{"id":19074,"date":"2023-03-28T16:26:20","date_gmt":"2023-03-28T10:56:20","guid":{"rendered":"https:\/\/gstguntur.com\/?p=19074"},"modified":"2023-03-28T16:27:15","modified_gmt":"2023-03-28T10:57:15","slug":"set-off-or-carry-forward-of-losses-ca-final-dt-question-bank","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/set-off-or-carry-forward-of-losses-ca-final-dt-question-bank\/","title":{"rendered":"Set-Off or Carry Forward of Losses \u2013 CA Final DT Question Bank"},"content":{"rendered":"

Set-Off or Carry Forward of Losses \u2013 CA Final DT Question Bank<\/a> is designed strictly as per the latest syllabus and exam pattern.<\/p>\n

Set-Off or Carry Forward of Losses \u2013 CA Final DT Question Bank<\/h2>\n

Question 1.
\nExplain in brief, the treatment as to the taxability and \/or allowability, under the provisions of Income-tax Act, 1961:<\/p>\n

\u2018B\u2019 Ltd. is a company engaged in the business of financing and investment in shares. It suffered loss of \u20b9 3,00,000 on account of futures and options, a transaction in the form of derivatives in which the underlying asset was shares.\u00a0 \u00a0[CA Final May 2010] [3 Marks]
\nAnswer:
\nAs per Sec. 73, loss of speculation business shall be set off only against the speculative business income. However, proviso (d) to Sec. 43(5) provides that a transaction in derivatives carried out in a recognised stock exchange, in which underlying asset is shares shall not be treated as speculative transaction. Since, the transaction is not a speculative transaction, the loss would be treated as an ordinary business loss eligible for set-off loss as per % normal set-off provisions.<\/p>\n

\"Set-Off<\/p>\n

Question 2.
\nX carrying on a business as sole proprietor, died on 31 st March, 2020. On his death, the same business was continued by his legal heirs, by forming a firm. As on 31st March 2020, a determined business loss of \u20b9 5 lakhs is to be carried forward under the Income-tax Act, 1961.<\/p>\n

Does the firm consisting of all legal heirs of Mr. X, get a right to have this loss adjusted against its current income? [CA Final May 2012] [3 Marks]
\nAnswer:
\nSection 78(2) provides that where a person carrying on any business or profession has been succeeded in such capacity by another person, otherwise than by inheritance, then, the successor is not entitled to carry forward and set-off the loss of the predecessor against his income. This implies that generally, set-off of business losses should be claimed by the same person who suffered the loss and the only exception to this provision is when the business passes on to another person by inheritance.<\/p>\n

The facts of case are similar to the facts in case of CIT v. Madhukant M. Mehta (2001) where the Supreme Court has held that if the business is succeeded by inheritance, the legal heirs are entitled to the benefit of carry forward of the loss of the predecessor.<\/p>\n

Even if the legal heirs constitute themselves as a partnership firm, the benefit of carry forward and set off of the loss of the predecessor would be available to the firm. In this case, the business of X was continued by his legal heirs after his death by constituting a firm. Hence, the exception contained in section 78(2) along with the decision of the Apex Court discussed above, would apply in this case. Therefore, the firm is entitled to carry forward the business loss of \u20b9 5 lakhs of X.<\/p>\n

\"Set-Off<\/p>\n

Question 3.
\nST & Co., a partnership firm was dissolved and as per the dissolution deed of the partnership firm, with effect from 18th September, 2006, S, one of the partners of erstwhile firm took over the entire business of the partnership firm in his individual capacity including fixed assets, current assets and liabilities and the other partner was paid his dues. He then continued the business as a sole proprietor with effect from that date. The assessee, relying upon Section 78(2) claimed the set-off of the losses suffered by the erstwhile partnership firm against his income earned as an individual proprietor, considering the case as inheritance of business. The claim of the assessee was disallowed by the A.O.<\/p>\n

Examine the correctness of the action of the Assessing Officer. [CA Final Nov 2016] [4 Marks]
\nAnswer:
\nThe issue is whether the loss of the partnership firm taken over by one of the partner can be set-off against the income of such individual proprietor considering the case of inheritance of business.<\/p>\n

The facts of this case are similar to the facts of the case Pramod Mittal v\/s CIT (2013), where the Delhi High Court observed that upon dissolution, the partnership firm ceased to exist. Also, the partnership firm and the proprietorship concern are two separate and distinct entities for the purpose of assessment.<\/p>\n

As per sec. 170(1), in case of dissolution, the partnership firm shall be assessed as such from beginning of the year till the date of dissolution. Thereafter, the income of the sole-proprietor shall be taxable in the hands of the assessee as an individual. Thus, sec. 170(1) clearly provides as to who will be assessable in respect of the income of the previous year from the business.<\/p>\n

Section 78(2) provides that only that person, who has incurred the losses, and no one else, would be entitled to carry forward and set-off such losses. The only exception is where there is succession by inheritance.<\/p>\n

Thus, section 170( 1) providing the person in whose hands income is assess-able in case of succession and section 78(2) providing for carry forward of losses in case of succession of business, deal with different situations and there is no contradiction between these sections.<\/p>\n

The High Court held that the exception u\/s 78(2), allowing the carry forward of losses by the successor in case of inheritance is not applicable in the present case since the partnership firm was dissolved and ceased to continue. Taking over the business of the firm by a partner cannot be construed as a case of inheritance by death as per the law of succession. Therefore, the loss suffered by erstwhile partnership firm, cannot be carried forward by the 5 successor sole proprietor, since it is not a case of succession by inheritance.<\/p>\n

Considering the decision pronounced in the above case, the assessee is not eligible to set-off the loss of the ST & Co. from his individual income and therefore, the contention of the A.O. to disallow such claim of assessee is correct.<\/p>\n

\"Set-Off<\/p>\n

Question 4.
\nVishvakshena & Co. is a partnership firm. For the year ended 31.3.2021, the following particulars are made available:<\/p>\n

    \n
  1. Secret commission of \u20b9 50,000 paid to Government official.<\/li>\n
  2. \u20b9 12 lakhs paid as commission to a partner’s son at 0.5% of the sales value, without deduction of tax at source. Partner has 25% share in firm.<\/li>\n
  3. Loss in the above business, after considering the above items debited to the profit and loss account are:
    \nBusiness Loss \u20b9 80 Lakhs, Unabsorbed depreciation \u20b919 lakhs.<\/li>\n<\/ol>\n

    In addition, the firm has a warehouse business opted for section 35AD. Loss suffered therein is \u20b9 55 lakhs.<\/p>\n

    The firm has filled the return of income for the assessment year 2021-22 on 29-11-2021. Specify the items (with quantum) which are eligible for carry forward to the subsequent years. Will your answer be different, if the firm has filled its return of income on 29-12-2021?<\/p>\n

    Assume that transactions in cash in respect of sale and purchase exceed 5% of the total sale and purchase.\u00a0 \u00a0[CA Final May 2017] [6 Marks]
    \nAnswer:
    \nAs per Sec. 44AB, the partnership firm is liable to tax audit if its turnover exceeds \u20b9 1 crores (since transactions in cash in respect of sale and purchase exceed 5% of total sale and purchase, the limit of \u20b9 5 crores shall not be considered) in the previous year. In this case, the turnover of Vishvakshena & Co. is \u20b9 24.00 crores (\u20b9 12 lakhs \u00f7 0.50% ), which exceeds \u20b9 1 crore and therefore, it is liable for tax audit u\/s 44AB for the A.Y. 2021- 1 22 and the due date of filing ROI will be 31.10.2021 (w.e.f. A.Y. 2021-22).<\/p>\n

    In this case, the firm has filed its return of loss u\/s 139(3) after the due date i.e., on 29.11.2021. Hence, it is not eligible for carry forward of its business loss of \u20b9 75,90,000 u\/s 72(1) [See Working Note below] and its loss of \u20b9 55,00,000 from specified business (referred to in section 35AD) as per section 73A(2), since, as per section 80 read with section 139(3), filing of return of income on or before the due date is necessary for carry forward of such losses.<\/p>\n

    However, there is no such restriction for carry forward of unabsorbed depreciation u\/s 32(2). Therefore, it can carry forward its unabsorbed depreciation of \u20b9 19 lakhs to A.Y. 2022-23.<\/p>\n

    \"Set-Off<\/p>\n

    The answer will remain the same even if the firm has filed its return of income on 29.12.2021, since both 29.11.2021 and 29.12.2021 fall beyond the due date of filing of return of income for the said firm.<\/p>\n

    Working Note:<\/p>\n\n\n\n\n\n\n\n
    Computation of business loss to be carried forward as per section 72(1)<\/td>\n\u20b9<\/td>\n<\/tr>\n
    Loss as per profit and loss account<\/td>\n(80,00,000)<\/td>\n<\/tr>\n
    Add: Secret commission to a Government official not allowable as per section 37 as it is an expenditure incurred for a purpose which is an offence and prohibited by law<\/td>\n50,000<\/td>\n<\/tr>\n
    30% of commission paid to partner’s son without TDS to be disal\u00adlowed u\/s 40(a)(ia)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 ‘<\/td>\n3,60,000<\/td>\n<\/tr>\n
    Business loss computed as per the provisions of the income-tax Act, 1961<\/td>\n(75,90,000)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    \"Set-Off<\/p>\n

    Question 5.
    \nVaamana Pvt. Ltd., has share capital in the form of equity shares. The shares were held up till 31st March, 2019 by four members, C, D, E, and F equally. The company made losses\/profits for the past three assessment years as follows:<\/p>\n\n\n\n\n\n\n\n
    Assessment Year<\/td>\nBusiness Loss<\/td>\nUnabsorbed Depreciation<\/td>\nTotal<\/td>\n<\/tr>\n
    2017-18<\/td>\nNil<\/td>\n5,00,000<\/td>\n5,00,000<\/td>\n<\/tr>\n
    2018-19<\/td>\nNil<\/td>\n2,00,000<\/td>\n2,00,000<\/td>\n<\/tr>\n
    2019-20<\/td>\n6,00,000<\/td>\n6,00,000<\/td>\n12,00,000<\/td>\n<\/tr>\n
    Total<\/td>\n6,00,000<\/td>\n13,00,000<\/td>\n19,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    The above figures have been accepted by the Income-tax Department.<\/p>\n

    During the previous year ended 31.3.2020, C sold his shares to A and during the previous year ended 31.3.2021, D sold his shares to B. The profits for the past two previous years are as follows:
    \n31.3.2020 – 8,00,000 (before charging depreciation of 1,00,000)
    \n31.3.2021 – 15,00,000 (before charging depreciation of 1,50,000)
    \nCompute the total income for the A.Y. 2021-22. Workings must form part of your answer. [CA Final May 2017, Nov. 2004] [10 Marks]
    \nAnswer:
    \nSection 79 provides, where in any previous year, there has been a change in the shareholding of a company in which the public are not sub-stantially interested, any unabsorbed loss of the company shall be allowed to be carried forward and set off against the income of the previous year only if the beneficial shareholders of at least 51 % of the voting power on the last day of the previous year remained the same as on the last day of the year or years in which the loss was incurred.<\/p>\n

    The shareholding patterns of the company in the last three financial years are given below:<\/p>\n\n\n\n\n\n\n\n
    As on 31st March<\/td>\nC<\/td>\nD<\/td>\nE<\/td>\nF<\/td>\nA<\/td>\nB<\/td>\n<\/tr>\n
    %<\/td>\n%<\/td>\n%<\/td>\n%<\/td>\n%<\/td>\n%<\/td>\n<\/tr>\n
    2019<\/td>\n25<\/td>\n25<\/td>\n25<\/td>\n25<\/td>\n–<\/td>\n–<\/td>\n<\/tr>\n
    2020<\/td>\n–<\/td>\n25<\/td>\n25<\/td>\n25<\/td>\n25<\/td>\n–<\/td>\n<\/tr>\n
    2021<\/td>\n–<\/td>\n–<\/td>\n25<\/td>\n25<\/td>\n25<\/td>\n25<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Since shareholders holding at least 51% of the voting power are the same in the P.Y. 2018-19 and P.Y. 2019-20, the restriction imposed by section 79 is not applicable for Set-off of losses of the P.Y. 2018-19 against income of the P.Y. 2019-20.<\/p>\n

    Taxable income for the Assessment Year 2020-21
    \n\"Set-Off
    \nBalance unabsorbed depreciation relating to the earlier assessment year can be carried forward to the next assessment year i.e., A.Y. 2021-22 for set-off against income of that year. There is no brought forward business loss and the restriction contained in section 79 is not applicable in case of carry forward of unabsorbed depreciation. Section 32 governs the carry forward and set off of depreciation for which the shareholding pattern is not relevant at all.
    \n\"Set-Off<\/p>\n

    \"Set-Off<\/p>\n

    Question 6.
    \nSurat Limited, engaged in the business of textiles also effected the sales and purchase of shares of other companies. It suffered loss from such transactions:<\/p>\n

      \n
    1. Whether such company can set off its losses from share trading, from the profit of textile business.<\/li>\n
    2. If principal business of such company is sale and purchase of shares of other company then what would be your answer?\u00a0 [CA Final May 2018 (New Syllabus)] [4 Marks]<\/li>\n<\/ol>\n

      Answer:
      \nAs per Explanation to Sec. 73, if any company deriving its income mainly under the head \u201cProfits and Gains of Business or Profession\u201d (other than a company whose principal business is trading in shares or banking or granting loans and advances) and any part of its business consisting of purchase or sale of shares, then such part of the business shall be deemed to be speculation business.<\/p>\n

      In this case, Surat Ltd. is engaged in the business of textiles and also effected the sales and purchase of shares of other companies. Therefore, the purchase and sale of shares of other companies by Surat Ltd. shall be deemed to be speculation business:<\/p>\n

      (i) As per Sec. 70, loss from a speculation business can be set off only against speculation business income and therefore, the company cannot set-oil its loss Irom share trading against the profit of textile business.<\/p>\n

      (ii) If principal business ol the company is sale and purchase of shares of other company, then the answer would be different, since Explanation to Sec. 73 shall not be applicable and the sale and purchase of shares of other companies shall not be treated as speculation business. Therefore, the company can set-olf the losses from share trading against the profit of textile business.<\/p>\n

      \"Set-Off<\/p>\n

      Question 7.
      \nOn 1.4.2020, Wuyu Ltd. was amalgamated with Rayu Ltd. satisfying all the conditions mentioned in section 2(1B).
      \nWuyu Ltd. had the following brought forward losses as assessed till the assessment year 2020-21:<\/p>\n\n\n\n\n\n\n\n
      <\/td>\n\u20b9 in lakhs<\/td>\n<\/tr>\n
      Speculation business loss<\/td>\n5.00<\/td>\n<\/tr>\n
      Unabsorbed Depreciation<\/td>\n13.00<\/td>\n<\/tr>\n
      Business loss<\/td>\n150.00<\/td>\n<\/tr>\n
      Unabsorbed expenditure of capital nature on scientific research<\/td>\n3.00<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Rayu Ltd. has computed a profit of \u20b9 180 lakhs for the financial year 202021 before setting off the eligible losses of Wuyu Ltd. but after providing depreciation @ 15% p.a. on \u20b9 140 lakhs, being the consideration at which plant and machinery were transferred by Wuyu Ltd. to Rayu Ltd. The WD V as per Income-tax records of Wuyu Ltd. as on 1.4.2020 was \u20b9 98 lakhs.<\/p>\n

      The above profit of Rayu Ltd. includes speculation business profit of \u20b9 15 lakhs. Compute the total income of Rayu Ltd. for the A.Y. 2021-22 and indicate the losses\/other allowances to be carried forward by it. Assume the amalgamation is within the meaning of section 72A of the Income-tax Act, 1961. Give reasons for treatment of each item. [CA Final May 2019 (Old Syllabus), Nov 2010] [8 Marks]
      \nAnswer:
      \nComputation of Total Income of Rayu Ltd for the A.Y. 2021-22
      \n\"Set-Off<\/p>\n

      Notes:
      \n1.
      \n\"Set-Off<\/p>\n

      2. In case of amalgamation of companies, the unabsorbed losses and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected and such business loss and unabsorbed depreciation shall be carried forward and set-off by the amalgamated company for a period of 8 years and indefinitely, respectively.<\/p>\n

      3. As per section 72A(7), the accumulated loss to be carried forward specifically excludes loss sustained in a speculative business. Therefore, speculative loss of \u20b9 5 lakhs of Wayu Ltd. cannot be carried forward by Ravu Ltd.<\/p>\n

      \"Set-Off<\/p>\n

      4. Section 72(2) provides that where any allowance or part thereof unabsorbed u\/s 32(2) (i.e., unabsorbed depreciation) or section 35(4) (i.e., unabsorbed scientific research capital expenditure) is to be carried forward, effect has to be first given to brought forward business losses u\/s 72.<\/p>\n

      5. Section 35(4) provides that the provisions of section 32(2) relating to unabsorbed depreciation shall apply in relation to deduction allowable under section 35(1)(iv) in respect of capital expenditure on scientific research related to the business carried on by the assessee. Therefore, unabsorbed capital expenditure on scientific research can be set-off and carried forward in the same manner as unabsorbed depreciation.<\/p>\n

      6. The restriction contained in section 73 is only regarding set-off of loss computed in respect of speculative business. Such a loss can be set-off only against profits of another speculation business and not non-speculation business. However, there is no restriction regarding set-off of normal business losses against speculative income. Therefore, normal business losses can be set-off against profits of a speculative business. Consequently, there is no loss or allowance to be carried forward by Rayu Ltd. to the A.Y. 2022-23.<\/p>\n","protected":false},"excerpt":{"rendered":"

      Set-Off or Carry Forward of Losses \u2013 CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern. Set-Off or Carry Forward of Losses \u2013 CA Final DT Question Bank Question 1. Explain in brief, the treatment as to the taxability and \/or allowability, under the provisions of Income-tax Act, …<\/p>\n

      Set-Off or Carry Forward of Losses \u2013 CA Final DT Question Bank<\/span> Read More »<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"spay_email":"","footnotes":""},"categories":[169],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/19074"}],"collection":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/comments?post=19074"}],"version-history":[{"count":1,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/19074\/revisions"}],"predecessor-version":[{"id":19081,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/19074\/revisions\/19081"}],"wp:attachment":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/media?parent=19074"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/categories?post=19074"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/tags?post=19074"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}