Month: July 2020

The Income Tax Act, 1961 and rules made there under relating to Set Off and Carry Forward of Losses. This is a complete guide to set off and carry forward the losses including the set off of losses from business and profession from presumptive income.

There are two types of adjustments under set off of losses:

1. Intra Head Adjustment (section 70): It means loss from one source of income can be set off against income from another source but in the same head of income.
2. Inter Head Adjustment (section 71): It means loss under one head of income can be set off against income from another head of income but in same previous year*.

Exceptions :

1. Speculative business loss can be set off against speculative business income only.
2. Specified business loss (u/s 35AD) can be set off against specified business income only.
3. Long term capital loss can be set off against long term capital gainonly.
4. Loss from owing & maintaining race horses can be set off against income from owing & maintaining race horses.
5. Short term capital loss can be set off against Short term capital gain and Long term capital gain only.
6. Loss from business cannot be set off against salary income.

*  In case of carry forward losses Inter Head adjustment Not Allowed.

1. Set Off & Carry Forward of Losses :

Timely filing of Income Tax Return

In order to carry forward the losses of current assessment year it is mandatory to file Income Tax Return within the timelines specified u/s 139(1) of the Act.

However, the provisions apply only in case of losses of current assessment year and not on the brought forward losses of previous assessment years which are still unutilized and required to be carried forwarded. Also, the losses are allowed to be set off against the income even if the return is filed after due date.

For Example : If a person has Losses of Rs. 1,00,000 brought forwarded from AY 2017-18 and incur losses of Rs. 6,00,000 in current AY 2019-20 and he filed his return of income after the due date of return filing then he is allowed to carry forward Rs. 1,00,000 pertaining to loss of AY 2017-18 but he is not allowed to carry forward the current year loss of Rs. 6,00,000 however, he can set off this loss from the eligible income in the current AY only.

Exception :

House Property loss & Unabsorbed Depreciation can be carry forwarded even if return filed after due date.

Brought Forward Loss & Presumptive Income

In case a person has brought forwarded losses from the business or profession and in the current assessment year the person files the return of income declaring his income under presumptive scheme specified u/s 44AD or 44ADA or 44AE then he is allowed to set off the brought forward losses from the presumptive income.

In such a case the person is required to file return of income under form ITR-3 declaring his income on presumptive basis under table 61 to 64 of “Part A P & L” of the form and declaring the brought forward losses under “Schedule-CYLA”.

Carry Forward of Losses in case of Amalgamation/ Demerger

Notes:

1. Only business losses (except speculative business loss) can be carry forwarded by successor.
2. Unabsorbed Depreciation can be carry forwarded by Amalgamating Co./ Resulting Co./ Successor Co./ LLP for unlimited period.
3. The Carry forward of losses by successors are subjected to some conditions specified under the Act.

“Capital asset” Means: 

Property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. Besides,

It includes the following:

1. Any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
2. Property of any kind held by an assessee (whether or not connected with his business or profession).
3. Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the SEBI Act.

Does Not Include:

1. any stock-in-trade [other than the securities referred to in sub-clause (b) above], consumable stores or raw materials held for the purposes of his business or profession,
2. Personal effects, that is to say, movable property (including wearing apparel and furniture), held for personal use by the assessee or any member of his family dependent on him. However, the following assets shall not be treated as personal effects though these assets are moveable and may be held for personal use:
   • Jewellery
   • Archaeological collections
   • Drawings
   • Paintings
   • Sculptures
   • Any work of art

• Agricultural land in India, which is not an urban agricultural land. In other words, it must be a rural agricultural land;

1. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under Gold Monetisation Scheme, 2015 notified by the Central Government.
2. Types of Capital Assets:

Capital assets are of two types:

1. Short-Term Capital Asset (STCA)
2. Long-Term Capital Asset (LTCA)

(1) Short-Term Capital Asset – STCA [Section 2(42A)]:

A capital asset held by an assessee for Not more than 36 months immediately preceding the date of its transfer is known as a short term capital asset.

Exceptions:

1. The following assets shall be treated as short-term capital assets if they are held for Not more than 12 months (instead of 36 months mentioned above) immediately preceding the date of its transfer:
   1. a security including shares (other than unit) listed in a recognised stock exchange in India
   2. a unit of an equity oriented fund
   3. a zero coupon bond
2. The following assets shall be treated as short-term capital assets if they are held for Not more than 24 months (instead of 36 months/12 months mentioned above)immediately preceding the date of its transfer:
   1. Share of a company (not being a share listed in a recognised stock exchange in India)
   2. An immovable property being land and building or both.

Hence, if unlisted share or immovable property is transferred after 24 months from the date of its acquisition, the gain arising from the transfer of share or immovable property shall be treated as long-term capital gain.

(2) Long-Term Capital Asset – LTCA [Section 2(29A)]:

It means a capital asset which is not a short-term capital asset.

Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period.

Full value consideration: The consideration received or to be received by the seller as a result of transfer of his capital assets. Capital gains are chargeable to tax in the year of transfer, even if no consideration has been received.

Cost of acquisition: The value for which the capital asset was acquired by the seller.

Cost of improvement: Expenses of a capital nature incurred in making any additions or alterations to the capital asset by the seller. Note that improvements made before April 1, 2001, is never taken into consideration.

NOTE: In certain cases where the capital asset becomes the property of the taxpayer otherwise than by an outright purchase by the taxpayer, the cost of acquisition and cost of improvement incurred by the previous owner would also be included.

Calculation of Short-Term Capital Gains

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively in connection with such transfer
• Cost of acquisition
• Cost of improvement

Step 3: This amount is a short-term capital gain

Short term capital gain = Full value consideration Less expenses incurred exclusively for such transfer Less cost of acquisition Less cost of improvement.

Calculation of Long-Term Capital Gains

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively in connection with such transfer
• Indexed cost of acquisition
• Indexed cost of improvement

Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B

Long-term capital gain= Full value consideration

Less: Expenses incurred exclusively for such transfer

Less: Indexed cost of acquisition

Less: Indexed cost of improvement

Less: Expenses that can be deducted from full value for consideration*

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or transfer of the capital asset are allowed to be deducted. These are the expenses which are necessary for the transfer to take place.)

As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. Moreover, tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1 lakh in one financial year without the benefit of indexation.

In the case of sale of house property:

These expenses are deductible from the total sale price:

1. Brokerage or commission paid for securing a purchaser
2. Cost of stamp papers
3. Travelling expenses in connection with the transfer – these may be incurred after the transfer has been affected.
4. Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases.

In the case of sale of shares:

You may be allowed to deduct these expenses:

1. Broker’s commission related to the shares sold
2. STT or securities transaction tax is not allowed as a deductible expense

Where jewellery is sold:

Here, and a broker’s services were involved in securing a buyer, the cost of these services can be deducted.Note that expenses deducted from the sale price of assets for calculating capital gains are not allowed as a deduction under any other head of income tax return, and you can claim the only once.

Business refers to any kind of economic activity done by an assessee for earning profits.

The term business/economic activity includes “any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”.

There are two types of business, speculative and non-speculative.

• Speculative business income: Income from intraday equity trading is considered a speculative business income. Intraday trading simply means the buying and selling of financial instruments on the same day.
• In other words, the amount (net amount from it) is not fixed and it can change from time to time. For example, share trading business.
• Non-speculative business income: It is the income from trading Futures & Options is taken as a non-speculative business. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of the underlying contract.
• In other words, the amount (net profit/loss from it) is fixed and does not change for a period of time. For example, any manufacturing/trading or any business.

It is not compulsory to have a series of permanent transactions in a business. In other words, the repetition or continuity of business transactions is not essential.

‘Profession’

A profession is a kind of job that requires special expertise, skill and knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. In other words, he/she utilizes either his/her intellectual or manual skills to earn the livelihood.

The term “profession” is about his/her declared accomplishments, in special knowledge distinguished from mere skill.

Income from business and profession

The term ‘Income from business and profession’ means any income shown in profit and loss account after taking into account all the allowed expenditures by an assessee.

The income also includes both positive (profit) and negative incomes (loss). In other words, ‘profit and gains’ represent plus income while ‘loss’ represents minus income. So, both legal and illegal business incomes are taxable in nature.

The income earned by the assessee from the previous year is taxable. An assessee involved in the business/profession should file his/her income on or before 31 July of an assessment year.

The word “profession” & “vocation” have not been defined in the Act while as per section 2(36) of the Income Tax Act, 1961, “profession” includes vocation. The word “vocation” is a word of wider import than the word ‘profession”.

The words “business” and “vocation” are not synonymous, Upon a proper construction of the words “business” and “vocation” in the context of the Indian Income-tax Act, there must be some real, substantive and systematic course of business or conduct before it can be said that a business or vocation exists the profits of which are taxable as such under the Act (Upper India Chamber of Commerce, Cawnpore vs. CIT (1947) 15 ITR 263 (All).

Also it was observed in Addl CIT vs. Ram Kripal Tripathi (1980) 125 ITR 408 (All) that the expression “profession” involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an occupation or business which is substantially the production or sale, or arrangements for the production or sale, of commodities. “Profession” is a word of wide import and includes “vocation” which is only a way of living and a person can have more than one vocation, and the vocation need not be for livelihood nor for making any income nor need it involves systematic and organised activity.

It was observed in Dr. P. Vadamalayan vs. CIT (supra) at page 96) that the term “business” as used in the fiscal statute cannot ordinarily be understood in its etymological sense. According to the Shorter Oxford Dictionary, “business” includes a state occupation, profession or trade; profession in a wide sense means any calling or occupation by which a person habitually earns his living.

Even so, “trade” is explained as the practice of some occupation, business or profession habitually carried on. As is not unusual several jurists and eminent judges while attempting to define the limits of one or the other of the words “business”, profession and trade”, entered the “labyrinth together but made exits by different paths”.

The Supreme Court in Narain Swadeshi Weaving Mills vs. Commissioner of Excess Profits Tax (1954) 26 ITR 765 (SC), said that the word “business” connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. Venkatarama Aiyar J.,speaking for the court in Mazagaon Dock Ltd. vs. CIT (1958) 34 ITR 368 at page 376 (SC), explained “business” as a word of wide import and in fiscal statutes it must be construed in a broad rather than a restricted sense.

Following Losses are Deductible from Business Income

• Loss of stock-in-trade as a result of enemy action, or arising under similar circumstances.
• Loss of stock-in-trade due to destruction by an act of God.
• Loss arising on account of failure on the part of the assessee to accept delivery of goods.
• Depreciation in funds kept in foreign country for purchase of stock-in-trade.
• Loss due to exchange rate fluctuations of foreign currency held on revenue account.
• Loss arising from sale of securities held in the regular course of business.
• Loss of cash and securities in a banking company on account of dacoity (maybe after banking hours.) Loss incurred on realisation of amount advanced in connection with business.
• Loss of security deposited for the purposes of acquisition of stock-in-trade.
• Loss due to forfeiture of a deposit made by the assessee for properly carrying out of contract for supply of commodities.
• Loss on account of embezzlement by an employee.
• Loss incurred due to theft or burglary in factory premises during or after working hours.
• Loss of precious stones or watches of a dealer while bringing them from business premises to his house.
• Loss arising from negligence or dishonesty of employees.
• Loss incurred on account of insolvency of banker with which current account is maintained by the assessee.
• Loss incurred due to freezing of the stock-in-trade by enemy action.
• Loss incurred by a sugar manufacturing company by foregoing advance made to sugarcane growers who used to sell sugarcane crop exclusively to the company.
• Loss on account of non-recovery of advances given by the assessee-company (engaged in the business of financing its subsidiaries) to its 100 per cent subsidiary company.
• Loss incurred by a holding company which has guaranteed a loan taken by its subsidiary company.
• Loss arising as a result of seizure and confiscation of illegal stock-in-trade is allowable as a business loss against income from illegal business
• Loss arising as a result of rejection of goods by the importer (as goods are unfit for human consumption).

Following Losses are Not Deductible from Business Income

• Loss which is not incidental to trade or profession, carried on by the assessee.
• Loss incurred due to damage, destruction, etc., of capital assets.
• Loss incurred due to sale of shares held as investment.
• Loss of advances made for setting up of a new business which ultimately could not be started.
• Depreciation of funds kept in foreign currency for capital purposes.
• Loss arising from non-recovery of tax paid by an agent on behalf of the non-resident.
• Anticipated future losses.
• Provision made by assessee in respect of non-performing assets.
• Loss relating to any business or profession discontinued before the commencement of previous year.

Expenditures disallowed for TDS default

The Income Tax Act states certain circumstances where if the TDS deductible on payments has not been deducted appropriately, such expenses are expressly disallowed.

The various provisions which relate to disallowance on account of TDS default are as follows:

• Payment (for other than salaries) outside India or to a non-resident or foreign company (for example payments for interest, royalty, technical fee, etc.)

The repercussions under various scenarios of TDS default are given below:

If any amount is paid as salaries to a person outside India or a non-resident without deduction of TDS, the amount so paid is disallowed as expenditure.

• Payment of any sum to a resident with TDS default (including salaries)
• The repercussions under various scenarios of TDS default are given below:

The act also provides for a relief in case of non-deduction of TDS if the below-mentioned clauses are fulfilled.

In a case where TDS is required to be deducted and the same has not been deducted, the assessee can claim a relief and the expenditures will be allowed if:

• The recipient has filed his return of income in time;
• The above payment has been taken into account by the recipient while filing his/her return;
• The recipient has paid taxes appropriately on the declared income;
• A certificate from a Chartered Accountant is obtained and uploaded with the return to this effect.

Expenditures disallowed for Equalization Levy default

In cases where for any particular expenditure (where the equalization levy is required to be deducted) there is a default on account of equalization levy through either of the following channels, the amount of such expenditure is disallowed.

• Non-deduction of equalization levy
• Non-deposit of equalization levy before due-date or filing of IT return

Although, in the subsequent year when the deduction or deposit is so made, the expenditure is thus allowed.

Expenditures disallowed for payment in cash

There are certain transactions where the payment for the services or goods are made by the assesses in cash instead of cheque or bank transfer, etc. In all such cases where the amount of payment exceeds Rs. 20,000, the expenditure is disallowed. The act provides for such payments to be made through an account payee cheque, account payee bank draft or bank transfer and likewise.

Although the section provides for disallowance in case of payments for expenditure in cash beyond Rs. 20,000, there are certain instances where the payment exceeding Rs. 20,000 is allowed in cash and the allowance for such expenditures are given as well. Such list of expenditures is prescribed in Rule 6DD.

An illustrative list is given here as follows:

• Payment to banks, financial institutions, etc.
• Payment to government
• Payment made by book adjustments
• Payment for purchase of agricultural products
• Payment made to cottage industries which are producing without the aid of power
• Payment to a person in a village which is not served by any banks
• Payment of employment terminal benefits (Up to Rs. 50,000)
• Payment of salary after deducting TDS appropriately
• Payment made on a day on which banks are closed
• Payment made by forex dealer

The provision applies in the case where the payment is made to a single person in a single day.

Recently, the income tax department has notified that the limit of all expenses made in cash on a particular day has been reduced to Rs 10,000. The rules provides for such payments made through an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as prescribed under rule 6ABBA and will have effect from the 1st of September 2019.

Here is the list of other electronic modes specified in Rule 6BBA:

• Credit/debit card
• Net banking
• IMPS
• UPI
• RTGS
• NEFT
• BHIM Aadhaar pay