Unit 3
Capital gains
Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”.
Capital asset is defined to include:
(a) Any kind of property held by a sasessee, whether or not connected with business or profession of the assesse.
(b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992. However, the following items are excluded from the definition of “capital asset”:
(i) any stock-in-trade (other than securities referred to in (b) above), consumable stores or raw materials held for the purposes of his business or profession;
(ii) personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him, but excludes—
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
“Jewellery" includes—
a. Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into any wearing apparel;
b. Precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;
(iii)Agricultural Land in India, not being a land situated: a. Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;
b. Within range of following distance measured aerially from the local limits of any municipality or cantonment board:
i. Not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
Ii. Not being more than 6 KMs, if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
Iii. Not being more than 8 KMs, if population of such area is more than 10 lakhs. Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year. (iv)61/2 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government; (v) Special Bearer Bonds, 1991; (vi)Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2016.
Types of capital gain
It is of two types-
Figure: Types of capital gain
- Short term capital gain:
Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
2. Long term capital gain:
Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset. However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months
Capital gains on distribution of assets by companies in liquidation (section 46)
(1) Notwithstanding anything contained in section, where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of section 45.
(2) Where a shareholder on the liquidation of a company receives any money or other assets from the company, he shall be chargeable to income-tax under the head ―Capital gains, in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend within the meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48.
Capital gains on purchase by company of its own shares or other specified securities (section 46A)
Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company.
Tax on long-term capital gain
Generally, long-term capital gains are charged to tax @ 20% (plus surcharge and cess as applicable), but in certain special cases, the gain may be (at the option of the taxpayer) charged to tax @ 10% (plus surcharge and cess as applicable). The benefit of charging long-term capital gain @ 10% is available only in following cases:
1) Long-term capital gains arising from sale of listed securities and it exceeds Rs. 1,00,000 (Section 112A);
2) Long-term capital gains arising from transfer of any of the following asset:
a) Any security (*) which is listed in a recognised stock exchange in India;
b) Any unit of UTI or mutual fund (whether listed or not) ($); and
c) Zero coupon bonds (*) Securities for this purpose means “securities” as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956. This definition generally includes shares, scrips, stocks, bonds, debentures, debenture stocks or other marketable securities of a like nature in or of any incorporated company or other body corporate, Government securities, such other instruments as may be declared by the Central Government to be securities and rights or interest in securities. ($) This option is available only in respect of units sold on or before 10-7-2014.
Long-term capital gains arising from sale of listed securities
The Finance Act, 2018 inserts a new Section 112A with effect from Assessment Year 2019-20. As per the new section capital gains arising from transfer of a long-term capital asset being an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust shall be taxed at the rate of 10 per cent of such capital gains exceeding Rs. 1,00,000. This concessional rate of 10 per cent will be applicable if:
a) in a case of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and
b) in a case a unit of an equity-oriented fund or a unit of a business trust, STT has been paid on transfer of such capital asset. The cost of acquisitions of a listed equity share acquired by the taxpayer before February 1, 2018, shall be deemed to be the higher of following:
a) The actual cost of acquisition of such asset; or
b) Lower of following:
(i) Fair market value of such shares as on January 31, 2018; or
(ii) Actual sales consideration accruing on its transfer. The Fair market value of listed equity share shall mean its highest price quoted on the stock exchange as on January 31, 2018. However, if there is no trading in such shares on January 31, 2018, the highest price of such share on a date immediately preceding January 31, 2018 on which trading happens in that share shall be deemed as its fair market value.
In case of units which are not listed on recognized stock exchange, the net asset value of such units as on January 31, 2018 shall be deemed to be its FMV. In a case where the capital asset is an equity share in a company which is not listed on a recognised stock exchange as on 31-1-2018 but listed on the date of transfer, the cost of unlisted shares as increased by cost inflation index for the financial year 2017-18 shall be deemed to be its FMV.
Long-term capital gains arising from transfer of specified asset
A taxpayer who has earned long-term capital gains from transfer of any listed security or any unit of UTI or mutual fund (whether listed or not), not being covered under Section 112A, and Zero-coupon bonds shall have the following two options: a. Avail of the benefit of indexation; the capital gains so computed will be charged to tax at normal rate of 20% (plus surcharge and cess as applicable). b. Do not avail of the benefit of indexation; the capital gain so computed is charged to tax @ 10% (plus surcharge and cess as applicable). The selection of the option is to be done by computing the tax liability under both the options, and the option with lower tax liability is to be selected.
Income from other sources has provided under section 56 of the income tax act, 1961-
(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head ―Income from other sources‖, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head ―Income from other sources‖, namely: —
(i) dividends;
(ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head ―Profits and gains of business or profession;
(iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head ―Profits and gains of business or profession;
(iv) income referred to in sub-clause (xi) of clause (24) of section 2, if such income is not chargeable to income-tax under the head ―Profits and gains of business or profession‖ or under the head ―Salaries;
(v) where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September, 2004 but before the 1st day of April, 2006, the whole of such sum: Provided that this clause shall not apply to any sum of money received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority as defined in the Explanation to clause (20) of section 10; or
(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.
Vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006 but before the 1st day of October, 2009.
Provided that this clause shall not apply to any sum of money received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority
(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.
(f) stamp duty value means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property;
Other Sources of Income are Stated Below:
- Income From:
Lottery, Gambling, Batting, Horse Race, Cross Ward, Puzzle
Any other casual income
Interest other than interest on securities
Interest on Securities
Commission (If it is not a part of one’s main Business or Profession)
Family Pension
Royalty
Director’s Fee
Subletting of House
Dividend
Tuition Income
2. Casual Income: TDS is applicable @ 30% on this. It generally received after deduction of tax. Hence it always grosses up while calculating the income under this head as given below:
Gross Income = Net Amount Received * 100/70
3. Lottery Income: If Lottery Income is less than Rs.5000/- then there will be no TDS. Hence no need to gross up.
4. Income from Horse Race: If Income from Horse Race is less than Rs.2500/- then there will be no TDS Hence no need to gross up.
5. Family Pension: Rs.15000/- or 1/3 of Actual Amount received, whichever is less, is exempt.
Taxable = Actual Amount Received – Exempted Amount
Dividend from Indian Co. Is fully exempted.
6. Taxable Dividend: a) Dividend from Foreign Co.
b) Dividend from Co-operative Society
7. Tax free in case of other sources: -
Interest from Capital Investment Bond
Interest on Post Office Savings
Interest on National Relief Bond
Income from UTI
Any Allowance to a M.P. (Member of Parliament)
Set off losses
An assessee may have various sources of income under any head of income but this is not necessary that in a previous year all these sources will generate income only. In fact, there may be a condition in which one or more source of income may generate losses while some other source of income may generate profit or gains under the same head of income. Since assessee is taxed on the net income, such losses are made good (Adjusted) against the gains or profits of other sources. This adjustment of losses is called 'Setting off of Losses'. Similarly, there may be profit under one head of income and loss in another head of income. This loss of one head can also be set off (Adjusted) against the profits/gains of another head.
Following are the provisions of Income Tax Act relating to set off of Losses:
- Inter Source Adjustment (Set off) (Section 70)
Where the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against the income from any other source under the same head. This is called Inter-Source Adjustment. For example, if an assessee has four house properties. Three of them yield net taxable income, but from the fourth there is net loss. The assessee can set-off the loss of one house property against the income of the remaining house properties. Similarly, if an assessee has four businesses of different nature in a particular year, from two businesses there is a taxable profit and from remaining two businesses there is loss. The loss of these two businesses can be set off against the profits of the other two businesses.
2. Inter Head Adjustment (Set off) (Section 71)
Where in respect of any assessment year the net result of the computation under any head of income is a loss, the assessee shall be entitled to have the amount of such loss, set-off against his income, if any, assessable under any other head of income.
3. Non-Speculation Business
General Business includes any non-speculation business. Any loss from business (except speculation business) or profession is eligible to be set-off against any other income falling under the same head or any other head including income from speculation business but excluding income under the head 'Salaries'. Losses of illegal business cannot be set-off against profits of a legal business. However, such losses (illegal losses) can be set off against profits of illegal business. Losses of discontinued business can also be set-off.
4. Set-off of Losses of Speculation Business [Section 73(1)]
Losses related with speculation business can be set off only from profits and gains (if any) of another similar business (i.e., speculation business) carried on by the assessee and not against the income of any other head.
5. Set off of Losses of Specified Business [Section 73A] (w.e.f. AY 2010-11)
Any loss computed in respect of any specified business referred to in Section 35 AD shall not be set off except against profits and gains, if any, of any other specified business. It cannot be set off from the income of any other business.
6. Set off of Losses under the Head Capital Gains
Capital Losses can be (a) Short-term and (b) Long-term.
i) Short-term capital Loss can be set off from any capital Gain i.e., short term gain or Long-term gain.
Ii) Long-term capital Loss can only be set off against Long-term Capital Gains.
7. Set-off of Losses from Owning and Maintaining Race Horses [Section 74A (3)]
The amount of the loss incurred by the assessee in the activity of owning and maintaining race horses in any assessment year shall be set off only against income of same activity (i.e., owning and maintaining race horses). This type of loss cannot be set off against the income from any other source.
8. Set off of Losses of Lottery, Betting, Gambling, Crossword Puzzles or Card Games etc
These losses are not allowed to be set off against any income including winnings of lotteries, crossword puzzles, races, card games etc.
9. Set off of Losses of Partnership Firm
Where the assessee is a firm, its losses can be set off from its own (firm's) income. The rules of setting off losses shall be the same as they (rules) apply in case of non – firm assessee and explained earlier. No partner can set off his share of loss in the firm against his/her personal income.
10. Set off of Losses of Association of Persons (AOP) or Body of Individuals (BOI)
Losses of AOP or BOI can be set off from their own income. The rules for setting off of losses shall be the same as they apply in case of general assessee. Members of AOP or BOI cannot set off their share of loss in the losses of AOP or BOI, from their personal income.
Carry forward losses
All losses cannot be carried forward for setting off in succeeding years. Only following specified losses are allowed to be carried forward and set off in succeeding assessment year/years:
1. Loss from House Property [Section 71(B)]
Loss under the head 'Income from House Property' can be set off against any other head of income subject to a maximum Rs. 2 Lakhs for any assessment year and any unabsorbed portion of such loss can be carried forward to be set off against the income only under the 'Income from House Property' in maximum subsequent 8 assessment years.
2. Losses of General Business [Section 72]
It is not possible to set off full number of losses of general business in the same previous year, such 'Not Set off Losses' can be carried forward and set off against the profits of subsequent year or years subject to following provisions:
• Such 'Not Set off Losses' can be carried forward and set off only against the profits under the head 'Profits and Gains of Business or Profession' Thus, if 'Not Set off Losses' are carried forward and set off in subsequent years, such losses cannot be set off against any other head of income except business or profession income.
• Such 'Not Set off Losses' can also be set off against incomes’ (not falling under the head ‘Profits and Gains of Business or Profession’) which arises due to a Business Activity.
• Such 'Not Set off Losses' shall be carried forward maximum for 8 assessment years immediately succeeding the assessment year for which the loss was first computed.
• The assessee who owns the business at the time when it (business) suffered losses is entitled to carry forward such losses. Thus, if the business is transferred to a new owner, then the new owner cannot carry forward 'Not Set off Losses.'
• Not set off Losses can be carried forward and set off against profits or gains of business or profession even if the business in which loss incurred has been discontinued.
• Brought forward losses of a specified business (referred to in Section 35 AD) can be set off in the subsequent years against the income of any specified business.
• If a business undertaking is discontinued because of losses due to natural calamities like floods, cyclones etc, but later on revived within 3 years thereafter, the unabsorbed losses of such undertaking shall be carried forward and set off against the profits of the revived business or any other business for maximum up to 8 years as reckoned from the year in which the business is restarted.
• Such loses cannot carried forward and set off unless the details of such losses are furnished in the income tax return filed by the assessee under the provisions of Section 139. However, delay in submission of return may be condoned if new conditions are satisfied.
3. Accumulated Losses and Unabsorbed Depreciation
In addition to business losses (a) unabsorbed depreciation, (b) unabsorbed capital expenditure on scientific research and (c) unabsorbed expenditure on family planning can also be carried forward indefinitely although as per Income Tax Law these are not business losses. These losses can be set off against the income under any head except salaries in the following order:
i) Current year's depreciation
Ii) Current year capital expenditure on scientific research and current year expenditure on family planning to the extent allowed.
Iii) Brought forward business or profession losses [Section 71(1)]
Iv) Unabsorbed depreciation [Section 32(2)]
v) Unabsorbed capital expenditure on scientific research [Section 35(4)]
Vi) Unabsorbed expenditure on family planning [Section 21(1) (9)]
It is necessary that the details of all such losses must be given in the return of income and the return must be filed before due date u/s 139 (1) otherwise the loss cannot be carried forward. The rules for carry forward and set off unabsorbed depreciation and accumulated losses in different situations are as under:
a) In certain cases of Amalgamation [ Section 72A]
As per Section 72 A (1), where there has been an amalgamation of a company
(i) owning an industrial undertaking or a ship or a hotel with another company or,
(ii) a banking company amalgamates with a specific bank or
(iii) one or more public sector company or companies engaged in the business of operation of aircraft amalgamates with one or more public sector company or companies engaged in similar business, the accumulated loss and the unabsorbed depreciation of the amalgamating company for the previous year in which the amalgamation was affected can be carried forward. Thus, subject to certain conditions for set off, the amalgamated company shall be eligible to carry forward and set off the loss and unabsorbed depreciation of the amalgamating company. If the prescribed conditions u/s 72(i) are not complied with, the set off and carry forward shall not be allowed to the company, eligible for doing so.
b) In certain cases of Demerger [ Section 72A]
U/s 72 A (4) in case of a demerger of an undertaking, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall be allowed to be carried forward and set off in the hands of resulting company. Such accumulated losses and unabsorbed depreciation transferred by the demerged company to the resulting company can be carried forward and set off by the resulting company.
c) In cases of succession of a firm or a proprietary concern by company:
As per provisions of Section 72 A (6), where a firm or a proprietary concern is succeeded by the company which fulfils the prescribed conditions, the accumulated loss and the unabsorbed depreciation of predecessor firm or proprietary concern shall be deemed to be the loss or allowance for depreciation of the successor company for the previous year in which business reorganization was effected and other provisions of set off and carry forward of loss and unabsorbed depreciation shall apply accordingly.
d) In cases of succession of a private company or an unlisted public company by a Limited Liability Partnership (LPP):
Under the provisions of Section 72 A(6A), due to reorganization of business, a private company or unlisted public company is succeeded by a Limited Liability Partnership fulfilling the conditions laid down in Section 47 (xiii) (b), the accumulated loss and the unabsorbed depreciation of the predecessor company shall be deemed to be the loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or allowance for depreciation of the successor Limited Liability Partnership of the previous year in which the such succession has taken place, other provisions of set off and carry forward of loss and depreciation shall apply accordingly.
e) In cases of scheme of amalgamation of Banking Company in certain cases [ Section 72AA]
Under the provisions of Section 72 AA, if there has been an amalgamation of Banking Company with any other Banking Institution, under a scheme sanctioned and brought into force. Other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.
f) In cases of Business Reorganization of Co-operative Banks
[Section 72AB]
Under the provisions of Section 72 AB, if two cooperative Banks have an amalgamation, then, the accumulated loss and unabsorbed depreciation of the predecessor Co-operative Bank can be set off and carry forward by the successor co-operative Bank. All other provisions of the Act relating to set-off and carry forward of the losses and unabsorbed depreciation shall apply accordingly.
4.Loss of Speculation business [Section 73]
Where it is not possible to fully set off losses of speculation business against the profits of another speculation business in the same year then 'Not Set off Losses' can be carried forward for the purpose of setting off such losses from the profits of speculation business. However, such carry forward of 'Not Set off Losses' can be made for a maximum period of 4 assessment years immediately succeeding the assessment year for which the loss was first computed.
5. Losses of Specified Business [Section 73A]
According to Section 73 A, for any assessment year if any loss computed in respect of Specified Business has not been wholly set off against any other Specified Business in the same assessment year, then 'Not set off' such losses can be carried forward in the following assessment year, and
i) It shall be set off against the profits and gains, if any, of any Specified Business carried on by him assessable for the assessment year.
Ii) If the loss cannot the wholly so set off, the amount of loss ‘not so set off’ shall be carried forward to the following assessment year and so on till it is fully set off out of profits of any Specified Business.
6. Capital Losses [Section 74]
a) 'Not Set off' Short Term Capital Loss of a previous year many be carried forward to be set off against the Capital Gains (whether Long-term Capital Gain or Short-term Capital Gain) arising in eight (8) subsequent years immediately succeeding the assessment year for which the loss was first computed.
b) 'Not Set off' Long-Term Capital Loss of a previous year may be carried forward to be set off against the Long-Term Capital Gains, arising in subsequent eight (8) years immediately succeeding the assessment year for which the loss was first computed.
7. Losses on Account of Owning and Maintaining Race Horses [Section 74A]
'Not Set Off' Losses from the activity of Owning and Maintaining Race Horses may be carried forward for maximum 4 assessment years immediately succeeding the assessment year in which such loss was first computed. Such 'Not Set off Losses' can be carried forward but are allowed to be set off from the profits of owning and Maintaining Race Horses only subject to the condition that such activities must have been continued till the losses are carried forward. If such activities related to race horses are discontinued, losses of such discontinued, losses of such discontinued business cannot be carried forward.
8. Losses of Firms
Partners of the firm share the profits of the firm and it is exempt in their hands but losses of the firm are not shared among the partners. The law related to set off and carry forward of losses of firms are broadly same as already discussed in the previous pages, however, some main points are given as under:
a) The firm can only set off and carry forward and set off its own losses and not the partners.
b) Firm's "Not Set Off" business losses can be carried forward for 8 assessment years and set off against business income of subsequent years.
c) Unabsorbed Depreciation, Capital Expenditure on Scientific Research and Family Planning are allowed to be carried forward for being set off in the subsequent assessment years and there is no time limit prescribed for such carry forward.
9. Losses of Firm in Case of Change in Constitution [Section 78 (1)]
It there is a change in the constitution of the firm due to retirement or death of a partner, on insolvent of one or more partner, on admission of one or more partners in the firm, or on change in the profit-sharing ratio of the partners, then, under above of the any situation and if there is any loss to deceased partner, it cannot be carried forward.
10. Losses in Case of Change in succession of Firm [Section 78 (2)]
Losses of a firm related to pre-succession period cannot be carried forward and set off by successor in the post succession period.
11. Losses in Case of Change in Succession in Business by Inheritance
If the succession has occurred due to inheritance, losses of a firm related to pre-succession period can be carried forward and set off by the successor against the profits of post-succession period.
12. Losses in Case of Certain Companies [Section 79]
i) If there is a change in the shareholders of a company (in which there is no substantial interest of the public in general) in the previous year, then losses incurred in any prior to the previous year shall be carried forward and set off against the income of previous year provided that shareholders having 51% voting rights should be old shareholders on the last day of the year or years in which the loss was incurred and the change should be in minority shareholding only.
Ii) In the case of a company, not being a company in which the public are substantially interested but being an eligible start-up as referred to in Section 80-IAC, the loss incurred in any year prior to the previous year shall be carried forward and set off against the income for the previous year, if all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred: -
a) Continue to hold those shares on the last day of such previous year; and
b) Such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.
This provision shall not apply in the following cases:
i) The death of a shareholder.
Ii) On account of transfer of shares by way of gift to any relative of the shareholders making such gift.
13. Losses of Lottery, Crossword Puzzles, Gambling, Betting etc
These losses cannot be carried forward; however, they can be set off in the same year in which they occur against the incomes of the similar sources.
14. Losses in Case of Association of Persons (AOP) or Body of Individuals (BOI)
Losses of AOP or BOI shall be set off and carry forward by the AOP or BOI itself. It will not be apportioned among members. In other words, rules regarding set off and carry forward of losses of AOP or BOI are the same as are applicable in case of a firm assessee.
15. Loss Arising in Case of Bonus Stripping [Section 94 (8)]
Bonus stripping is a situation when purchase or sale of units of a listed company is transacted in a manner, which would result in short term capital loss that can be adjusted against any other capital gains. In Bonus Stripping, shareholders acquire units before the company makes any bonus issue. Once the company issues bonus units, the investors sell the original units which they had held earlier. This can result in to short term capital loss. Later, after one year they dispose the bonus units. This situation enables the shareholders to enjoy two-fold benefits.
i) Short-term capital loss for the sale of original units can be set off against any capital gains.
Ii) Benefit of concessional rate of tax at the rate of 10% can be availed on the long-term gains made on the same of the bonus unit.
To prevent the practice of Bonus Stripping Section 94 (8) has been inserted. According to the said Section [94 (8)], if an investor sells or transfers all or any of the original units within a period of 9 months after record date (date on which bonus units is allotted), while continuing to hold all or any of the bonus units, then the loss, if any arising from such transfer shall be ignored for the purpose of calculating income chargeable to tax and the amount of the loss so ignored shall be deemed to be the cost of purchase or acquisition of additional units (bonus units). Thus, the shareholders will not be allowed to book the above-mentioned loss on original units against other capital gains.
16. Return of Losses
No loss can be carried forward and set off unless it is determined in pursuance of a return filed as per provisions of Section 139(3) before the Assessing Officer within the time limits prescribed or within the extended time permitted. If the return of loss is filed after the allowed time limit or prescribed time limit, the delay may be condoned, if certain conditions are satisfied.
17. Order of Set Off
If the assessee is entitled to claim depreciation, capital expenditure etc. and carried forward business losses, the order of set off will be as under:
i) Current year depreciation [Section 32 (1)]
Ii) Current year capital expenditure on scientific research and family planning to the extent allowed.
Iii) Brought forward business or profession losses [Section 72(1)]
Iv) Unabsorbed Depreciation [Section 32 (2)]
v) Unabsorbed Capital expenditure on scientific research [Section 35 (4)]
Vi) Unabsorbed expenditure on family planning [Section 36 (i) (ix)]
According to these provisions to the extent of transfer of income to the other person or to the extent of income earned by such person on such transfers shall be included in the total income of the assessee. Such inclusion of income of other person in the income of the assessee is called ‘Clubbing of Income’. Provisions of Clubbing of Income are as under:
1. Transfer of Income without Transfer of Assets
If an income earned through an asset is transferred by a person to another person without transferring the ownership of the asset, the income from such asset shall be deemed to be the income of the transferor and shall be included in his total income.
2. Revocable Transfer of Assets (Section 61)
Where a revocable transfer is made of an asset by one person to another person, any income arising or derived from such assets shall be deemed to be the income of the transferor and shall be included in his total income. A transfer shall be deemed to be revocable if
i)It contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor, or
Ii) It (Transfer) in any way, give the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets.
Transfer includes any settlement, trust, covenant, agreement or arrangement (Sec. 63).
3.Salary, Commission, Fees, or Any Other Remuneration to the Spouse (Section 64)
In computing the total income of an individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest. However, these provisions will not apply on the income of such spouse who possesses Technical or Professional Qualifications and the income is solely attributable to the application of his or her Technical or Professional knowledge and experience. In case of a company, an individual is considered as deemed to have substantial interest, if he beneficially has at least 20% equity shares along with his relatives at any time during the previous year. The shares must carry voting rights. In any other case (where the concern is not a company), the individual along with his relatives is entitled to at least 20% of the profits of the concern at any time during the previous year. If each spouse has substantial interest in a concern and both are in receipt of remuneration from such concern, the remuneration shall be clubbed in the income of that spouse (husband or wife) whose total income is higher excluding such remuneration. Spouse means husband or wife and the clubbing is limited to the incomes of salary, commission, fees or any other remuneration received by the spouse, directly or indirectly and in cash or kind.
4. Income from Assets Transferred to Spouse [Section 64 (1) iv]
Where an individual transfers his asset (excluding house property) directly or indirectly, to his spouse, any income from such asset is deemed to be the income of the transferor. However, these provisions will not apply in the following circumstances:
i) If the transfer is made for adequate consideration.
Ii) If the transfer is made under an agreement between the spouses to live apart. Such separation may be judicial or voluntary. In the cases, where the consideration is not adequate, proportionate income shall be included in the income of the transferor. The income from house property transferred to spouse shall be taxed under the head 'Income from House Property' in the hands of transferor and not in the hands of transferee.
5. Income from Assets Transferred to Daughter-in-law (Son's wife) [Section 64 (1) (vi)]
Income arising from transfer of an asset by an individual directly or indirectly on or after the 1st day of June 1973 without adequate consideration to son's wife (daughter-in-law) is included in the total income of the transferor.
6. Income from Assets Transferred to a Person or Association of Persons for the Benefit of Spouse [Section 64 (1) (vii)]
Income arising from transfer of an asset directly or indirectly by an individual without adequate consideration to a person or Association of Persons for the immediate or deferred benefit of his or her spouse shall be included in the total income of the transferor to the extent it is for the benefit of the spouse.
7. Income from Assets Transferred to a Person or Association of Persons for the Benefit of Son's Wife [Section 64 (1) (viii)]
Income arising from transfer of an asset after 31.05.1973, directly or indirectly by an individual without adequate consideration to a person or Association of Persons for the immediate or deferred benefit of son's wife, shall be included in the total income of the transferor to the extent it is for the benefit of the son's wife.
8. Income to the Spouse or Son's wife from investment of Transferred Asset
Where the individual has transferred any asset or assets directly or indirectly to the spouse or son's wife and such assets are invested by the transferee.
a) In any business, such investment being not in the nature of contribution of capital as a partner in a firm or for being admitted to the benefits of partnership in a firm, the amount as calculated in the following manner shall be included in the total income of the transferor =
Value of the asset transferred by the Transferor on the 1st day of previous Year/ Total Investment in the business by the transfer as on the 1st day of previous year × Income from the business to the transferee
b) In any business, such investment in the nature of contribution of capital as a partner in a firm, the amount as calculated in the following manner, shall be included in the total income of the transferor=
Such capital contribution of the transferee as on 1st day of previous year/ Total capital contribution of the transferee as on 1st day of previous year × Total Income received by the transferee from the firm
Income of a minor child
Every income of a minor child not being a minor child suffering from any, disability of the nature specified in Section 80 U shall be included (clubbed) in the income of his/her parent. Income includes both which arises or accrues to the minor. However, the following incomes shall not be included in the total income of parent:
a) Income as arises or accrues to the minor child on account of any manual work done by him; or
b) Income as arises or accrues to the minor child from any activity involving application of his skill, talent or specialized knowledge and experience.
Rules of clubbing of a minor's income in the income of parent are as under:
a) Where the marriage of his (minor's) parent subsists, income shall be clubbed in the income of that parent whose total income (excluding the income of minor child) is greater, for example, if in the previous year, exclusive income of mother is Rs 6,00,000 and father’s income is Rs 7,00,000 (without adding minor’s income in both the cases), and the minor’s income in the previous year is Rs 2,00,000, then, minor’s income shall be included in the income of the father because his exclusive income is greater.
b) Where the marriage of his parent does not subsist, the income of the minor child shall be included (clubbed) in the minor child in the income of that parent who maintains the minor child in the previous year.
Where any income of minor is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent unless the Assessing Officer is satisfied and gives approval for doing so. If a minor child's income is included in the total income of an individual (any parent), such individual shall be entitled to the following exemption in respect of each minor child separately:
The income of the minor child so included
Or
Rs. 1,500 (Whichever is less)
Income from converted property
If an individual who is a member of H.U.F. Converts any asset owned by him into asset of HUF without adequate consideration after 31.12.1969, then the income from such asset shall be deemed to be the income of the individual and not of the H.U.F. And shall be included in the total income of the transferor (individual). If such converted property is partitioned subsequently, the income earned/received from such converted property or transferred property as is received by the spouse of the transferor, shall be deemed to be the income of the transferor and shall be included in his total income.
Income from the accretion to assets
Income arising to the transferee from the property transferred without consideration to him is taxable in the hands of the transferor. However, if an income arises from accretion of such property or from accumulated income of such property to the transferee, it will not be included in the total income of the transferor and shall be taxable in the hands of the transferee.
Clubbing of negative incomes (losses)
Losses are also called Negative Incomes. Since incomes of other persons (transferee) may be clubbed in the income of transferor, the negative incomes or losses shall be taken into account in computing the income of transferor for such purpose. Thus, it may be concluded that for the purpose of clubbing provision income includes, loss also.
References:
1. Singhanai V.K.: Student’s Guide to Income Tax; Taxmann, Delhi.
2. Prasad, Bhagwati: Income Tax Law & practice: Wiley Publication, New Delhi.
3. Dinker Pagare: Income Tax Law and Practice; Sultan Chand & Sons, New Delhi.
4. Girish Ahuja and Ravi Gupta; Systematic approach to income tax; Sahitya Bhawan Publications, New Delhi.
5. Chandra Mahesh and Shukla D.C.: Income Tax Law and Practice; Pragati Publications, New Delhi.
