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Set Off And Carry Forward Of Losses 115

SET OFF AND CARRY FORWARD OF LOSSES

SECTION 70 TO 80 Aggregation of Income In certain cases, some amounts are deemed as income in the hands of the assessee though they are actually not in the nature of income. These cases are contained in sections 68, 69, 69A, 69B, 69C and 69D. The Assessing Officer may require the assessee to furnish explanation in such cases. If the assessee does not offer any explanation or the explanation offered by the assessee is not satisfactory, the amounts referred to in these sections would be deemed to be the income of the assessee. Such amounts have to be aggregated with the assessee’s income. Concept of set-off and carry forward of losses Specific provisions have been made in the Income-tax Act, 1961 for the set-off and carry forward of losses. In simple words, “Set-off” means adjustment of losses against the profits from another source/head of income in the same assessment year. If losses cannot be set-off in the same year due to inadequacy of eligible profits, then such losses are carried forward to the next assessment year for adjustment against the eligible profits of that year. The maximum period for which different losses can be carried forward for set-off has been provided in the Act. Inter source adjustment [Section 70] (i) Under this section, the losses incurred by the assessee in respect of one source shall be set-off against income from any other source under the same head of income, since the income under each head is to be computed by grouping together the net result of the activities of all the sources covered by that head. In simpler terms, loss from one source of income can be adjusted against income from another source, both the sources being under the same head. Example 1: Loss from one house property can be set off against the income from another house property. Example 2: Loss from one business, say textiles, can be set off against income from any other business, say printing, in the same year as both these sources of income fall under one head of income. Therefore, the loss in one business may be set-off against the profits from another business in the same year. (ii) Inter-source set-off, however, is not permissible in the following cases - (a) Long-term capital loss -

(1) Where the net result in respect of any short term capital asset is a loss, such loss shall be allowed to be set-off against income, if any, for that assessment year under the head “capital gains” in respect of any other capital asset, and (2) Where the net result in respect of any long-term capital asset is a loss, such loss shall be allowed to be set-off against income, if any, for that assessment year under the head “capital gains” in respect of any other asset not being a short-term capital asset. Thus, short-term capital loss is allowed to be set off against both short-term capital gain and long-term capital gain. However, long-term capital loss can be set-off only against long-term capital gain and not short-term capital gain.

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(b) Speculation loss - A loss in speculation business can be set-off only against the profits of any other speculation business and not against any other business or professional income. However, losses from other business can be adjusted against profits from speculation business. (c) Loss from the activity of owning and maintaining race horses - See section 74A(3) in para 10.13 of this chapter.

(iii) It must be noted that loss from an exempt source cannot be set-off against profits from a taxable source of income. For example, long-term capital loss on sale of shares sold through a recognized stock exchange cannot be set-off against long-term capital gains on sale of land. Inter head adjustment [Section 71] Loss under one head of income can be adjusted or set off against income under another head. However, the following points should be considered: (i) Where the net result of the computation under any head of income (other than ‘Capital Gains’) is a loss, the assessee can set-off such loss against his income assessable for that assessment year under any other head, including ‘Capital Gains’. (ii) Where the net result of the computation under the head “Profits and gains of business or profession” is a loss, such loss cannot be set off against income under the head “Salaries”. (iii) Where the net result of computation under the head ‘Capital Gains’ is a loss, such capital loss cannot be set-off against income under any other head. (iv) Speculation loss and loss from the activity of owning and maintaining race horses cannot be set off against income under any other head. Illustration 1 Mr. A submits the following particulars pertaining to the A.Y.2014-15:

Particulars ` Income from salary Loss from self-occupied property Business loss Bank interest (FD) received

4,00,000(-) 70,000

(-) 1,00,00080,000

Compute the taxable income of Mr. A for the A.Y.2014-15. Solution

Computation of taxable income of Mr. A for the A.Y. 2014-15 Particulars Amount

(`) Amount (`)

Income from salary Income from house property Business income Income from other sources (interest on fixed deposit with bank) Business loss to be carried forward Gross total income [See Note below] Less: Deduction under chapter VIA Taxable income

4,00,000 (-) 70,000

(-) 1,00,000

80,000 (-) 20,000

3,30,000

-3,30,000

Nil

3,30,000

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Note: Gross Total Income includes salary income of ` 3,30,000 after adjusting house property loss. Business

loss of ` 1,00,000 is set off against bank interest of ` 80,000 and remaining business loss of ` 20,000 will be carried forward as it cannot be set off against salary income. Set-off and carry forward of loss from house property [Section 71B] (i) In any assessment year, if there is a loss under the head ‘Income from house property’, such loss will first be set-off against income from any other head during the same year. (ii) If such loss cannot be so set-off, wholly or partly, the unabsorbed loss will be carried forward to the following assessment year to be set-off against income under the head ‘Income from house property’. (iii) The loss under this head is allowed to be carried forward upto 8 assessment years immediately succeeding the assessment year in which the loss was first computed. (iv) For example, loss from one house property can be adjusted against the profits from another house property in the same assessment year. Any loss under the head ‘Income from house property’ can be set off against any income under any other head in the same assessment year. However, if after such set off, there is still any loss under the head “Income from house property”, then the same shall be carried forward to the next year. (v) It is to be remembered that once a particular loss is carried forward, it can be set off only against the income from the same head in the forthcoming assessment years. Carry forward and set-off of business losses [Sections 72 & 80] Under the Act, the assessee has the right to carry forward the loss in cases where such loss cannot be set-off due to the absence or inadequacy of income under any other head in the same year. The loss so carried forward can be set-off against the profits of subsequent previous years. Section 72 covers the carry forward and set-off of losses arising from a business or profession. Conditions The assessee’s right to carry forward business losses under this section is, however, subject to the following conditions:- (i) The loss should have been incurred in business, profession or vocation. (ii) The loss should not be in the nature of a loss in the business of speculation. (iii) The loss may be carried forward and set-off against the income from business or profession though not necessarily against the profits and gains of the same business or profession in which the loss was incurred. However, a loss carried forward cannot, under any circumstances, be set-off against the income from any head other than “Profits and gains of business or profession”. (iv) The loss can be carried forward and set off only against the profits of the assessee who incurred the loss. That is, only the person who has incurred the loss is entitled to carry forward or set off the same. Consequently, the successor of a business cannot carry forward or set off the losses of his predecessor except in the case of succession by inheritance. (v) A business loss can be carried forward for a maximum period of 8 assessment years immediately succeeding the assessment year in which the loss was incurred. (vi) As per section 80, the assessee must have filed a return of loss under section 139(3) in order to carry forward and set off a loss. In other words, the non-filing of a return of loss disentitles the assessee from carrying forward the loss sustained by him. Such a return should be filed within the time allowed under

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section 139(1). However, this condition does not apply to a loss from house property carried forward under section 71B and unabsorbed depreciation carried forward under section 32(2). Illustration 2 Mr. B, a resident individual, furnishes the following particulars for the P.Y. 2013-14:

Particulars `Income from salary (Net) Income from house property Income from business – non-speculative Income from speculative business Short-term capital gains Long-term capital gains

45,000(24,000)(22,000)(4,000)

(25,000)19,000

Solution The total income chargeable to tax for the A.Y. 2014-15 is calculated as under: Particulars Amount ` Amount ` Income from salaries Income from house property Profits and gains of business and profession Business loss to be carried forward [Note 1] Speculative loss to be carried forward [Note 2] Capital Gains Long term capital gain Short term capital loss Short term capital loss to be carried forward [Note 3] Taxable income

45,000(24,000)

(22,000)(4,000)

19,000(25,000)

21,000

(6,000)

21,000 Note 1: Business loss cannot be set-off against salary income. Therefore, loss of ` 22,000 from the non-speculative business cannot be set off against the income from salaries. Hence, such loss has to be carried forward to the next year for set-off against business profits, if any. Note 2: Loss of ` 4,000 from the speculative business can be set off only against the income from the speculative business. Hence, such loss has to be carried forward. Note 3: Short term capital loss can be set off against both short term capital gain and long term capital gain.

Therefore, short term capital loss of ` 25,000 can be set-off against long-term capital gains to the extent of `19,000. The balance short term capital loss of ` 6,000 cannot be set-off against any other income and has to be carried forward to the next year for set-off against capital gains, if any. Carry forward and set-off of accumulated business losses and unabsorbed depreciation in certain cases of Amalgamation/ Demerger, etc. [Section 72A] (i) Amalgamation - This section applies where there has been an amalgamation of – (1) a company owning an industrial undertaking or a ship or a hotel with another company or an amalgamation of a banking company with a specified bank; or (2) public sector companies engaged in the business of operation of aircrafts. It provides that the accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or depreciation, as the case may be, of the amalgamated company for the previous

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year in which the amalgamation took place. Other provisions of the Act relating to set off and carry forward shall also apply accordingly. Conditions for availing benefit under this section (1) Conditions to be fulfilled by the amalgamating company (i) The amalgamating company should have been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for 3 or more years. (ii) The amalgamating company has held continuously as on the date of amalgamation, at least 3/4th of the book value of the fixed assets held by it, 2 years prior to the date of amalgamation. (2) Conditions to be fulfilled by the amalgamated company (i) The amalgamated company should hold at least 3/4th in the book value of fixed assets of the amalgamating company acquired as a result of amalgamation for a minimum period of 5 years from the effective date of amalgamation. (ii) The amalgamated company continues the business of the amalgamating company for at least 5 years. (iii) The amalgamated company must also fulfill such other conditions prescribed under Rule 9C for the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose - (1) The amalgamated company shall achieve the level of production of at least 50% of the installed capacity (capacity as on the date of amalgamation) of the said undertaking before the end of 4 years from the date of amalgamation and continue to maintain the said minimum level of production till the end of 5 years from the date of amalgamation. Central Government has the power to modify this requirement on an application made by the amalgamated company. (2) The amalgamated company shall furnish to the Assessing Officer a certificate in Form No.62 verified by a Chartered Accountant in this regard. In case the above specified conditions are not fulfilled, that part of carry forward of loss and unabsorbed depreciation remaining to be utilized by the amalgamated company shall lapse and such loss or depreciation as has been set-off shall be treated as the income in the year in which there is a failure to fulfill the conditions. (ii) Demerger - Where there has been a demerger of an undertaking, the accumulated loss and the unabsorbed depreciation directly relatable to the undertaking transferred by the demerged company to the resulting company shall be allowed to be carried forward and set off in the hands of the resulting company. If the accumulated loss or unabsorbed depreciation is not directly relatable to the undertaking, the same will be apportioned between the demerged company and the resulting company in the same proportion in which the value of the assets have been transferred. The Central Government is empowered to notify such conditions as it considers necessary to ensure that the demerger or amalgamation is for genuine business purpose. (iii) Re-organisation of business [Section 72A(6)]: In case of re-organisation of business, whereby a firm is succeeded by a company as per the provisions of section 47(xiii), or a sole proprietary concern is succeeded by a company as per the provisions of section 47(xiv), then the accumulated business loss and the unabsorbed depreciation of the firm / proprietary concern, as the case may be, shall be deemed to be the loss or depreciation allowance of the successor company for the previous year in which the business re-organisation took place. Other provisions of the Act relating to set-off and carry forward will apply accordingly.

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However, this facility will not be available if it is found that any of the conditions laid down in the corresponding sub-sections (xiii) and (xiv) of section 47 have not been complied with. In such case, the set-off of loss or allowance of depreciation made in any previous year in the hands of the successor company shall be deemed to be the income of the company chargeable to tax in the year in which the conditions have been violated. (iv) Conversion of a company into LLP [Section 72A(6A)]: The successor LLP would be allowed to carry forward and set-off the business loss and unabsorbed depreciation of the predecessor company. However, if the entity fails to fulfill the conditions specified in section 47(xiiib), the benefit of set-off of business loss/unabsorbed depreciation availed by the LLP would be deemed to be the profits and gains of the LLP chargeable to tax in the previous year in which the LLP fails to fulfill any of the conditions. Meanings of certain terms “Accumulated loss” means so much of the loss of the predecessor firm or the proprietary concern or the amalgamating company or the demerged company, as the case may be, under the head “Profit and gains of business or profession” (not being a loss sustained in a speculation business) which such predecessor firm or the proprietary concern or amalgamating company or demerged company, would have been entitled to carry forward and set off under the provisions of section 72 if the re-organisation of business or amalgamation or demerger had not taken place. “Unabsorbed depreciation” means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the amalgamating company or the demerged company, as the case may be, which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the reorganization of business or amalgamation or demerger had not taken place. “Industrial undertaking” means any undertaking which is engaged in - (i) the manufacture or processing of goods; (ii) the manufacture of computer software; (iii) the business of generation or distribution of electricity or any other form of power; (iv) providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broad band network and internet services. (v) mining; (vi) the construction of ships, aircraft or rail systems. “Specified bank” means the State Bank of India (SBI) constituted under the SBI Act, 1955 or a subsidiary bank as defined in the SBI (Subsidiary Banks) Act, 1959 or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980. Set-off of losses of a banking company against the profit of a banking institution under a scheme of amalgamation [Section 72AA] (i) This section provides for carry forward and set off of accumulated loss and unabsorbed depreciation allowance of a banking company against the profits of a banking institution under a scheme of amalgamation sanctioned by the Central Government.

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(ii) Where a banking company has been amalgamated with a banking institution under a scheme sanctioned and brought into force by the Central Government under section 45(7) of the Banking Regulation Act, 1949, the accumulated loss and unabsorbed depreciation of the amalgamating banking company shall be deemed to be the loss or the allowance for depreciation of the banking institution for the previous year in which the scheme of amalgamation is brought into force, and all the provisions contained in the Income-tax Act, 1961, relating to set off and carry forward of loss and unabsorbed depreciation shall apply accordingly. (iii) The Explanation to this section defines the expressions “accumulated loss”, “banking company, “banking institution” and “unabsorbed depreciation” as follows – (a) “accumulated loss” means so much of the loss of the amalgamating banking company under the head “Profits and gains of business or profession” (not being a loss sustained in a speculation business) which such amalgamating banking company, would have been entitled to carry forward and set-off under the provisions of section 72 if the amalgamation had not taken place; (b) “banking company” shall have the same meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949; (c) “banking institution” shall have the same meaning assigned to it in sub-section (15) of section 45 of the Banking Regulation Act, 1949; (d) “unabsorbed depreciation” means so much of the allowance for depreciation of the amalgamating banking company which remains to be allowed and which would have been allowed to such banking company if the amalgamation had not taken place. Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation in business reorganisation of co-operative banks [Section 72AB] (i) Under this section, in a case where the amalgamation has taken place during the previous year, set-off of accumulated loss and the unabsorbed depreciation of the predecessor co-operative bank will be allowed in the hands of the successor co-operative bank as if the amalgamation had not taken place. All the other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation would apply accordingly. (ii) The benefit of carry-forward and set-off of accumulated losses under this section would be allowed only on fulfillment of the following conditions – (a) Conditions to be fulfilled by the predecessor co-operative bank (1) It should have been engaged in the business of banking for three or more years; and (2) It has held at least three-fourths of the book value of fixed assets as on the date of the business reorganisation, continuously for two years prior to the date of business reorganisation; (b) Conditions to be fulfilled by the successor co-operative bank (1) It should hold at least three-fourths of the book value of fixed assets of the predecessor co-operative bank acquired through business reorganisation, continuously for a minimum period of five years immediately succeeding the date of business reorganisation; (2) It continues the business of the predecessor co-operative bank for a minimum period of five years from the date of business reorganisation; and (3) It fulfils such other conditions as may be prescribed to ensure the revival of the business of the predecessor co-operative bank or to ensure that the business reorganisation is for genuine business purpose.

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(iii) The amount of set-off of the accumulated loss and unabsorbed depreciation allowable to the resulting co-operative bank has to be calculated in the following manner – (1) In a case where the whole of the amount of such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting co-operative bank - the entire accumulated loss or unabsorbed depreciation of the demerged cooperative bank is allowed to be set-off. (2) In a case where the accumulated loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting co-operative bank – the amount which bears the same proportion to the accumulated loss or unabsorbed depreciation of the demerged co-operative bank as the assets of the undertaking transferred to the resulting co-operative bank bears to the assets of the demerged cooperative bank. For example, if A Co-op Bank is the demerged co-operative bank and B Co. op Bank is the resulting co-operative bank, the amount of set-off of the accumulated loss and unabsorbed depreciation allowable to B Co-op. bank would be –

bank op-CoA of Assets

bank Op- Co B of

ed transferrgundertakin theof Assets

bank Op-CoA ofciation loss/depre business Unabsorbed ×

(iv) The Central Government may specify other conditions by notification in the Official Gazette as it considers necessary, to ensure that the business reorganisation is for genuine business purposes. (v) The period commencing from the beginning of the previous year and ending on the date immediately preceding the date of business reorganisation, and the period commencing from the date of such business reorganisation and ending with the previous year shall be deemed to be two different previous years for the purposes of set off and carry forward of loss and allowance for depreciation. For example, if the date on which business re-organisation took place is 01.11.2013, then the period between 01.04.2013 and 31.10.2013 and the period between 01.11.2013 and 31.03.2014 would be deemed to be two different previous years for the purposes of set-off and carry forward of unabsorbed business losses and depreciation. (vi) In a case where the conditions specified in (ii) above or notified under (iv) above are not complied with, the set-off of accumulated loss or unabsorbed depreciation allowed in any previous year to the successor co-operative bank shall be deemed to be the income of the successor co-operative bank chargeable to tax for the year in which the conditions are not complied with. (vii) Accumulated loss means so much of loss of the amalgamating co-operative bank or the demerged co-operative bank, as the case may be, under the head “Profits and gains of business or profession” (not being a loss sustained in a speculation business) which such amalgamating co-operative bank or the demerged co-operative bank, would have been entitled to carry forward and set-off under the provisions of section 72 as if the business reorganisation had not taken place. (viii) Unabsorbed depreciation means so much of the allowance for depreciation of the amalgamating co-operative bank or the demerged co-operative bank, as the case may be, which remains to be allowed and which would have been allowed to such bank as if the business reorganisation had not taken place. Losses in Speculation Business [Section 73] (i) The meaning of the expression ‘speculative transaction’ as defined in section 43(5) and the treatment of income from speculation business has already been discussed under the head “Profits and gains of business or profession”.

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(ii) Since speculation is deemed to be a business distinct and separate from any other business carried on by the assessee, the losses incurred in speculation can be neither set off in the same year against any other non-speculation income nor be carried forward and set off against other income in the subsequent years. (iii) Therefore, if the losses sustained by an assessee in a speculation business cannot be set-off in the same year against any other speculation profit, they can be carried forward to subsequent years and set-off only against income from any speculation business carried on by the assessee. (iv) The loss in speculation business can be carried forward only for a maximum period of 4 years from the end of the relevant assessment year in respect of which the loss was computed. Loss from the activity of trading in derivatives, however, is not to be treated as speculative loss. (v) The Explanation to this section discourages companies (other than banking and investment companies) from indulging in speculation business or dealing in shares otherwise than in the ordinary course of their business. It provides that where any part of the business of a company (other than investment company / banking / financing company) consists of the purchase and sale of the shares of other companies, such a company shall be deemed to be carrying on speculation business to the extent to which the business consists of the purchase and sale of such shares. Thus, companies engaged in the business of banking or the granting of loans and advances as their principal business would be exempted from the operation of this Explanation. Accordingly, both investment companies and banking companies would not be treated as carrying on speculation business in cases where they purchase and sell shares of other companies. (vi) For this purpose, an investment company means a company whose Gross Total Income consists mainly of income which is chargeable under the heads “Income from house property”, “Capital gains” and “Income from the other sources”. Carry forward & set off of losses by specified businesses [Section 73A] (i) Any loss computed in respect of the specified business referred to in section 35AD shall be set off only against profits and gains, if any, of any other specified business. (ii) The unabsorbed loss, if any, will be carried forward for set off against profits and gains of any specified business in the following assessment year and so on. (iii) There is no time limit specified for carry forward and set-off and therefore, such loss can be carried forward indefinitely for set-off against income from specified business. Note - The loss of an assessee claiming deduction under section 35AD in respect of a specified business can be set-off against the profit of another specified business under section 73A, irrespective of whether the latter is eligible for deduction under section 35AD. An assessee can, therefore, set-off the losses of a hospital or hotel which begins to operate after 1st April, 2010 and which is eligible for deduction under section 35AD, against the profits of the existing business of operating a hospital (with atleast 100 beds for patients) or a hotel (of two star or above category), even if the latter is not eligible for deduction under section 35AD. Losses under the head ‘Capital Gains’ [Section 74 ] Section 74 provides that where for any assessment year, the net result under the head ‘Capital gains’ is short term capital loss or long term capital loss, the loss shall be carried forward to the following assessment year to be set off in the following manner: (i) Where the loss so carried forward is a short term capital loss, it shall be set off against any capital gains, short term or long term, arising in that year.

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(ii) Where the loss so carried forward is a long term capital loss, it shall be set off only against long term capital gain arising in that year. (iii) Net loss under the head capital gains cannot be set off against income under any other head. (iv) Any unabsorbed loss shall be carried forward to the following assessment year up to a maximum of 8 assessment years immediately succeeding the assessment year for which the loss was first computed. Illustration 3 During the P.Y. 2013-14, Mr. C has the following income and the brought forward losses:

Particulars ` Short term capital gains on sale of shares Long term capital loss of A.Y. 2012-13 Short term capital loss of A.Y. 2013-14 Long term capital gain

1,50,000(96,000)(37,000)

75,000

What is the capital gain taxable in the hands of Mr. C for the A.Y.2014-15? Solution The capital gains taxable are as under:

Particulars ` ` Short term capital gains on sale of shares Less: Brought forward short term capital loss of the A.Y.2013-14 Long term capital gain Less: Brought forward long term capital loss of A.Y.2012-13 [See Note below] Taxable short-term capital gains

1,50,000(37,000) 1,13,000

Nil

75,000(75,000)

1,13,000 Note: Long-term capital loss cannot be set off against short-term capital gain. Hence, the unadjusted long

term capital loss of A.Y. 2012-13 of ` 21,000 (i.e. ` 96,000 – ` 75,000) has to be carried forward to the next year to be set-off against long-term capital gains of that year. Losses from the activity of owning and maintaining race horses [Section 74A(3)] (i) According to provisions of section 74A(3), the losses incurred by an assessee from the activity of owning and maintaining race horses cannot be set-off against the income from any other source other than the activity of owning and maintaining race horses. (ii) Such loss can be carried forward for a maximum period of 4 assessment years for being set-off against the income from the activity of owning and maintaining race horses in the subsequent years. (iii) For this purpose, the “amount of loss incurred by the assessee in the activity of owning and maintaining race horses” means the amount by which such income by way of stake money falls short of the amount of revenue expenditure incurred by the assessee for the purpose of maintaining race horses. i.e. Loss = Stake money – revenue expenditure for the purpose of maintaining race horses. (iv) Further, the expression ‘horse race’ means a horse race upon which wagering or betting may be lawfully made. (v) “Income by way of stake money” means the gross amount of prize money received on a race horse or race horses by the owner thereof on account of the horse or horses or any one or more of the horses winning or being placed second or in any lower position in horse races. Illustration 4 Mr. D has the following income for the P.Y. 2013-14 –

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Particulars `Income from the activity of owning and maintaining the race horses Income from textile business Brought forward textile business loss Brought forward loss from the activity of owning and maintaining the race horses (relating to A.Y.2011-12)

75,00085,00050,00096,000

What is the taxable income in the hands of Mr. D for the A.Y. 2014-15? Solution The taxable income is calculated as under:

Particulars ` `Income from the activity of owning and maintaining race horses Less: Brought forward loss from the activity of owning and maintaining race horses Loss from the activity of owning and maintaining race horses to be carried forward to A.Y.2015-16 Income from textile business Less: Brought forward business loss from textile business. Taxable business income

75,000 96,000(21,000)

85,00050,000 35,000

35,000 Note: Loss from the activity of owning and maintaining race horses cannot be set-off against any other source/head of income. Carry forward and set-off of losses in case of change in constitution of firm or succession [Section 78] (i) Where there is a change in the constitution of a firm, so much of the loss proportionate to the share of a retired or deceased partner remaining unabsorbed, shall not be allowed to be carried forward by the firm. However, unabsorbed depreciation can be carried forward. (ii) Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, such other person shall not be allowed to carry forward and set off against his income, any loss incurred by the predecessor. (iii) Where there is a succession by inheritance, the legal heirs (assessable as BOI) are entitled to set-off the business loss of the predecessor. Such carry forward and set-off is possible even if the legal heirs constitute themselves as a partnership firm. In such a case, the firm can carry forward and set-off the business loss of the predecessor. Carry forward and set-off of losses in case of closely held companies [Section 79] (i) Where in any previous year, there has been a change in the shareholding of a company in which the public are not substantially interested, any unabsorbed loss of the company shall be allowed to be carried forward and set off against the income of the previous year only if the beneficial shareholders of at least 51% of the voting power on the last day of the previous year remained the same as on the last day of the year or years in which the loss was incurred. (ii) However, this restriction shall not apply in the following two cases:

(1) where a change in the voting power is consequent upon the death of a shareholder or on account of transfer of shares by way of gift by a shareholder to his relative; and (2) where the change in shareholding takes place in an Indian company, being a subsidiary of a foreign company, as a result of amalgamation or demerger of the foreign company. However, this is subject to the condition that 51% of the shareholders of the amalgamating/demerged company continue to be shareholders of the amalgamated/ resulting company.

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(iii) The provisions of this section are applicable only in respect of carry forward of losses and not in respect of carry forward of unabsorbed depreciation, which is covered by section 32(2). Order of set-off of losses As per the provisions of section 72(2), brought forward business loss is to be set-off before setting off unabsorbed depreciation. Therefore, the order in which set-off will be effected is as follows - (a) Current year depreciation / Current year capital expenditure on scientific research and current year expenditure on family planning, to the extent allowed. (b) Brought forward loss from business/profession [Section 72(1)] (c) Unabsorbed depreciation [Section 32(2)] (d) Unabsorbed capital expenditure on scientific research [Section 35(4)]. (e) Unabsorbed expenditure on family planning [Section 36(1)(ix)] Illustration 5 Mr. E has furnished his details for the A.Y.2014-15 as under:

Particulars `Income from salaries Income from speculation business Loss from non-speculation business Short term capital gain Long term capital loss of A.Y.2012-13 Winning from lotteries

1,50,00060,000

(40,000)80,000

(30,000)20,000

What is the taxable income of Mr. E for the A.Y. 2014-15? Solution

Computation of taxable income of Mr. E for the A.Y.2014-15 Particulars ` `

Income from salaries Income from speculation business Less: Loss from non-speculation business Short-term capital gain Winning from lotteries Taxable income

60,000(40,000)

1,50,000

20,00080,00020,000

2,70,000

Note: Long term capital loss can be set off only against long term capital gain. Therefore, long term capital

loss of ` 30,000 has to be carried forward to the next assessment year. Illustration 6 Compute the gross total income of Mr. F for the A.Y.2014-15 from the information given below –

Particulars `Net income from house property Income from business (before provided for depreciation) Short term capital gains on sales of shares Long term capital loss from sale of property (brought forward from A.Y. 2013-14) Income from tea business Dividend from Indian companies carrying on agricultural operations Current year depreciation Brought forward business loss (loss incurred six years ago)

1,25,0001,35,000

56,000(90,000)1,20,000

80,00026,000

(45,000)

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Solution The gross total income of Mr. F for the A.Y. 2014-15 is calculated as under:

Particulars ` ` Income from house property Income from business Profits before depreciation Less: Current year depreciation Less: Brought forward business loss Income from tea business (40% is business income) Income from the capital gains Short term capital gains Long term capital loss from property (cannot be set off) Gross Total Income

1,35,00026,00045,000

1,25,000

1,12,000

56,000

64,00048,000

56,000

Nil

2,93,000 Note: Dividend from Indian companies is exempt from tax. 60% of the income from tea business is treated as agricultural income and therefore, exempt from tax.

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Illustration 1: Mr. X has loss under the head House Property `5,00,000 and income under the head Salary `3,00,000 and income under the head Business/Profession `10,00,000 and LTCG `6,00,000 and Casual

income `2,00,000 and unadjusted loss of Business/Profession `4,00,000 of Assessment Year 2009-10 and

loss of Business/Profession `3,00,000 of Assessment Year 2010-11. Compute his tax liability for assessment year 2014-15. Solution: ` The assessee has the option to adjust loss of house property from normal income or from LTCG. Option I Loss of house property is set off from normal income Income under the head Salary 3,00,000.00 Less: loss of house property 3,00,000.00 Income under the head Salary Nil Income under the head Business/Profession 10,00,000.00 Less: Brought forward business loss of A.Y. 2009-10 4,00,000.00 Less: Brought forward business loss of A.Y. 2010-11 3,00,000.00 Less: Loss of house property 2,00,000.00 Income under the head Business/Profession 1,00,000.00 Long term capital gain 6,00,000.00 Casual Income 2,00,000.00 Gross Total Income 9,00,000.00 Less: Deduction u/s 80C to 80U Nil Total Income 9,00,000.00 Computation of Tax Liability Tax on LTCG `5,00,000 (`6,00,000 – `1,00,000) @ 20% 1,00,000.00

Tax on Casual income `2,00,000 @ 30% 60,000.00

Tax on Normal income `1,00,000 at slab rate Nil Tax before education cess 1,60,000.00 Add: Education cess @ 2% 3,200.00 Add: SHEC @ 1% 1,600.00 Tax Liability 1,64,800.00 Option II Loss of house property is set off from LTCG Income under the head Salary 3,00,000.00 Income under the head Business/Profession 10,00,000.00 Less: Brought forward business loss of A.Y. 2009-10 4,00,000.00 Less: Brought forward business loss of A.Y. 2010-11 3,00,000.00 Income under the head Business/Profession 3,00,000.00 Long term capital gain 6,00,000.00 Less: loss of house property 5,00,000.00 Long term capital gain 1,00,000.00 Casual Income 2,00,000.00

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Gross Total Income 9,00,000.00 Less: Deduction u/s 80C to 80U Nil Total Income 9,00,000.00 Computation of Tax Liability Tax on LTCG `1,00,000 @ 20% 20,000.00


Tax on Normal income `6,00,000 at slab rate 50,000.00 Tax before education cess 1,30,000.00 Add: Education cess @ 2% 2,600.00 Add: SHEC @ 1% 1,300.00 Tax Liability 1,33,900.00 Option II is better. Illustration 2: Mrs. X has income and losses as given below:

1. Income under the head Salary ` 5,00,000

2. Loss under the head House Property `10,00,000

3. Income under the head Business/Profession `12,00,000

4. Income from STCG ` 2,00,000

5. Income from STCG u/s 111A `10,00,000

6. Casual Income ` 3,00,000

Deduction under section 80C to 80U ` 1,00,000 Brought forward Business/Profession loss for

- Previous year 2004-05 ` 3,00,000

- Previous year 2006-07 ` 6,00,000

- Previous year 2007-08 ` 3,00,000 Compute tax liability of Mrs. X for Assessment Year 2014-15. Solution: ` Option I Loss of house property is set off from normal income Income under the head Salary 5,00,000.00 Less: Loss of house property 5,00,000.00 Income under the head Salary Nil Income under the head Business/Profession 12,00,000.00 Less: loss of house property 3,00,000.00 Less: Brought forward business/profession loss P.Y. 2006-07 6,00,000.00 Less: Brought forward business/profession loss P.Y. 2007-08 3,00,000.00 Income under the head Business/Profession Nil Short term capital gain 2,00,000.00

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Less: loss of house property 2,00,000.00 Short term capital gain Nil Short term capital gain u/s 111A 10,00,000.00 Casual Income 3,00,000.00 Gross Total Income 13,00,000.00 Less: Deduction u/s 80C to 80U Nil Total Income 13,00,000.00 Computation of Tax Liability Tax on STCG u/s 111A `8,00,000 (`10,00,000 – `2,00,000) @ 15% 1,20,000.00

Tax on Casual income `3,00,000 @ 30% 90,000.00 Tax on Normal income at slab rate Nil Tax before education cess 2,10,000.00 Add: Education cess @ 2% 4,200.00 Add: SHEC @ 1% 2,100.00 Tax Liability 2,16,300.00 Option II Loss of house property is set off from STCG u/s 111A Income under the head Salary 5,00,000.00 Income under the head Business/Profession 12,00,000.00 Less: Brought forward business/profession loss P.Y. 2006-07 6,00,000.00 Less: Brought forward business/profession loss P.Y. 2007-08 3,00,000.00 Income under the head Business/Profession 3,00,000.00 Short term capital gain 2,00,000.00 Short term capital gain u/s 111A 10,00,000.00 Less: loss of house property 10,00,000.00 Short term capital gain u/s 111A Nil Casual Income 3,00,000.00 Gross Total Income 13,00,000.00 Less: Deduction u/s 80C to 80U 1,00,000.00 Total Income 12,00,000.00 Computation of Tax Liability Tax on STCG u/s 111A Nil


Tax on Normal income `9,00,000 at slab rate 1,10,000.00 Tax before education cess 2,00,000.00 Add: Education cess @ 2% 4,000.00 Add: SHEC @ 1% 2,000.00 Tax Liability 2,06,000.00 Option II is better. Illustration 3: A partnership firm ABC & Co. has three partners, Mr. A, Mr. B and Mr. C and profit sharing

ratio is 1:2:1 and in P.Y. 2012-13, the partnership has unadjusted business loss of ` 8 lakhs and unadjusted

short term capital loss of ` 2 lakhs and Mr. A is retired w.e.f 01.04.2013 and remaining partners are

continuing the firm and the firm has income under head Business/Profession of ` 11 lakhs and LTCG ` 6 lakhs before adjusting brought forward losses.

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Compute tax liability of the partnership firm for Assessment Year 2014-15. (b) Presume Mr. A is retired w.e.f 01.10.2013. (c) Presume Mr. A is retired w.e.f 01.01.2014. Solution: ` Income under head Business/ Profession 11,00,000.00

Less: Share of B & C in b/f business loss (` 8,00,000 x ¾) 6,00,000.00 Less: Share of Mr. A to be adjusted u/s 78 Nil Income under head Business/ Profession 5,00,000.00 Long Term Capital Gain 6,00,000.00 Less: Share of B & C in b/f short term loss 1,50,000.00 Less: Share of Mr. A to be adjusted u/s 78 Nil Long Term Capital Gain 4,50,000.00 Gross Total Income 9,50,000.00 Less: Deduction u/s 80C to 80U Nil Total Income 9,50,000.00 Computation of Tax Liability Tax on normal income ` 5,00,000 @ 30 % 1,50,000.00

Tax on LTCG ` 4,50,000 @ 20% 90,000.00 Tax before education cess 2,40,000.00 Add: EC @ 2% 4,800.00 Add: SHEC @ 1% 2,400.00 Tax Liability 2,47,200.00 Solution: (b) Income from Business /Profession 11,00,000.00

Less: Share of B & C in Business loss (` 8,00,000 x 3/4) 6,00,000.00 Less: Share of Mr. A to be adjusted u/s 78 (Ref WN 1) 1,37,500.00 Income from Business/ Profession 3,62,500.00 Long term capital gain 6,00,000.00 Less: Share of B & C in b/f short term loss 1,50,000.00 Less: Share of Mr. A to be adjusted u/s 78 (Ref WN 2) 50,000.00 Long term capital gain 4,00,000.00 Gross Total Income 7,62,500.00

Less: Deduction u/s 80C to 80U N Nil Total Income 7,62,500.00 Computation of Tax Liability Tax on normal income ` 3,62,500 @ 30 % 1,08,750.00

Tax on LTCG ` 4,00,000 @ 20% 80,000.00 Tax before Education cess 1,88,750.00 Add: EC@ 2% 3,775.00 Add: SHEC @ 1% 1,887.50 Tax Liability 1,94,412.50

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Rounded off u/s 288B 1,94,410.00 Working Note 1. (a) Share of A in current year profit till date of retirement ` 11,00,000 x 1/2 x 1/4 = ` 1,37,500 OR

(b) Share in Loss i.e. ` 8,00,000 x ¼ = ` 2,00,000

Lower of (a) or (b) can be set off i.e. ` 1,37,500 Working Note 2. (a) Share of A in current LTCG ` 6,00,000 x ½ x ¼ = ` 75,000 OR

(b) Share in loss i.e. ` 2,00,000 x ¼ = ` 50,000

Lower of (a) or (b) can be set off i.e. ` 50,000 Solution (c): Income from Business /Profession 11,00,000.00

Less: Share of B & C in Business loss ` 8,00,000 x ¾ 6,00,000.00 Less: Share of Mr. A to be adjusted u/s 78 (Ref WN 3) 2,00,000.00 Income from Business/ Profession 3,00,000.00 Long term capital gain 6,00,000.00 Less: Share of B & C in b/f short term loss 1,50,000.00 Less: Share of Mr. A to be adjusted u/s 78 (Ref WN 4) 50,000.00 Long term capital gain 4,00,000.00 Gross Total Income 7,00,000.00

Less: Deduction u/s 80C to 80U N Nil Total Income 7,00,000.00 Computation of Tax Liability Tax on normal income ` 3,00,000 @ 30 % 90,000.00

Tax on LTCG ` 4,00,000 @ 20% 80,000.00 Tax before education cess 1,70,000.00 Add: EC @ 2% 3,400.00 Add: SHEC @ 1% 1,700.00 Tax Liability 1,75,100.00 Working Note 3. (a) Share of A in current year profit till date of retirement ` 11,00,000 x 3/4 x 1/4 = ` 2,06,250 OR

(b) Share in business loss i.e. ` 8,00,000 x ¼ = ` 2,00,000

Lower of (a) or (b) can be set off i.e. ` 2,00,000 Working Note 4. (a) Share of A in current LTCG ` 6,00,000 x 3/4 x 1/4 = ` 1,12,500 OR

(b) Share in b/f short term loss i.e. ` 2,00,000 x ¼ = ` 50,000

Lower of (a) or (b) can be set off i.e. ` 50,000

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EXAMINATION QUESTIONS

IPCC MAY – 2013 Question 4(a) (8 Marks) From the following information of Mr. Mohit for the financial year 2013-14 you are required to compute his total income for the financial year 2013-14 and ascertain the amount of losses which will be carried forward to next year. ` (i) He owns two houses: House No. 1 – Income after all statutory deductions 80,000 House No. 2 – Current year loss (38,000) (ii) He has three proprietory business concerns :

(a) Textile Business : (i) Discontinued from 30th September 2013 – Current year’s loss 40,000 (ii) Brought forward loss of Asst. year 2010-11 95,000

(b) (i) Chemical Business – since discontinued : Nil (ii) Bad debts allowed in earlier years recovered during the year 35,000 (iii) Brought forwarded business loss of Asst. year 2012-13 50,000 (c) Leather Business – Profit for the current year 1,00,000 (d) Share of Profit in a firm in which he is partner since 2002 16,550 (iii) (a) Short Term Capital Gain 60,000 (b) Long Term Capital Loss 35,000 (iv) Contribution to L.I.C. towards premium 10,000 Solution: Computation of total income of Mr. Mohit for the A.Y. 2014-15 Particulars ` ` 1. Income from house property House No.1 House No.2 2. Profits and gains of business or profession Profit from leather business Less: Current year loss of textile business Bad debts (allowed as deduction in earlier year) recovered during the year is taxable under section 41(4) Less: Brought forward business loss of textile business for A.Y.2010-11 set off against the business income of current year 3. Capital Gains Short-term capital gains Gross Total Income Less: Deduction under Chapter VI-A Under section 80C – LIC premium paid Total Income

80,000

(-) 38,000

1,00,000

(-) 40,000

60,000

35,000

95,000

95,000

42,000

Nil

60,000

1,02,000 10,000

92,000

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Losses to be carried forward to A.Y. 2014-15 Particulars `

Business loss of discontinued chemical business of A.Y. 2012-13 to be carried forward under section 72 Long term capital loss of A.Y. 2014-15 to be carried forward under section 74 (Note 2)

50,000

35,000

Notes: (1) Share of profit from firm of ` 16,550 is exempt under section 10(2A) in the hands of the partner, Mr. Mohit. (2) Long-term capital loss cannot be set-off against short-term capital gains. Therefore, it has to be carried forward to the next year to be set-off against long-term capital gains of that year. It can be carried forward for a maximum of 8 assessment years. Note: The above solution has been worked out on the basis of the following assumptions:

(1) The current year loss of `38,000 is respect of House No. 2 is the computed loss after deduction of municipal tax, interest and 30% of Net Annual Value. (2) Life insurance premium paid is fully allowable as deduction under section 80C on the assumption that the same is within the limit of 10% or 20% of actual capital sum assured, as the case may be (20% if the policy is issued before 01.04.2012 and 10% if the policy is issued on or after 01.04.2012).

IPCC NOV – 2012 Question No. 5(a) (8 Marks) Mr. Rahul an assessee aged 61 years gives the following information for the previous year 31.03.2014: Sr. Particulars ` a. Loss from profession

1,05,000

b. Capital loss on the sale of property-short term

55,000

c. Capital gains on sale of shares-long term

2,05,000

d. Loss in respect of self occupied property

15,000

e. Loss in respect of let out property

30,000

f. Share of loss from firm

1,60,000

g. Income from card games

55,000

h. Winnings from lotteries

1,00,000

i. Loss from horse races in Mumbai

40,000

j. Medical insurance premium paid by cheque 18,000 Compute the total income of Mr. Rahul for the assessment year 2014-15. (Modified) Solution: ` Income from Capital Gains Long term capital Gain 2,05,000 Short term capital loss on sale of property (55,000) Long Term Capital Gain 1,50,000

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Income from House Property Loss from Self Occupied House (15,000) Loss from Let out House (30,000) Loss from House Property (45,000) Income from Business /Profession Loss from profession (1,05,000) Loss from house property and loss from PGBP can be set off against income from capital gains (LTCG) Income from Capital Gains (LTCG) 1,50,000 Less: Loss from House Property 45,000 Less: Loss from Business/Profession 1,05,000 Income under the head Capital Gains Nil Income from Other Sources Winning from lottery 1,00,000 Income from card game 55,000 Income under the head Other Sources 1,55,000 Gross Total Income 1,55,000 Less: Deduction u/s 80C to 80U (Deductions are not allowed from casual incomes) Nil Total Income 1,55,000 Working Notes:

1. Share of loss from firm is exempt in the hands of partner u/s 10(2A) 2. Loss from races can neither be set off nor be carried forward.

PCC NOV – 2011 Question 1 (5 Marks) Mr. Batra furnishes the following details for year ended 31.03.2014. ` Short term capital gain 1,40,000 Loss from speculative business 60,000 Long term capital gain on sale of land 30,000 Long term capital loss on sale of shares 1,00,000 (securities transaction tax not paid) Income from business of textile (after allowing current year depreciation) 50,000 Income from activity of owning and maintaining race horses 15,000 Income from salary 1,00,000 Loss from house property 40,000 Following are the carry forward losses:

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(i) Losses from activity of owning and maintaining race horses-pertaining to A.Y. 2011-12 `25,000.

(ii) Carry forward loss from business of textile `60,000- Loss pertains to A.Y. 2006-07. Compute gross total income of Mr. Batra for the assessment year 2014-15. Also state the eligible carry forward losses for the assessment Year 2014-15. (Modified) Answer: Calculation of Gross Total Income of Mr. Batra for the assessment year 2014-15 ` Income under the head Business/Profession Income from Business of textile 50,000 Less: Loss Carried forward from textile business (A.Y. 2006-07) (50,000)

Balance loss of `10,000 shall lapse Income under the head Salary Salary 1,00,000 Less: Loss from house property (40,000) Income under the head Salary after set off 60,000 Income under the head Other Sources Income from owning and maintaining race horses 15,000 Less: Loss carried forward to be adjusted (A.Y. 2011-12) (15,000)

(Balance brought forward loss of `10,000 to be carried forward to next year) Income under the head Capital Gains Short Term Capital Gains 1,40,000 Long Term Capital Gains 30,000 Less: Long term loss (30,000) (Balance of loss of 70,000 shall be carried forward) Gross Total Income 2,00,000

Loss from speculative business of A.Y. 2014-15 `60,000 to be carried forward for 4 years starting from assessment year 2015-16.

IPCC MAY – 2011 Question 4 (4 Marks)The following are the details relating to Mr. Srivatsan, a resident Indian, aged 57, relating to the year ended

31.03.2014: (`) Income from salaries 2,20,000 Loss from house property 1,90,000 Loss from cloth business 2,40,000 Income from speculation business 30,000 Long-term capital gains from sale of urban land 2,50,000 Long-term capital loss from sale of listed shares in recognized stock exchange (STT paid) 1,10,000

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Loss from card games 32,000 Income from betting 45,000 Life insurance premium paid 1,20,000 Compute the total income and show the items eligible for carry forward. (Modified) Answer.

Computation of total income of Mr. Srivatsan for the A.Y. 2014-15 Particulars ` `

Salaries Income from salaries Less: Loss from house property Profits and gains of business or profession Income from speculation business Less: Loss from cloth business set off Capital gains Long-term capital gains from sale of urban land Less: Loss from cloth business set off Income from other sources Income from betting Gross total income Less: Deduction under section 80C (life insurance premium paid) Total income

2,20,000 1,90,000

30,000 30,000

2,50,000 2,10,000

30,000

Nil

40,000

45,0001,15,000 30,000 85,000

Losses to be carried forward `(1) Loss from cloth business (2,40,000-30,000-2,10,000) NilNotes (i) Long-term capital gains from sale of listed shares in a recognized stock exchange is exempt under section 10(38). Loss from an exempt source cannot be set off against profits from a taxable source. Therefore, long-term capital loss on sale of listed shares cannot be set-off against long-term capital gains from sale of urban land.

(ii) Business loss cannot be set off against salary income. However, the balance business loss of `2,10,000 (` 2,40,000 – `30,000 set-off against income from speculation business) can be set-off against long-term capital

gains of ` 2,50,000 from sale of urban land. Consequently, the taxable long-term capital gains would be ` 40,000. (iii) Loss from card games can neither be set off against any other income, nor can it be carried forward. (iv) For providing deduction under Chapter VIA, gross total income has to be reduced by the amount of long-term capital gains and casual income. Therefore, the deduction under section 80C in respect of life

insurance premium paid has to be restricted to `30,000 [i.e., Gross Total Income of `1,15,000 – `40,000

(LTCG) – `45,000 (Casual income)]. (v) Income from betting is chargeable at a flat rate of 30% under section 115BB and no expenditure or allowance can be allowed as deduction from such income, nor can any loss be set-off against such income.

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PCC MAY – 2011 Question 4 (6 Marks) Balamurugan furnishes the following information for the year ended 31.03.2014: ` Income from business (1,35,000) Income from house property (15,000) Lottery winning (Gross) 3,00,000 Speculation business income 1,00,000 Income by way of salary 60,000 Long term capital gain 70,000 Compute his total income, tax liability and advance tax obligations. Answer.

Computation of total income of Balamurugan for the year ended 31.03.2014 Particulars ` ` Salaries Less: Loss from house property Net Salary (after set off of loss from house property)

60,000 (15,000)

45,000

Profits and gains of business or profession Speculation business income Less: Business loss set-off Net business loss to be set-off against long-term capital gain

1,00,000 (1,35,000) (35,000)

Capital Gains Long term capital gain Less: Business loss set-off Long term capital gain after set off of business loss

70,000

(35,000)

35,000

Income from other sources Lottery winnings (Gross)

3,00,000

Total Income 3,80,000 Computation of tax liability Particulars ` On total income of `80,000 (excluding lottery winning) Nil

On lottery winnings of `3,00,000 @ 30% 90,000

Less: Rebate u/s 87A (90,000 or `2,000) 2,000 Tax after rebate 88,000 Add: Education Cess @ 2% and Secondary and higher education cess @ 1% 2,640 Total tax liability 90,640 The assessee need not pay advance tax since the total income (excluding lottery income) liable to tax is below the basic exemption limit. Further, in respect of lottery income, tax would have been deducted at

source @ 30% under section 194B. Since the remaining tax liability of `640 (`90,640 – `90,000) is less than `10,000, advance tax liability is not attracted.

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IPCC NOV – 2010 Question 1 (5 Marks)Mr. Soohan submits the following details of his income for the assessment year 2014-15. Income from salary

3,00,000.00

Loss from let out house property

40,000.00

Income from sugar business

50,000.00

Loss from iron ore business b/f (discontinued in 2007-08)

1,20,000.00

Short term capital loss

60,000.00

Long term capital gain

40,000.00

Dividend

5,000.00

Income received from lottery winning (Gross)

50,000.00

Winning in card games (Gross)

6,000.00

Agricultural income

20,000.00

Long term capital gain from shares (STT paid)

10,000.00

Short term capital loss under section 111A

10,000.00

Bank interest on fixed deposit 5,000.00 Calculate gross total income and losses to be carried forward. (Modified) Answer.

Computation of gross total income of Mr. Soohan for the A.Y. 2014-15 Particulars ` ` Salaries Income from salary 3,00,000 Less: Loss from house property set-off against salary income (40,000) 2,60,000 as per section 71 Profits and gains of business or profession

Note (1) The basic exemption limit of `2,00,000 has to be first exhausted against salary income of `45,000. The

unexhausted basic exemption limit of `1,55,000 can be adjusted against long-term capital gains of `35,000 as per section 112, but not against lottery winnings which are taxable at a flat rate of 30% under section 115BB. (2) The first proviso to section 234C provides that since it is not possible for the assessee to estimate his income from lotteries, the entire amount of tax payable (after considering TDS) on such income should be paid in the remaining installments of advance tax which are due. Where no such installment is due, the entire tax should be paid by 31st March, 2014. The first proviso to section 234C would be attracted in case of non-deduction or short-deduction of tax at source under section 194B.

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Income from sugar business 50,000 Less: Brought forward loss from iron-ore business set-off as per (50,000) Nil section 72

Balance business loss of `70,000 of P.Y.2007-08 carried forward to A.Y.2015-16 Capital gains Long term capital gain 40,000 Less: Short term capital loss set-off (40,000) Nil

Balance short-term capital loss of `20,000 to be carried forward

Short-term capital loss of `10,000 under section 111A to be carried forward Income from other sources Winnings from lottery 50,000 Winnings from card games 6,000 Bank interest on fixed deposit 5,000 61,000 Gross Total Income 3,21,000 Losses to be carried forward to A.Y. 2015-16 Loss of iron-ore business 70,000 Short term capital loss 30,000 Notes: 1. The following income are exempt under section 10 –

(i) Dividend income [Exempt under section 10(34)], assuming that dividend is received from a domestic company. (ii) Agricultural income [Exempt under section 10(1)] (iii) Long-term capital gains on which STT is paid [Exempt under section 10(38)]

2. It is presumed that loss from iron-ore business relates to P.Y.2007-08, the year in which the business was discontinued.

PCC NOV – 2010 Question 1 (5 Marks) Determine the total income of Mr. Chand from the following information for the Assessment Year 2014-15: `(i)

Interest received on enhanced compensation (It relates to transfer of land in the financial

year 2008-09. Out of the above `65,000 relates to financial year 2013-14 and the balance relate to preceding years)

4,00,000

(ii) Business loss relating to discontinued business of the assessment year 2008-09 brought forward and eligible for set off.

1,50,000

(iii) Current year business income (i.e. financial year 2013-14) (Computed) 1,10,000(Modified)

Answer. Computation of total income of Mr. Chand for A.Y. 2014-15 Particulars Amount Amount (`) (`) Profits and gains of business or profession

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Current year business income 1,10,000 Less: Brought forward business loss of discontinued business

`1,50,000 set-off to the extent of current year business income as per section 72 1,10,000 Nil Income from other sources Interest on enhanced compensation taxable on receipt basis under section 56(2)(viii) 4,00,000 Less: Deduction under section 57(iv) @ 50% 2,00,000 2,00,000 Total Income 2,00,000

The unabsorbed business loss of `40,000 (`1,50,000 – `1,10,000) of A.Y. 2008-09 relating to discontinued business will be carried forward for set-off against income from any business in the next year i.e. A.Y. 2015-16. Question 7 (4 Marks) Discuss briefly on carry forward and set off of losses in the case of change in constitution of firm or succession. Answer. Carry forward and set off of losses in cases of change in constitution of firm or on succession [Section 78] (i) Where there is a change in the constitution of firm, so much of the loss proportionate to the share of a retired or deceased partner remaining unabsorbed, shall not be allowed to be carried forward by the firm. (ii) Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, such other person shall not be allowed to carry forward and set off against his income, any loss incurred by the predecessor. (iii) Where there is a succession by inheritance, the legal heirs are entitled to set off the business loss of the predecessor. Such carry forward and set off is possible even if the legal heirs constitute themselves as partnership firm. In such a case, the firm can carry forward and set off the business loss of the predecessor.

PCC MAY – 2010 Question 4 (6 Marks) Mr. Banerjee furnishes you the following details for the year ended 31.03.2014:

Income (loss) from house property ` House – 1 36,000 House – 2 Self occupied (20,000) House – 3 60,000 Profits and gains from Business or Profession Textile Business 2,00,000 Automobile Business (3,00,000) Speculation Business 2,00,000 Capital Gains Long-term capital gain from sale of shares (STT paid) 1,50,000 Long-term capital gain from sale of vacant site 2,00,000 Short-term capital loss from sale of building 1,00,000 (Note: Assume that the figures given above are computed and arrived at after considering eligible deductions).

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Other sources: Gift from a Friend (non-relative) on 05.06.2013 60,000 Gift from Maternal Uncle on 25.02.2014 1,00,000 Gift from Grandfather’s Younger Brother on 10.02.2014 1,00,000 Compute the total income of Mr. Banerjee for the Assessment Year 2014-15. (Modified) Answer. Computation of total income of Mr. Banerjee for the Assessment year 2014-15 ` ` Income (loss) House property House –I 36,000 House-2 –Self occupied (20,000) House-3 60,000 Income from House Property 76,000 Profits and gains of business and profession Textile business 2,00,000 Automobile business (3,00,000) Speculation business 2,00,000 Income from business or profession representing speculation business profit (after set off of loss of automobile business) 1,00,000 Capital Gains Long term capital gain from sale of shares (STT paid) ` 1,50,000 – exempt u/s. 10(38) Nil Long term capital gain from sale of vacant site 2,00,000 Short term capital loss from sale of building (1,00,000) Long term capital gain-after set off of short term loss against 1,00,000 long term capital gain Income from Other sources Gift from a friend (non relative) on 05.06.2013 60,000

Gift from maternal uncle (on 25.02.2014) ` 1,00,000, not taxable Nil since maternal uncle is covered by the definition of the term’ relative’ given in explanation to section 56(2) Gift from grand father’s younger brother on 10.02.2014. This amount is taxable as grandfather’s younger brother is not covered by the definition of ‘relative’. 1,00,000 1,60,000 Gross Total Income 4,36,000 Less: Deduction u/s 80C to 80U Nil Total income 4,36,000

IPCC NOV – 2009 Question 3 (10 Marks)Mr. Rajat submits the following information for the financial year ending 31st March, 2014. He desires that you should :

(a) Compute the total income and

(b) Ascertain the amount of losses that can be carried forward.

(i) He has two houses : ` (a) House No. I – Income after all statutory deductions 72,000

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(b) House No. II – Current year loss

(30,000)

(ii) He has three proprietary businesses :

(a) Textile Business :

(i) Discontinued from 31st October, 2013 – Current year loss 40,000

(ii) Brought forward business loss of the A.Y. 2010-2011

95,000

(b) Chemical Business :

(i) Discontinued from 1st March, 2012 – hence no Profit/Loss Nil

(ii) Bad debts allowed in earlier years recovered during this year 35,000

(iii) Brought forward business loss of the A.Y. 2012-13

50,000

(c) Leather Business : Profit for the current year

1,00,000

(d) Share of profit in a firm in which he is Partner since 2005 16,550

(iii) (a) Short-term Capital Gain

60,000

(b) Long-term Capital Loss

35,000

(iv) Contribution to LIC towards Premium 10,000

Answer. Computation of total income of Mr. Rajat for the A.Y. 2014-15

Particulars ` ` 1. Income from house property House No. I 72,000

House No. II (-) 30,000 42,000

2. Profits and gains of business or profession Profit from leather business 1,00,000

Less: Current year loss of textile business (-) 40,000

60,000

Bad debts recovered taxable under section 41(4) 35,000

95,000

Less: Brought forward business loss of textile business for

A.Y.2010-11 set off against the business income of current year 95,000 Nil

3. Capital Gains Short-term capital gain 60,000

Gross Total Income 1,02,000 Less: Deduction under chapter VI-A

Under section 80C – LIC premium paid 10,000

Total Income 92,000 Statement of losses to be carried forward to A.Y. 2015-16

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Particulars Business loss of A.Y. 2012-13 to be carried forward under section 72 50,000

Long term capital loss of A.Y. 2014-15 to be carried forward under section 74 35,000

Notes: (i) Share of profit from firm of `16,550 is exempt under section 10(2A).

(ii) Long-term capital loss cannot be set-off against short-term capital gains. Therefore, it has to be carried forward to the next year to be set-off against long-term capital gains of that year.

Question 4 (4 Marks) Discuss briefly on carry forward and set off of losses in the case of change in constitution of firm or succession. Answer. Refer to Answer given in PCC NOV – 2010 Question No.7

PCC JUNE – 2009 Question 4 (8 Marks) Ms. Geeta, a resident individual, provides the following details of her income / losses for the year ended 31.03.2014:

(i) Salary received as a partner from a partnership firm ` 7,50,000.

(ii) Loss on sale of shares listed in BSE ` 3,00,000. Shares were held for 15 months and STT paid on sale.

(iii) Long-term capital gain on sale of land ` 5,00,000.

(iv) ` 51,000 received in cash from friends in party.

(v) ` 55,000, received towards dividend on listed equity shares of domestic companies.

(vi) Brought forward business loss of assessment year 2013- 14 ` 12,50,000. The return for assessment year 2013-14 was filed in time. Compute gross total income of Ms. Geeta for the assessment year 2014 -15 and ascertain the amount of loss that can be carried forward. (Modified) Answer. Computation of Gross Total Income of Ms. Geeta for the Assessment Year 2014-15

Particulars ` Profits and gains of business and profession Salary received as a partner from a partnership firm is taxable under the head “Profits and gains of business and profession” 7,50,000 Less: brought forward business loss of assessment year 2013-14 to be 7,50,000 set-off against business income

Nil Capital Gains Long term capital gain on sale of land – (See Note (ii)) 5,00,000 Income from other sources Cash gift received from friends - since the value of cash gift exceeds

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Set Off And Carry Forward Of Losses 145 `50,000, the entire sum is taxable 51,000

Dividend received from a domestic company is exempt under section 10(34) Nil 51,000 Gross Total Income 5,51,000 Notes – (i) Balance brought forward business loss of assessment year 2013-14 of `5,00,000 has to be carried forward to the next year. (ii) Long-term capital loss on sale of shares cannot be set-off against long-term capital gain on sale of land since loss from an exempt source cannot be set-off against profit from a taxable source. Further, long-term capital gain on sale of listed shares on which STT is paid is exempt under section 10(38), loss on sale of listed shares is a loss from an exempt source. So it cannot be set-off against long-term capital gain on sale of land, which is a profit from a taxable source.

PCC NOV – 2008 Question 4 (6 Marks) Mr. P, a resident individual, furnishes the following particulars of his income and other details for the previous year 2013-14:

` (i) Income from salary 18,000 (ii) Net annual value of house property 70,000 (iii) Income from business 80,000 (iv) Income from speculative business 12,000 (v) Long term capital gain on sale of land 15,800 (vi) Loss on maintenance of race horse 9,000 (vii) Loss on gambling 8,000

Depreciation allowable under the Income-tax Act comes to `8,000 for which no treatment is given above. The other details of unabsorbed depreciation and brought forward losses of previous year 2010-11 are: ` (i) Unabsorbed depreciation 9,000 (ii) Loss from speculative business 16,000 (iii) Short term capital loss 7,800 Compute the gross total income of Mr. P, for the Assessment year 2014-15, and the amount of loss that can or cannot be carried forward. (Modified) Answer. Computation of Gross Total Income of Mr. P for the A.Y. 2014-15

` ` (i) Income from salary 18,000 (ii) Income from House Property Net annual value 70,000

Less: Deduction under section 24(a) (30% of `70,000) 21,000 49,000

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(iii) Income from business and profession (a) Profit from business 80,000 Less: Current year depreciation 8,000

72,000 Less: Unabsorbed depreciation 9,000 63,000 (b) Income from speculative business 12,000 Less: Brought forward loss from speculative business 12,000 Nil

(Balance loss of `4,000 (i.e. `16,000 – `12,000) can be carried forward to the next year) (iv) Income from capital gain Long term capital gain on sale of land 15,800 Less: Brought forward short term capital loss 7,800 8,000 Gross total income 1,38,000 Amount of loss to be carried forward to the next year

Particulars ` Loss from speculative business (to be carried forward as per section 73) 4,000 Loss on maintenance of race horses (to be carried forward as per section 74A) 9,000 Notes: (i) Loss on gambling can neither be set-off nor be carried forward. (ii) It has been assumed that the brought forward losses relate to P.Y. 2010-11 or thereafter. Only then speculative business loss can set off against income from speculative business of the current year and the balance loss can be carried forward to A.Y. 2015-16. It may be noted that speculative business loss can be carried forward for a maximum of four years as per section 73.

PCC MAY – 2008 Question 3 (9 Marks) M/s. Vivitha & Co., a partnership firm, with four partners A, B, C and D having equal shares, furnishes the following details, summarised from the valid returns of income filed by it:

Assessment Year Item eligible for carry forward and set off 2012-13 : Unabsorbed business loss `1,20,000

2013-14 : Unabsorbed business loss `1,90,000

2013-14 : Unabsorbed depreciation `1,20,000

2013-14 : Unabsorbed long term Capital loss:

- from shares `1,10,000 STT not paid

- from building `1,90,000

C who was a partner during the last three years, retired from the firm with effect from 01.04.2013.

The Summarized results of the firm for the assessment year 2014-15 are asunder:

`Income under the head house property 70,000

Income from business:

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Speculation 2,20,000

Non-speculation (50,000)

Capital Gains:

Short-term (from sale of shares) STT not paid 40,000

Long-term (from sale of building) 2,10,000

Income from other sources 60,000

Briefly discuss, how the items brought forward from earlier years can be set off in the hands of the firm for the assessment year 2014-15, in the manner most beneficial to the assessee. Also show the items to be carried forward. Computation of total income is not required. (Modified) Answer. As per section 78, if there is a change in the constitution of a firm, so much of the loss proportionate to the share of a retired or deceased partner remaining unabsorbed shall not be allowed to be carried forward by the firm. However, unabsorbed depreciation can be carried forward. Therefore, the firm will be allowed to carry forward the following losses/depreciation.

Unabsorbed business loss for assessment year 2012-13 (1,20,000 x 75%) 90,000

Unabsorbed business loss for assessment year 2013-14 (1,90,000 x 75%) 1,42,500

Unabsorbed depreciation for assessment year 2013-14 1,20,000

Unabsorbed long term capital loss for assessment year 2013-14

From Shares (1,10,000 x 75%) 82,500

From building (1,90,000 x 75%) 1,42,500

The above losses should be adjusted against the income of assessment year 2014-15.

Income under the head house property 70,000

Less: Unabsorbed deprecation (70,000)

Nil

Income from speculation business 2,20,000

Less: Loss from non-speculation business (50,000)

Less: Brought forward business loss for assessment year 2012-13 (90,000)

Less: Brought forward business loss for assessment year 2013-14 (80,000)

Income from Business/Profession Nil

Income from Capital Gains

Income from short term capital gains 40,000

Income from long term capital gains 2,10,000

Less: Brought forward long term capital gains (2,10,000)

Income from capital gains 40,000

Income from Other Sources 60,000

Less: Brought forward unabsorbed depreciation 50,000

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Income from other Sources 10,000

Carried forward losses:

Unabsorbed business loss for assessment year 2013-14 62,500

Unabsorbed long term capital loss for assessment year 2013-14 15,000

PCC NOV – 2007 Question 5 (4 Marks) Discuss in brief the provisions relating to set off and carry forward of losses in speculation business. Answer. (i) The loss of a speculation business of any assessment year is allowed to be set off only against the profits and gains of another speculation business in the same assessment year. (ii) The speculation loss not set-off in the same assessment year, is allowed to be carried forward to subsequent years and set-off only against income of any speculation business. (iii) The loss in speculation business can be carried forward only for a maximum period of 4 years from the end of the relevant assessment year in respect of which the loss was computed. (iv) Loss from the activity of trading in derivatives, however, is not to be treated as speculative loss. (v) According to the Explanation to section 73, where any part of the business of a company consists in the purchase and sale of shares of other companies such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. However, this Explanation does not apply to- (a) a company whose gross total income consists mainly of income which is chargeable under the heads “Income from house property”, “Capital gains” and “Income from other sources”; and (b) a company the principal business of which is the business of banking or money lending.

PCC MAY – 2007 Question 4 (6 Marks) Simran, engaged in various types of activities, gives the following particulars of her income for the year ended 31.03.2014:

` (a) Profit of business of consumer and house-hold products 50,000 (b) Loss of business of readymade garments 10,000 (c) Brought forward loss of catering business which was closed in Asst. Year 2013-14 15,000 (d) Short-term loss on sale of securities and shares 15,000 (e) Profit of speculative transactions entered into during the year 12,500 (f) Loss of speculative transactions of Asst. Year 2009-10 not set off till Asst. Year 2013-14 15,000 Compute the total income of Simran for the A.Y. 2014-15. (Modified)

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Answer. Computation of total income of Simran for the A.Y. 2014-15 Particulars ` `

Profit of business of consumer and house-hold products 50,000 Less: Loss of business of readymade garments for the year adjusted under section 70(1) 10,000

40,000 Less: Brought forward loss of catering business closed in A.Y. 2013-14 set off against business income for the year as per section 72(1) 15,000 25,000 Profit of speculative transaction 12,500 Total Income 37,500 Notes – (i) Loss of speculative transaction of A.Y. 2009-10 is not allowed to be set off against the profit of speculative transaction of the A.Y. 2014-15, since, as per the provisions of section 73(4), such loss can be carried forward for set-off for a maximum period of 4 years only i.e. up to A.Y. 2013-14

(ii) Short term capital loss of `15,000 on sale of securities and shares has to be carried forward as per section 74 since there is no income under the head Capital Gains for the A.Y. 2014-15. The loss is to be carried forward for set off in future years against income chargeable under the head Capital Gains. Such loss can be carried forward for a maximum period of 8 assessment years. Question 5 (4 Marks) State the factors to be borne in mind relating to carry forward and set off of losses in case of change in constitution of firm or succession under section 78. Answer. Refer to Answer given in PCC NOV – 2010 Question No.7

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Set Off and Carry Forward Of Losses 150

EXERCISES 1. In a case where the business is succeeded by inheritance, and the legal heirs constitute themselves as a partnership firm, then – a) the partnership firm can carry forward and set-off the loss of the predecessor. b) the partnership firm cannot carry forward and set-off the loss of the predecessor. c) the loss of the predecessor can be carried forward and set-off only by the individual partners in proportion to the share of profits of the firm. 2. According to section 80, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of section 139(3), shall be carried forward. The exceptions to this are – a) Only loss under the head “Capital Gains” under section 74. b) Loss under the head “Capital Gains” and unabsorbed depreciation carried forward under section 32(2) c) Loss from house property and unabsorbed depreciation carried forward under section 32(2). 3. Section 70 enables set off of losses under one source of income against income from any other source under the same head. The exceptions to this section are – a) Loss under the head “Capital Gains”, Loss from speculative business and loss from the activity of owning and maintaining race horses b) Long-term capital loss, Loss from speculative business and loss from the activity of owning and maintaining race horses c) Short-term capital loss and loss from speculative business 4. The maximum period for which speculation loss can be carried forward is – a) 4 years b) 8 years c) indefinitely

5. Mr. A incurred short-term capital loss of ` 10,000 on sale of shares through the National Stock Exchange. Such loss can be set-off – a) only against short-term capital gains b) against both short-term capital gains and long-term capital gains a) against any head of income. 6. Write short notes on – a) Inter-head adjustment b) Inter-source adjustment. 7. Discuss the correctness of the following statements – (i) Long term capital loss can be set-off against short-term capital gains arising in that year. (ii) Business loss can be set-off against salary income arising in that year. 8. Discuss briefly on – a) Carry forward and set-off of losses by closely held companies b) Set-off and carry forward of speculation business loss.

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Set Off and Carry Forward Of Losses 151

9. State the conditions to be fulfilled by an amalgamated company for carry forward of the accumulated loss and unabsorbed depreciation of the amalgamating company. 10. Discuss the provisions of the Income-tax Act, 1961 regarding set-off and carry forward of the following losses – a) Loss under the head “Capital Gains” b) Loss from the activity of owning and maintaining race horses. 11. Discuss briefly on carry forward and set off of losses in the case of change in constitution of firm or on succession under section 78 of the Income-tax Act, 1961. 12. What are the consequences of demerger as to the accumulated loss and unabsorbed depreciation?

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