Article Details

File the return in time to enjoy the benefit of carry forward of loss
TAX TALK-15.02.2016-THE HITAVADA
 
TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant


File the return in time to enjoy the benefit of carry forward of loss
 
Query 1]
I know a Farmer in my Neighborhood who was having agriculture land & has been acquired by MIHAN in FY 09-10. The peoples who put illegal Layouts moved to court claiming that the farmer has sold the plot & the compensation money belongs to them.
The court ordered MIHAN to deposit the compensation of Rs. 50 Lacs in court instead of giving to farmer & the court has deposited the same in Bank. Now after 6 Years, i.e., in FY 15-16 the court decision came in favour of farmer & the compensation money of Rs. 50 lacs along with the interest of Rs. 7 lacs is been given to farmer.
My Queries are:-
1. Will LTCG tax is attracted in such case?
2. What would be tax impact on the Interest Received?
3. Whether tax on interest received should be paid on cash basis or on accrual basis & why?
4. Any tax saving Remedy? Please advice. [adityapatel025@gmail.com]
Opinion:
  1. Rural Agricultural Land:
    As far as rural agricultural land is concerned, it may be noted that it is not a capital assets and the surplus arising on its transfer is also tax free in the hands of taxpayer.
    An agricultural land is considered as rural agricultural land only if it is not situated in any area within the distance (measured aerially) of not more than:
    a] 2 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or
     b] 6 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
    c] 8 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.
  2. Urban Agricultural Land:
    In case of Urban agricultural land, any Capital gain arising to an Individual/ HUF out of the compulsory acquisition is exempt from income tax u/s 10(37) of the Income Tax Act-1961 provided:
    a] It is received after 31.03.2004 &
    b] The said agricultural land was used by the assessee or his parents for agricultural purpose during the preceding 2 years prior to its transfer.
 
Coming to specific issues raised in the query,
  1. In case of compulsory acquisition of agricultural land, entire amount would be exempt. If urban agricultural land then amount would be exempt u/s 10(37) as mentioned in point No.(2) above. If rural agricultural land then also it would be exempt as rural agricultural land is not treated as a capital assets at all.
  2. Interest received on compensation of compulsory acquisition of land is taxable. It is “Income from Other Source” u/s 56(2)(viii) of the Income Tax Act-1961.
  3. Interest on such compensation is taxable on cash basis by virtue of specific provision incorporated u/s 145A(b) of the Income Tax Act-1961.
  4. Against interest income, one can claim deduction u/s 80C by making an investment in LIC/PFF/NSC etc up to Rs. 1.50 Lacs. Further, deduction towards mediclaim u/s 80D can also be claimed in such cases. Further, an additional deduction of Rs 50,000/- u/s 80CCD (1B) towards investment in National Pension Scheme (NPS) is also available from the FY 2015-16.
 
 
Query 2]
If there is short term loss in shares, whether this can be set off against intra-day gains? As short term loss can be carried forward for eight years, whether following year gains also can be set off against intra-day gains? [S.S.Gattani, Amravati
- shiva37ster@gmail.com]
Opinion:
Uncertainty in the business & investment transactions has become a part of life now. Whenever there is a loss in any business or investment transactions, there is a provision to adjust the loss against other income or to carry forward such loss so as to adjust it against the profit of subsequent years. However, such adjustment or carry forward is not absolute but is subject to various terms, conditions & stipulations. Awareness of the relevant provisions pertaining to set off and carry forward of losses is essential in order to maximize tax benefits. As all the readers may know, all the income of an assessee has to be classified individually in any one of the following five heads of income i.e., (1). Salary Income. (2) House property income (3) Business/Profession Income. (4) Capital Gain Income (5) Other source Income.

In normal course,
  1. Loss from one source under any one particular head of income, as mentioned above, can be adjusted against other income in the same head of income. It is referred to as “Intra-head set off”.
  2. If after intra-head adjustment, still there is a loss then such loss can be adjusted against Income under other Heads. It is called as “Inter-head Set Off”.
 
However, above intra & inter head adjustment is subject to the following exceptions.
A] Exceptions to Intra-head set off:
  1. Loss from speculation business cannot be set of against profit from non speculation business. However, reverse is not true & loss from non speculative business can be set-off against speculation income.
  2. Long term Capital Loss (LTCL) can only be set off only against LTCG. LTCL cannot be set off against STCG.
  3. No loss can be set-off against casual income i.e. Income from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature. No expenses can be claimed against casual income.
  4. Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses.
  5. Loss from an exempted source cannot be set off against taxable Income- If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax. E.g., Agricultural income or capital gain on sale of shares sold through a stock exchange after a holding period of more than 12 months is exempt from tax. Hence, if the taxpayer incurs loss in such activity, then such loss cannot be adjusted against any other taxable income.
  6. Loss from business specified u/s 35AD cannot be set off against any other income except income from specified business. section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building a housing projects, etc.
 
B] Exceptions to Inter-head set off:
  1. Before making inter-head adjustment, the taxpayer has to first make intra-head adjustment.
  2. Loss from speculative business cannot be set off against any other income. Interestingly, non-speculative business loss can be set off against income from speculative business. For Example: House property loss can be set-off against Speculative Incomes but speculation loss cannot be set off against House property income.
  3. Business loss cannot be set-off against salary income. It can be set-off against income under other heads.
  4. Loss under the head Capital Gains (LTCL or STCL) cannot be set-off against any other head. However, Loss from other heads can be set-off against Capital Gains income.
  5. No loss can be set off against Casual income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature. No expenses can be claimed against casual income.
  6. Loss from the business of owning and maintaining race horses cannot be set off against any other income.
  7. Loss from an exempted source cannot be set off against any other income. (e.g. Shares/Agricultural income as mentioned above).
  8. Loss from business specified under section 35AD cannot be set off against any other income (section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building housing projects, etc.)
 
A word of caution: The benefit of carry forward of loss is available to the taxpayer only if the return of income is field within the due date. If the return is filed belatedly, the benefit of carry forward is not available. In short, file the return in time to enjoy the benefit of carry forward of loss.
 
Coming to the specific issues raised by Mr. Gattani ji, it may be noted that Intra-day transactions in shares results in speculative profit/loss. In your case, Short Term Capital Loss (STCL) in shares can be set off against Capital Gain income only. If STCL cannot be set off in the same year, it can be carried forward in subsequent years for set off against STCG only. It cannot be set off against intra-day gains, neither in the same year nor in subsequent years.
 
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
Nagpur-440008
or email it at
nareshjakhotia@ssrpn.com]

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