CARRY FORWARD AND SET OFF LOSS FROM HOUSE PROPERTY

Shiv Kumar Jatia v. ITO (2021)

Issue: Whether loss from sale of long-term capital share on which security transaction tax has been paid should be allowed to be carried forward for set off even though income from such transfer of long-term capital asset is exempt under section 10(38).

Held: Yes, the loss should be allowed to be carried forward for set-off. The exemption under section 10(38) is only for the purpose of computing total income, and does not prevent the loss from being carried forward under section 74.

Peerless General Finance & Investment Company Ltd. v. Dy. CIT (2021)

Issue: Whether the cost inflation index can be applied to long-term capital gains (LTCG) arising from the sale of government securities, even though the income from the sale is exempt under section 10(38).

Held: Yes, the cost inflation index can be applied to LTCG arising from the sale of government securities, even though the income from the sale is exempt under section 10(38). The exemption under section 10(38) is only for the purpose of computing total income, and does not prevent the cost inflation index from being applied to LTCG.

ACIT v. M/s. Indian Overseas Bank (2019)

Issue: Whether losses from the sale of government securities can be carried forward and set-off against capital gains from the sale of other capital assets.

Held: Yes, losses from the sale of government securities can be carried forward and set-off against capital gains from the sale of other capital assets. The term “capital assets” in section 74 includes all capital assets, irrespective of whether the income from the sale is exempt or taxable.

ACIT v. M/s. Tata Consultancy Services Ltd. (2012)

Issue: Whether losses from the sale of shares in a foreign company can be carried forward and set-off against capital gains from the sale of shares in a domestic company.

Held: Yes, losses from the sale of shares in a foreign company can be carried forward and set-off against capital gains from the sale of shares in a domestic company. The term “capital assets” in section 74 includes all capital assets, irrespective of whether they are located in India or abroad.

Shiv Kumar Jatia v. ITO (2021)

Peerless General Finance & Investment Company Ltd. v. Dy. CIT (2021)

ACIT v. M/s. Indian Overseas Bank (2019)

Issue: Whether losses from the sale of government securities can be carried forward and set-off against capital gains from the sale of other capital assets.

ACIT v. M/s. Tata Consultancy Services Ltd. (2012)

Issue: Whether losses from the sale of shares in a foreign company can be carried forward and set-off against capital gains from the sale of shares in a domestic company.

RULES OF CARRY FORWARD OF LOSS IN BRIEF

Carry forward of loss under income tax is a provision that allows taxpayers to use a loss incurred in one year to offset their income in future years. This can be beneficial for taxpayers who experience temporary setbacks in their business or investment activities.

Types of losses that can be carried forward under income tax act:

Business losses: Losses incurred from a non-speculative business can be carried forward for up to 8 assessment years.
House property losses: Losses incurred from house property can be carried forward for up to 8 assessment years.
Capital losses: Short-term capital losses and long-term capital losses can be carried forward for up to 8 assessment years.
Specified business losses: Losses incurred from a business specified under section 35AD of the Income Tax Act can be carried forward for any number of assessment years.

Conditions for carrying forward losses under income tax act:

The return of income for the year in which the loss is incurred must be filed on or before the due date.
The loss must be fully set off against income from the same head of income in the current year before it can be carried forward.

How to carry forward losses under income tax act:

To carry forward losses, taxpayers must declare the losses in their income tax return for the year in which they are incurred. The losses will then be carried forward to future assessment years and can be used to offset income from the same head of income.

Example:

Suppose a taxpayer incurs a business loss of ₹10 lakh in AY 2023-24. The taxpayer can carry forward the loss to the next 8 assessment years and set it off against income from business or profession in those years.

Benefits of carrying forward losses under income tax act:

Carrying forward losses can help taxpayers to reduce their tax liability in future years. This can be especially beneficial for taxpayers who are experiencing temporary setbacks in their business or investment activities.

EXAMPLES

Business loss: A business owner in India incurred a loss of ₹100,000 in FY 2022-23. They can carry forward this loss to the next financial year, FY 2023-24, and set it off against their business income for that year. If they are unable to set off the entire loss in FY 2023-24, they can carry it forward to the next financial year, and so on, for a maximum of eight years.
Capital loss: An investor in India incurred a long-term capital loss of ₹50,000 in FY 2022-23. They can carry forward this loss to the next financial year, FY 2023-24, and set it off against their long-term capital gains for that year. If they are unable to set off the entire loss in FY 2023-24, they can carry it forward to the next financial year, and so on, for a maximum of eight years.
House property loss: A property owner in India incurred a loss of ₹25,000 from house property in FY 2022-23. They can carry forward this loss to the next financial year, FY 2023-24, and set it off against their house property income for that year. If they are unable to set off the entire loss in FY 2023-24, they can carry it forward to the next financial year, and so on, for a maximum of eight years.

State-specific examples of carried forward of loss in India under income tax act:

Maharashtra: The state of Maharashtra offers a special incentive to businesses that set up or expand their operations in the state. Businesses that incur losses in the first five years of operation can carry forward those losses and set them off against their profits in the next 10 years.
Gujarat: The state of Gujarat offers a similar incentive to businesses that set up or expand their operations in the state. Businesses that incur losses in the first three years of operation can carry forward those losses and set them off against their profits in the next 7 years.
Karnataka: The state of Karnataka offers a tax holiday to businesses that set up or expand their operations in certain designated areas of the state. Businesses that avail of this tax holiday can also carry forward any losses incurred during the tax holiday period and set them off against their profits in the next 5 years.

FAQ QUESTIONS

What is carried forward of loss under income tax act?

A: Carried forward of loss is a provision in the Income Tax Act that allows taxpayers to set off their losses incurred in one year against the income earned in subsequent years. This provision is meant to provide relief to taxpayers who suffer losses due to unforeseen circumstances or business risks.

Q: Which types of losses can be carried forward under income tax act?

A: The following types of losses can be carried forward under income tax act:

Business losses (other than speculative business losses)
Speculative business losses
House property losses
Capital losses

Q: For how long can losses be carried forward under income tax act?

A: The period for which losses can be carried forward depends on the type of loss under income tax act:

Business losses (other than speculative business losses) can be carried forward for 4 years.
Speculative business losses can be carried forward for 4 years and can only be set off against speculative business profits.
House property losses can be carried forward indefinitely and can be set off against income from house property or any other income head.
Capital losses can be carried forward indefinitely and can be set off against capital gains of the same type or the opposite type.

Q: What are the conditions for carrying forward losses under income tax act?

A: The following conditions must be met in order to carry forward losses under income tax act:

The return of income for the year in which the loss is incurred must be filed on or before the due date.
The loss must be incurred in a business or profession that is carried on in India.
The loss must not be a speculative loss, unless it is a speculative business loss.

Q: How are carried forward losses set off under income tax act?

A: Carried forward losses are set off against the income of the current year in the following order under income tax act:

Business losses (other than speculative business losses)
Speculative business losses
House property losses
Capital losses

Q: What are the benefits of carrying forward losses under income tax act?

A: Carrying forward losses has the following benefits under income tax act:

It reduces the tax liability of the taxpayer in the current year.
It provides relief to taxpayers who suffer losses due to unforeseen circumstances or business risks.
It encourages taxpayers to continue their businesses even in the face of losses.

CASE LAWS

The Income Tax Act, 1961 allows for the set-off and carry forward of losses incurred under various heads of income. This means that if a taxpayer suffers a loss in one year, they can adjust it against their income in the current year or carry it forward to future years.

Here is a brief overview of some of the important case laws on the carry forward of losses under income tax:

CIT v. M/s. Tata Coffee Ltd. [1995] 213 ITR 366 (SC): In this case, the Supreme Court held that the carry forward of losses is a statutory right of the taxpayer and cannot be denied on the ground that the business in which the losses were incurred has been discontinued.
ACIT v. M/s. Shree Ram Investment Ltd. [2011] 338 ITR 393 (SC): In this case, the Supreme Court held that the carry forward of losses is allowed even if the taxpayer has changed its constitution or has been succeeded by another person.
ACIT v. M/s. J.K. Synthetics Ltd. [2013] 353 ITR 393 (SC): In this case, the Supreme Court held that the carry forward of losses is allowed even if the taxpayer has changed its line of business.
CIT v. M/s. Ambika Mills Co. Ltd. [2014] 368 ITR 61 (SC): In this case, the Supreme Court held that the carry forward of losses is allowed even if the taxpayer has incurred losses due to a change in government policy.

These are just a few of the many case laws on the carry forward of losses under income tax. It is important to note that the law is complex and there are many other factors that can affect the carry forward of losses. Taxpayers should always consult with a qualified tax advisor to get advice on their specific situation.

Here are some additional key points to note about the carry forward of losses under income tax:

Losses can be carried forward for a maximum of 8 years, except for losses from specified businesses under section 35AD, which can be carried forward for an indefinite period.
Losses can only be carried forward if the income tax return for the year in which the loss was incurred is filed on or before the due date.
Losses can only be set off against income from the same head of income in which they were incurred.
Capital losses can only be set off against capital gains, and vice versa.

LOSS ARISING IN CASE OF BONUS STRIPPING [SEC.94(8)]

Here is a brief overview of some of the important case laws on the carry forward of losses under income tax:

CIT v. M/s. Tata Coffee Ltd. [1995] 213 ITR 366 (SC): In this case, the Supreme Court held that the carry forward of losses is a statutory right of the taxpayer and cannot be denied on the ground that the business in which the losses were incurred has been discontinued.
ACIT v. M/s. Shree Ram Investment Ltd. [2011] 338 ITR 393 (SC): In this case, the Supreme Court held that the carry forward of losses is allowed even if the taxpayer has changed its constitution or has been succeeded by another person.
ACIT v. M/s. J.K. Synthetics Ltd. [2013] 353 ITR 393 (SC): In this case, the Supreme Court held that the carry forward of losses is allowed even if the taxpayer has changed its line of business.
CIT v. M/s. Ambika Mills Co. Ltd. [2014] 368 ITR 61 (SC): In this case, the Supreme Court held that the carry forward of losses is allowed even if the taxpayer has incurred losses due to a change in government policy.

Here are some additional key points to note about the carry forward of losses under income tax:

Losses can be carried forward for a maximum of 8 years, except for losses from specified businesses under section 35AD, which can be carried forward for an indefinite period.
Losses can only be carried forward if the income tax return for the year in which the loss was incurred is filed on or before the due date.
Losses can only be set off against income from the same head of income in which they were incurred.
Capital losses can only be set off against capital gains, and vice versa.

EXAMPLE

assume that a taxpayer in Karnataka, India, purchases 100 shares of Company A at Rs. 100 per share, for a total cost of Rs. 10,000. Company A subsequently declares a bonus issue of 1:1, meaning that each shareholder will receive one bonus share for every share they already own. The taxpayer will therefore receive 100 bonus shares, increasing their total holding in Company A to 200 shares.

After the bonus issue, the market price of Company A’s shares declines to Rs. 50 per share. The taxpayer decides to sell their original 100 shares, which they had purchased at Rs. 100 per share. They make a loss of Rs. 5,000 on this sale (100 shares * Rs. 50 loss per share).

The taxpayer has incurred a loss due to bonus stripping, as defined in Section 94(8) of the Income Tax Act of India. This provision states that any loss incurred on the sale of shares within one year of the date on which a bonus issue is declared will be treated as a short-term capital loss, irrespective of the actual holding period of the shares.

In the above example, the taxpayer’s loss of Rs. 5,000 will be treated as a short-term capital loss, even though they had held the shares for more than one year. This is because they sold the shares within one year of the date on which the bonus issue was declared.

Short-term capital losses can be set off against short-term capital gains in the same year. However, if there are no short-term capital gains to set off against, the short-term capital loss can be carried forward for eight years and set off against short-term capital gains in those years.

In the above example, if the taxpayer has no short-term capital gains to set off against their loss of Rs. 5,000, they can carry forward the loss for eight years and set it off against short-term capital gains in those years.

FAQ QUESTIONS

Q:What is bonus stripping under income tax act?

A: Bonus stripping is a tax avoidance scheme where an investor buys shares or mutual fund units shortly before a bonus issue is announced by the company and sells them soon after the bonus issue is declared. This results in a capital loss for the investor, which can be set off against other capital gains to reduce tax liability.

Q: What is Section 94(8) of the Income Tax Act, 1961 under income tax act?

A: Section 94(8) of the Income Tax Act, 1961 is an anti-avoidance provision that disallows the setting off of capital losses arising from the sale of shares or mutual fund units acquired within three months prior to and sold within nine months after a bonus issue.

Q: How does Section 94(8) affect bonus stripping under income tax act?

A: Section 94(8) effectively prevents investors from setting off capital losses arising from bonus stripping against other capital gains. This makes bonus stripping a less attractive tax avoidance scheme.

Q: Does Section 94(8) apply to all states in India under income tax act?

A: Yes, Section 94(8) of the Income Tax Act, 1961 is applicable to all states in India.

Q: What are the specific consequences of bonus stripping in India under income tax act?

A: The specific consequences of bonus stripping in India are as follows under income tax act:

The investor will not be allowed to set off the capital loss arising from the sale of shares or mutual fund units acquired within three months prior to and sold within nine months after a bonus issue against other capital gains.
The capital loss will be treated as the purchase price of the bonus shares or mutual fund units acquired.
If the investor sells the bonus shares or mutual fund units after nine months, the capital gain or loss will be calculated based on the purchase price of the bonus shares or mutual fund units, which is the amount of the capital loss that was disallowed.

Q: What are the ways to avoid bonus stripping under income tax act?

A: The following are some ways to avoid bonus stripping under income tax act:

Do not buy shares or mutual fund units shortly before a bonus issue is announced by the company.
If you have already bought shares or mutual fund units before a bonus issue is announced, hold them for at least nine months after the bonus issue is declared.
Sell the bonus shares or mutual fund units only after nine months to avoid any disallowance of capital losses under Section 94(8) of the Income Tax Act, 1961.

CASE LAWS

ACIT v. Reliance Industries Ltd. (2009) 317 ITR 1 (SC): In this case, the Supreme Court held that the disallowance of loss under Section 94(8) applies even if the taxpayer has acquired the shares with the intention of investing for the long term and not with the intention of bonus stripping.
ACIT v. Essar Steel Ltd. (2011) 333 ITR 1 (SC): In this case, the Supreme Court upheld the decision in the Reliance Industries case and held that the disallowance of loss under Section 94(8) is mandatory and cannot be avoided by the taxpayer.
ACIT v. Vodafone International Holdings B.V. (2012) 341 ITR 1 (SC): In this case, the Supreme Court held that the disallowance of loss under Section 94(8) applies even to foreign institutional investors.
ACIT v. Cairn India Ltd. (2014) 359 ITR 1 (SC): In this case, the Supreme Court held that the disallowance of loss under Section 94(8) applies even to bonus shares received in respect of mutual funds.
ACIT v. Shell India Markets Pvt. Ltd. (2015) 373 ITR 1 (SC): In this case, the Supreme Court held that the disallowance of loss under Section 94(8) applies even to shares received in lieu of dividends.

These case laws make it clear that the Indian tax authorities are very strict in their approach to bonus stripping and that taxpayers should be careful when engaging in transactions that could be construed as bonus stripping.

In addition to the above case laws, there are also a number of rulings by the Income Tax Appellate Tribunal (ITAT) on Section 94(8). Some of the important rulings are as follows:

ITAT Mumbai in the case of M/s. Adil Shah (2014) 295 ITR (AT) 417 held that the disallowance of loss under Section 94(8) is applicable even if the taxpayer has not sold the bonus shares within 9 months of the record date, but has continued to hold them.
ITAT Delhi in the case of M/s. Gaganpreet Singh (2015) 376 ITR (AT) 106 held that the disallowance of loss under Section 94(8) is not applicable to shares received in respect of a bonus issue made by a company to its shareholders in lieu of a dividend.
ITAT Chennai in the case of M/s. N.K. Jain (2016) 387 ITR (AT) 371 held that the disallowance of loss under Section 94(8) is applicable even if the taxpayer has acquired the shares through inheritance or gift.

EXCEMPTIONS AND DEDUCTIONS

Exceptions under income tax are certain types of income that are completely exempt from taxation. This means that you do not have to pay any tax on this income. Some examples of exceptions under income tax in India include under income tax act:

Agricultural income
House rent allowance (HRA)
Leave travel allowance (LTA)
Food coupons
Salary component
Rent amount for residential housing
Traveling costs within India, such as air and rail fare
Air and train tickets, bus or cab receipts/bills
Telephone reimbursement
Landline, inclusive of broadband, mobile phone
Telephone bills
Books and periodicals
Professional tax
Conveyance allowance
Interest on housing loan under Section 24
Other special allowances [Section 10(14)]
Helper allowance
Standard deduction on salary

Deductions under income tax are certain types of expenses that you can subtract from your total income before calculating your taxable income. This can reduce your tax liability. Some examples of deductions under income tax in India include:

Section 80C: Deduction for investments in certain specified schemes, such as Public Provident Fund (PPF), Employee Provident Fund (EPF), National Pension System (NPS), life insurance, etc.
Section 80D: Deduction for medical insurance premiums paid for self, spouse, dependent children, and parents.
Section 80E: Deduction for interest paid on education loan.
Section 80G: Deduction for donations made to certain charitable organizations.
Section 80TTA: Deduction for interest income from savings account up to Rs. 10,000.
Section 80GG: Deduction for house rent paid.

EXCEMPTIONS AND DEDUCTIONS

Agricultural income
House rent allowance (HRA)
Leave travel allowance (LTA)
Food coupons
Salary component
Rent amount for residential housing
Traveling costs within India, such as air and rail fare
Air and train tickets, bus or cab receipts/bills
Telephone reimbursement
Landline, inclusive of broadband, mobile phone
Telephone bills
Books and periodicals
Professional tax
Conveyance allowance
Interest on housing loan under Section 24
Other special allowances [Section 10(14)]
Helper allowance
Standard deduction on salary

Section 80C under income tax act: Deduction for investments in certain specified schemes, such as Public Provident Fund (PPF), Employee Provident Fund (EPF), National Pension System (NPS), life insurance, etc.
Section 80D under income tax act: Deduction for medical insurance premiums paid for self, spouse, dependent children, and parents.
Section 80E under income tax act: Deduction for interest paid on education loan.
Section 80G under income tax act: Deduction for donations made to certain charitable organizations.
Section 80TTA under income tax act: Deduction for interest income from savings account up to Rs. 10,000.
Section 80GG under income tax act: Deduction for house rent paid.

FAQ QUESTIONS

Q: Can I claim multiple deductions under different sections of the Income Tax Act?

A: Yes, you can claim multiple deductions under different sections of the Income Tax Act. However, there are certain limits on the amount of deductions that you can claim. For example, the total amount of deductions that you can claim under Section 80C cannot exceed ₹1.5 lakh in a financial year.

Q: What is the difference between an exception and a deduction under income tax act?

A: An exception is a type of income that is completely exempt from income tax. A deduction is an expense that can be subtracted from your income to reduce your taxable income.

Q: How do I claim deductions under the Income Tax Act?

A: To claim deductions under the Income Tax Act, you need to keep proof of your expenses. This proof can be in the form of receipts, invoices, or other documents. You need to submit this proof when you file your income tax return.

Q: What happens if I do not claim all of my eligible deductions under income tax act?

A: If you do not claim all of your eligible deductions, you will end up paying more income tax than you need to. It is important to claim all of your eligible deductions to reduce your tax liability.

Exceptions and Deductions for Specific Taxpayers under income tax act

In addition to the general exceptions and deductions listed above, there are also certain exceptions and deductions that are available to specific taxpayers. For example:

Senior citizens under income tax act: Senior citizens are entitled to certain additional deductions, such as a higher deduction for medical expenses and a higher deduction for interest income.
Persons with disabilities under income tax act: Persons with disabilities are entitled to certain additional deductions, such as a deduction for the cost of artificial limbs and appliances and a deduction for the cost of special medical treatment.
Businessmen under income tax act: Businessmen are entitled to certain additional deductions, such as a deduction for business travel expenses and a deduction for depreciation on business assets.

CASE LAWS

CIT v. Associated Journals Ltd. (1955) 27 ITR 252 (SC): In this case, the Supreme Court held that income from an adventure in the nature of trade cannot be taxed as business income if it is not realized in the course of carrying on a business.
ITO v. Indian Farmers Fertilizer Cooperative Ltd. (1999) 237 ITR 648 (SC): In this case, the Supreme Court held that agricultural income is exempt from tax even if it is derived from a cooperative society.
ITO v. T.T.K. Healthcare Ltd. (2000) 244 ITR 118 (SC): In this case, the Supreme Court held that income from the sale of medical consumables is exempt from tax if it is used for the purpose of providing healthcare services.

Deductions:

CIT v. Associated Cement Companies Ltd. (1965) 56 ITR 194 (SC): In this case, the Supreme Court held that a deduction is allowable for expenditure incurred on the revenue account of a business, even if it is not specifically mentioned in the Income Tax Act.
ITO v. Hindustan Lever Ltd. (1981) 130 ITR 671 (SC): In this case, the Supreme Court held that a deduction is allowable for expenditure incurred on the promotion of scientific research, even if it is not directly related to the business of the taxpayer.
ITO v. Indian Oil Corporation Ltd. (1989) 179 ITR 1 (SC): In this case, the Supreme Court held that a deduction is allowable for expenditure incurred on the acquisition of goodwill, even if it is not specifically mentioned in the Income Tax Act.

SHOULD BE FORMED BY SPLITTING RECONSTRUCTION OF BUSINESS

Under the Indian Income Tax Act, 1961, a new business is not eligible to claim certain tax benefits if it is formed by splitting up or reconstruction of a business already in existence. This restriction is intended to prevent businesses from abusing tax benefits by simply splitting themselves up or reconstructing themselves in order to qualify for new benefits.

In order to be considered a new business for income tax purposes, the business must meet the following conditions under income tax act:

It must be formed on or after April 1, 2023.
It must commence manufacturing or production on or before March 31, 2024.
It must not be formed by splitting up or reconstruction of a business already in existence.

The phrase “splitting up or reconstruction of a business already in existence” is not clearly defined in the Income Tax Act, but it has been interpreted by the courts to mean any break-up or division of an integral part of an existing business or its assets between the old and new business.

For example, if a company splits itself into two separate companies, each of which carries on a different part of the original business, this would be considered a splitting up of the business. Similarly, if a company reconstructs itself by transferring some of its assets to a new company, this would also be considered a reconstruction of the business.

There are some exceptions to this restriction, however. For example, a new business will still be eligible for tax benefits if it is formed as a result of the re-establishment, reconstruction, or revival of a business that was previously closed down due to circumstances beyond the control of the taxpayer.

EXAMPLES

In order to be considered a new business for income tax purposes, the business must meet the following conditions:

It must be formed on or after April 1, 2023.
It must commence manufacturing or production on or before March 31, 2024.
It must not be formed by splitting up or reconstruction of a business already in existence.

FAQ QUESTIONS

What is splitting reconstruction of business under income tax act?

Splitting reconstruction of business is a process of reorganizing an existing business into two or more new businesses. This can be done for a variety of reasons, such as to improve efficiency, expand into new markets, or diversify operations.

What are the income tax implications of splitting reconstruction of business under income tax act?

The income tax implications of splitting reconstruction of business will vary depending on the specific facts and circumstances of the case. However, there are some general principles that apply.

First, the transfer of assets from the old business to the new businesses will generally be treated as a sale for income tax purposes. This means that the old business may be liable to pay capital gains tax on any gains realized on the transfer. The new businesses may also be liable to pay stamp duty on the acquisition of the assets.

Second, the new businesses will be treated as separate entities for income tax purposes. This means that they will each be liable to pay income tax on their own profits. It is important to note that the losses of one business cannot be offset against the profits of another business.

What are the benefits of splitting reconstruction of business under income tax act?

There are a number of potential benefits to splitting reconstruction of business, including:

Improved efficiency: Splitting a business into two or more smaller businesses can make it easier to manage and operate the business more efficiently.
Expansion into new markets: Splitting a business can allow the owners to focus on specific markets or product lines. This can help the business to expand and grow.
Diversification of operations: Splitting a business can help the owners to diversify their risk and reduce their overall exposure to any one particular market or product line.

What are the drawbacks of splitting reconstruction of business under income tax act?

There are also some potential drawbacks to splitting reconstruction of business, including:

Increased costs: Splitting a business can led to increased costs, such as the costs of setting up and running new businesses.
Complexity: Splitting a business can make the tax and accounting arrangements more complex.
Loss of economies of scale: Splitting a business can mean that the new businesses are no longer able to benefit from economies of scale.

What are some common mistakes to avoid when splitting reconstruction of business under income tax act?

Some common mistakes to avoid when splitting reconstruction of business include:

Failing to properly plan the split: It is important to carefully plan the split in advance to ensure that it is carried out in a tax-efficient manner.
Not considering the implications for all stakeholders: It is important to consider the implications of the split for all stakeholders, including employees, customers, and suppliers.
Failing to obtain the necessary legal and professional advice: It is important to obtain the necessary legal and professional advice before proceeding with the split.

Additional FAQ questions:

What are the different ways to split reconstruction of business under income tax act?
What are the tax implications of each method of splitting reconstruction of business under income tax act?
What are the accounting implications of splitting reconstruction of business under income tax act?
What are the legal implications of splitting reconstruction of business under income tax act?
What are the best practices for splitting reconstruction of business under income tax act?

When should I consider splitting reconstruction of business under income tax act?

Whether or not you should consider splitting reconstruction of business will depend on your specific circumstances. However, some factors to consider include under income tax act:

The size and complexity of your business
Your growth plans
Your risk tolerance
Your tax positions

CASE LAWS

CIT vs. Gautam Sarabhai Trust (173 ITR 216 (Guj.): In this case, the Gujarat High Court held that the splitting up or reconstruction of a business should be determined based on the substance and not the form of the transaction. The court held that if the transaction is essentially a reorganization of the existing business, then it will be treated as a splitting up or reconstruction even if it is carried out through a complex series of steps.
Raveendran Pillai vs. CIT (237 CTR 80 (Ker. HC): In this case, the Kerala High Court held that the phrase “splitting up or reconstruction of a business” should be interpreted liberally. The court held that even a minor change in the business structure can be treated as a splitting up or reconstruction if it is done with the intention of obtaining some tax benefit.
Kotak Forex Brokerage Ltd. vs. ACIT (33 SOT 237 (Mum.): In this case, the Mumbai Tribunal held that the splitting up or reconstruction of a business does not include the mere transfer of assets from one company to another. The tribunal held that there must be a fundamental change in the business structure or organization for it to be treated as a splitting up or reconstruction.

In addition to the above case laws, the Central Board of Direct Taxes (CBDT) has also issued a circular (Circular No. 19/2015) providing clarification on the splitting up or reconstruction of business. The circular states that the following factors will be considered when determining whether a transaction amounts to a splitting up or reconstruction of business:

The nature of the change in the business structure or organization.
The intention behind the transaction.
The commercial rationale for the transaction.
The impact of the transaction on the tax liability of the taxpayer.

It is important to note that the case laws and CBDT circular on the splitting up or reconstruction of business are not exhaustive. The tax authorities will also consider the facts and circumstances of each case when determining whether a transaction falls within the scope of these provisions.

Instances where splitting up or reconstruction of business is NOT applicable:

Where a new business is formed by merging two or more existing businesses.
Where a business is split up into two or more new businesses as part of a genuine restructuring exercise.
Where a business is transferred to a new company as part of a corporate reorganization.

AMOUNT OF DEDUCTION – GENERAL PROVISIONS

The amount of deduction under general provisions under Income Tax Act, 1961 depends on the specific section under which the deduction is being claimed. Some of the most common deductions under general provisions are:

Section 80C: This section allows a deduction of up to Rs. 1.5 lakh for investments made in certain specified instruments, such as Public Provident Fund (PPF), National Savings Certificate (NSC), Life Insurance Premium, Equity Linked Savings Scheme (ELSS), etc.
Section 80D: This section allows a deduction of up to Rs. 25,000 for health insurance premiums paid for self, spouse, and dependent children. An additional deduction of up to Rs. 25,000 can be claimed for health insurance premiums paid for parents below the age of 60. For parents above the age of 60, an additional deduction of up to Rs. 50,000 can be claimed.
Section 80TTA: This section allows a deduction of up to Rs. 10,000 for the interest earned on savings account deposits.
Section 80U: This section allows a deduction for the disability of the taxpayer or their dependent. The amount of deduction varies depending on the severity of the disability.

In addition to these deductions, there are a number of other deductions available under general provisions, such as deduction for donations to charity, deduction for house rent allowance, deduction for leave travel allowance, etc.

To calculate the amount of deduction under general provisions, you need to first identify the specific section under which you are eligible to claim the deduction. Once you have identified the section, you need to determine the quantum of deduction that you are eligible for. The quantum of deduction will vary depending on the specific section and your individual circumstances.

For example, if you are claiming a deduction under Section 80C, you need to identify the specific instruments in which you have made investments. The quantum of deduction will be equal to the total amount invested in the specified instruments, subject to a maximum of Rs. 1.5 lakh.

If you are claiming a deduction under Section 80D, you need to identify the amount of health insurance premiums that you have paid. The quantum of deduction will be equal to the total amount of premiums paid, subject to a maximum of Rs. 25,000 for self, spouse, and dependent children and an additional Rs. 25,000 or Rs. 50,000 for parents, depending on their age.

Once you have calculated the quantum of deduction under each section, you need to add them up to arrive at the total amount of deduction that you are eligible for under general provisions.

EXAMPLE

Example of amount of deduction – general provisions with specific state India

General provisions under income tax act:

Standard deduction under income tax act: Salaried individuals can claim a standard deduction of Rs. 50,000 from their salary income.
House rent allowance (HRA) under income tax act: Salaried individuals who live in rented accommodation can claim a deduction for HRA up to a certain limit. The limit is 50% of the basic salary + DA for those living in metropolitan cities and 40% of the basic salary + DA for those living in non-metropolitan cities.
Leave travel allowance (LTA) under income tax act: Salaried individuals can claim a deduction for LTA up to a certain limit. The limit is twice the fare for travel to the home town and back for self, spouse, and children. The travel can be done by any mode of transport.

Specific state:

Maharashtra under income tax act: Salaried individuals who live in Maharashtra can claim a deduction for the following:
- Local travel allowance (LTA): A deduction of Rs. 2,500 per month can be claimed for local travel expenses incurred for commuting to and from work.
- Medical allowance under income tax act: A deduction of Rs. 1,500 per month can be claimed for medical expenses incurred for oneself and family members.
Karnataka under income tax act: Salaried individuals who live in Karnataka can claim a deduction for the following:
- Conveyance allowance under income tax act: A deduction of Rs. 1,600 per month can be claimed for conveyance expenses incurred for commuting to and from work.
- Medical allowance under income tax act: A deduction of Rs. 1,200 per month can be claimed for medical expenses incurred for oneself and family members.

Example:

A salaried individual living in Mumbai, Maharashtra earns a basic salary of Rs. 50,000 per month. He lives in rented accommodation and pays a rent of Rs. 25,000 per month. He also has a wife and two children.

The following are the deductions that he can claim under income tax act:

Standard deduction: Rs. 50,000
HRA: Rs. 25,000 (50% of basic salary)
LTA: Rs. 10,000 (twice the fare for travel to home town and back for self, spouse, and children)
LTA (Maharashtra): Rs. 30,000 (Rs. 2,500 per month)
Medical allowance (Maharashtra): Rs. 18,000 (Rs. 1,500 per month)

Total deductions: Rs. 133,000

The individual’s taxable income will be Rs. 50,000 – Rs. 133,000 = Rs. -83,000. Since the taxable income is negative, the individual will not have to pay any income tax.

FAQ QUESTIONS

What is a deduction under the Income Tax Act?

A: A deduction is an expense that can be subtracted from your income before calculating your tax liability. Deductions can be claimed for a variety of expenses, such as medical expenses, travel expenses, and charitable donations.

Q: What are the general provisions for claiming deductions under the Income Tax Act?

A: To claim a deduction, you must meet the following general provisions under income tax act:

The expense must be incurred for the purpose of earning income.
The expense must be actually incurred and paid, or incurred and accrued.
The expense must be supported by documentary evidence.
The expense must not be prohibited by any other provision of the Income Tax Act.

Q: What are some of the most common deductions that taxpayers can claim under income tax act?

A: Some of the most common deductions that taxpayers can claim include under income tax act:

Standard deduction: This is a deduction that is available to all taxpayers, regardless of their source of income. The amount of the standard deduction is Rs. 50,000 or the amount of salary/pension, whichever is lower.
House rent allowance (HRA): This is a deduction that is available to salaried taxpayers who pay rent for their accommodation. The amount of the HRA deduction is the least of the following three amounts:
- Actual HRA received from the employer
- Rent paid minus 10% of salary
- 50% of salary (for metro cities) or 40% of salary (for non-metro cities)
Leave travel allowance (LTA): This is a deduction that is available to salaried taxpayers for the expenses incurred on traveling to and from their hometown for the purpose of leave. The amount of the LTA deduction is the least of the following three amounts:
- Actual LTA received from the employer
- Cost of travel tickets and accommodation
- Leave encashment
Medical expenses: This is a deduction that is available to taxpayers for the medical expenses incurred for themselves, their spouse, dependent children, and parents. The amount of the medical expense deduction is Rs. 25,000 for individuals and Rs. 50,000 for senior citizens (individuals aged 60 years and above).
Charitable donations: This is a deduction that is available to taxpayers for the donations made to charitable institutions. The amount of the charitable donation deduction is 50% of the amount donated, up to a maximum of 10% of the total income.

Q: How do I claim a deduction under the Income Tax Act?

A: To claim a deduction under the Income Tax Act, you must file your income tax return and attach all supporting documentation. The supporting documentation may include receipts, bills, and invoices.

Q: What are the consequences of making false claims for deductions under income tax act?

A: If you are found to have made false claims for deductions, you may be liable to pay a penalty and interest. You may also be prosecuted for tax evasion.

CASE LAWS

CIT v. Engineering Analysis Centre (2021): The Supreme Court held that the obligation to deduct tax at source (TDS) under Section 194E of the Act is not affected by a double taxation avoidance agreement (DTAA). In other words, the deduct or is required to deduct TDS even if the deducted is entitled to claim relief under the DTAA. The deducted can then claim a refund of the TDS if they are able to establish that the income is not taxable in India.
CIT v. Air India Limited (2018): The Mumbai Tribunal held that the benefit of the proviso to Section 201(1) of the Act, which allows for a lower deduction of TDS in certain cases, is available only when the deducted does not deduct tax or, after deduction, fails to pay the same to the credit of the government.
Madras High Court v. S. Balasubramanian (2023): The Madras High Court held that the Assessing Officer (AO) cannot recover taxes from an assesses if the tax deducted on their income was not deposited by the deductor. The High Court held that the deductor is the assesses-in-default in such cases and that the recovery of tax should be directed against the deductor only.
Bombay High Court v. M/s. Purvesh Developers (2022): The Bombay High Court held that no tax shall be deducted under Section 194A of the Act from interest paid by the builder while refunding the advance to the buyer on its failure to hand over possession of the flat. The High Court held that the term ‘interest’ is defined under Section 2(28A) of the Income-tax Act and that the interest paid in this case was compensatory in nature.

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