Tag: Section 114

Management Notes

Carry Forward and Set off of Loss from Specified Business Covered u/s 35AD [Sec.114]

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Section 114 of the Income-tax Act, 2025 provides special rules for the set-off and carry forward of losses from specified business. These businesses receive separate treatment because losses arising from them are subject to a ring-fencing rule and cannot generally be adjusted against ordinary business income or income under other heads. Where a loss from a specified business cannot be completely set off during the relevant tax year, the unabsorbed amount may be carried forward to subsequent tax years. The provision ensures that such losses are adjusted only against profits and gains arising from an eligible specified business, subject to statutory conditions.

1. Meaning of Loss from Specified Business

A specified business loss arises where the allowable expenditure and deductions of a business classified as a specified business under the Act exceed the income earned from that business during the tax year. Such businesses are given special tax treatment and their losses are governed separately from ordinary business losses. The loss is first determined according to the applicable provisions for computing profits and gains of the specified business. Once determined, it cannot generally be freely adjusted against income from ordinary business, salary, house property, capital gains or other sources. Section 114 therefore creates a separate mechanism for adjustment of such specified-business losses.

2. Set-off of Specified Business Loss

Under Section 114, a loss arising from a specified business can be set off only against profits and gains of another specified business carried on by the assessee. It cannot be adjusted against profits from an ordinary non-specified business merely because both incomes fall under the broad head Profits and Gains of Business or Profession. Similarly, the loss cannot ordinarily be set off against income chargeable under other heads. This restriction is commonly described as ring-fencing of losses. If the assessee carries on more than one specified business, a loss from one eligible specified business may be adjusted against profits from another specified business, subject to statutory conditions.

3. Carry Forward of Specified Business Loss

Where the loss from a specified business cannot be wholly set off during the relevant tax year, the unabsorbed loss may be carried forward to subsequent tax years in accordance with Section 114. In a subsequent year, the brought-forward loss can be adjusted only against profits and gains arising from a specified business. It does not become an ordinary business loss merely because it has been carried forward. If sufficient specified-business profit is unavailable in a particular subsequent year, the remaining eligible loss may continue to be carried forward according to the Act. Thus, the special character of the loss is maintained until it is absorbed.

4. Period of Carry Forward

A significant feature of the provisions relating to specified-business loss is the treatment of the period for which an eligible loss may be carried forward. Unlike an ordinary business loss, which is subject to a prescribed limited carry-forward period, specified-business loss is governed by the special rules contained in Section 114. Subject to satisfaction of the applicable statutory conditions, the loss may continue to be carried forward until it can be absorbed against eligible profits of a specified business. Therefore, maintaining proper records of the year of loss, amount carried forward and subsequent set-off is important for determining the remaining loss available for adjustment.

5. Restriction on Inter-Head Adjustment

Loss from a specified business is subject to a strict restriction regarding inter-head adjustment. Such loss cannot ordinarily be set off against salary income, income from house property, capital gains or income from other sources. It also cannot generally be adjusted against profit from an ordinary business that does not qualify as a specified business. The purpose of this restriction is to ensure that special deductions and benefits associated with specified businesses do not reduce unrelated taxable income. Consequently, the loss remains attached to the specified-business category and is available for adjustment only against eligible specified-business profits, whether arising in the same year or subsequent years.

illustration

Suppose an assessee has the following income and loss:

Particulars Amount (₹)
Profit from Ordinary Business 6,00,000
Profit from Specified Business A 2,00,000
Loss from Specified Business B (5,00,000)
Loss set off against Specified Business A 2,00,000
Balance Specified-Business Loss carried forward 3,00,000

The ₹3,00,000 balance loss cannot be adjusted against the ₹6,00,000 profit from the ordinary business. It remains available for set-off against eligible specified-business profits in subsequent tax years, subject to Section 114.

Management Notes

Resolutions, Meaning and Types, Registration of Resolutions

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Resolutions in corporate meetings are formal decisions passed by a company’s board of directors or shareholders. They are legally binding and serve as documented evidence of the company’s decisions regarding its governance, operations, or strategic plans. Resolutions are integral to corporate decision-making and are required for actions that need the approval of shareholders, directors, or other stakeholders. These resolutions ensure compliance with laws, transparency, and accountability.

Types of Corporate Resolutions:

  • Ordinary Resolution

Ordinary resolution is the most common type of resolution passed at a company’s general meeting. It requires a simple majority—that is, more than 50% of the votes cast by members present and entitled to vote—for approval. Ordinary resolutions cover routine business decisions such as approving annual financial statements, declaring dividends, appointing or reappointing directors and auditors, and approving the remuneration of directors. These resolutions are generally straightforward and do not require special notice. Once passed, they become legally binding and enable the company to carry out ordinary business activities. Ordinary resolutions promote democratic decision-making by reflecting the majority opinion of shareholders on regular company affairs.

  • Special Resolution

Special resolution requires a higher level of approval—typically at least 75% of the votes cast—to pass. This type of resolution is necessary for major decisions that affect the company’s structure or fundamental policies. Examples include altering the company’s Articles of Association, changing the company’s name, reducing share capital, approving mergers or acquisitions, or winding up the company voluntarily. Special resolutions usually require prior notice to members, often specifying the intention to propose such a resolution. The higher voting threshold protects minority shareholders by ensuring that significant changes cannot be made without broad consensus, safeguarding their interests and ensuring corporate stability.

  • Board Resolution

Board resolution is passed during meetings of the company’s Board of Directors. It authorizes decisions related to the management and day-to-day operations of the company. Common examples include approving contracts, opening bank accounts, appointing officers or key executives, authorizing borrowing, or implementing company policies. Board resolutions typically require a majority of directors present and voting to pass. These resolutions enable the board to act collectively and officially document their decisions. Board resolutions are essential for maintaining proper governance and ensuring that managerial actions are authorized and legally valid, providing clarity and accountability in corporate management.

  • Unanimous Resolution

Unanimous resolution is one agreed upon by all members entitled to vote without any opposition. It is often used in small or closely held companies where all shareholders must consent to decisions, ensuring total agreement. Unanimous resolutions may be passed outside formal meetings, via written consent, and are legally binding. This type of resolution is important when the company wants to take swift decisions without convening a meeting, or when unanimity is required by the company’s governing documents for certain actions. Unanimous resolutions provide certainty and prevent disputes by reflecting the collective agreement of all shareholders.

Registration of Resolutions:

Registration of resolutions refers to the formal process of recording and filing the decisions made by the company’s general meetings or board meetings with appropriate governmental or regulatory bodies, such as the Registrar of Companies (RoC) in India. This process involves preparing official documents that detail the resolution, getting them signed and certified, and submitting them within prescribed timelines.

The registration serves multiple purposes:

  • It makes the resolution legally binding.
  • It ensures transparency and public disclosure.
  • It protects the company and its members by providing a formal record.
  • It facilitates regulatory oversight to prevent fraud or misuse of corporate powers.

Types of Resolutions Subject to Registration:

Not all resolutions require registration. Generally, special resolutions and some ordinary resolutions that affect the company’s constitution or statutory compliance must be registered. Examples include:

  • Amendments to the Memorandum of Association (MoA) or Articles of Association (AoA)
  • Changes in the company’s name
  • Increase or reduction of share capital
  • Approval of mergers, demergers, or acquisitions
  • Voluntary winding up of the company
  • Appointment or removal of auditors in some jurisdictions

Ordinary business resolutions like approval of annual financial statements or appointment of directors typically do not require registration, though they must be recorded in the company’s minutes.

Process of Registration:

The registration process typically involves the following steps:

  • Passing the Resolution: The resolution must be passed in a validly convened meeting with the required quorum and voting majority.

  • Recording Minutes: The company secretary or authorized person records the minutes, including the text of the resolution.

  • Certification: The resolution and minutes are signed and certified by the chairman or company secretary.

  • Preparation of Filing Documents: The company prepares the required forms and attaches certified copies of the resolution and any supporting documents.

  • Submission to Registrar: The forms and documents are submitted electronically or physically to the Registrar of Companies or relevant authority within the prescribed time.

  • Acknowledgment and Registration: Upon acceptance, the Registrar registers the resolution and issues an acknowledgment or certificate.

Importance of Registration:

Registration of resolutions is crucial for multiple reasons:

  • Legal Validity: Registered resolutions are legally enforceable. Unregistered resolutions may be challenged in court, potentially invalidating company decisions.

  • Public Record: Registration ensures that key decisions are part of the public record, allowing shareholders, creditors, and other stakeholders to access them. This transparency builds trust and accountability.

  • Compliance and Governance: Proper registration demonstrates compliance with statutory requirements, reducing the risk of penalties and enhancing corporate governance.

  • Facilitates Future Transactions: Registered resolutions often form the basis for legal actions like share transfers, borrowing, or contracts with third parties.

Drafting and Passing Resolutions:

Corporate resolutions must be clearly worded and include:

  • The title indicating the type of resolution.
  • A statement of purpose or intent.
  • The details of the decision being approved.
  • The names of members/directors involved in the voting process.

Resolutions are passed through voting mechanisms, such as:

  • Show of Hands: Common for ordinary resolutions.
  • Poll: Ensures weighted voting based on shareholding.
  • Postal Ballot/Electronic Voting: Used for decisions requiring broader shareholder involvement.
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