note:- Marginal relief would be available.

Rebate under section 87A under optional tax regime under normal provisions of the Act.

An individual resident in India whose total income ≤ ₹ 5 lakhs, assessee shall be entitled to a deduction from the amount of income tax.

Least of the following would be rebate –

  1. Amount of income-tax
    • OR
  2. ₹ 12,500

Note:- Rebate under section 87A of the Income-tax Act, 1961 is not available from tax on long term capital gain u/s 112A.

Suggestion:- u/s represents under section.

Health and Education cess @4% on income-tax and surcharge, if applicable.

Amalgamation| Absorption| External Reconstruction

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Meaning of Amalgamation:-

Amalgamation means where two or more companies are merged to form a single entity.

Example: – Company X and Company Y merge to form Company Z. This is called as amalgamation. Here, company X and company Y are called transferor companies and company Z is called as transferee company. In addition to this, transferor company is also called as vendor company and transferee company is also called as vendee company.

Absorption:- When company takes over the other by outright purchase.

Example: – Company X taken over [purchased] by company Y. This is called as absorption. Here, Company X is called as transferor company and company Y is called as transferee company.

External Reconstruction:- When new company is formed to take over the business of an existing company which is wound-up.

Example: – Company Y is formed to take over the business of X. This is called as external reconstruction.

Note: – External reconstruction can be seen where company has been suffering from losses for past years.

Differences among Amalgamation, Absorption and External Reconstruction:-

Sr. No.BasisAmalgamationAbsorptionExternal Reconstruction
1.MeaningWhen two or more companies are combined to form a new company or entity.
Old companies are wound up.		When one existing company takes over the business of another existing company.
Old company is wound up and the new company will continue in business.		When new company is formed to take over the business of an existing company.
One company takes over the business of an existing loss making company.
2.ExampleX Company + Y Company = Z Company [New Company].X company taken over by Y company
Y company will continue in business. 		Y company is formed to take over the business of X.
3.Minimum number of companies requiredAt least three.At least two.only two.
4.ResultOne company is formed, two companies are wound up.No new company is formed.New company is formed to take over business of existing.
5.ReasonEliminate competition/Economies of large scale operations.Eliminate competition/Economies of large scale operations.Reorganize the financial structure of the company.

Types of Amalgamation:- As per AS 14, there are two types of amalgamation.

  1. Amalgamation in the nature of merger: – Amalgamation which satisfies the following conditions is called as ‘amalgamation in the nature of merger‘.
    • After amalgamation, all the assets and liabilities of transferor company become the assets and liabilities of the transferee company.
    • Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held by the transferee company or its subsidiaries or their nominees immediately before the amalgamation) become equity shareholders of the transferee company by virtue of the amalgamation.
    • The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.
    • After the amalgamation, the intention of the transferee company is to be carried on the business of the transferor company.
    • No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.
  2. Amalgamation in the nature of purchase: – Amalgamation which doesn’t satisfy one one or more of the above conditions, then, such amalgamation is called as amalgamation in the nature of purchase.

Difference between amalgamation in the nature of merger and amalgamation in the nature of purchase

BasisAmalgamation in the nature of MergerAmalgamation in the Nature of Purchase
Transfer of Assets & LiabilitiesAll the assets and liabilities are to be transferred by transferor company to transferee company.No need to transfer all the assets & liabilities.
ShareholdersEquity shareholders holding at least 90% equity shares in transferor company become shareholders of the transferee company.Equity shareholders of transferor company need not become shareholders of the transferee company.
Same businessThe transferee company is intended to be carried on the same business of transferor company.The transferee company need not be intended to be carried on the business of the transferor company.
Purchase considerationPC is discharged wholly by issue of equity shares.PC need not be discharged wholly by issue of equity shares.
Recording of Assets & LiabilitiesAt net cost as reflected in a company’s book. [except where adjustment is required to bring uniformity].At net cost or fair values.
Method of AccountingPooling of interest method.Purchase method.
Methods of calculating Purchase Consideration: – these are the following methods to compute purchase consideration: –
  1. Lumpsum method:– as the name suggests, in this method, the transferee company agrees to pay a fixed/lumpsum amount to shareholders of the transferor company.
  2. Net payment method: – under this method, the transferee company makes payments to the equity and preference shareholders.
  3. Net asset method: – in this method, purchase consideration is calculated by subtracting the outside liabilities [except share capital and reserves] from the value of assets taken over by the transferee company [book value/agreed value].
  4. Intrinsic value: – Under this method, purchase consideration is calculated at the intrinsic value of shares.