Company Reconstruction & Taxable Income Computation: quick revision, 15 bites

Capital Reduction: The Core Logic of Reconstruction

Reduce capital, erase losses, rebuild the balance sheet.

In internal reconstruction, share capital is **reduced** to write off accumulated losses and overvalued assets, so the company gets a realistic, healthy balance sheet without liquidating.

Takeaway. Reconstruction = sacrifice by shareholders + write-offs of losses/assets = a clean balance sheet.

Capital Reduction Amount — The Master Formula

How much did shareholders sacrifice?

For Devis Ltd.: Equity = 2000 × 87.50 = **₹1,75,000**; Preference = 1500 × 50 = **₹75,000**; Total = **₹2,50,000**.

Takeaway. Total capital reduction = ₹2,50,000, which funds all write-offs and the Capital Reserve.

Step-by-Step: Journal Entries for Reconstruction

Four entries solve the whole problem.

Takeaway. All write-offs are debited to Capital Reduction A/c; the remaining balance is transferred to Capital Reserve.

Devis Ltd. — Capital Reduction A/c Working

Track every rupee of the sacrifice.

Takeaway. Capital Reserve = ₹40,875 — the surplus left after all write-offs.

Don't Touch Capital Reserve During Reconstruction

Capital Reserve is protected — leave it alone.

Takeaway. Existing Capital Reserve stays untouched; only the Capital Reduction A/c funds write-offs.

DTR vs OTR: Two Tax Regimes, Two Outcomes

Old rates vs new rates — which saves more?

Takeaway. OTR offers lower rates but strips most deductions; DTR allows deductions but has higher slab rates.

Computing Taxable Income from P&L A/c

Net profit is just the starting point.

Takeaway. Always adjust P&L net profit for inadmissible/admissible items before computing tax.

Mr. Rahul — Key Adjustments to Net Profit

Spot what's not allowed, add it back.

Takeaway. Each add-back increases taxable income; correct depreciation and 80TTA reduce it.

Section 80U: Disability Deduction

82% disability unlocks a big deduction.

Takeaway. Mr. Rahul gets ₹1,25,000 deduction under DTR only — a major tax-saving lever.

Exam Strategy: Always Show Both Regimes

Two columns, full marks.

Takeaway. Presenting both regimes side-by-side with a clear recommendation earns full marks.

Remember the Write-Off Order

G-P-F then P&M — that's the order.

Takeaway. GPF-PM: Goodwill, P&L, Formation, then Plant & Machinery — surplus to Capital Reserve.

Why Companies Reconstruct in Real Life

Sick companies don't die — they restructure.

Takeaway. Reconstruction is a rescue mechanism — it sacrifices capital to erase past losses.

Don't Forget: Municipal Tax Paid by Tenant

Whose tax is it anyway?

Takeaway. Only municipal tax borne by the owner is deductible — tenant-paid tax is excluded.

House Property Income: The 30% Standard Deduction

30% off, no questions asked.

For self-occupied property, GAV = **Nil**, but interest on loan is still deductible (up to ₹2,00,000 for self-occupied).

Takeaway. GAV minus municipal tax, then 30% deduction, then subtract loan interest — that's house property income.

Rebate u/s 87A: The Income Threshold Trap

One rupee over, full rebate gone.

Takeaway. A small income increase near the threshold can trigger a large tax jump — always check 87A eligibility.