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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Business Restructuring

Kaveri Housing Finance Ltd, a housing finance company, earns Rs 50,00,000 profit from eligible business (long-term finance for construction or purchase of houses in India), computed before any deduction under the special reserve clause of section 32. Its paid-up share capital plus general reserves total Rs 40,00,000. It has never previously transferred anything to the special reserve. What is the maximum deduction for the special reserve this year?

The maximum deduction is Rs 10,00,000. The special reserve deduction is limited to 20% of eligible business profit, which is 20% of Rs 50,00,000. The overall ceiling of twice paid-up capital and general reserves, Rs 80,00,000, is not breached by this first transfer.

  1. ARs 8,00,000
  2. BRs 10,00,000Correct
  3. CRs 50,00,000
  4. DRs 80,00,000

Explanation

Under section 32(e)(i), the amount carried to the reserve is limited to 20% of eligible business profit: 20% x 50,00,000 = Rs 10,00,000. The cap under (ii) is twice (paid-up capital + general reserves) = Rs 80,00,000 in aggregate, and the first transfer of Rs 10,00,000 is well within it. Rs 8,00,000 wrongly applies 20% to the Rs 40,00,000 capital base.

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