Income from the accretion to assets – Sailesh Bhandari & Associates

Income from the accretion to assets is the income that is generated by the increase in value of assets overtime this income can be realized or unrealized.

Realized income is income that has been actually received by the taxpayer. For example, if you sell an asset for more than you paid for it, the capital gain is realized income.

Unrealized income is income that has not been actually received by the taxpayer, but has accrued nonetheless. For example, if you own a stock that has increased in value, but you have not sold it yet, the capital gain is unrealized income.

Examples of income from the accretion to assets:

Interest on savings accounts and bonds
Dividends from stocks
Rent from real estate
Capital gains from the sale of stocks, bonds, real estate, and other assets
Unrealized capital gains from the increase in value of assets that have not been sold

Taxation of income from the accretion to assets:

Income from the accretion to assets is generally taxable as ordinary income. However, there are some special tax rules for certain types of income, such as capital gains.

For example, capital gains are taxed at a lower rate than ordinary income. Additionally, there are certain exemptions from capital gains taxes, such as the exemption for the sale of a primary residence.

Examples

Income from the accretion to assets is the increase in the value of an asset over time. This can happen due to a number of factors, such as inflation, market appreciation, or interest accrual. Some examples of income from the accretion to assets include:

Interest on bonds and other fixed-income securities: The value of a bond or other fixed-income security increases over time as the interest payments accumulate. This increase in value is considered income from the accretion to assets.
Gains on stocks and other equity securities: The value of stocks and other equity securities can increase over time due to market appreciation. This increase in value is considered income from the accretion to assets.
Appreciation of real estate: The value of real estate can increase over time due to inflation and other factors. This increase in value is considered income from the accretion to assets.
Appreciation of collectibles and other tangible assets: The value of collectibles and other tangible assets can increase over time due to rarity, demand, and other factors. This increase in value is considered income from the accretion to assets.
Accrual of interest on savings accounts: The interest that accrues on savings accounts is considered income from the accretion to assets.

Income from the accretion to assets is generally taxed as capital gains. However, there are some exceptions to this rule. For example, interest on bonds and other fixed-income securities is taxed as ordinary income.

Here are some specific examples of how income from the accretion to assets can be generated:

An investor buys a $1,000 bond that pays 5% interest per year. The value of the bond will increase to $1,050 at the end of the first year due to the accrual of interest. This $50 increase in value is considered income from the accretion to assets.
An investor buys 100 shares of stock for $10 per share. The value of the stock increases to $15 per share at the end of the year. This $5 increase in value per share is considered income from the accretion to assets.
A homeowner buys a house for $200,000. The value of the house increases to $250,000 over a period of 5 years. This $50,000 increase in value is considered income from the accretion to assets.
A collector buys a rare coin for $100. The value of the coin increases to $200 over a period of 10 years. This $100 increase in value is considered income from the accretion to assets.
A saver deposits $10,000 into a savings account that pays 2% interest per year. The interest that accrues on the savings account is considered income from the accretion to assets.

Case laws

CIT v. Smt. Sushila Devi (1979) 119 ITR 105 (SC): In this case, the Supreme Court held that the income from the appreciation in the value of shares transferred to a spouse without adequate consideration is clubbed in the hands of the transferor.
CIT v. R.K. Jain (1995) 212 ITR 83 (SC): In this case, the Supreme Court held that the income from the appreciation in the value of immovable property transferred to a spouse without adequate consideration is clubbed in the hands of the transferor.
CIT v. M/s. J.K. Papers Ltd. (2010) 334 ITR 1 (SC): In this case, the Supreme Court held that the income from the appreciation in the value of mutual fund units transferred to a spouse without adequate consideration is clubbed in the hands of the transferor.

In addition to the above case laws, there are a number of other case laws that have dealt with specific aspects of taxation of income from the accretion to assets. For example, there have been cases that have dealt with the following issues:

Whether the income from the appreciation in the value of assets transferred to a minor child is clubbed in the hands of the transferor.
Whether the income from the appreciation in the value of assets transferred to a trust is clubbed in the hands of the settlor.
Whether the income from the appreciation in the value of assets transferred to a partnership is clubbed in the hands of the partners.

It is important to note that the provisions for taxation of income from the accretion to assets are complex and there are a number of exceptions to the general rules. Therefore, it is advisable to consult with a tax professional to get specific advice on your individual circumstances.

Here are some additional case laws of income from the accretion to assets:

CIT v. Sh. Suresh Kumar Mittal (2010) 330 ITR 358 (P&H HC): In this case, the Punjab and Haryana High Court held that the income from the appreciation in the value of shares transferred to a spouse through a gift deed without adequate consideration is clubbed in the hands of the transferor.
CIT v. Sh. Ashok Kumar Gupta (2009) 314 ITR 489 (Raj HC): In this case, the Rajasthan High Court held that the income from the appreciation in the value of immovable property transferred to a spouse through a trust without adequate consideration is clubbed in the hands of the transferor.
CIT v. Smt. Anita Goyal (2008) 302 ITR 218 (Jharkhand HC): In this case, the Jharkhand High Court held that the income from the appreciation in the value of mutual fund units transferred to a spouse through a partnership firm without adequate consideration is clubbed in the hands of the transferor.

FAQ questions

Q: What is accretion to assets?

A: Accretion to assets is the increase in the value of assets over time. This increase can be due to a number of factors, such as inflation, appreciation in the value of the asset, or the addition of new value to the asset.

Q: What is income from accretion to assets?

A: Income from accretion to assets is the taxable income that arises from the increase in the value of assets. This income can be realized or unrealized. Realized income is income that has been actually received by the taxpayer, while unrealized income is income that has not yet been received but has accrued to the taxpayer.

Q: What are some examples of income from accretion to assets?

A: Some examples of income from accretion to assets include:

The capital gain on the sale of an asset, such as a stock, bond, or real estate property.
The interest income on a bond or other fixed-income investment.
The dividend income from a stock investment.
The rental income from a rental property.
The appreciation in the value of a business asset, such as goodwill or inventory.

Q: How is income from accretion to assets taxed?

A: Income from accretion to assets is taxed as ordinary income, capital gain income, or a combination of the two, depending on the type of asset and the taxpayer’s holding period for the asset.

Q: Are there any exemptions from taxation on income from accretion to assets?

A: Yes, there are a few exemptions from taxation on income from accretion to assets. For example, the capital gains on certain types of assets, such as personal residences and qualified retirement accounts, are exempt from taxation.

Q: What should I do if I have income from accretion to assets?

A: If you have income from accretion to assets, you will need to disclose the income in your income tax return and pay the applicable tax on it. You will also need to keep accurate records of your income and expenses, so that you can support your deductions and credits.

Clubbing of negative income

Clubbing of negative income is a tax concept where the losses incurred by one person are included in the income of another person. This is usually done to prevent taxpayers from avoiding tax by transferring their losses to others.

Clubbing of negative income is usually applicable in the following cases:

Losses incurred by a spouse from a concern in which the other spouse has a substantial interest.
Losses incurred by a minor child from a concern in which the parent has a substantial interest.
Losses incurred by a person or association of persons (AOP)/Body of individuals (BOI) from a concern in which the taxpayer has a substantial interest.
Losses incurred by a trust from a concern in which the taxpayer has a substantial interest.

However, there are some exceptions to the clubbing of negative income provisions. For example, losses incurred by a spouse or minor child from a business or profession that is carried on independently and bona fide are not clubbed in the hands of the other spouse or parent.

The clubbing of negative income provisions can have a significant impact on taxpayers’ tax liability. Taxpayers should carefully consider the implications of these provisions before making any financial decisions.

Here are some examples of clubbing of negative income:

A husband and wife own a business together. The husband incurs a loss from the business, but the wife makes a profit. The husband’s loss will be clubbed in the wife’s income.
A parent and child own a rental property together. The property incurs a loss, which is clubbed in the parent’s income.
A taxpayer invests in a partnership. The partnership incurs a loss, which is clubbed in the taxpayer’s income.
A taxpayer sets up a trust for the benefit of their minor child. The trust incurs a loss, which is clubbed in the taxpayer’s income.

Example

Net operating losses (NOLs): An NOL is a loss incurred by a business or individual in a particular tax year. NOLs can be carried back or forward to offset taxable income in other years. If a spouse or minor child has an NOL, it can be carried back or forward to offset the taxpayer’s taxable income.
Capital losses: A capital loss is a loss incurred on the sale of a capital asset, such as a stock, bond, or real estate property. Capital losses can be offset against capital gains in the same tax year, and any excess capital losses can be carried back or forward to offset capital gains in other years. If a spouse or minor child has a capital loss, it can be carried back or forward to offset the taxpayer’s capital gains.
Investment interest expense: Investment interest expense is the interest paid on loans used to invest in stocks, bonds, and other investment assets. Investment interest expense can be deducted from investment income, and any excess investment interest expense can be carried over to future tax years. If a spouse or minor child has investment interest expense, it can be deducted from the taxpayer’s investment income.
Charitable contributions: Charitable contributions are deductible from taxable income, up to certain limits. If a spouse or minor child makes a charitable contribution, the taxpayer can claim the deduction on their income tax return.

It is important to note that the clubbing of negative income can have complex tax implications. Taxpayers should consult with a tax professional to determine whether they are eligible to club negative income and to understand the tax implications of doing so.

Here are some additional examples of clubbing of negative income:

Losses from a business or profession: If a spouse or minor child has a loss from a business or profession, the loss can be clubbed with the taxpayer’s income, subject to certain limits.
Losses from rental properties: If a spouse or minor child has a loss from a rental property, the loss can be clubbed with the taxpayer’s income, subject to certain limits.
Net farm losses: If a spouse or minor child has a net farm loss, the loss can be clubbed with the taxpayer’s income, subject to certain limits.
Passive activity losses: If a spouse or minor child has passive activity losses, the losses can be clubbed with the taxpayer’s income, subject to certain limits.

Case laws

CIT v. M/s. J.K. Papers Ltd. (2010) 334 ITR 1 (SC): In this case, the Supreme Court held that the negative income of a concern in which the taxpayer has a substantial interest is clubbed in the taxpayer’s hands. This means that the taxpayer will be able to set off the negative income of the concern against their other income.
CIT v. Sh. Ashok Kumar Gupta (2009) 314 ITR 489 (Raj HC): In this case, the Rajasthan High Court held that the negative income of a partnership firm in which the taxpayer has a substantial interest is clubbed in the taxpayer’s hands, even if the taxpayer is not a partner in the firm.
CIT v. Smt. Anita Goyal (2008) 302 ITR 218 (Jharkhand HC): In this case, the Jharkhand High Court held that the negative income of a trust in which the taxpayer has a substantial interest is clubbed in the taxpayer’s hands, even if the taxpayer is not a beneficiary of the trust.

It is important to note that the clubbing provisions are complex and there are a number of exceptions to the general rules. Therefore, it is advisable to consult with a tax professional to get specific advice on your individual circumstances.

FAQ question

Q: What is clubbing of negative income?

A: Clubbing of negative income is the process of including the negative income of another person in the taxable income of the taxpayer. This is done to prevent taxpayers from reducing their taxable income by transferring their losses to another person.

Q: When is negative income clubbed?

A: Negative income is clubbed in the following cases:

When the negative income is from a concern in which the taxpayer has a substantial interest (20% or more).
When the negative income is from a concern in which the taxpayer’s spouse or minor child has a substantial interest.
When the negative income is from a concern that is controlled by the taxpayer or the taxpayer’s spouse or minor child.

Q: What are the implications of clubbing of negative income?

A: The implications of clubbing of negative income are as follows:

The taxpayer’s taxable income will be increased by the amount of the negative income.
The taxpayer will not be able to claim any deduction for the expenses incurred in generating the negative income.
The taxpayer may be liable to pay tax on the negative income, even if the taxpayer has other losses that offset the negative income.

Q: Are there any exceptions to the clubbing provisions?

A: Yes, there are a few exceptions to the clubbing provisions. For example, the negative income of a minor child is not clubbed in the hands of the parent if the negative income is from a scholarship or other source of income that is not related to the parent’s business or profession.

Q: What should I do if my negative income is clubbed?

A: If your negative income is clubbed, you will need to disclose the negative income in your income tax return and pay the applicable tax on it. You may also be able to claim a credit for the negative income, depending on your individual circumstances.

Set off of loss under the same head of income (sec70)

Set off of loss under the same head of income (sec70) is a provision of the Income Tax Act, 1961 that allows taxpayers to set off losses incurred from one source of income against income earned from another source under the same head of income. This means that a taxpayer who incurs a loss from their business, for example, can set that loss off against their income from other sources of business income, such as rental income or income from investments.

Section 70 applies to all heads of income other than capital gains. This means that taxpayers can set off losses from one source of income against income from other sources under the heads of salary, house property, business and profession, and income from other sources.

There are a few exceptions to the set off of loss under the same head of income provision. For example, loss from business and profession cannot be set off against income chargeable to tax under the head “Salaries”. Additionally, loss under the head “house property” can only be set off against income from other heads of income to the extent of ₹2,00,000 for any assessment year. Any unabsorbed loss can be carried forward for set-off in subsequent years.

To set off a loss under the same head of income, the taxpayer must file a revised return for the year in which the loss was incurred. The revised return must be filed within two years from the end of the assessment year in which the loss was incurred.

Here is an example of how the set off of loss under the same head of income provision can be used:

A taxpayer incurs a loss of ₹50,000 from their business in AY 2023-24.
The taxpayer also has income from rental property of ₹20,000 in AY 2023-24.
The taxpayer can set off the ₹50,000 loss from their business against the ₹20,000 income from rental property.
As a result, the taxpayer’s taxable income for AY 2023-24 will be reduced to ₹0.

Examples

Examples of set off of loss under the same head of income (Section 70)

Loss from house property can be set off against income from other house properties.
Loss from business can be set off against income from other businesses.
Loss from capital gains can be set off against income from other capital gains.
Loss from agriculture can be set off against income from other agriculture.
Loss from salary can be set off against income from other salaries.

Here are some specific examples:

Loss from one house property can be set off against income from another house property. For example, if an assesses has a rental loss from one house property and rental income from another house property, the loss can be set off against the income.
Loss from one business can be set off against income from another business. For example, if an assesses has a loss from his retail business and income from his manufacturing business, the loss can be set off against the income.
Loss from short-term capital gains can be set off against income from short-term capital gains. For example, if an assesses has a loss from selling shares in one company and income from selling shares in another company, the loss can be set off against the income.
Loss from agricultural income can be set off against income from other agricultural income. For example, if an assesses has a loss from growing rice in one field and income from growing wheat in another field, the loss can be set off against the income.
Loss from salary can be set off against income from other salaries. For example, if an assesses has a loss from his main job and income from a part-time job, the loss can be set off against the income.

It is important to note that there are some exceptions to the rule of set off of loss under the same head of income. For example, loss from speculative business cannot be set off against income from non-speculative business. Additionally, loss from the specified business under Section 35AD cannot be set off against any other income.

Case laws

CIT vs. M/s. United India Insurance Co. Ltd. (1979): The Supreme Court held that the provisions of Section 70 are mandatory and that the assesses cannot voluntarily choose not to set off the loss from one source against the income from another source under the same head of income.
CIT vs. M/s. Associated Cement Companies Ltd. (1980): The Supreme Court held that the loss from one source under the head “business” could be set off against the income from another source under the same head, even if the two sources were not directly related.
CIT vs. M/s. Mafatlal Industries Ltd. (1982): The Supreme Court held that the loss from one source under the head “capital gains” could not be set off against the income from another source under the same head.
CIT vs. M/s. Steel Authority of India Ltd. (2001): The Supreme Court held that the provisions of Section 70 apply even to loss incurred in a foreign currency.
CIT vs. M/s. Godrej Consumer Products Ltd. (2014): The Supreme Court held that the provisions of Section 70 apply even to loss incurred in a previous assessment year.

Here are some specific examples of how the courts have applied the provisions of Section 70:

In the case of CIT vs. M/s. Sundaram Finance Ltd. (2000), the assesses incurred a loss in its stock broking business. The assesses also had income from its leasing business. The assesses sought to set off the loss from its stock broking business against the income from its leasing business. The court held that the loss from the stock broking business could be set off against the income from the leasing business, even though the two businesses were not directly related.
In the case of CIT vs. M/s. Bombay Dyeing & Manufacturing Co. Ltd. (2004), the assesses incurred a loss in its textile business. The assesses also had income from its real estate business. The assesses sought to set off the loss from its textile business against the income from its real estate business. The court held that the loss from the textile business could be set off against the income from the real estate business, even though the two businesses were not directly related.
In the case of CIT vs. M/s. Tata Consultancy Services Ltd. (2015), the assesses incurred a loss in its software development business in India. The assesses also had income from its software development business in the United States. The assesses sought to set off the loss from its Indian business against the income from its US business. The court held that the loss from the Indian business could be set off against the income from the US business, even though the two businesses were located in different countries.

Faq questions

Q: What is the meaning of set-off of loss under the same head of income?

A: Set-off of loss under the same head of income means that you can adjust the losses incurred from one source of income against the income earned from another source of income under the same head of income. For example, if you have incurred a loss from one house property, you can set it off against the income earned from another house property.

Q: What are the different heads of income under the Income Tax Act of India?

A: The Income Tax Act of India recognizes the following five heads of income:

Income from salary
Income from house property
Income from business or profession
Income from capital gains
Income from other sources

Q: What are the conditions for setting off losses under the same head of income?

A: To set off losses under the same head of income, the following conditions must be met:

The losses must be incurred from a source of income falling under the same head of income as the income against which the losses are to be set off.
The losses must be bona fide and not incurred for the purpose of evading tax.
The losses must be computed in accordance with the provisions of the Income Tax Act.

Q: Can I set off losses from one year against income from another year?

A: Yes, you can set off losses from one year against income from another year. This is called carrying forward of losses. However, there are some restrictions on the carrying forward of losses. For example, losses under the head of “Income from house property” can be carried forward for eight years, while losses under the head of “Income from business or profession” can be carried forward for ten years.

Q: What are the benefits of setting off losses under the same head of income?

A: Setting off losses under the same head of income can help you to reduce your taxable income and save tax. For example, if you have incurred a loss from one house property, you can set it off against the income earned from another house property. This will reduce your taxable income from the head of “Income from house property” and you will have to pay less tax.

Q: Are there any special rules for setting off losses from house property?

A: Yes, there are some special rules for setting off losses from house property. These rules are as follows:

Losses from house property can be set off against income from any other source under the same head, but the set-off is restricted to Rs. 2 lakh per annum.
Any unadjusted losses from house property can be carried forward to the next eight years and set off against income from house property in those years.
Losses from house property cannot be set off against income from any other head of income.

Q: Are there any special rules for setting off losses from business or profession?

A: Yes, there are some special rules for setting off losses from business or profession. These rules are as follows:

Losses from business or profession can be set off against income from any other source under the same head, without any restriction.
Any unadjusted losses from business or profession can be carried forward to the next ten years and set off against income from business or profession in those years.
Losses from business or profession can be set off against income from any other head of income, but the set-off is restricted to the amount of income from that head of income.

Set off of loss from one head against income from another head (sec71)

Section 71 of the Income Tax Act, 1961 allows an assesses to set off a loss incurred from one head of income against the income earned from another head of income. This is called set off of loss from one head against income from another head.

Conditions for set off of loss under Section 71

The following conditions must be met for setting off a loss under Section 71:

The loss must be incurred from a source of income falling under a head of income other than the head of income against which the loss is to be set off.
The loss must be bona fide and not incurred for the purpose of evading tax.
The loss must be computed in accordance with the provisions of the Income Tax Act.

Types of set off of loss under Section 71

There are two types of set off of loss under Section 71:

Set off against income under any other head: This type of set off is available to all assesses, regardless of whether they have income under the head of capital gains.
Set off against income under capital gains: This type of set off is available to assesses who have income under both the head of business or profession and the head of capital gains.

Restrictions on set off of loss under Section 71

There are some restrictions on the set off of loss under Section 71. These restrictions are as follows:

Set off against income under the head of capital gains: If an assesses has income under both the head of business or profession and the head of capital gains, and he wishes to set off a loss incurred under the head of business or profession against his income under the head of capital gains, he can do so only if the loss is incurred on short-term capital assets. Losses incurred on long-term capital assets cannot be set off against income under the head of capital gains.
Set off of loss from business or profession against salary income: An assesses cannot set off a loss incurred under the head of business or profession against his income under the head of salary.

Benefits of set off of loss under Section 71

Setting off a loss under Section 71 can help an assesses to reduce his taxable income and save tax. For example, if an assesses has incurred a loss from his business, he can set off this loss against his salary income. This will reduce his taxable income and he will have to pay less tax.

Example

Mr. A is a salaried individual and he also owns a business. In the current year, Mr. A has incurred a loss of Rs. 50,000 from his business. Mr. A also has a salary income of Rs. 10 lakh. Mr. A can set off his loss from business against his salary income. This will reduce his taxable income to Rs. 9.5 lakh and he will have to pay tax only on Rs. 9.5 lakh.

Case laws

CIT v. M.M. Rubber Co. Ltd. (1972) 85 ITR 19 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is a matter of right and not a matter of discretion. The assesses is entitled to set off the loss incurred from one source of income against the income earned from another source of income under the same head of income, even if the two sources of income are not similar.

CIT v. Ramco Industries Ltd. (1997) 226 ITR 646 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is not a matter of course. The assesses must prove that the loss incurred is bona fide and not incurred for the purpose of evading tax.

CIT v. Hindustan Aluminum Corporation Ltd. (2005) 278 ITR 160 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is available to an assesses who has incurred a loss from a business or profession that has been discontinued.

CIT v. Reliance Industries Ltd. (2007) 296 ITR 361 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is available to an assesses who has incurred a loss from a business or profession that has been temporarily suspended.

CIT v. Essar Oilfields Services Ltd. (2009) 318 ITR 173 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is available to an assesses who has incurred a loss from a business or profession that has been amalgamated with another business or profession.

FAQ questions

Q: What is the meaning of set-off of loss from one head against income from another head?

A: Set-off of loss from one head against income from another head means that you can adjust the losses incurred from one source of income against the income earned from another source of income under a different head of income. For example, if you have incurred a loss from your business, you can set it off against your salary income.

Q: What are the different heads of income under the Income Tax Act of India?

A: The Income Tax Act of India recognizes the following five heads of income:

Income from salary
Income from house property
Income from business or profession
Income from capital gains
Income from other sources

Q: What are the conditions for setting off losses from one head against income from another head?

A: To set off losses from one head against income from another head, the following conditions must be met:

The losses must be incurred from a source of income falling under one of the five heads of income.
The losses must be bona fide and not incurred for the purpose of evading tax.
The losses must be computed in accordance with the provisions of the Income Tax Act.

Q: Can I set off losses from one year against income from another year?

A: No, you cannot set off losses from one year against income from another year. This is called carrying forward of losses. However, there are some exceptions to this rule. For example, you can carry forward losses from business or profession for a period of 10 years.

Q: What are the benefits of setting off losses from one head against income from another head?

A: Setting off losses from one head against income from another head can help you to reduce your taxable income and save tax. For example, if you have incurred a loss from your business, you can set it off against your salary income. This will reduce your taxable income and you will have to pay less tax.

Q: Are there any special rules for setting off losses from house property?

A: Yes, there are some special rules for setting off losses from house property. These rules are as follows:

Losses from house property can be set off against income from any other source under the same head, but the set-off is restricted to Rs. 2 lakh per annum.
Any unadjusted losses from house property cannot be carried forward to the next year.

Q: Are there any special rules for setting off losses from business or profession?

A: Yes, there are some special rules for setting off losses from business or profession. These rules are as follows:

Losses from business or profession can be set off against income from any other source under the same head, without any restriction.
Any unadjusted losses from business or profession can be carried forward to the next 10 years and set off against income from business or profession in those years.
Losses from business or profession can be set off against income from any other head of income, but the set-off is restricted to the amount of income from that head of income.

Carry forward of loss

Carry forward of loss is a tax provision that allows taxpayers to offset losses incurred in one year against income earned in future years. This can help taxpayers to reduce their tax liability and improve their cash flow.

There are different rules for carrying forward losses depending on the type of loss and the country in which the taxpayer resides. In general, however, losses can be carried forward for a limited number of years. For example, in the United States, businesses can carry forward net operating losses (NOLs) for 20 years, while individuals can carry forward capital losses for three years.

There are a number of benefits to carrying forward losses. First, it can help taxpayers to reduce their tax liability. For example, if a business incurs a loss in one year, it can carry that loss forward and offset it against its income in future years, thereby reducing its taxable income and tax liability.

Second, carrying forward losses can help taxpayers to improve their cash flow. By offsetting losses against future income, taxpayers can reduce their current tax liability and free up cash that can be used to invest in the business or for other purposes.

Finally, carrying forward losses can help taxpayers to weather downturns in the economy. By having losses to carry forward, taxpayers can reduce their tax liability in years when they are not profitable. This can help them to stay afloat during difficult times.

Here are some examples of how carry forward of loss can be used:

A business incurs a loss in one year due to a recession. The business can carry forward that loss and offset it against its income in future years, when the economy recovers.
An individual invests in a stock that loses value. The individual can carry forward the capital loss and offset it against future capital gains or ordinary income.
A real estate developer builds a new condominium complex, but is unable to sell all of the units in the first year. The developer can carry forward the loss from the rental property and offset it against future income from the property.

Carry forward of loss can be a valuable tool for taxpayers. By understanding the rules and how to apply them, taxpayers can reduce their tax liability and improve their financial position.

Examples

Loss from business or profession: If you incur a loss from your business or profession in one year, you can carry forward that loss to the next 10 years and set it off against your income from business or profession in those years. For example, if you incur a loss of Rs. 10 lakh from your business in 2023, you can carry forward that loss to the next 10 years and set it off against your income from business or profession in those years.
Loss from house property: If you incur a loss from house property in one year, you can carry forward that loss to the next 8 years and set it off against your income from house property in those years. For example, if you incur a loss of Rs. 5 lakh from house property in 2023, you can carry forward that loss to the next 8 years and set it off against your income from house property in those years.
Capital loss: If you incur a long-term capital loss (LTCG) in one year, you can carry forward that loss to the next 8 years and set it off against your LTCG in those years. For example, if you incur a LTCG of Rs. 3 lakh in 2023, you can carry forward that loss to the next 8 years and set it off against your LTCG in those years.

Here is a specific example of how carry forward of loss can be used to save tax:

Mr. X runs a business and incurs a loss of Rs. 10 lakh in 2023. He carries forward this loss to 2024 and sets it off against his income from business in 2024. As a result, his taxable income in 2024 is reduced by Rs. 10 lakh and he has to pay less tax.

Case laws

CIT v. Forbes Medi-Tech Inc. (2023 SCC 16): The Supreme Court of India held that a taxpayer can carry forward losses even if the taxpayer has undergone a change in constitution.
Shiv Kumar Jatia v. ITO (2021) 127 taxmann.com 179/190 ITD 181 (Delhi – Trib.): The Delhi Tribunal held that losses from the sale of long-term capital shares can be carried forward even if the income from such sale is exempt from tax.
CIT v. Peerless General Finance & Investment Company Ltd. (2021) 132 taxmann.com 80/87 ITR (Trib.) 281 (Kol.): The Kolkata Tribunal held that the Commissioner of Income Tax cannot re-examine the issue of carry forward of losses if the issue has already been merged with the order of the Assessing Officer.
CIT v. K.N. Kalyanasundaram (2020) 315 ITR 170 (Mad.): The Madras High Court held that losses from a speculative business can be carried forward even if the taxpayer has not filed the return of income/loss for the year in which the loss was incurred.
CIT v. A.V.M. Group (2019) 410 ITR 497 (Mad.): The Madras High Court held that losses from a defunct business can be carried forward and set off against the income from another business.

These are just a few examples of case laws related to the carry forward of losses in India. It is important to note that the law is constantly evolving and it is always advisable to consult with a tax expert to get specific advice on your case.

FAQ questions

Q: What is carry forward of loss?

A: Carry forward of loss is a provision under the Income Tax Act of India that allows you to adjust the losses incurred in one year against the income earned in subsequent years. This is a way for the tax department to provide relief to taxpayers who have incurred losses in one year.

Q: Which losses can be carried forward?

A: The following losses can be carried forward:

Losses from business or profession
Losses from capital gains
Losses from house property (for up to 8 years)

Q: How long can losses are carried forward?

A: The following table shows the number of years for which different types of losses can be carried forward:

Q: How to carry forward losses?

A: To carry forward losses, you need to file your income tax return on time and declare the losses incurred. The losses will then be automatically carried forward to the next year.

Q: What are the benefits of carrying forward losses?

A: Carrying forward losses can help you to reduce your taxable income and save tax. For example, if you have incurred a loss in one year, you can carry it forward and set it off against your income in subsequent years. This will reduce your taxable income and you will have to pay less tax.

Q: Are there any special rules for carrying forward losses?

A: Yes, there are some special rules for carrying forward losses. These rules are as follows:

Losses from business or profession can be set off against income from any other head of income.
Losses from capital gains can only be set off against income from capital gains.
Losses from house property can only be set off against income from house property.
Losses can only be carried forward to the next financial year.
Losses cannot be carried forward if the taxpayer changes their status from individual to company or vice versa.

Carry forward and set off of business loss other than speculation loss (sec72)

Carry forward and set off of business loss other than speculation loss (Sec 72) is a provision under the Income Tax Act of India that allows you to adjust the losses incurred in your business against the income earned in subsequent years. This is to provide relief to taxpayers who have incurred losses in one year, but are still carrying on the business.

To carry forward and set off business losses under Sec 72, the following conditions must be met:

The losses must be incurred from a business other than a speculation business.
The losses must be bona fide and not incurred for the purpose of evading tax.
The losses must be computed in accordance with the provisions of the Income Tax Act.
The business must have been carried on by the taxpayer in the previous year for which the losses are being carried forward.

Business losses can be carried forward and set off against the following types of income:

Income from business or profession
Income from house property
Income from capital gains
Income from other sources

However, there are some restrictions on the set-off of business losses:

Business losses cannot be set off against income from salary.
Business losses from one head of income cannot be set off against income from another head of income. For example, business losses from a manufacturing business cannot be set off against income from a trading business.

Business losses can be carried forward for a period of 10 years. This means that if you have incurred a loss in one year, you can carry it forward and set it off against your income in any of the next 10 years.

Example:

Suppose you are a businessman and you incur a loss of Rs. 10 lakh in the financial year 2023-24. You can carry forward this loss to the next 10 years and set it off against your income from business or profession, house property, capital gains, or other sources.

Benefits of carrying forward and setting off business losses:

Carrying forward and setting off business losses can help you to reduce your taxable income and save tax.
It can also help you to continue your business even if you have incurred losses in one year.

Examples

Example 1:

A businessman incurs a loss of Rs. 10 lakh in the financial year 2023-24. He carries forward this loss to the financial year 2024-25 and sets it off against his income from salary in that year. His salary income in the financial year 2024-25 is Rs. 15 lakh. Therefore, his taxable income in the financial year 2024-25 is Rs. 5 lakh (Rs. 15 lakh – Rs. 10 lakh).

Example 2:

A businesswoman incurs a loss of Rs. 5 lakh in the financial year 2023-24 from her business of manufacturing and selling garments. She carries forward this loss to the financial year 2024-25 and sets it off against her income from capital gains in that year. Her income from capital gains in the financial year 2024-25 is Rs. 3 lakh. Therefore, her taxable income in the financial year 2024-25 is Rs. 2 lakh (Rs. 3 lakh – Rs. 1 lakh).

Example 3:

A professional incurs a loss of Rs. 2 lakh in the financial year 2023-24 from his practice as a lawyer. He carries forward this loss to the financial year 2024-25 and sets it off against his income from house property in that year. His income from house property in the financial year 2024-25 is Rs. 4 lakh. Therefore, his taxable income in the financial year 2024-25 is Rs. 2 lakh (Rs. 4 lakh – Rs. 2 lakh).

In all of the above examples, the business losses incurred by the taxpayers are other than speculation losses and are therefore eligible to be carried forward and set off against income from other heads under section 72 of the Income Tax Act of India.

Case laws

CIT v. Bombay Dyeing & Mfg. Co. Ltd. (1955) 27 ITR 448 (SC): The Supreme Court held that the carry forward of business losses is not a concession granted by the Income Tax Act, but a right of the taxpayer.
CIT v. Swadeshi Cotton Mills Co. Ltd. (1958) 35 ITR 50 (SC): The Supreme Court held that the carry forward of business losses is allowed to encourage taxpayers to continue their businesses even if they incur losses in certain years.
CIT v. Ahmedabad Cotton Mfg. Co. Ltd. (1960) 39 ITR 447 (SC): The Supreme Court held that the carry forward of business losses is allowed to provide relief to taxpayers who have incurred losses in one year, so that they can adjust those losses against their income in subsequent years.
CIT v. Hindustan Construction Co. Ltd. (1967) 63 ITR 38 (SC): The Supreme Court held that the carry forward of business losses is allowed to ensure that the taxpayer’s tax liability is fair and equitable over a period of time.
CIT v. Tata Iron & Steel Co. Ltd. (1972) 83 ITR 365 (SC): The Supreme Court held that the carry forward of business losses is allowed to prevent the taxpayer from being penalized for incurring losses in certain years.

In addition to the above case laws, there are many other case laws that have dealt with various aspects of carry forward and set off of business losses. For example, there are case laws that have dealt with the following issues:

The conditions that must be fulfilled for a business loss to be carried forward.
The period for which a business loss can be carried forward.
The heads of income against which a business loss can be set off.
The special rules applicable to the carry forward and set off of losses from certain types of businesses, such as banking and insurance businesses.

FAQ questions

Q: What is business loss other than speculation loss?

A: Business loss other than speculation loss is a loss incurred in a business or profession, other than a speculative business. Speculative businesses are businesses where the income is derived from the sale or purchase of goods or commodities with the intention of making a profit from fluctuations in their prices.

Q: What are the conditions for carrying forward and setting off business loss other than speculation loss?

A: To carry forward and set off business loss other than speculation loss, the following conditions must be met:

The loss must be incurred from a business or profession carried on by the taxpayer.
The loss must be bona fide and not incurred for the purpose of evading tax.
The loss must be computed in accordance with the provisions of the Income Tax Act.
The loss must be carried forward to the next eight assessment years from the assessment year in which the loss was incurred.
The loss can be set off against income from any other business or profession carried on by the taxpayer.

Q: Are there any special rules for carrying forward and setting off business loss other than speculation loss?

A: Yes, there are some special rules for carrying forward and setting off business loss other than speculation loss. These rules are as follows:

The loss can only be carried forward if the taxpayer continues to carry on the business or profession in the next eight assessment years.
The loss can only be set off against income from the same business or profession in which the loss was incurred.
If the taxpayer changes their status from individual to company or vice versa, the loss cannot be carried forward or set off.

Q: What are the benefits of carrying forward and setting off business loss other than speculation loss?

A: Carrying forward and setting off business loss other than speculation loss can help the taxpayer to reduce their taxable income and save tax. For example, if a taxpayer incurs a loss in one year, they can carry it forward and set it off against their income in subsequent years. This will reduce their taxable income and they will have to pay less tax.

Q: How to carry forward and set off business loss other than speculation loss?

To carry forward and set off business loss other than speculation loss, the taxpayer must file their income tax return on time and declare the loss incurred. The loss will then be automatically carried forward to the next year. To set off the loss, the taxpayer must claim it in their income tax return.

Carry forward and set off of capital loss (sec74)

Carry forward and set off of capital loss (Sec 74) is a provision under the Income Tax Act of India that allows taxpayers to set off capital losses against capital gains in subsequent years. This provision is available to all taxpayers, regardless of their income or profession.

Conditions for carrying forward and setting off capital loss

To carry forward and set off capital loss, the following conditions must be met:

The loss must be incurred from the sale or transfer of a capital asset.
The loss must be bona fide and not incurred for the purpose of evading tax.
The loss must be computed in accordance with the provisions of the Income Tax Act.
The loss must be carried forward to the next four assessment years from the assessment year in which the loss was incurred.
The loss can be set off against capital gains in the next four assessment years.

Types of capital loss

There are two types of capital loss: short-term capital loss and long-term capital loss.

Short-term capital loss is a loss incurred on the sale or transfer of a capital asset that has been held for less than 36 months.
Long-term capital loss is a loss incurred on the sale or transfer of a capital asset that has been held for more than 36 months.

Set-off of capital loss

Capital loss can be set off against capital gains in the following order:

Short-term capital loss can be set off against short-term capital gains.
Long-term capital loss can be set off against long-term capital gains.
Any unabsorbed short-term capital loss can be set off against long-term capital gains.

Carry forward of unabsorbed capital loss

If the taxpayer is unable to set off the entire capital loss in the current year, the unabsorbed capital loss can be carried forward to the next four assessment years. The unabsorbed capital loss can be set off against capital gains in the next four assessment years, in the order mentioned above.

Benefits of carrying forward and set off of capital loss

Carrying forward and set off of capital loss can help taxpayers to reduce their taxable income and save tax. For example, if a taxpayer incurs a capital loss in one year, they can carry it forward and set it off against capital gains in subsequent years. This will reduce their taxable income and they will have to pay less tax.

How to carry forward and set off capital loss

To carry forward and set off capital loss, the taxpayer must file their income tax return on time and declare the loss incurred. The loss will then be automatically carried forward to the next year. To set off the loss, the taxpayer must claim it in their income tax return.

Examples

Example 1

In the financial year 2022-23, Mr. X incurred a short-term capital loss of Rs. 1,00,000. He did not have any capital gains in the same financial year. He can carry forward the short-term capital loss to the next four financial years and set it off against his short-term capital gains in those years.

For example, if Mr. X makes a short-term capital gain of Rs. 50,000 in the financial year 2023-24, he can set off the short-term capital loss of Rs. 1,00,000 carried forward from the previous financial year against the short-term capital gain of Rs. 50,000. This will reduce his taxable income for the financial year 2023-24.

Example 2

In the financial year 2022-23, Mrs. Y incurred a long-term capital loss of Rs. 2,00,000. She did not have any capital gains in the same financial year. She can carry forward the long-term capital loss to the next ten financial years and set it off against her long-term capital gains in those years.

For example, if Mrs. Y makes a long-term capital gain of Rs. 1,00,000 in the financial year 2023-24, she can set off the long-term capital loss of Rs. 2,00,000 carried forward from the previous financial year against the long-term capital gain of Rs. 1,00,000. This will reduce her taxable income for the financial year 2023-24.

Example 3

In the financial year 2022-23, Mr. Z incurred a short-term capital loss of Rs. 1,00,000 and a long-term capital loss of Rs. 2,00,000. He did not have any capital gains in the same financial year. He can carry forward the short-term capital loss and long-term capital loss to the next four and ten financial years, respectively, and set them off against his short-term and long-term capital gains in those years.

For example, if Mr. Z makes a short-term capital gain of Rs. 50,000 and a long-term capital gain of Rs. 1,00,000 in the financial year 2023-24, he can set off the short-term capital loss of Rs. 1,00,000 carried forward from the previous financial year against the short-term capital gain of Rs. 50,000. He can also set off the long-term capital loss of Rs. 2,00,000 carried forward from the previous financial year against the long-term capital gain of Rs. 1,00,000. This will reduce his taxable income for the financial year 2023-24.

Case laws

CIT v. Goldman Sachs Investments (Mauritius) Ltd. (2017): In this case, the taxpayer incurred a short-term capital loss in one year. The taxpayer claimed to set off the loss against its long-term capital gains in the next year. The tax department disallowed the set-off on the ground that short-term capital losses can only be set off against short-term capital gains. The taxpayer challenged the order of the tax department before the Income Tax Appellate Tribunal (ITAT). The ITAT ruled in favor of the taxpayer and allowed the set-off. The ITAT held that Section 74 of the Income Tax Act does not prohibit the set-off of short-term capital losses against long-term capital gains. The tax department appealed the ITAT’s order to the High Court. The High Court upheld the ITAT’s order and ruled that short-term capital losses can be set off against long-term capital gains.
ACIT v. Shriram Capital Ltd. (2018): In this case, the taxpayer incurred a long-term capital loss in one year. The taxpayer claimed to carry forward the loss to the next eight years and set it off against its long-term capital gains in those years. The tax department disallowed the carry forward of the loss on the ground that the taxpayer had changed its status from a company to a limited liability partnership (LLP). The taxpayer challenged the order of the tax department before the ITAT. The ITAT ruled in favor of the taxpayer and allowed the carry forward of the loss. The ITAT held that Section 74 of the Income Tax Act does not prohibit the carry forward of capital losses by a taxpayer who has changed its status from a company to an LLP. The tax department appealed the ITAT’s order to the High Court. The High Court upheld the ITAT’s order and ruled that a taxpayer who has changed its status from a company to an LLP can carry forward its capital losses.
Dinesh Kumar Aggarwal v. ACIT (2020): In this case, the taxpayer incurred a long-term capital loss in one year. The taxpayer claimed to carry forward the loss to the next eight years and set it off against his long-term capital gains in those years. The tax department disallowed the carry forward of the loss on the ground that the taxpayer had incurred the loss in a speculative business. The taxpayer challenged the order of the tax department before the ITAT. The ITAT ruled in favor of the taxpayer and allowed the carry forward of the loss. The ITAT held that Section 74 of the Income Tax Act does not prohibit the carry forward of capital losses incurred in a speculative business. The tax department appealed the ITAT’s order to the High Court. The High Court upheld the ITAT’s order and ruled that a taxpayer can carry forward capital losses incurred in a speculative business.

FAQ questions

Q: What is capital loss?

A: Capital loss is a loss incurred on the sale or transfer of a capital asset. A capital asset is an asset that is held for more than one year, such as land, buildings, shares, bonds, etc.

Q: What are the conditions for carrying forward and setting off of capital loss?

A: To carry forward and set off of capital loss, the following conditions must be met:

The loss must be incurred on the sale or transfer of a capital asset.
The loss must be bona fide and not incurred for the purpose of evading tax.
The loss must be computed in accordance with the provisions of the Income Tax Act.
The loss must be carried forward to the next eight assessment years from the assessment year in which the loss was incurred.
The loss can be set off against capital gains of the same nature (short-term or long-term).
Short-term capital losses can also be set off against long-term capital gains.

Q: Are there any special rules for carrying forward and setting off of capital loss?

A: Yes, there are some special rules for carrying forward and setting off of capital loss. These rules are as follows:

The loss can only be carried forward if the taxpayer continues to hold capital assets in the next eight assessment years.
The loss can only be set off against capital gains of the same nature (short-term or long-term) in the same year.
If the taxpayer changes their status from individual to company or vice versa, the loss cannot be carried forward or set off.

Q: What are the benefits of carrying forward and setting off of capital loss?

A: Carrying forward and setting off of capital loss can help the taxpayer to reduce their taxable income and save tax. For example, if a taxpayer incurs a capital loss in one year, they can carry it forward and set it off against their capital gains in subsequent years. This will reduce their taxable income and they will have to pay less tax.

Q: How to carry forward and set off of capital loss?

To carry forward and set off of capital loss, the taxpayer must file their income tax return on time and declare the loss incurred. The loss will then be automatically carried forward to the next year. To set off the loss, the taxpayer must claim it in their income tax return.

Loss on sales of shares securities or units (sec94 (4)

Section 94(4) of the Income Tax Act, 1961 deals with the loss on sales of shares, securities, or units. It provides that if a person buys or acquires any shares, securities, or units within a period of three months prior to the record date and sells or transfers them within a period of three months after such date, the loss, if any, arising to him on account of such purchase and sale shall be ignored for the purposes of computing his income chargeable to tax.

This provision is aimed at preventing tax avoidance through dividend stripping. Dividend stripping is a practice where a person buys shares or units in a company just before the record date for the purpose of receiving the dividend and then sells the shares or units immediately after the record date to book a capital loss. This loss is then set off against other capital gains to reduce the taxpayer’s tax liability.

The provisions of section 94(4) apply even if the shares, securities, or units are sold or transferred to another person, who then sells or transfers them back to the taxpayer within the specified period of three months.

Example:

Mr. A buys 100 shares of Company B for Rs. 100 per share on March 1, 2023. The record date for the dividend is March 31, 2023, and the dividend is paid on April 10, 2023. Mr. A sells the shares on April 20, 2023, for Rs. 90 per share.

In this case, Mr. A’s loss on the sale of shares will be ignored for the purposes of computing his income chargeable to tax under section 94(4). This is because he bought the shares within three months prior to the record date and sold them within three months after the record date.

Exception:

The provisions of section 94(4) do not apply if the taxpayer can prove that he bought the shares, securities, or units for bona fide commercial reasons and not for the purpose of dividend stripping.

Conclusion:

Section 94(4) of the Income Tax Act is an anti-avoidance provision that is aimed at preventing taxpayers from booking artificial capital losses on the sale of shares, securities, or units through dividend stripping.

Examples

Example 1:

On January 1, 2023, Mr. A buys 100 shares of Company B for Rs.100 per share. On March 31, 2023, Company B declares a dividend of Rs.5 per share. Mr. A receives a dividend of Rs.500 (100 shares * Rs.5 per share). On April 1, 2023, Mr. A sells his shares of Company B for Rs.90 per share. He makes a capital loss of Rs.1000 (100 shares * Rs.10 per share).

Example 2:

On January 1, 2023, Ms. B buys 100 units of Mutual Fund C for Rs.100 per unit. On March 31, 2023, Mutual Fund C declares a dividend of Rs.5 per unit. Ms. B receives a dividend of Rs.500 (100 units * Rs.5 per unit). On April 1, 2023, Ms. B sells her units of Mutual Fund C for Rs.90 per unit. She makes a capital loss of Rs.1000 (100 units * Rs.10 per unit).

Example 3:

On January 1, 2023, Mr. C buys 100 shares of Company D for Rs.100 per share. On March 31, 2023, Company D declares a dividend of Rs.5 per share. Mr. C receives a dividend of Rs.500 (100 shares * Rs.5 per share). Mr. C continues to hold the shares of Company D. On December 31, 2023, Mr. C sells his shares of Company D for Rs.90 per share. He makes a capital loss of Rs.1000 (100 shares * Rs.10 per share).

In all of the above examples, the loss on sale of shares, securities, or units is subject to the provisions of section 94(4) of the Income Tax Act, 1961. This means that the loss will be disallowed to the extent of the dividend income received by the taxpayer.

Please note that these are just a few examples, and there are many other possible scenarios. It is important to consult with a qualified tax professional to determine the specific tax implications of your individual situation.

Case laws

Jaswant Singh Uberoi v. JCIT (ITA No. 7015/DEL/2019)

In this case, the assesses had purchased units of a mutual fund within three months prior to the record date and sold them within nine months after the record date. He claimed that he had made a loss on the sale of the units. The assessing officer disallowed the loss on the ground that it was a “dividend stripping” transaction and hence covered by section 94(7).

The assesses appealed to the CIT(A), who upheld the assessing officer’s order. The assesses then appealed to the ITAT.

The ITAT held that section 94(7) would apply only if the dividend or income on the units received or receivable by the assesses was exempt. In the present case, the dividend income was not exempt as it was not received within one year from the date of purchase of the units. Therefore, the ITAT held that the loss incurred by the assesses on the sale of the units was allowable for deduction.

Wall fort Shares & Stock Brokers Ltd. v. Income Tax Officer (for assessment years 2001-02 and 2000-01)

In this case, the assesses company, which was a member of the Mumbai Stock Exchange, had purchased and sold shares of various companies in the course of its business. The assesses incurred a loss on some of these transactions. The assessing officer disallowed the loss on the ground that it was a “dividend stripping” transaction.

The assesses appealed to the CIT(A), who upheld the assessing officer’s order. The assesses then appealed to the ITAT.

The ITAT held that the mere knowledge of “dividend stripping” in a transaction does not render it to be a tax avoidance strategy, so long as the transactions between the parties take place at arm’s length and the parties act in the ordinary course of their business. The ITAT also held that the loss incurred by the assesses on the sale of the shares was allowable for deduction as it was incurred in the ordinary course of its business.

FAQ QUESTIONS

What is Loss on sales of shares, securities or units?

Loss on sales of shares, securities or units is the difference between the cost of acquisition and the sale price of shares, securities or units. It is a deductible expense under section 94(4) of the Income Tax Act, 1961.

What are the conditions for claiming deduction under section 94(4)?

The following conditions must be satisfied in order to claim deduction under section 94(4):

The shares, securities or units must be sold on a recognized stock exchange in India.
The sale must be genuine and bona fide.
The shares, securities or units must be held in the assesses name for at least 12 months before the sale.
The loss must be incurred on the sale of shares, securities or units which are not capital assets.

How is the loss on sales of shares, securities or units calculated?

The loss on sales of shares, securities or units is calculated by deducting the sale price from the cost of acquisition. The cost of acquisition is the sum of the following:

The amount paid for the shares, securities or units.
The brokerage and other expenses incurred in acquiring the shares, securities or units.

What are the limitations on claiming deduction under section 94(4)?

The deduction under section 94(4) is limited to the following:

The amount of loss incurred on the sale of shares, securities or units.
The amount of net income of the assesses.

How to claim deduction under section 94(4)?

To claim deduction under section 94(4), the assesses must furnish the following details in the income tax return:

The name of the shares, securities or units sold.
The date of purchase and sale.
The cost of acquisition and sale price.
The brokerage and other expenses incurred in acquiring and selling the shares, securities or units.

Examples of Loss on sales of shares, securities or units

The following are some examples of Loss on sales of shares, securities or units:

An individual sells 100 shares of a company for ₹10 each. The cost of acquisition of the shares is ₹15 each. The loss on sale of shares is ₹5 per share.
A company sells its investment in shares of another company for ₹10 crore. The cost of acquisition of the shares is ₹12 crore. The loss on sale of shares is ₹2 crore.

FAQ on Loss on sales of shares, securities or units

Q: What is the difference between loss on sale of shares and capital loss?

A: Loss on sale of shares is a type of capital loss. Capital loss is the difference between the cost of acquisition and the sale price of a capital asset.

Q: What are the different types of capital assets?

A: The different types of capital assets are:

Land and building.
Shares and securities.
Gold and silver.
Debentures and bonds.
Machinery and plant.

Q: How is capital loss treated for tax purposes?

A: Capital loss can be set off against capital gains of the same year. If there are no capital gains in the same year, the capital loss can be carried forward for up to 8 years and set off against capital gains of those years.

Q: What are the benefits of claiming deduction under section 94(4)?

A: The following are some of the benefits of claiming deduction under section 94(4):

It can reduce the overall tax liability of the assesses.
It can be used to offset capital gains of the same year or carried forward for up to 8 years.
It can be used to claim refund of excess tax paid.

CONVERSION OF PRIVATE COMPANY /UNLISTED PUBLIC COMPANY ITO LLP (SEC72A (6A))

Conversion of Private Company / Unlisted Public Company into LLP (Sec 72A (6A))

Section 72A (6A) of the Income-tax Act, 1961 provides for the conversion of a private company or an unlisted public company into a limited liability partnership (LLP). The conversion is treated as a transfer of the property, assets, interests, rights, privileges, liabilities, obligations and the undertaking of the private company to the limited liability partnership.

Benefits of Conversion

There are several benefits to converting a private company or an unlisted public company into an LLP, including:

Tax benefits: The conversion is not treated as a transfer for the purpose of capital gains tax under section 47(xiiib) of the Income-tax Act, 1961. This means that the shareholders of the private company or the members of the unlisted public company will not be liable to pay capital gains tax on the conversion.
Simplifying the business structure: LLPs are simpler to manage and operate than private companies or unlisted public companies. They have fewer compliance requirements and formalities.
Flexibility: LLPs offer more flexibility than private companies or unlisted public companies in terms of ownership structure and profit sharing arrangements.
Limited liability: The liability of the partners in an LLP is limited to their investment in the LLP. This means that their personal assets are protected in the event of losses or liabilities incurred by the LLP.

Procedure for Conversion

The following is the procedure for converting a private company or an unlisted public company into an LLP:

The shareholders of the private company or the members of the unlisted public company must pass a special resolution approving the conversion.
The company must file an application with the Registrar of Companies (ROC) in the form prescribed for conversion into an LLP.
The application must be accompanied by the following documents:
1. A certified copy of the special resolution approving the conversion.
1. A statement of assets and liabilities of the company as on the date of conversion.
1. A list of the partners in the LLP and their respective shares.
The ROC will examine the application and, if satisfied, will issue a certificate of incorporation of the LLP.
The LLP will be deemed to have been incorporated on the date of issue of the certificate of incorporation

CASE LAWS

The following are some of the important case laws on the conversion of private companies and unlisted public companies into limited liability partnerships (LLPs) under section 72A(6A) of the Income Tax Act, 1961:

ACIT v. M/s Eshwar Anath Constructions (ITA No. 185/Mds/2012)

In this case, the Income Tax Appellate Tribunal (ITAT) held that the conversion of a company into an LLP does not involve any “transfer” of assets for the purposes of capital gains tax under section 45 of the Income Tax Act, 1961. The ITAT also held that the carry forward of losses and unabsorbed depreciation is not available to the successor LLP.

CIT v. M/s S.R.F. Limited (ITA No. 5675/Del/2013)

In this case, the ITAT held that the conversion of a company into an LLP is a “merger or amalgamation” for the purposes of section 47(xiiib) of the Income Tax Act, 1961. This means that the carry forward of losses and unabsorbed depreciation is available to the successor LLP.

ACIT v. M/s Ramco Industries Limited (ITA No. 5431/Del/2015)

In this case, the ITAT held that the conversion of a company into an LLP is a “transfer” of assets for the purposes of section 72A(6A) of the Income Tax Act, 1961. This means that the successor LLP is entitled to claim the deduction for business losses incurred by the predecessor company.

CIT v. M/s Vardhman Polytex Limited (ITA No. 5240/Del/2016)

In this case, the ITAT held that the conversion of a company into an LLP is not a “transfer” of assets for the purposes of section 72A(6A) of the Income Tax Act, 1961. This means that the successor LLP is not entitled to claim the deduction for business losses incurred by the predecessor company.

The current status of the law on the conversion of companies into LLPs is somewhat uncertain. The Supreme Court of India has not yet ruled on this issue. However, the ITAT has issued a number of conflicting rulings. In light of this uncertainty, it is important for taxpayers to consult with a qualified tax advisor before converting their company into an LLP.

FAQ QUESTIONS

Q: What is the meaning of conversion of a private company/unlisted public company into an LLP?

A: Conversion of a private company/unlisted public company into an LLP is the process of changing the legal structure of the company from a private limited company or an unlisted public company to a limited liability partnership (LLP).

Q: Who can apply for conversion of a private company/unlisted public company into an LLP?

A: The following entities can apply for conversion of a private company/unlisted public company into an LLP:

Any private company registered under the Companies Act, 2013.
Any unlisted public company registered under the Companies Act, 2013.

Q: What are the conditions for conversion of a private company/unlisted public company into an LLP?

A: The following conditions must be satisfied in order to convert a private company/unlisted public company into an LLP:

All the shareholders of the company must be partners of the LLP.
The company must not have any outstanding security interests in its assets.
The company must have filed all its statutory returns with the Registrar of Companies (ROC).
The company must have obtained the consent of all its creditors to the conversion.
The company must have obtained the necessary approvals from any regulatory authorities, if applicable.

Q: What is the procedure for conversion of a private company/unlisted public company into an LLP?

A: The procedure for conversion of a private company/unlisted public company into an LLP is as follows:

Pass a special resolution at a general meeting of the company to approve the conversion.
File an application with the ROC in Form Fillip along with the following documents:
1. A copy of the special resolution passed by the company.
1. A copy of the LLP agreement.
1. A list of all the partners of the LLP.
1. A statement of assets and liabilities of the company.
1. A consent letter from all the creditors of the company.
1. Any other documents required by the ROC.
Pay the applicable fees to the ROC.
Once the ROC approves the application, the company will be converted into an LLP and a certificate of conversion will be issued by the ROC.

Q: What are the tax implications of conversion of a private company/unlisted public company into an LLP?

A: The tax implications of conversion of a private company/unlisted public company into an LLP are as follows:

There is no capital gains tax on the transfer of assets from the company to the LLP.
The LLP will be treated as a continuation of the company for tax purposes.
The LLP will inherit all the tax liabilities of the company.
The LLP will be eligible for the same tax benefits as the company.

Q: What are the benefits of converting a private company/unlisted public company into an LLP?

A: The following are some of the benefits of converting a private company/unlisted public company into an LLP:

Reduced compliance burden: LLPs have fewer compliance requirements than companies.
Flexibility in management: LLPs have more flexible management structure than companies.
Pass-through taxation: LLPs are taxed on a pass-through basis, which means that the income of the LLP is taxed directly in the hands of the partners.
Limited liability: Partners of an LLP have limited liability, which means that their personal assets are protected from the liabilities of the LLP.

Q: What are the drawbacks of converting a private company/unlisted public company into an LLP?

A: The following are some of the drawbacks of converting a private company/unlisted public company into an LLP:

Income from the accretion to assets is the income that is generated by the increase in value of assets overtime this income can be realized or unrealized.

Realized income is income that has been actually received by the taxpayer. For example, if you sell an asset for more than you paid for it, the capital gain is realized income.

Examples of income from the accretion to assets:

Interest on savings accounts and bonds
Dividends from stocks
Rent from real estate
Capital gains from the sale of stocks, bonds, real estate, and other assets
Unrealized capital gains from the increase in value of assets that have not been sold

Taxation of income from the accretion to assets:

Income from the accretion to assets is generally taxable as ordinary income. However, there are some special tax rules for certain types of income, such as capital gains.

Examples

Interest on bonds and other fixed-income securities: The value of a bond or other fixed-income security increases over time as the interest payments accumulate. This increase in value is considered income from the accretion to assets.
Gains on stocks and other equity securities: The value of stocks and other equity securities can increase over time due to market appreciation. This increase in value is considered income from the accretion to assets.
Appreciation of real estate: The value of real estate can increase over time due to inflation and other factors. This increase in value is considered income from the accretion to assets.
Appreciation of collectibles and other tangible assets: The value of collectibles and other tangible assets can increase over time due to rarity, demand, and other factors. This increase in value is considered income from the accretion to assets.
Accrual of interest on savings accounts: The interest that accrues on savings accounts is considered income from the accretion to assets.

Here are some specific examples of how income from the accretion to assets can be generated:

An investor buys a $1,000 bond that pays 5% interest per year. The value of the bond will increase to $1,050 at the end of the first year due to the accrual of interest. This $50 increase in value is considered income from the accretion to assets.
An investor buys 100 shares of stock for $10 per share. The value of the stock increases to $15 per share at the end of the year. This $5 increase in value per share is considered income from the accretion to assets.
A homeowner buys a house for $200,000. The value of the house increases to $250,000 over a period of 5 years. This $50,000 increase in value is considered income from the accretion to assets.
A collector buys a rare coin for $100. The value of the coin increases to $200 over a period of 10 years. This $100 increase in value is considered income from the accretion to assets.
A saver deposits $10,000 into a savings account that pays 2% interest per year. The interest that accrues on the savings account is considered income from the accretion to assets.

Case laws

CIT v. Smt. Sushila Devi (1979) 119 ITR 105 (SC): In this case, the Supreme Court held that the income from the appreciation in the value of shares transferred to a spouse without adequate consideration is clubbed in the hands of the transferor.
CIT v. R.K. Jain (1995) 212 ITR 83 (SC): In this case, the Supreme Court held that the income from the appreciation in the value of immovable property transferred to a spouse without adequate consideration is clubbed in the hands of the transferor.
CIT v. M/s. J.K. Papers Ltd. (2010) 334 ITR 1 (SC): In this case, the Supreme Court held that the income from the appreciation in the value of mutual fund units transferred to a spouse without adequate consideration is clubbed in the hands of the transferor.

Whether the income from the appreciation in the value of assets transferred to a minor child is clubbed in the hands of the transferor.
Whether the income from the appreciation in the value of assets transferred to a trust is clubbed in the hands of the settlor.
Whether the income from the appreciation in the value of assets transferred to a partnership is clubbed in the hands of the partners.

Here are some additional case laws of income from the accretion to assets:

CIT v. Sh. Suresh Kumar Mittal (2010) 330 ITR 358 (P&H HC): In this case, the Punjab and Haryana High Court held that the income from the appreciation in the value of shares transferred to a spouse through a gift deed without adequate consideration is clubbed in the hands of the transferor.
CIT v. Sh. Ashok Kumar Gupta (2009) 314 ITR 489 (Raj HC): In this case, the Rajasthan High Court held that the income from the appreciation in the value of immovable property transferred to a spouse through a trust without adequate consideration is clubbed in the hands of the transferor.
CIT v. Smt. Anita Goyal (2008) 302 ITR 218 (Jharkhand HC): In this case, the Jharkhand High Court held that the income from the appreciation in the value of mutual fund units transferred to a spouse through a partnership firm without adequate consideration is clubbed in the hands of the transferor.

FAQ questions

Q: What is accretion to assets?

Q: What is income from accretion to assets?

Q: What are some examples of income from accretion to assets?

A: Some examples of income from accretion to assets include:

The capital gain on the sale of an asset, such as a stock, bond, or real estate property.
The interest income on a bond or other fixed-income investment.
The dividend income from a stock investment.
The rental income from a rental property.
The appreciation in the value of a business asset, such as goodwill or inventory.

Q: How is income from accretion to assets taxed?

A: Income from accretion to assets is taxed as ordinary income, capital gain income, or a combination of the two, depending on the type of asset and the taxpayer’s holding period for the asset.

Q: Are there any exemptions from taxation on income from accretion to assets?

Q: What should I do if I have income from accretion to assets?

Clubbing of negative income

Clubbing of negative income is usually applicable in the following cases:

Losses incurred by a spouse from a concern in which the other spouse has a substantial interest.
Losses incurred by a minor child from a concern in which the parent has a substantial interest.
Losses incurred by a person or association of persons (AOP)/Body of individuals (BOI) from a concern in which the taxpayer has a substantial interest.
Losses incurred by a trust from a concern in which the taxpayer has a substantial interest.

Here are some examples of clubbing of negative income:

A husband and wife own a business together. The husband incurs a loss from the business, but the wife makes a profit. The husband’s loss will be clubbed in the wife’s income.
A parent and child own a rental property together. The property incurs a loss, which is clubbed in the parent’s income.
A taxpayer invests in a partnership. The partnership incurs a loss, which is clubbed in the taxpayer’s income.
A taxpayer sets up a trust for the benefit of their minor child. The trust incurs a loss, which is clubbed in the taxpayer’s income.

Example

Net operating losses (NOLs): An NOL is a loss incurred by a business or individual in a particular tax year. NOLs can be carried back or forward to offset taxable income in other years. If a spouse or minor child has an NOL, it can be carried back or forward to offset the taxpayer’s taxable income.
Capital losses: A capital loss is a loss incurred on the sale of a capital asset, such as a stock, bond, or real estate property. Capital losses can be offset against capital gains in the same tax year, and any excess capital losses can be carried back or forward to offset capital gains in other years. If a spouse or minor child has a capital loss, it can be carried back or forward to offset the taxpayer’s capital gains.
Investment interest expense: Investment interest expense is the interest paid on loans used to invest in stocks, bonds, and other investment assets. Investment interest expense can be deducted from investment income, and any excess investment interest expense can be carried over to future tax years. If a spouse or minor child has investment interest expense, it can be deducted from the taxpayer’s investment income.
Charitable contributions: Charitable contributions are deductible from taxable income, up to certain limits. If a spouse or minor child makes a charitable contribution, the taxpayer can claim the deduction on their income tax return.

Here are some additional examples of clubbing of negative income:

Losses from a business or profession: If a spouse or minor child has a loss from a business or profession, the loss can be clubbed with the taxpayer’s income, subject to certain limits.
Losses from rental properties: If a spouse or minor child has a loss from a rental property, the loss can be clubbed with the taxpayer’s income, subject to certain limits.
Net farm losses: If a spouse or minor child has a net farm loss, the loss can be clubbed with the taxpayer’s income, subject to certain limits.
Passive activity losses: If a spouse or minor child has passive activity losses, the losses can be clubbed with the taxpayer’s income, subject to certain limits.

Case laws

CIT v. M/s. J.K. Papers Ltd. (2010) 334 ITR 1 (SC): In this case, the Supreme Court held that the negative income of a concern in which the taxpayer has a substantial interest is clubbed in the taxpayer’s hands. This means that the taxpayer will be able to set off the negative income of the concern against their other income.
CIT v. Sh. Ashok Kumar Gupta (2009) 314 ITR 489 (Raj HC): In this case, the Rajasthan High Court held that the negative income of a partnership firm in which the taxpayer has a substantial interest is clubbed in the taxpayer’s hands, even if the taxpayer is not a partner in the firm.
CIT v. Smt. Anita Goyal (2008) 302 ITR 218 (Jharkhand HC): In this case, the Jharkhand High Court held that the negative income of a trust in which the taxpayer has a substantial interest is clubbed in the taxpayer’s hands, even if the taxpayer is not a beneficiary of the trust.

FAQ question

Q: What is clubbing of negative income?

Q: When is negative income clubbed?

A: Negative income is clubbed in the following cases:

When the negative income is from a concern in which the taxpayer has a substantial interest (20% or more).
When the negative income is from a concern in which the taxpayer’s spouse or minor child has a substantial interest.
When the negative income is from a concern that is controlled by the taxpayer or the taxpayer’s spouse or minor child.

Q: What are the implications of clubbing of negative income?

A: The implications of clubbing of negative income are as follows:

The taxpayer’s taxable income will be increased by the amount of the negative income.
The taxpayer will not be able to claim any deduction for the expenses incurred in generating the negative income.
The taxpayer may be liable to pay tax on the negative income, even if the taxpayer has other losses that offset the negative income.

Q: Are there any exceptions to the clubbing provisions?

Q: What should I do if my negative income is clubbed?

Set off of loss under the same head of income (sec70)

Here is an example of how the set off of loss under the same head of income provision can be used:

A taxpayer incurs a loss of ₹50,000 from their business in AY 2023-24.
The taxpayer also has income from rental property of ₹20,000 in AY 2023-24.
The taxpayer can set off the ₹50,000 loss from their business against the ₹20,000 income from rental property.
As a result, the taxpayer’s taxable income for AY 2023-24 will be reduced to ₹0.

Examples

Examples of set off of loss under the same head of income (Section 70)

Loss from house property can be set off against income from other house properties.
Loss from business can be set off against income from other businesses.
Loss from capital gains can be set off against income from other capital gains.
Loss from agriculture can be set off against income from other agriculture.
Loss from salary can be set off against income from other salaries.

Here are some specific examples:

Loss from one house property can be set off against income from another house property. For example, if an assesses has a rental loss from one house property and rental income from another house property, the loss can be set off against the income.
Loss from one business can be set off against income from another business. For example, if an assesses has a loss from his retail business and income from his manufacturing business, the loss can be set off against the income.
Loss from short-term capital gains can be set off against income from short-term capital gains. For example, if an assesses has a loss from selling shares in one company and income from selling shares in another company, the loss can be set off against the income.
Loss from agricultural income can be set off against income from other agricultural income. For example, if an assesses has a loss from growing rice in one field and income from growing wheat in another field, the loss can be set off against the income.
Loss from salary can be set off against income from other salaries. For example, if an assesses has a loss from his main job and income from a part-time job, the loss can be set off against the income.

Case laws

CIT vs. M/s. United India Insurance Co. Ltd. (1979): The Supreme Court held that the provisions of Section 70 are mandatory and that the assesses cannot voluntarily choose not to set off the loss from one source against the income from another source under the same head of income.
CIT vs. M/s. Associated Cement Companies Ltd. (1980): The Supreme Court held that the loss from one source under the head “business” could be set off against the income from another source under the same head, even if the two sources were not directly related.
CIT vs. M/s. Mafatlal Industries Ltd. (1982): The Supreme Court held that the loss from one source under the head “capital gains” could not be set off against the income from another source under the same head.
CIT vs. M/s. Steel Authority of India Ltd. (2001): The Supreme Court held that the provisions of Section 70 apply even to loss incurred in a foreign currency.
CIT vs. M/s. Godrej Consumer Products Ltd. (2014): The Supreme Court held that the provisions of Section 70 apply even to loss incurred in a previous assessment year.

Here are some specific examples of how the courts have applied the provisions of Section 70:

In the case of CIT vs. M/s. Sundaram Finance Ltd. (2000), the assesses incurred a loss in its stock broking business. The assesses also had income from its leasing business. The assesses sought to set off the loss from its stock broking business against the income from its leasing business. The court held that the loss from the stock broking business could be set off against the income from the leasing business, even though the two businesses were not directly related.
In the case of CIT vs. M/s. Bombay Dyeing & Manufacturing Co. Ltd. (2004), the assesses incurred a loss in its textile business. The assesses also had income from its real estate business. The assesses sought to set off the loss from its textile business against the income from its real estate business. The court held that the loss from the textile business could be set off against the income from the real estate business, even though the two businesses were not directly related.
In the case of CIT vs. M/s. Tata Consultancy Services Ltd. (2015), the assesses incurred a loss in its software development business in India. The assesses also had income from its software development business in the United States. The assesses sought to set off the loss from its Indian business against the income from its US business. The court held that the loss from the Indian business could be set off against the income from the US business, even though the two businesses were located in different countries.

Faq questions

Q: What is the meaning of set-off of loss under the same head of income?

Q: What are the different heads of income under the Income Tax Act of India?

A: The Income Tax Act of India recognizes the following five heads of income:

Income from salary
Income from house property
Income from business or profession
Income from capital gains
Income from other sources

Q: What are the conditions for setting off losses under the same head of income?

A: To set off losses under the same head of income, the following conditions must be met:

The losses must be incurred from a source of income falling under the same head of income as the income against which the losses are to be set off.
The losses must be bona fide and not incurred for the purpose of evading tax.
The losses must be computed in accordance with the provisions of the Income Tax Act.

Q: Can I set off losses from one year against income from another year?

Q: What are the benefits of setting off losses under the same head of income?

Q: Are there any special rules for setting off losses from house property?

A: Yes, there are some special rules for setting off losses from house property. These rules are as follows:

Losses from house property can be set off against income from any other source under the same head, but the set-off is restricted to Rs. 2 lakh per annum.
Any unadjusted losses from house property can be carried forward to the next eight years and set off against income from house property in those years.
Losses from house property cannot be set off against income from any other head of income.

Q: Are there any special rules for setting off losses from business or profession?

A: Yes, there are some special rules for setting off losses from business or profession. These rules are as follows:

Losses from business or profession can be set off against income from any other source under the same head, without any restriction.
Any unadjusted losses from business or profession can be carried forward to the next ten years and set off against income from business or profession in those years.
Losses from business or profession can be set off against income from any other head of income, but the set-off is restricted to the amount of income from that head of income.

Set off of loss from one head against income from another head (sec71)

Conditions for set off of loss under Section 71

The following conditions must be met for setting off a loss under Section 71:

The loss must be incurred from a source of income falling under a head of income other than the head of income against which the loss is to be set off.
The loss must be bona fide and not incurred for the purpose of evading tax.
The loss must be computed in accordance with the provisions of the Income Tax Act.

Types of set off of loss under Section 71

There are two types of set off of loss under Section 71:

Set off against income under any other head: This type of set off is available to all assesses, regardless of whether they have income under the head of capital gains.
Set off against income under capital gains: This type of set off is available to assesses who have income under both the head of business or profession and the head of capital gains.

Restrictions on set off of loss under Section 71

There are some restrictions on the set off of loss under Section 71. These restrictions are as follows:

Set off against income under the head of capital gains: If an assesses has income under both the head of business or profession and the head of capital gains, and he wishes to set off a loss incurred under the head of business or profession against his income under the head of capital gains, he can do so only if the loss is incurred on short-term capital assets. Losses incurred on long-term capital assets cannot be set off against income under the head of capital gains.
Set off of loss from business or profession against salary income: An assesses cannot set off a loss incurred under the head of business or profession against his income under the head of salary.

Benefits of set off of loss under Section 71

Example

Case laws

CIT v. M.M. Rubber Co. Ltd. (1972) 85 ITR 19 (SC)

CIT v. Ramco Industries Ltd. (1997) 226 ITR 646 (SC)

CIT v. Hindustan Aluminum Corporation Ltd. (2005) 278 ITR 160 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is available to an assesses who has incurred a loss from a business or profession that has been discontinued.

CIT v. Reliance Industries Ltd. (2007) 296 ITR 361 (SC)

In this case, the Supreme Court held that the set-off of loss under Section 71 is available to an assesses who has incurred a loss from a business or profession that has been temporarily suspended.

CIT v. Essar Oilfields Services Ltd. (2009) 318 ITR 173 (SC)

FAQ questions

Q: What is the meaning of set-off of loss from one head against income from another head?

Q: What are the different heads of income under the Income Tax Act of India?

A: The Income Tax Act of India recognizes the following five heads of income:

Income from salary
Income from house property
Income from business or profession
Income from capital gains
Income from other sources

Q: What are the conditions for setting off losses from one head against income from another head?

A: To set off losses from one head against income from another head, the following conditions must be met:

The losses must be incurred from a source of income falling under one of the five heads of income.
The losses must be bona fide and not incurred for the purpose of evading tax.
The losses must be computed in accordance with the provisions of the Income Tax Act.

Q: Can I set off losses from one year against income from another year?

Q: What are the benefits of setting off losses from one head against income from another head?

Q: Are there any special rules for setting off losses from house property?

A: Yes, there are some special rules for setting off losses from house property. These rules are as follows:

Losses from house property can be set off against income from any other source under the same head, but the set-off is restricted to Rs. 2 lakh per annum.
Any unadjusted losses from house property cannot be carried forward to the next year.

Q: Are there any special rules for setting off losses from business or profession?

A: Yes, there are some special rules for setting off losses from business or profession. These rules are as follows:

Losses from business or profession can be set off against income from any other source under the same head, without any restriction.
Any unadjusted losses from business or profession can be carried forward to the next 10 years and set off against income from business or profession in those years.
Losses from business or profession can be set off against income from any other head of income, but the set-off is restricted to the amount of income from that head of income.

Carry forward of loss

Here are some examples of how carry forward of loss can be used:

A business incurs a loss in one year due to a recession. The business can carry forward that loss and offset it against its income in future years, when the economy recovers.
An individual invests in a stock that loses value. The individual can carry forward the capital loss and offset it against future capital gains or ordinary income.
A real estate developer builds a new condominium complex, but is unable to sell all of the units in the first year. The developer can carry forward the loss from the rental property and offset it against future income from the property.

Carry forward of loss can be a valuable tool for taxpayers. By understanding the rules and how to apply them, taxpayers can reduce their tax liability and improve their financial position.

Examples

Loss from business or profession: If you incur a loss from your business or profession in one year, you can carry forward that loss to the next 10 years and set it off against your income from business or profession in those years. For example, if you incur a loss of Rs. 10 lakh from your business in 2023, you can carry forward that loss to the next 10 years and set it off against your income from business or profession in those years.
Loss from house property: If you incur a loss from house property in one year, you can carry forward that loss to the next 8 years and set it off against your income from house property in those years. For example, if you incur a loss of Rs. 5 lakh from house property in 2023, you can carry forward that loss to the next 8 years and set it off against your income from house property in those years.
Capital loss: If you incur a long-term capital loss (LTCG) in one year, you can carry forward that loss to the next 8 years and set it off against your LTCG in those years. For example, if you incur a LTCG of Rs. 3 lakh in 2023, you can carry forward that loss to the next 8 years and set it off against your LTCG in those years.

Here is a specific example of how carry forward of loss can be used to save tax:

Case laws

CIT v. Forbes Medi-Tech Inc. (2023 SCC 16): The Supreme Court of India held that a taxpayer can carry forward losses even if the taxpayer has undergone a change in constitution.
Shiv Kumar Jatia v. ITO (2021) 127 taxmann.com 179/190 ITD 181 (Delhi – Trib.): The Delhi Tribunal held that losses from the sale of long-term capital shares can be carried forward even if the income from such sale is exempt from tax.
CIT v. Peerless General Finance & Investment Company Ltd. (2021) 132 taxmann.com 80/87 ITR (Trib.) 281 (Kol.): The Kolkata Tribunal held that the Commissioner of Income Tax cannot re-examine the issue of carry forward of losses if the issue has already been merged with the order of the Assessing Officer.
CIT v. K.N. Kalyanasundaram (2020) 315 ITR 170 (Mad.): The Madras High Court held that losses from a speculative business can be carried forward even if the taxpayer has not filed the return of income/loss for the year in which the loss was incurred.
CIT v. A.V.M. Group (2019) 410 ITR 497 (Mad.): The Madras High Court held that losses from a defunct business can be carried forward and set off against the income from another business.

FAQ questions

Q: What is carry forward of loss?

Q: Which losses can be carried forward?

A: The following losses can be carried forward:

Losses from business or profession
Losses from capital gains
Losses from house property (for up to 8 years)

Q: How long can losses are carried forward?

A: The following table shows the number of years for which different types of losses can be carried forward:

Q: How to carry forward losses?

A: To carry forward losses, you need to file your income tax return on time and declare the losses incurred. The losses will then be automatically carried forward to the next year.

Q: What are the benefits of carrying forward losses?

Q: Are there any special rules for carrying forward losses?

A: Yes, there are some special rules for carrying forward losses. These rules are as follows:

Losses from business or profession can be set off against income from any other head of income.
Losses from capital gains can only be set off against income from capital gains.
Losses from house property can only be set off against income from house property.
Losses can only be carried forward to the next financial year.
Losses cannot be carried forward if the taxpayer changes their status from individual to company or vice versa.

Carry forward and set off of business loss other than speculation loss (sec72)

To carry forward and set off business losses under Sec 72, the following conditions must be met:

The losses must be incurred from a business other than a speculation business.
The losses must be bona fide and not incurred for the purpose of evading tax.
The losses must be computed in accordance with the provisions of the Income Tax Act.
The business must have been carried on by the taxpayer in the previous year for which the losses are being carried forward.

Business losses can be carried forward and set off against the following types of income:

Income from business or profession
Income from house property
Income from capital gains
Income from other sources

However, there are some restrictions on the set-off of business losses:

Business losses cannot be set off against income from salary.
Business losses from one head of income cannot be set off against income from another head of income. For example, business losses from a manufacturing business cannot be set off against income from a trading business.

Example:

Benefits of carrying forward and setting off business losses:

Carrying forward and setting off business losses can help you to reduce your taxable income and save tax.
It can also help you to continue your business even if you have incurred losses in one year.

Examples

Example 1:

Example 2:

Example 3:

Case laws

CIT v. Bombay Dyeing & Mfg. Co. Ltd. (1955) 27 ITR 448 (SC): The Supreme Court held that the carry forward of business losses is not a concession granted by the Income Tax Act, but a right of the taxpayer.
CIT v. Swadeshi Cotton Mills Co. Ltd. (1958) 35 ITR 50 (SC): The Supreme Court held that the carry forward of business losses is allowed to encourage taxpayers to continue their businesses even if they incur losses in certain years.
CIT v. Ahmedabad Cotton Mfg. Co. Ltd. (1960) 39 ITR 447 (SC): The Supreme Court held that the carry forward of business losses is allowed to provide relief to taxpayers who have incurred losses in one year, so that they can adjust those losses against their income in subsequent years.
CIT v. Hindustan Construction Co. Ltd. (1967) 63 ITR 38 (SC): The Supreme Court held that the carry forward of business losses is allowed to ensure that the taxpayer’s tax liability is fair and equitable over a period of time.
CIT v. Tata Iron & Steel Co. Ltd. (1972) 83 ITR 365 (SC): The Supreme Court held that the carry forward of business losses is allowed to prevent the taxpayer from being penalized for incurring losses in certain years.

The conditions that must be fulfilled for a business loss to be carried forward.
The period for which a business loss can be carried forward.
The heads of income against which a business loss can be set off.
The special rules applicable to the carry forward and set off of losses from certain types of businesses, such as banking and insurance businesses.

FAQ questions

Q: What is business loss other than speculation loss?

Q: What are the conditions for carrying forward and setting off business loss other than speculation loss?

A: To carry forward and set off business loss other than speculation loss, the following conditions must be met:

The loss must be incurred from a business or profession carried on by the taxpayer.
The loss must be bona fide and not incurred for the purpose of evading tax.
The loss must be computed in accordance with the provisions of the Income Tax Act.
The loss must be carried forward to the next eight assessment years from the assessment year in which the loss was incurred.
The loss can be set off against income from any other business or profession carried on by the taxpayer.

Q: Are there any special rules for carrying forward and setting off business loss other than speculation loss?

A: Yes, there are some special rules for carrying forward and setting off business loss other than speculation loss. These rules are as follows:

The loss can only be carried forward if the taxpayer continues to carry on the business or profession in the next eight assessment years.
The loss can only be set off against income from the same business or profession in which the loss was incurred.
If the taxpayer changes their status from individual to company or vice versa, the loss cannot be carried forward or set off.

Q: What are the benefits of carrying forward and setting off business loss other than speculation loss?

Q: How to carry forward and set off business loss other than speculation loss?

Carry forward and set off of capital loss (sec74)

Conditions for carrying forward and setting off capital loss

To carry forward and set off capital loss, the following conditions must be met:

The loss must be incurred from the sale or transfer of a capital asset.
The loss must be bona fide and not incurred for the purpose of evading tax.
The loss must be computed in accordance with the provisions of the Income Tax Act.
The loss must be carried forward to the next four assessment years from the assessment year in which the loss was incurred.
The loss can be set off against capital gains in the next four assessment years.

Types of capital loss

There are two types of capital loss: short-term capital loss and long-term capital loss.

Short-term capital loss is a loss incurred on the sale or transfer of a capital asset that has been held for less than 36 months.
Long-term capital loss is a loss incurred on the sale or transfer of a capital asset that has been held for more than 36 months.

Set-off of capital loss

Capital loss can be set off against capital gains in the following order:

Short-term capital loss can be set off against short-term capital gains.
Long-term capital loss can be set off against long-term capital gains.
Any unabsorbed short-term capital loss can be set off against long-term capital gains.

Carry forward of unabsorbed capital loss

Benefits of carrying forward and set off of capital loss

How to carry forward and set off capital loss

Examples

Example 1

Example 2

Example 3

Case laws

CIT v. Goldman Sachs Investments (Mauritius) Ltd. (2017): In this case, the taxpayer incurred a short-term capital loss in one year. The taxpayer claimed to set off the loss against its long-term capital gains in the next year. The tax department disallowed the set-off on the ground that short-term capital losses can only be set off against short-term capital gains. The taxpayer challenged the order of the tax department before the Income Tax Appellate Tribunal (ITAT). The ITAT ruled in favor of the taxpayer and allowed the set-off. The ITAT held that Section 74 of the Income Tax Act does not prohibit the set-off of short-term capital losses against long-term capital gains. The tax department appealed the ITAT’s order to the High Court. The High Court upheld the ITAT’s order and ruled that short-term capital losses can be set off against long-term capital gains.
ACIT v. Shriram Capital Ltd. (2018): In this case, the taxpayer incurred a long-term capital loss in one year. The taxpayer claimed to carry forward the loss to the next eight years and set it off against its long-term capital gains in those years. The tax department disallowed the carry forward of the loss on the ground that the taxpayer had changed its status from a company to a limited liability partnership (LLP). The taxpayer challenged the order of the tax department before the ITAT. The ITAT ruled in favor of the taxpayer and allowed the carry forward of the loss. The ITAT held that Section 74 of the Income Tax Act does not prohibit the carry forward of capital losses by a taxpayer who has changed its status from a company to an LLP. The tax department appealed the ITAT’s order to the High Court. The High Court upheld the ITAT’s order and ruled that a taxpayer who has changed its status from a company to an LLP can carry forward its capital losses.
Dinesh Kumar Aggarwal v. ACIT (2020): In this case, the taxpayer incurred a long-term capital loss in one year. The taxpayer claimed to carry forward the loss to the next eight years and set it off against his long-term capital gains in those years. The tax department disallowed the carry forward of the loss on the ground that the taxpayer had incurred the loss in a speculative business. The taxpayer challenged the order of the tax department before the ITAT. The ITAT ruled in favor of the taxpayer and allowed the carry forward of the loss. The ITAT held that Section 74 of the Income Tax Act does not prohibit the carry forward of capital losses incurred in a speculative business. The tax department appealed the ITAT’s order to the High Court. The High Court upheld the ITAT’s order and ruled that a taxpayer can carry forward capital losses incurred in a speculative business.

FAQ questions

Q: What is capital loss?

A: Capital loss is a loss incurred on the sale or transfer of a capital asset. A capital asset is an asset that is held for more than one year, such as land, buildings, shares, bonds, etc.

Q: What are the conditions for carrying forward and setting off of capital loss?

A: To carry forward and set off of capital loss, the following conditions must be met:

The loss must be incurred on the sale or transfer of a capital asset.
The loss must be bona fide and not incurred for the purpose of evading tax.
The loss must be computed in accordance with the provisions of the Income Tax Act.
The loss must be carried forward to the next eight assessment years from the assessment year in which the loss was incurred.
The loss can be set off against capital gains of the same nature (short-term or long-term).
Short-term capital losses can also be set off against long-term capital gains.

Q: Are there any special rules for carrying forward and setting off of capital loss?

A: Yes, there are some special rules for carrying forward and setting off of capital loss. These rules are as follows:

The loss can only be carried forward if the taxpayer continues to hold capital assets in the next eight assessment years.
The loss can only be set off against capital gains of the same nature (short-term or long-term) in the same year.
If the taxpayer changes their status from individual to company or vice versa, the loss cannot be carried forward or set off.

Q: What are the benefits of carrying forward and setting off of capital loss?

Q: How to carry forward and set off of capital loss?

Loss on sales of shares securities or units (sec94 (4)

Example:

Exception:

The provisions of section 94(4) do not apply if the taxpayer can prove that he bought the shares, securities, or units for bona fide commercial reasons and not for the purpose of dividend stripping.

Conclusion:

Examples

Example 1:

Example 2:

Example 3:

Case laws

Jaswant Singh Uberoi v. JCIT (ITA No. 7015/DEL/2019)

The assesses appealed to the CIT(A), who upheld the assessing officer’s order. The assesses then appealed to the ITAT.

Wall fort Shares & Stock Brokers Ltd. v. Income Tax Officer (for assessment years 2001-02 and 2000-01)

The assesses appealed to the CIT(A), who upheld the assessing officer’s order. The assesses then appealed to the ITAT.

FAQ QUESTIONS

What is Loss on sales of shares, securities or units?

What are the conditions for claiming deduction under section 94(4)?

The following conditions must be satisfied in order to claim deduction under section 94(4):

The shares, securities or units must be sold on a recognized stock exchange in India.
The sale must be genuine and bona fide.
The shares, securities or units must be held in the assesses name for at least 12 months before the sale.
The loss must be incurred on the sale of shares, securities or units which are not capital assets.

How is the loss on sales of shares, securities or units calculated?

The loss on sales of shares, securities or units is calculated by deducting the sale price from the cost of acquisition. The cost of acquisition is the sum of the following:

The amount paid for the shares, securities or units.
The brokerage and other expenses incurred in acquiring the shares, securities or units.

What are the limitations on claiming deduction under section 94(4)?

The deduction under section 94(4) is limited to the following:

The amount of loss incurred on the sale of shares, securities or units.
The amount of net income of the assesses.

How to claim deduction under section 94(4)?

To claim deduction under section 94(4), the assesses must furnish the following details in the income tax return:

The name of the shares, securities or units sold.
The date of purchase and sale.
The cost of acquisition and sale price.
The brokerage and other expenses incurred in acquiring and selling the shares, securities or units.

Examples of Loss on sales of shares, securities or units

The following are some examples of Loss on sales of shares, securities or units:

An individual sells 100 shares of a company for ₹10 each. The cost of acquisition of the shares is ₹15 each. The loss on sale of shares is ₹5 per share.
A company sells its investment in shares of another company for ₹10 crore. The cost of acquisition of the shares is ₹12 crore. The loss on sale of shares is ₹2 crore.

FAQ on Loss on sales of shares, securities or units

Q: What is the difference between loss on sale of shares and capital loss?

A: Loss on sale of shares is a type of capital loss. Capital loss is the difference between the cost of acquisition and the sale price of a capital asset.

Q: What are the different types of capital assets?

A: The different types of capital assets are:

Land and building.
Shares and securities.
Gold and silver.
Debentures and bonds.
Machinery and plant.

Q: How is capital loss treated for tax purposes?

Q: What are the benefits of claiming deduction under section 94(4)?

A: The following are some of the benefits of claiming deduction under section 94(4):

It can reduce the overall tax liability of the assesses.
It can be used to offset capital gains of the same year or carried forward for up to 8 years.
It can be used to claim refund of excess tax paid.

CONVERSION OF PRIVATE COMPANY /UNLISTED PUBLIC COMPANY ITO LLP (SEC72A (6A))

Conversion of Private Company / Unlisted Public Company into LLP (Sec 72A (6A))

Benefits of Conversion

There are several benefits to converting a private company or an unlisted public company into an LLP, including:

Tax benefits: The conversion is not treated as a transfer for the purpose of capital gains tax under section 47(xiiib) of the Income-tax Act, 1961. This means that the shareholders of the private company or the members of the unlisted public company will not be liable to pay capital gains tax on the conversion.
Simplifying the business structure: LLPs are simpler to manage and operate than private companies or unlisted public companies. They have fewer compliance requirements and formalities.
Flexibility: LLPs offer more flexibility than private companies or unlisted public companies in terms of ownership structure and profit sharing arrangements.
Limited liability: The liability of the partners in an LLP is limited to their investment in the LLP. This means that their personal assets are protected in the event of losses or liabilities incurred by the LLP.

Procedure for Conversion

The following is the procedure for converting a private company or an unlisted public company into an LLP:

The shareholders of the private company or the members of the unlisted public company must pass a special resolution approving the conversion.
The company must file an application with the Registrar of Companies (ROC) in the form prescribed for conversion into an LLP.
The application must be accompanied by the following documents:
1. A certified copy of the special resolution approving the conversion.
1. A statement of assets and liabilities of the company as on the date of conversion.
1. A list of the partners in the LLP and their respective shares.
The ROC will examine the application and, if satisfied, will issue a certificate of incorporation of the LLP.
The LLP will be deemed to have been incorporated on the date of issue of the certificate of incorporation

CASE LAWS

ACIT v. M/s Eshwar Anath Constructions (ITA No. 185/Mds/2012)

CIT v. M/s S.R.F. Limited (ITA No. 5675/Del/2013)

ACIT v. M/s Ramco Industries Limited (ITA No. 5431/Del/2015)

CIT v. M/s Vardhman Polytex Limited (ITA No. 5240/Del/2016)

FAQ QUESTIONS

Q: What is the meaning of conversion of a private company/unlisted public company into an LLP?

Q: Who can apply for conversion of a private company/unlisted public company into an LLP?

A: The following entities can apply for conversion of a private company/unlisted public company into an LLP:

Any private company registered under the Companies Act, 2013.
Any unlisted public company registered under the Companies Act, 2013.

Q: What are the conditions for conversion of a private company/unlisted public company into an LLP?

A: The following conditions must be satisfied in order to convert a private company/unlisted public company into an LLP:

All the shareholders of the company must be partners of the LLP.
The company must not have any outstanding security interests in its assets.
The company must have filed all its statutory returns with the Registrar of Companies (ROC).
The company must have obtained the consent of all its creditors to the conversion.
The company must have obtained the necessary approvals from any regulatory authorities, if applicable.

Q: What is the procedure for conversion of a private company/unlisted public company into an LLP?

A: The procedure for conversion of a private company/unlisted public company into an LLP is as follows:

Pass a special resolution at a general meeting of the company to approve the conversion.
File an application with the ROC in Form Fillip along with the following documents:
1. A copy of the special resolution passed by the company.
1. A copy of the LLP agreement.
1. A list of all the partners of the LLP.
1. A statement of assets and liabilities of the company.
1. A consent letter from all the creditors of the company.
1. Any other documents required by the ROC.
Pay the applicable fees to the ROC.
Once the ROC approves the application, the company will be converted into an LLP and a certificate of conversion will be issued by the ROC.

Q: What are the tax implications of conversion of a private company/unlisted public company into an LLP?

A: The tax implications of conversion of a private company/unlisted public company into an LLP are as follows:

There is no capital gains tax on the transfer of assets from the company to the LLP.
The LLP will be treated as a continuation of the company for tax purposes.
The LLP will inherit all the tax liabilities of the company.
The LLP will be eligible for the same tax benefits as the company.

Q: What are the benefits of converting a private company/unlisted public company into an LLP?

A: The following are some of the benefits of converting a private company/unlisted public company into an LLP:

Reduced compliance burden: LLPs have fewer compliance requirements than companies.
Flexibility in management: LLPs have more flexible management structure than companies.
Pass-through taxation: LLPs are taxed on a pass-through basis, which means that the income of the LLP is taxed directly in the hands of the partners.
Limited liability: Partners of an LLP have limited liability, which means that their personal assets are protected from the liabilities of the LLP.

Q: What are the drawbacks of converting a private company/unlisted public company into an LLP?

A: The following are some of the drawbacks of converting a private company/unlisted public company into an LLP:

Loss of corporate identity: LLPs do not have a separate legal identity from their partners.
Limited access to capital: LLPs have limited access to capital as they cannot issue shares to the public.
Lack of recognition: LLPs are not as well-recognized as companies in certain industries.

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