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

Kaveri Housing Finance Ltd is a housing finance company with an eligible business profit of ₹5,00,000 (before the special reserve deduction). Its paid-up share capital is ₹30,00,000 and general reserves are ₹20,00,000. It has not previously carried any amount to the special reserve. It transfers ₹2,00,000 to the special reserve. Applying the section 32(e) conditions in the official text, what deduction is allowed?

The deduction is ₹1,00,000. The special reserve deduction is limited to 20% of eligible business profit, which is 20% of ₹5,00,000. The cumulative ceiling of twice capital plus general reserves is far higher, so the 20% limit is what restricts the ₹2,00,000 transfer.

  1. A₹2,00,000
  2. B₹1,00,000Correct
  3. C₹5,00,000
  4. D₹1,50,000

Explanation

The deduction cannot exceed 20% of the eligible profit: 20% x 5,00,000 = ₹1,00,000. The cumulative cap is twice (30,00,000 + 20,00,000) = ₹1,00,000,00, which is not breached. The transfer of ₹2,00,000 is therefore limited to ₹1,00,000.

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