Shut down / Continue Decisions

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Shut down  / Continue Decision  :

         Loss co-exists with profit in a business. A business may suffer loss due to one / more of the following reasons : 
1. Fall in demand
2.financial problems
3. Change in technology
4. High rates of taxes
5. Miss management

 1. Fall in demand  :   The demand of the product may fall due to availability of new products in the market, change in fashion / increase in number of producers/ competitors.

 2. Financial problems :  A firm may not have sufficient finance of its own nor further credit is available from banks/ financial institutions due to government restrictions.

 3. Change in technology :  Where the growth of technology is rapid & if it is not possible to keep pace with it the net results may be a loss of profit.

 4. High rates of taxes  :   High rate of taxes - import duty, excise , sales tax, octroi etc, increases the price of the product . Due to this demand of the product may fall and the business may suffer losses.

 5. Mis management :      Efficient management is an important factor for success of business. If it is lax, the result may be disastrous. 

                             When a business suffer loss continuously , whatever the reason of loss may be , the management has to decide whether the business should be shutdown/ continue . While taking this decision, the impact of income tax provisions should not be overlooked.
1. Treatment  of losses & unabsorbed depreciation :    When a business as a whole is discontinued/ closed down, the brought forward business losses & unabsorbed depreciation shall be dealt with as under: 
Business loss :  If  the business /profession has been discontinued loss can be carried forward & set off against profits & gains of business or profession.

 Unabsorbed depreciation : If the  business   /  profession has been discontinued , unabsorbed depreciation :
1. Can be set off against income from business or profession or income under any head.
2.Can be carried forward & set off for indefinite period , whether business is carried or discontinued.

 2.Withdrawal of certain deductions :  The benefit of deductions u/s 33 AB (Tea development a/c or coffee a/c or rubber development a/c) &115 VT  (Reserve for shipping business) may be withdrawn & liable to tax for the year in which business is discontinued. 

 3. Deemed  Income :  If the business is discontinued & the assets used for scientific research & family planning are sold , the selling price to the extent of deduction claimed shall be deemed as profit of the previous year in which such assets are sold.

 4.Sale of depreciable assets :  The assets on which the assessee has claimed depreciation, are sold in the event of discontinuance of business, the difference between the net consideration & W.D.V. shall be treated as short term capital gain or loss . If there is a gain it will be liable to tax. In case of loss it can be set off only against the capital gains, if any.

 5. Sale of other assets :  When other assets ( except mentioned in 3&4 ) are sold,  there may be long term or Short term capital gain or loss , as the case may be. Such gain is liable too tax. In case of loss it can be set off only against thee capital gains, if  any.

TAX PLANNING :
         If a person  is running more than one business the loss making business  should  not be discontinued but operated at a low key  for  Some time to  claim  the following losses  & expenses against the  income  of  profit making  business..

 1.Retrenchment compensation to staff . If the business is closed & retrenchment compensation paid, the expenditure would be disallowed as not incurred for 'carrying on business'.

 2. Interest on borrowed funds & bad debts in relation to discontinued business.

 3. In case of closely-held company it may be taken care that there may not be change in the shareholding exceeding 49% of the shareholding if there is a change in shareholding exceeding 49% ,& the transferors & transferees are relatives ,they may transfer some % of shares as gift rather than sale so that the conditions for set off of losses are complied with.

 4. If the assessee is a company , it may amalgamate / demerge with other company after satisfying the conditions laid down in sec 72 A.




    

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