carry forward & set off of brought forward losses

Set-off of Brought Forward Business Losses against Capital Gains u/s 50 The Rajkot Bench of the Tribunal in the case of Master Silk Mills (P.) Ltd. v. Dy. CIT, 77 ITD 530 observed: “Where the Tribunal held that unabsorbed business losses could not be set off against sales proceeds of scrap of building that was taxable u/s.50 as a short- term capital gains. In that case the business had been closed and the income could not be said to have arisen in the course of business”

Unabsorbed loss must have been carried forward without interruption Hiralal Jeramdas v. CIT [1965] 58 ITR 1 (Bom.) “The unabsorbed losses must enter the assessment of every ‘following year’ for ascertaining whether they could be set off against the profits and gains of any business, profession or vocation. It is only when it is found in each year that they could not be so absorbed then they are allowed to be carried forward to the next following year and so on”

Section 70 (case laws) Losses in illegal business must be taken into account for computation of real profits of the illegal business. However loss for illegal business cannot be set off against profits of legal business – CIT v/s Kurji Jinabhai Kotecha (1977) 107 ITR 101 (SC) Loss from exempt source of income cannot be set off against income from a different source or income under a different head -CIT v/s Thiagarajan (1981) 129 ITR 115 (Mad)

Section 71(case laws) G.Atherton & Company v/s CIT (1989) Tax LR 13 (Cal.) The judiciary held that- “ Partial set off and partial carry forward is not permissible”

Section 71B Unabsorbed Loss under the head “income from house property” shall be carried forward and set off against income from house property of the following assessment year upto eight immediately succeeding assessment years (w.e.f. A.Y 1999-2000)

Section 72 No option given to assessee to show profit as income from one source and carry forward the loss from another source of income to the next year - CIT v/s Milling Trading Company. (P) Ltd. (1994) 76 Taxman 389 (Guj.) Current depreciation must be deducted first before deducting the unabsorbed carried forward business losses of earlier years – CIT v/s Mother India Refrigeration Industries (P) Ltd. 155 ITR 711 (SC)

SECTION 73 (case laws) Provisions of explanation to section 73 not applicable to dealings in units of UTI CIT v/s Appollo Tyres Ltd. (1999) 237 ITR 706 (Ker) Explanation to s. 73 applies not only where a part of the business of a company consists of purchase and sale of shares but also where the entire business activity of a company consists of purchase and sale of shares – Commissioner Of Income tax V. Arvind Investments Ltd. 1991-(192)-ITR -0365 -CAL

CBDT clarifies the process of set-off and carry forward of losses in relation to eligible units pertaining to Section 10A, 10AA, 10B and 10BA of the Act There are several cases where the High Court have taken the view that losses of other non-eligible units cannot be set off against the profits of 10A units before giving exemption under the said Section. As a result the 10A benefit will be available on the eligible unit and the losses of non-eligible unit will be allowed to be carried forward to be set-off against future income.

Deductions under section 10A – CBDT seeks to overrule Court decisions The Central Board of Direct Taxes (CBDT) issued a circular, dated 16 July 2013, stating that the deductions under sections 10A/10AA/10B shall be available only after setting off the following losses: a) Losses incurred from various sources (eligible/ineligible units) under the same head of income (business/profession) as per the provisions of section 70 of the Act b) Losses under any other head of income as per the provisions of section 71 of the Act c) Brought forward business loss as per the provisions of section 72 of the Act

Accounting for Depreciation

Is claim of depreciation optional ?  Judgement made by the Bombay High Court in the case of Someshwar Sahakari Sakhar Karkhana Ltd. (supra) [page 237] : “In our view, to sum up on the first issue, the assessee has a choice to claim or not to claim a deduction on account of depreciation. If he chooses not to claim it, the Income-tax Officer is not entitled to allow a deduction on account of depreciation.”

Depreciation — Passive use of asset for the purpose of business CIT v. Oriental Coal Co. Ltd., (1994) 206 ITR 682 (Cal.) held that no depreciation can be allowed on plant and machinery where the factory of the assessee remained under lock-out throughout the relevant previous year and the plant and machinery had not been actually used for the purpose of business even for a single day during that year.  The allowance for depreciation does not depend upon actual working of the machinery, it is sufficient if the assessee for the purpose of business employs the machinery in question and it is kept ready for actual use. 

Indian Supreme Court ruling – Tax depreciation should be available to the lessor in a finance lease transaction The recent ruling of the Supreme Court of India in the case of ICDS Ltd (‘ICDS’) is an important ruling as it establishes that tax depreciation on a finance lease transaction should be available to the lessor, as the lessor qualifies as the ‘owner’ of the asset and is using the asset for the ‘purpose of business’

Current depreciation must be deducted first CIT v. Mother India Refrigeration Industries (P.) Ltd./Hindustan Vacuum Glass Ltd. v. CIT [1985] 155 ITR 711 (SC)/CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 (SC). Current depreciation must be deducted first before deducting the unabsorbed carried forward business losses of earlier years. Such losses cannot be given preference over current depreciation in the matter of set off in computing an assessee’s income for any particular assessment year”

CAPITAL GAINS

Does a capital losse its nature on resale? In the case of CIT vs. Niraj Amidhar Surti, it was held that- “a capital investment and resale does not lose its capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment. Merely because shares are purchased by taking loan at high interest does not mean gains are taxable as business profits.”

Sale of Agricultural Land Case- S.K. Kaintal, 23 DTR 68, it was held that- “Where the assessee sold its agricultural land which was used by it for carrying out agricultural activities after holding the same for more than two decades, gain arising out of sale of such land was held to be assessable as ‘Capital gain’ and not ‘Profits and gain of business or profession”

Real Estate Business Hitashi Estates Ltd., 18 DTR 206, it was held that- “Assessee dealing in real estate, tenancy right in respect of a building occupied by it for a long time constituted capital asset in its hands, notwithstanding that it was shown as stock in trade in its books of accounts and receipts from surrender thereof in favour of the owner gave rise to capital gains/loss”

Bad Debts

Case law South India Surgical Co. Ltd. v. ACIT, 287 ITR 62, it was held that- “that the judgement of the assessee in regarding the debts as bad debts was a convenient judgement to suit its claim, and not an honest judgement having regard to the financial position”.

CIT v. Morgan Securities & Credits (P) Ltd. , (ITA No CIT v. Morgan Securities & Credits (P) Ltd., (ITA No. 1442/2006) 2007-TIOL-15-HC-DEL-IT: Case- The Assessing Officer disallowed the claim for deduction of the bad debts amounting to Rs.6 crore, holding that their writing off as bad was not based on an honest opinion formed by the assessee, and that the provisions of S. 36(1)(vii) could not be used as a carte blanche to treat any debt as bad. “The Delhi High Court therefore held that the bad debt written off by the assessee was allowable in the year of write-off”.

Section 14(A)

Disallowances u/s.14A of Income-tax Act As per, the Central Board of Direct Taxes, has clcircular No.5/2014, dated 11 February, 2014- “in exercise of its powers u/s 119 of the Act hereby clarifies that Rule 8D read with section 14A, of the Act provides for disallowances, of the expenditure, even where taxpayer in a particular year has not earned any exempt income”

Is Income from various ventures covered? In the case of Rajasthan State Warehousing Corporation v CIT, the Supreme Court reversing the decision of the High Court held that- “ in view of that fact that income from various ventures was earned in the course of one indivisible business, apportionment of the expenditure and allowing deduction of only that portion of it which was referable to taxable income was unsustainable”

Section 30

New Shorrock Spg. & Mfg. Co. Ltd. v. CIT [1956] 30 ITR 338 (Bom.)/R.B. Bansilal Abirchand Spg. & Wvg. Millsv. CIT [1957] 31 ITR 427 (Nag.)/N.N. Kotak v. CIT It this case it was held that- “The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage”

CIT v. Kalyanji Mavji Co. CIT v. I. C. I. (India) (P. ) Ltd CIT v. Kalyanji Mavji Co. CIT v. I.C.I. (India) (P.) Ltd. [1983] 139 ITR 105 (Cal.) In this case, it was held that- “Repairs which are not current repairs can be considered under section 37(1) - Repairs which are not ‘current repairs’ should be considered for deduction on general principles or under section 37(1)”

Section 43

Furnishing of bank guarantee is not actual payment as required under section 43B In the case CIT v. Udaipur Distillery Co. Ltd.[2004] 134 Taxman 398 (Raj.) “A bank guarantee is only a guarantee for payment on some happening and that cannot be actual payment as required under section 43B for allowance as deduction in computation of profits”.

Government audit fees are not covered In the case of, CIT v. Shree Warna Sahakari Sakhar Karkhana Ltd. [2002] 253 ITR 226 (Bom.), it was held that- ” Government audit fees payable by a co-operative society is not covered by section 43B, and hence deduction thereof is to be allowed in full without restricting the same to amount actually paid”

Section 40(A)(3)

Disallowance of Cash Payments exceeding Section 40A(3) exception Rule 6DD No deduction is allowed in respect of which a payment or aggregate of payments exceeding rupees twenty thousand are made to a person in a day otherwise than by an account payee cheque drawn on a bank or account payee bank draft. The disallowance under Section 40A(3) are relevant for computation of income under the head “income from business or profession” and by virtue of Section 58(2) these provisions also apply to computation of income under the head “income from other sources”.

Section 37

CIT v. Puran Das Ranchhoddas & Sons [1988] 169 ITR 480 (AP). In the above case, it was held that- “Legal character cannot be ignored and substituted by substance of the transaction - The legal character of the transaction which is the source of the receipt in question cannot be ignored and substituted by what the taxing authorities considered as the substance of the matter.”

CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544 (SC) It was held that- “Department cannot dictate the circumstances in which expenditure is to be incurred - It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best”

DISCLAIMER The contents in this presentation are merely for reference and must not be taken as having authority of or binding in any way on the author. For authoritative information please refer to the relevant provisions of the Income Tax Act , Rules, Circulars and Judicial Precedents.

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