Income Tax - Set off and carry forward of losses

 

DIRECT TAXATION

Set off and carry forward of losses

 

Part A: Discussion of basic theories including relevant provisions of the Income Tax Act, 1961

Part B: 10 Illustrations with solutions

Part A

Inter-source set off [Sec 70]     

GENERAL RULE:

A loss in respect of any source under any head of income can be set off against income from any other source under the same head of income.

 

EXCEPTIONS:

i.    Loss in speculation business can be set off only against profit from a speculation business.

 

ii.    Loss of any specified business (as referred to u/s 35AD) shall not be set off except against profits of any other specified business.

 

iii.   Long-term capital loss can be set off only against long-term capital gains.

 

iv.   Loss incurred in the business of owning and maintaining race horses can be set off only against income from such business.

 

v.   No loss can be set off against winning from lotteries, crossword puzzles, races (including horse races), card games, gambling, betting, etc.

 

vi.   Loss from sale of shares or units as reduced by dividend received or receivable on these      shares or units can be set off against income under the head “capital gains”, provided that

        (a) Shares or units are bought or acquired within 3 months before the record date,

        (b) Shares are sold within 3 months (9 months in case of units) after the record date,

        (c) Dividend received or receivable by the assessee is exempt from tax.

 

vii.  Loss from purchase and sale of units (hereinafter referred to as “original units”) shall be ignored for the purpose of computing income chargeable to tax and shall be deemed to be the cost of purchase or acquisition of any units (hereinafter referred to as “bonus units”) allotted additionally without any payment on the basis of holding of the original units, provided that

          (a) Original units are bought or acquired within 3 months before the record date,

          (b) Bonus units are allotted on the basis of holding of the original units,

          (c) Original units are sold or transferred within 9 months after the record date,

          (d) The assessee continues to hold all (or any) of the bonus units.

 

 

 

OTHER POINTS:

i.    Loss from a non-speculation business can be set off against income from speculation or non-speculation business.

 

ii.    Loss from a non-specified business can be set off against income from any specified business (as referred to u/s 35AD).

 

iii.   Short-term capital loss can be set off against any capital gains – long-term or short-term.

 

iv.   Loss from a house property can be set off against income from any other house property.

 

v.   Under the head “income from other sources” loss from an activity can be set off against any income other than winning from lotteries, crossword puzzles, races (including horse races), card games, gambling, betting, etc. But loss from lotteries, crossword puzzles, races (including horse races), card games, gambling, betting, etc. cannot be set off against other income.

 

vi. If income from a particular source is exempt from tax, loss from such source cannot be set off   against income chargeable to tax.

 

Inter-head set off [Sec 71]

GENERAL RULE:

A loss in respect of any head of income can be set off against the income from other heads.

 

EXCEPTIONS:

i.    Loss in a speculation business cannot be set off against any other income.

 

ii.    Loss of any specified business cannot be set off against any other income.

 

iii.   Losses under the head “capital gains” cannot be set off against any income except income under the head “capital gains”.

 

iv.   Losses from the business of owning and maintaining race horses cannot be set off against any other income.

 

v.   Losses from business or profession (including depreciation) cannot be set off against income under the head “salaries”.

 

vi.   No loss can be set off against winning from lotteries, crossword puzzles, races (including horse races), card games, gambling, betting, etc.

 

 

vii.  Loss from sale of shares or units as reduced by dividend received or receivable on these          shares or units can be set off against income under the head “capital gains”, provided that

        (a) Shares or units are bought within 3 months before the record date,

        (b) Shares are sold within 3 months (9 months in case of units) after the record date,

        (c) Dividend received or receivable by the assessee is exempt from tax.

 

vii   Loss from purchase and sale of units (hereinafter referred to as “original units”) shall be ignored for the purpose of computing income chargeable to tax and shall be deemed to be the cost of purchase or acquisition of any units (hereinafter referred to as “bonus units”) allotted additionally without any payment on the basis of holding of the original units, provided that

          (a) Original units are bought or acquired within 3 months before the record date,

          (b) Bonus units are allotted on the basis of holding of the original units,

          (c) Original units are sold or transferred within 9 months after the record date,

          (d) The assessee continues to hold all (or any) of the bonus units.

 

OTHER POINTS:

i.        Before setting off losses u/s 71, one has to set off the losses u/s 70.

 

ii.     With effect from 1 – 4 – 2018, where in respect of any assessment year, the net result of the computation under the head "Income from house property" is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds Rs 2, 00,000, against income under the other heads.

 

iii.     Business loss can be set off against property income, capital gains or income from other sources.

 

iv.   A loss under the head “income from other sources” can be set off against salary income, property income, business income or capital gains. But loss from lotteries, crossword puzzles, races (including horse races), card games, gambling, betting, etc. cannot be set off against other income.

 

IMPORTANT NOTES:

1.  Under section 43(5), speculative transaction means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is periodically or ultimately settled, otherwise than by the actual delivery or transfer of the commodity or scrips.

 

2.  No order of priority in setting off losses is given in the Act. But those losses which cannot be carried forward to the next year should be set off first. In fact the losses which can be carried forward for a shorter period than the period for other losses should be set off first.

 

Carry forward of loss and set off

 

Following are the losses which can be carried forward:

(a)  Loss of any business – i.e. loss from speculative or non-speculative business.

(b)  Capital loss – i.e. short-term or long-term capital loss.

(c)  Loss from the business of owning and maintaining race horses.

(d)  Loss from house property.

[Losses other than those stated above cannot be carried forward.]

 

Carry forward and set off of business loss other than speculation loss [Sec 72]

 

i.    Normal business loss can be carried forward and set off only against business income (from same business or some other business). Brought forward business loss can also be set off against current year’s dividend / interest income if the shares / debentures are held as stock-in-trade. Brought forward loss of a specified business (as referred to u/s 35AD) can be set off in a subsequent year only against income from such specified business.

 

ii.    Such loss can be carried forward and set off only by the person who incurred the loss. However, this rule has the following exceptions:

      (a)  Accumulated business loss of an amalgamating company u/s 72A or 72AA.

      (b)  Accumulated business loss of a demerged company.

     (c)  Accumulated business loss of a proprietary concern or a firm when its business is taken over by a company by satisfying conditions of section 47(xiii) (xiv).

      (d)  Loss of business acquired by inheritance.

 

iii.   Such loss cannot be carried forward for more than 8 assessment years. However, loss of a specified business (as referred to u/s 35AD) can be carried forward without any time-limit. It can be carried forward for indefinite period, if necessary.

 

iv.   Such loss cannot be carried forward if the assessee fails to file his return of loss on or before the due date of furnishing of return u/s 139(1).

 

v.   The business or profession in which the loss was originally suffered may or may not continue to be carried on by the assessee during the year in which brought forward loss is sought to be set off.

 

vi.   Under Section 41(5), Where a business or profession is no longer in existence and there is income chargeable to tax u/s 41(1), 41(3), 41(4) and 41(4A) in respect of that business or profession, any loss, not being a loss sustained in speculation business, which arose in that business or profession during the previous year in which it ceased to exist (even if the business ceased to exist more than 8 years back) and which could not be set off against any other income of that previous year shall, so far as may be possible, be set off against the income chargeable to tax under the sub-sections aforesaid.

 

vii.  The rules discussed above are not applicable in the case of carry forward of unabsorbed depreciation, capital expenditure on scientific research and family planning expenditure. These losses are governed by section 32(2).

 

viii.  Carry forward and set off of loss in the case of change in the constitution of the firm

Section 78 of the Income Tax Act, 1961 provides that where a change has occurred in the previous year in the constitution of a firm, nothing shall entitle the firm to have carried forward and set off so much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits, if any, in the firm in respect of the previous year. In other words, where a change occurs in the constitution of firm, on account of retirement or death of a partner, the proportionate loss of the retired or deceased partner shall not be carried forward. It does not, however, cover the case of change in profit-sharing ratio or the case of admission of a partner.

 

        Section 78 is not applicable in the case of unabsorbed depreciation and unabsorbed capital expenditure on scientific research. These unadjusted allowances (without deducting share of outgoing partner) can be carried forward by the reconstituted firm.

 

Carry forward and set off of speculation loss [Sec 73]

 

i.    Loss in a speculation business can be carried forward to the subsequent year and set off only against the profit of a speculation business carried on in that year.

ii.    Such loss can be carried forward for 4 assessment years.

 

iii.   It is not necessary that the speculation business in which the loss was incurred should continue to be carried on in the subsequent year in which brought forward loss is sought to be set off.

 

iv.   Such loss can be carried forward and set off only by the person who incurred the loss.

 

v.   Such loss cannot be carried forward if the assessee fails to file his return of loss on or before the due date of furnishing of return u/s 139(1).

 

vi.   The rules discussed above are not applicable in the case of carry forward of unabsorbed depreciation, capital expenditure on scientific research and family planning expenditure. These losses are governed by section 32(2).

 

vii.  Loss incurred in speculative business in banned items cannot be carried forward to the next year.

 

viii.  Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, 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.

 

Carry forward and set off of capital loss [Sec 74]

i.    Long-term capital loss can be set off only against long-term capital gains. Short-term capital loss can be set off against short-term or long-term capital gains.

 

ii.    Such loss can be carried forward for 8 assessment years.

 

iii.   Such loss cannot be carried forward if the assessee fails to file his return of loss on or before the due date of furnishing of return u/s 139(1).

 

Carry forward and set off of loss from business of owning and maintaining race horses

[Sec 74A]

i.    Loss from the business of owning and maintaining race horses can be carried forward to a subsequent year and set off only against income from the business of owning and maintaining race horses.

 

ii.    Such loss can be carried forward to a subsequent year only if the business of owning and maintaining race horses is carried on by the assessee in the previous year in which brought forward loss is sought to be set off.

 

iii.   Such loss can be carried forward for 4 assessment years.

 

iv.   Such loss cannot be carried forward if the assessee fails to file his return of loss on or before the due date of furnishing of return u/s 139(1).

 

v.   Provisions of section 74A are applicable only in the case of loss from the business of owning and maintaining race horses. Loss from the business of owning and maintaining other race animals is governed by section 72.

 

Carry forward and set off of loss from house property [Sec 71B]

i.    Loss from house property can be carried forward to a subsequent year and set off only against income from house property.

 

ii.    Such loss can be carried forward for 8 assessment years.

 

Carry forward and set off of unabsorbed depreciation [Sec 32(2)]

1.   Depreciation allowance of the previous year is first deducted from the business income.

 

2.   If the depreciation allowance cannot be fully deducted from the business income, it can be deducted from incomes chargeable under other heads of income (except income from salaries) for the same assessment year.

 

3.   If depreciation allowance is still unabsorbed, it can be carried forward to the subsequent assessment year.

 

4.   No time limit is fixed for the purpose of carry forward of unabsorbed depreciation. It can be carried forward for indefinite period, if necessary.

 

5.   In the subsequent years the unabsorbed depreciation can again be set off against any income including business income but excluding income from salaries.

 

6.   In the matter of set off in the subsequent years, the following order of priority is to be followed:

      (a)  Current depreciation.

        (b)  Brought forward business loss.

        (c)  Unabsorbed depreciation.

 

7.   If in the subsequent year(s), there is no brought forward business loss, unabsorbed depreciation can be added to current depreciation for the purpose of claiming deduction.

 

8.   Continuity of business is not relevant for the above carry forward and set off of unabsorbed depreciation and brought forward business loss.

 

 

 

Carry forward and set off of capital expenditure on scientific research [Sec 35]

If on account of inadequacy or absence of profits of the business, deduction on account of capital expenditure on scientific research cannot be allowed, fully or partly, the deficiency so arising is to be carried forward and set off as if it is unabsorbed depreciation.

 

Carry forward and set off of family planning expenditure [Sec 36(1) (ix)]

Any family planning expenditure which is not allowed as deduction due to inadequacy or absence of profits of the business shall be carried forward and set off as if it is unabsorbed depreciation.

 

Carry forward and set off of losses by specified business [Sec. 73A]

1.    Any loss, computed in respect of any specified business referred to in section 35AD shall not be set off except against profits and gains, if any, of any other specified business.

2.    Where for any assessment year any loss computed in respect of the specified business referred to in sub-section (1) has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee has no income from any other specified business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—

i.    It shall be set off against the profits and gains, if any, of any specified business carried on by him assessable for that assessment year; and

ii.   If the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.

3.      No time limit is fixed for the purpose of carry forward of losses by specified business. It can be carried forward for indefinite period, if necessary.

Part B

Illustration 1

Compute gross total income of Mr. X in following cases –

Source of income	Case I (Rs)	Case II (Rs)
Income from house property (A)	30,000	40,000
Income from house property (B)	(10,000)	(25,000)
Speculation income	80,000	(70,000)
Business income	(30,000)	50,000
Income from activity of owning and maintaining race-horses business (A)	(50,000)	10,000
Income from activity of owning and maintaining race-horses business (B)	20,000	(6,000)
Income from agricultural business	(25,000)	10,000
Short term capital gain (transaction A)	30,000	(20,000)
Short term capital gain (transaction B)	(10,000)	5,000
Long term capital gain (transaction A)	(30,000)	45,000
Long term capital gain (transaction B)	10,000	(2,000)
Income from lottery	40,000	-
Income from horse races	10,000	25,000
Income on card games	(5,000)	(3,000)
Interest on securities	20,000	10,000

 

Illustration 1 – Solution

Case: 1 – Computation of GTI of Mr. X for the assessment year 2020 – 21

Particulars	Rs	Rs
Income from lottery		40,000
Income from horse races		10,000
Interest on securities		20,000
Income from house property (A)	30,000
Income from house property (B)	(10,000)	20,000
Income from speculation business	80,000
Income from non-speculation business	(30,000)	50,000
LTCL (A)	(30,000)
LTCG (B)	10,000
(LTCL to be carried forward Rs 20,000)
STCG (A)	30,000
STCL (B)	(10,000)	20,000
Income from activity of OMRH (A)	(50,000)
Income from activity of OMRH (B)	20,000
(Loss from activity of OMRH to be carried forward Rs 30,000)
GTI		1,60,000

 

Loss to be carried forward

	Rs
LTCL	20,000
Loss from activity of OMRH	30,000
Loss to be carried forward	50,000

 

Case: 2 – Computation of GTI of Mr. X for the assessment year 2020 – 21

Particulars	Rs	Rs
Income from lottery		Nil
Income from horse races		25,000
Interest on securities		10,000
Income from house property (A)	40,000
Income from house property (B)	(25,000)	15,000
(Loss from speculation business to be carried forward Rs 70,000)
Income from non-speculation business		50,000
LTCG (A)	45,000
LTCL (B)	(2,000)
	43,000
STCL (A)	(20,000)
STCG (B)	5,000	28,000
Income from activity of OMRH (A)	10,000
Income from activity of OMRH (B)	(6,000)	4,000
GTI		1,32,000

 

Loss to be carried forward

	Rs
Loss from speculation business	70,000
Loss to be carried forward	70,000

 

Illustration 2

Compute gross total income of Mr. Jacky from following data –

Source of income	Rs
Income under the head ‘Salaries’	2,60,000
Income from house property (A)	60,000
Income from house property (B)	(2,80,000)
Speculation income	20,000
Business income	(1,30,000)
Income from activity of owning and maintaining race-horses	(1,50,000)
Income from agricultural business	(1,25,000)
Short term capital gain	30,000
Long term capital gain	(1,00,000)
Income from lottery	10,000
Income from horse races	1,70,000
Dividend income from non-domestic company (shares purchased out of borrowed money)	(90,000)
Interest on securities	20,000

 

Illustration 2 – Solution

Computation of GTI of Mr. Jacky for the assessment year 2020 – 21

Particulars	Rs	Rs	Rs
Income from lottery			10,000
Income from horse races			1,70,000
Income from salaries		2,60,000
Income from house property (A)	60,000
Income from house property (B)	(2,80,000)	(2,00,000)
Important note: Maximum inter-head set off of loss from house property allowed is Rs 2, 00,000. Therefore, loss from house property to be carried forward Rs 20,000
Dividend income	(90,000)
Interest on securities	20,000	(70,000)
Balance loss to be set off (after setting off loss from house property and loss under the head ‘Income from other sources’ against ‘Income from salaries’)		(10,000)
STCG		30,000
Balance of STCG		20,000
(LTCL to be carried forward Rs 1,00,000)
Income from speculation business	20,000
Loss from non-speculation business	(1,30,000)	(1,10,000)
(Business loss to be carried forward Rs 90,000)		(90,000)
GTI			1,80,000

 

Loss to be carried forward

	Rs
Loss from house property	20,000
LTCL	1,00,000
Business loss	90,000
Loss to be carried forward	2,10,000

 

Illustration 3

Smart has computed his tax liability as under –

Particulars	Details	Rs
Income from business A		4,50,000
Long term capital gain	20,000
Less: Income from business B u/s 71	(10,000)	10,000
Income from other sources		50,000
Gross Total Income		5,10,000
Less: Deduction u/s 80C to 80U		Nil
Total Income		5,10,000
Tax liability		15,080

 

Comment on the above computation.

 

Illustration 3 – Solution

Computation of Total Income and Tax Liability of Mr. Jacky for the A.Y. 2020 – 21

Particulars	Rs	Rs
Income from business (A)	4,50,000
Loss from business (B)	(10,000)	4,40,000
LTCG		20,000
Income from other sources		50,000
GTI		5,10,000
Less: Deduction u/s 80C to 80U		Nil
Total Income / Taxable Income		5,10,000
Computation of Tax Liability:
TI – LTCG = 5,10,000 – 20,000 = Rs 4,90,00 > BEL
∴ Benefit of Basic Exemption Limit is not available to the assessee.
Tax on LTCG (Rs 20,000 × 20%)                     (A)		4,000
Tax on other income:                                    (B)
Up to Rs 2,50,000	Nil
5% of Rs 2,40,000	12,000	12,000
Income Tax                                               (A + B)		16,000
Add: Surcharge (TI does not exceed Rs 50 Lacs)		Nil
Income tax and Surcharge		16,000
Less: Rebate u/s 87A (TI > Rs 5 Lacs)		Nil
Income tax after rebate		16,000
Add: Health and Education Cess (Rs 16,000 × 4%)		640
Tax Liability		16,640

 

Illustration 4

Mr. Bhola has furnished you the following data –

Particulars	Rs
Income from house property	(1,30,000)
Salaries (Net)	80,000
Income from other sources	(90,000)
Income from lotteries	3,50,000

 

Mr. Bhola is seeking your advice relating to set off and carry-forward.

 

Illustration 4 – Solution

Computation of GTI of Mr. Bhola for the assessment year 2020 – 21

Particulars	Rs	Rs
Income from lottery		3,50,000
Income from salary	80,000
Income from other sources	(90,000)
Important note: Loss from other sources cannot be carried forward	(10,000)
GTI		3,50,000

 

Loss to be carried forward

	Rs
Loss from house property	1,30,000
Loss to be carried forward	1,30,000

 

Illustration 5

Compute Gross total income of Mrs. Shikha from following details for the A.Y.2020-21 –

Particulars	Rs
Income from house property A	60,000
Income from house property B	(1,50,000)
Income from house property C	1,00,000
Income from other sources	1,00,000
Losses u/s 22 for the A.Y. 2019-20	(30,000)
Losses u/s 22 for the A.Y. 1998-99	(15,000)
Losses u/s 56 for the A.Y. 2019-20	(45,000)

 

Illustration 5 – Solution

Computation of GTI of Mrs. Shikha for the assessment year 2020 – 21

Particulars	Rs	Rs
Income from house property:
Income from house property (A)	60,000
Income from house property (B)	(1,50,000)
Income from house property (C)	1,00,000
Current year’s (2020- 21) income from house property	10,000
Loss from house property of 2019- 20 brought forward and set off	(10,000)	Nil
Income from other sources:		1,00,000
GTI		1,00,000

 

Loss to be carried forward

	Rs
Loss from house property of A.Y. 2019- 20 to be carried forward till the A.Y. 2027- 28	20,000
Loss to be carried forward	20,000

 

Important note:

1.    Loss from house property can be carried forward for 8 assessment years.

2.    Brought forward loss from house property can be set off only against income from house property.

3.    Loss under the head ‘Income from other sources’ cannot be carried forward.

 

Illustration 6

Mr. Arun is running several businesses since last so many years. From the following details compute his taxable business income:

Nature of business	Current Year’s Income	Brought Forward Loss	Year to Which B/F Loss relates	Whether Business Continued Or not	Year of disconti- nuation of business
Readymade garments	1,00,000	2,30,000	2013- 14	Yes	NA
Retail of cosmetics	80,000	1,70,000; Unabsorbed Depreciation 50,000	1999-00;   2014-15	Yes	NA
Wholesale of soft toys	Nil	80,000	2017-18	No	2016-17
Wholesale of fruits	30,000 (Recovery of bad debt)	70,000	2002-03	No	2002-03
Optical	30,000 (Recovery of bad debt)	70,000	2001-02	No	2002-03
Investment business	90,000; 15,000 (Dividend From foreign Company)	-	-	Yes Yes	NA NA
Medicines	40,000 (Recovery of bad debt)	-	-	No	1994-95
Manufacturing school uniform	-	40,000	2013-14 No return filed	No	2014-15

 

Illustration 6 – Solution

Computation of GTI of Mr. Arun for the assessment year 2020 – 21

Particulars	Rs	Rs
Income from readymade garments business	1,00,000
B/F loss of the same business	(2,30,000)	(1,30,000)
Income from retail cosmetics business	80,000
B/F loss of the same business (more than 8 A.Y. expired)	Nil	80,000
B/F loss of wholesale soft-toys business		(80,000)
Recovery of bad debts u/s 41 (5) from wholesale fruits business	30,000
B/F loss of the same business from the year of its discontinuation (set off to the extent possible)	(30,000)	Nil
B/F loss of optical business (more than 8 A.Y. expired)	Nil
Recovery of bad debts from the same business	30,000	30,000
Income from Investment business		90,000
Recovery of bad debts from medicine business		40,000
B/F loss of manufacturing school uniform business (cannot be brought forward, because return was not filed before the due date)		Nil
Business Income		30,000
Income from other sources (Dividend Income)		15,000
Less: Unabsorbed depreciation of retail cosmetics business         (maximum possible)		(45,000)
GTI		Nil

 

Important note:

1.    Under Section 41(5), Where a business or profession is no longer in existence and there is income chargeable to tax u/s 41(1), 41(3), 41(4) and 41(4A) in respect of that business or profession, any loss, not being a loss sustained in speculation business, which arose in that business or profession during the previous year in which it ceased to exist (even if the business ceased to exist more than 8 years back) and which could not be set off against any other income of that previous year shall, so far as may be possible, be set off against the income chargeable to tax under the sub-sections aforesaid.

 

2.    Brought forward business loss cannot be carried forward if the assessee fails to file his return of loss on or before the due date of furnishing of return u/s 139(1).

 

3.    In the subsequent years the unabsorbed depreciation can again be set off against any income including business income but excluding income from salaries.

 

4.    No time limit is fixed for the purpose of carry forward of unabsorbed depreciation. It can be carried forward for indefinite period, if necessary. Therefore, unabsorbed depreciation of Rs 5,000 of retail cosmetics business can be carried forward for unlimited years.

 

Illustration 7

Compute total income of X Ltd. under following cases:

Business A: Business of ice cream

Business B: Trading of shares of other companies (treated as speculation business)

Case 1

Particulars	A	B
Income of P.Y. 2019 – 20	80,000	20,000
B/F loss of P.Y. 2018 - 19	70,000	65,000

 

Case 2

Particulars	A	B
Income of P.Y. 2019 – 20	75,000	85,000
B/F loss of P.Y. 2018 - 19	85,000	50,000

 

Case 3

Particulars	A	B
Income of P.Y. 2019 – 20	(56,000)	1,50,000
B/F loss of P.Y. 2018 - 19	90,000	65,000

 

Case 4

Particulars	A	B
Income of P.Y. 2019 – 20	3,00,000	(50,000)
B/F loss of P.Y. 2018 - 19	30,000	90,000
Unabsorbed depreciation	-	20,000

 

Illustration 7 – Solution

Case 1: Computation of Total Income of X Ltd. for the assessment year 2020 – 21

Particulars	Rs	Rs
Income from speculation business	20,000
Less: B/F loss of speculation business	(65,000)
B/F loss of speculation business to be carried forward	(45,000)
Income from non-speculation business	80,000
Less: B/F loss of non-speculation business	(70,000)	10,000
Total Income / Taxable Income		10,000

 

Note: B/F loss of speculation business to be carried forward = Rs 45,000

 

Case 2: Computation of Total Income of X Ltd. for the assessment year 2020 – 21

Particulars	Rs	Rs
Income from speculation business	85,000
Less: B/F loss of speculation business	(50,000)	35,000
Income from non-speculation business		75,000
Less: B/F loss of non-speculation business		(85,000)
Total Income / Taxable Income		25,000

 

Case 3: Computation of Total Income of X Ltd. for the assessment year 2020 – 21

Particulars	Rs	Rs
Income from speculation business	1,50,000
Less: B/F loss of speculation business	(65,000)	85,000
Less: B/F loss of non-speculation business		(90,000)
Total Income / Taxable Income		Nil

 

Note:

1.    B/F loss of non-speculation business to be carried forward (90,000 – 85,000) = Rs 5,000

2.    Current previous year’s loss of non-speculation business to be carried forward = Rs 56,000

 

Case 4: Computation of Total Income of X Ltd. for the assessment year 2020 – 21

Particulars	Rs	Rs
Current year’s loss of speculation business to be carried forward	50,000
B/F loss of speculation business	90,000
Therefore, total loss of speculation business to be carried forward	1,40,000
Income from non-speculation business		3,00,000
B/F loss of non-speculation business		(30,000)
Unabsorbed depreciation		(20,000)
Total Income / Taxable Income		2,50,000

 

Note:

Total loss of speculation business to be carried forward = Rs 1, 40,000

 

Illustration 8

MNP Ltd. commenced operations of the business of a new four-star hotel in Chennai on 1-4-2019. The company incurred capital expenditure of Rs 40 lakh during the period January, 2019 to March, 2019 exclusively for the above business, and capitalised the same in its books of account as on 1st April, 2019. Further, during the Previous Year 2019-20, it incurred capital expenditure of Rs 2.5 crore (out of which Rs 1 crore was for acquisition of land) exclusively for the above business. Compute the income under the heading “profits and gains of business or profession” for the assessment year 2020-21, assuming that MNP Ltd. has fulfilled all the conditions specified for claim of deduction u/s 35AD and has not claimed any deduction under Chapter VI-A under the heading “C.-Deductions in respect of certain incomes”. The profits from the business of running this hotel (before claiming deduction u/s 35AD), for the A.Y. 2020-21, are Rs 80 lakhs. Assume that the company also has another existing business of running a four-star hotel in Kanpur, which commenced operations 5 years back, the profits from which are Rs 130 lakhs for assessment year 2020-21.

 

Illustration 8 – Solution

Computation of income from specified business at Chennai for A.Y. 2020 – 21

Particulars	Rs	Rs
Net profit		80 L
Less: Deduction u/s 35AD
Capital expenditure incurred in 2018 – 19	40 L
Capital expenditure incurred in 2019 – 20	150 L	(190 L)
Loss from specified business at Chennai		(110 L)

 

Computation of business income of MNP Ltd. for A.Y. 2020 – 21

Particulars	Rs	Rs
Income from specified business at Kanpur		130 L
Less: Set off of loss from specified business at Chennai		(110 L)
Business Income		20 L

 

Illustration 9

Compute taxable income under following cases for the A.Y. 2020 – 21:

Case 1

Particulars	STCG	LTCG
Income of P.Y. 2019 – 20	1,00,000	(30,000)
B/F loss of P.Y. 2018 - 19	50,000	-

 

Case 2

Particulars	STCG	LTCG
Income of P.Y. 2019 – 20	(30,000)	1,00,000
B/F loss of P.Y. 2018 - 19	-	50,000

 

Case 3

Particulars	STCG	LTCG
Income of P.Y. 2019 – 20	1,00,000	(20,000)
B/F loss of P.Y. 2018 - 19	60,000	50,000

 

Case 4

Particulars	STCG	LTCG
Income of P.Y. 2019 – 20	(30,000)	1,00,000
B/F loss of P.Y. 2018 - 19	10,000	20,000

 

Illustration 9 – Solution

Case 1: Computation of taxable income for the A.Y. 2020 – 21

Particulars	Rs
LTCL to be carried forward = Rs 30,000
STCG	1,00,000
Less: B/F STCL	(50,000)
Taxable Income	50,000

 

Case 2: Computation of taxable income for the A.Y. 2020 – 21

Particulars	Rs
LTCG	1,00,000
Less: B/F LTCL	(50,000)
Less: STCL	(30,000)
Taxable Income	20,000

 

Case 3: Computation of taxable income for the A.Y. 2020 – 21

Particulars	Rs
LTCL to be carried forward (50,000 + 20,000) = Rs 70,000
STCG	1,00,000
Less: B/F STCL	(60,000)
Taxable Income	40,000

 

Case 4: Computation of taxable income for the A.Y. 2020 – 21

Particulars	Rs
LTCG	1,00,000
Less: B/F LTCL	(20,000)
Less: B/F STCL	(10,000)
Less: STCL	(30,000)
Taxable Income	40,000

 

Illustration 10

P, Q and R, partners in a firm sharing profits and losses in the ratio of 1: 1: 2 provide the following information. Find firm’s net income assuming that salary and interest are not paid to partners:

1.    Net income of the firm in assessment year 2019-20 is (−) Rs 1, 20,000, out of which unadjusted depreciation is Rs 40,000.

2.    On 31.05.2019, R retires from the firm and the other partners carry on the same business.

3.    The firm’s income for the Assessment Year 2020-21 before adjusting the aforesaid loss and depreciation is Rs 1, 20,000.

Illustration 10 – Solution

Computation of Total Income of the firm for the assessment year 2020 – 21

Particulars	Rs	Rs
Business income (before set off of B/F Business Loss and Unabsorbed Depreciation of the A.Y. 2019 – 20)		1,20,000
Less: Set off of B/F Business Loss:
B/F Business Loss (1,20,000 – 40,000)	80,000
Less: R’s share of B/F Business Loss which cannot be set off [W.N.]	(30,000)	(50,000)
Total Income before set off of Unabsorbed Depreciation of A.Y. 2019 – 20		70,000
Less: Unabsorbed Depreciation of the A.Y. 2019 – 20		(40,000)
Total Income / Taxable Income		30,000

 

Working note:

Computation of R’s share of B/F Business Loss which cannot be set off in A.Y. 2020 – 21

Particulars	Rs
B/F loss of A.Y. 2019 – 20 (Including Unabsorbed Depreciation)	1,20,000
Less: B/F Unabsorbed Depreciation of A.Y. 2019 – 20	(40,000)
B/F Business Loss of A.Y. 2019 – 20	80,000
R’s share of B/F Business Loss of A.Y. 2019 – 20 (80,000 × 2/4)	40,000
Less: R’s share of income of the A.Y. 2020 – 21 for 2 months (1,20,000 × 2/12 × 2/4)	(10,000)
R’s share of B/F Business Loss which cannot be set off in A.Y. 2020 – 21	30,000