Knowing About 17 Questions On Loss May Help You In Saving Taxes!

Everybody tries to earn profit, but sometime even best of effort produces losses. Income Tax Act has provisions to adjust the losses from one head to another , within own head and if losses still remain, facility of carry forward to specified years and adjusting in any future years . These provisions are contained in Chapter VI of the I T Act titled "Aggregation of Income And set off or carry forward and set off of losses" . Sixteen frequently asked questions have been answered below

Question 1 : Can intra head set off of losses optional to assessee?
Answer 1: No. assessee has no option but to set off of looses of one head with income of another head. If assessee does not do, A.O is bound to do the adjustment.

Question 2 :Can assessee postpone set off of losses u/s 70?
Answer : No

Question 3 : Can the losses of an assessee who is beneficiary of a trust , out of his shares in losses of trust , be set off with his income ?
Answer : Yes, only if A.O assesses him separately. Refer CIT vs Smt Veenaben Vadilal 197 ITR 156 (Guj)
Question 4: If a person has more than one business , can loss of one business be set off with income of another business ?
Answer 4 : Yes, however loss of discontinued business can be set off with income of a business which is being continued. Refer South India Industries Ltd vs CIT 3 ITR 11 (Madras).However , it is not necessary that the source must be in existence throughout the relevant year. Refer Hulasilal Ramdayal 9 ITR 635 (Allahabad ).

Question 5: Can loss from one source of income , which is exempt from tax , be set off against income from other source?
Answer 5: No. Refer India Malwa United Mills Ltd vs CIT (45 ITR 210 (S.C)
And CIT vs Harprasad & Co 99 ITR 118 (SC)
Question 6 :Can loss suffered by non resident outside India be adjusted with income tax able in India?

Answer 6: No . But in case of resident, he can adjust the loss suffered outside India with income in India . P M Muthuraman Chettiar & Anr vs CIT 44 ITR 710 (SC). Also refer the S.C judgment in CIT vs Mahalaxmi Sugar Mills Co Ltd 160 ITR 920 . Also refer the decision of Madras High court in case of CIT vs S S Thiagarajan (1981) [129 ITR 115 ] which did not allow set off losses from exempt income source with income of another sources.

Question 7 : Can loss of illegal business be allowed to be set off with i9ncome of legal business ?
Answer 7 : No ., refer CIT vs Kurji Jinabhai Kotecha 107 ITR 101 (SC) . Similarly , loss of illegal speculation business are also not allowed to be set of with legal speculation business . Refer CIT vs S.C Kothari 82 ITR 794 (SC) and also ADD.CIT vs RanjitSinhji Oil Mills Pvt Ltd 103 ITR 405

Question 8 : What are exceptional rule of inter-head adjustmnet of losses?

Answer : The general rule of adjustment of loss of one head against another head has following four exception

1. Speculation loss can be adjusted with speculation gain only.
2. Loss from activity of owning and maintaining horses can not be set off against any head of income from any sources as per section 74A of the I T Act. Other than maintaining of horses.
3. Losses from gambling can not be set off against any other income, not even another gambling income.
4. Long term loss can be set off with long term gain only.

Question 9 : Can losses from house property be carried forward if one does not file return within due period,?
Answer : Yes, the losses from house property can be carried forward and set off in subsequent years even when the return u/s 139(1) is not filed within due time.
Question 10 : Is filing of return within due time important for carry forward of losses?

Answer : The losses has to be determined first in order to be set off. As per section 80, unless return is filed u/s 139 the loss can not be determined.. Following losses are not allowed to be carried forward unless return is filed in accordance with the provision of sub section 3 of section 139

1. Business loss (Sec. 72(1))
2. Speculation loss (sec 73(2))
3. Losses under capital gains (74(1).
4. Losses from horse maintenance (74A(3).

Loses must be determined by A.O , otherwise it is not allowed to be carried forward .
CIT vs Haryana Hotels Ltd 276 ITR 521 (Punj & Haryana )
Question 11 : Is clubbing provisions applicable in case of losses also?

Answer : As per CBDT circular 104 dated 19.2.73 and also judicially , income include loss. Therefore, just as income of certain persons –like minor or others are clubbed with other person as per section 60 to section 64 , losses can also be clubbed and adjusted . Refer Supreme Court decision in case of

1. CIT vs P.Doraisamy Chetty 183 ITR 559
2. CIT vs J M Gotla 156 ITR 323

Question 12: Has assessee the right to carry forward the losses if the AO has not intimated him the losses assessed?
Answer : Yes , .Refer order of Mysore High Court in case of G. R. J Reddy vs CIT ,68 ITR 813 .

Question 13: Can loss be claimed even after the expiry of date of filing of return ?

Answer : Yes, an application to the Commissioner or Chief Commissioner or to the Board can be made u/s 119(2)(b) of the I T Act may be made for condoning the delay in filing and return and if allowed by the said authorities , claim of loss or refund can be entertained. In this regard , CBDT's circular No 8 of 2001 dated 16/5/2001 should be referred.

Question 14: Can losses of one industry be set off before claiming exemption u/s 10 A/ 10B of the I T Act?

Answer 1: No , because the exemption u/s 10A or 10 B are special scheme of taxation to encourage the setting up of businesses . Therefore, losses earned in one industry can not wipe out the benefit available by enactment to another industry. Reference may be taken to Canara Workshop 161 ITR 320 in which Apex Court held “ An industry entitled to the benefit of of sec.80E could have its profits wholly wiped out on adjustment against a heavy loss suffered by another industry and thus be totally denied the relief which should have been its due by virtue of its profits. In our opinion , each industry must be considered on its own working only when adjudging its title to the deduction u/s 80E. It can not be allowed to suffer because it keeps company with some other industry in the hands of the assessee.

Question 15 :Whether loss can be carried forward by Industry exempt u/s 10A/10B after the sunset year i.e year from which the exemption is withdrawn?

Ans: Yes, undertakings getting exemption u/s 10A /10B of the I T Act are allowed to carry forward the loss even for the year exemption is withdrawn by virtue of sub section 6(ii) of the section 10A/10B which was introduced with retrospective effect from Asst Yr 2001-02.

Question 16 :Whether loss can be carried forward by Industry exempt u/s 10C after the sunset year i.e year from which the exemption is withdrawn?

Answer 16 : No , because no such provision , as was introduced in section 10A/10B , was brought in section 10 C. So , undertaking having exemption u/s 10C are not allowed to carry forward the loss beyond the year when exemption stops.

Question 17 Whether speculation loss can be set off with dividend income?

Answer : Yes, only if the dividend is product or profit earned during the course of speculation business. This is as per ration of Mumbai Tribunal in case of Star Line Ispat & Alloys (2007) 14 SOT 140 (Mum) which held that dividend by itself is not speculative profit, but certainly is a profit out of speculation business.

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Is Fee To Lawyers or CA For Income Tax Case Allowable Expenditure?

I have paid Rs15000/- as legal fee to my Income Tax Lawyer in Jan 08 for representing my Scrutiny case of A/Y 2005-06, Can I Claim deduction of this amount from my salary income of A/Y 2008-09.Harish Chander Kochhar, Beas District Amritsar

The simple rule for allowance of an expense under Income Tax Law is that all expense incurred for earning taxable income should be allowed. You are earning salary income , and no part of your salary earning was dependent on the expense you incurred on scrutiny assessment. Moreover there is no provision for any kind of expense allowance against salary. So, Rs 15,000 is not claimable expense.

What would have been the position in case of business income?

There are contradictory decision on the allowance of fees to chartered accountants or lawyers for income tax proceedings in case of earning of business income.

First the favourable decision for assessee

In Commissioner Of Income Tax, (Central), New Delhi. vs Dalmia Dadri Cement Limited. 125 ITR 510 , Delhi High Court

We next advert to question No. 2 relating to the amount of Rs. 8,679 claimed by the assessee as fee paid to lawyers for preparation and pursuing of income tax appeals. The assessee has in this regard placed reliance upon the observations of the Supreme Court in the case of CIT v. Birla Cotton Spinning & Weaving Mills Ltd. [1971] 82 ITR 166 (SC), to the effect that the earning of profit and payment of taxes are not isolated and independent activities of a business. These are continuous and take place from year to year during the whole period for which the business continues. If the assessee takes any step for reducing its liability to tax which results in more funds being left for the purpose of carrying on of business there is always the possibility of higher profit. Similarly, in Sree Meenakshi Mills Ltd. v. CIT [1967] 63 ITR 207, the Supreme Court observed that in order that an expenditure may be admissible as a deduction, it is not necessary that the primary motive in incurring it must be directly to earn income thereby.

The Allahabad High Court too has in the case of Modi Sugar Mills Ltd. v. CIT [1973] 90 ITR 201 allowed expenditure reasonably and honestly incurred in connection with legal proceedings taken by an assessee by way of a writ for escaping tax liability consequent upon the discovery of concealed income. The Delhi High Court too in a Division Bench case, D.S. Bist and Sons v. CIT [1972] 85 ITR 254, has held that the expenses incurred by an assessee in payment of professional fees to chartered accountants in connection with representation to the Central Board of Revenue and other legal proceedings in appeals and in connection with settlement of old assessments with the Directorate of Inspection were allowable as business expenditure under s. 10(2)(xv) of the Indian I.T. Act, 1922. In view of this chain of decisions, we are unable to interfere with the order of the Tribunal holding that the sum of Rs. 8,679 claimed by the assessee as legal and court expenses for preparation and pursuing of income tax appeals was permissible. Question No. 2 is answered in favour of the assessee.

Against the assessee

Rajasthan high court has decided in favour of the assessee in case of Associated Stone Industries v. Commissioner of Income-tax [2003] 261 ITR 766 (Raj) saying

The amount, which has been claimed for deduction under section 80VV only part thereof has been disallowed. The Tribunal was right in its approach in disallowing the payment of fees to chartered accountants for filing the returns and preparing the accounts after the close of the year and for litigation to contest the tax imposed. We do not find that the payment of fees incurred for such type of jobs was for the business of the assessee. It relates to the income and that income has already been earned in the previous year, to contest the tax imposed cannot be said to be for the purpose of business, particularly when a negligible part of the amount of fees has been disallowed.

Take your decision!

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Why Should You Not Forget To Deduct Tax At Source?

Now , even individuals or HUF have been made responsible for deducting tax at source if their sales turnover exceeds Rs 40 lakhs or gross receipts from profession exceeds Rs 10 lacs. Not deducting tax at source from payments made will make them suffer very heavily. The punishment for not deducting tax at source, was enhanced by Finance Act 2004 by an amendment in section 40 of the I T Act. So , substituted section 40(ia) consists of following provision

40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession,

^{...........................................}

^{..............................................}

(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 :

Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid

The aforesaid provision contained in section 40(ia) clearly states if the TDS had to be deducted on any payment which is an expense, such expense shall be allowed as business expense only in year in which tax is deducted and deposited .

This year's budget has further plugged in a loophole in section 194C of the I T Act. Previously , the individuals or HUF were not responsible for deducting tax at source in case of any contractual payment . They were responsible for TDS only for payment to a sub-contractor. But from 1/6/2007, even individuals and HUF are responsible for TDS on contractual payments. So , individuals having business turnover over Rs 40 lacs or having professional receipts exceeding Rs 10 Lacs, should be careful not to forget to deduct the tax at source and pay to govt in time .Otherwise , the whole of expense shall be disallowed while computing total income for that year. It shall be allowable only in that year in which the TDS is paid to govt.This is apart from risk of penalty and interest for not deducting the tax at source.

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How to Compute Taxable Income From Adsense Receipt?

I have a blog with Adsense Ads on it. I have had a steady income from it of about $100 (average) every month.I am also a Software Professional based in Bangalore.I don't have a clue on how to file my Income Tax details regarding my Adsense Earnings.Could you give me details on how much Income Tax would be charged on my Adsense Earnings and also the process of filing income tax for my Adsense Earnings.Kavita

First following important points to note :

1. The adsense is taxable for all residents of India.
2. The earning can be shown as either income from profession or income from other sources. The basic difference between two heads is that if you are carrying on the blog writings on a continuous basis , it shall fall within the meaning of profession even if your prime earning may be from something else. However , there can always be difference of opinion. In my view, best is to show as income from profession .
3. If your earning is above Rs 10 lacs , you will have to get your accounts audited. I do not foresee any problem on this count because there may not be any books of account , if you do not account for expense for earning such income. If you want to claim, keep one date wise expense and bank book. Pass book may itself serve as cash/bank book required for maintaining books.What I mean there is no problem case of Adsense earning as far as accounting is concerned.

Suggestion for computing taxable income from Adsense?

The basic principal of computation of business or professional income is that reduce all expense incurred for earning the professional professional income. Therefore , an income & expenditure account can be prepared on following way for adsense earning.

Gross professional receipt or accrued xxxxx

Less

Expense incurred

Internet Charges xxxx

Depreciation on Car xxxx

depreciation on computer xxxx

Advertisement Cost like Adwords xxxx

Expense on books xxxx

Staff expense xxxx

Total Expense xxxxxx

Taxable professional income xxxxxx

All the aforesaid expense can be claimed only if incurred and were spent for the purpose of earning the adsense income.Otherwise not.Depreciation on car can not be availed if you can not prove how car is required for earning such professional income. In nut shell, claim only valid expnese.

And file the return in Form ITR-4 . Get it from here.

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How to Compute Turnover In Case Of Future & Options Trades?

I am a working professional and apart from my salary I have some income in Futures and option transactions and shares. I need to know few this.

1. Since Futures and options transactions are under business income. Can we set of gains and losses against income from salary?
2. How is turnover in Futures and options transactions calculated?? If notional value is considered, even 5-10 transactions will exceed 40L turnover and we need go through tedious Tax audit process.
3. What are documents that needs to be submitted while filing returns of income. Apart from Form 16, will a statement of account for futures and options transactions would be enough?

santoshk.sahu@gmail.com

Answer to your first question is Negative. The loss from "Capital Gains " and "Business & professions" can not be set off with income from Salary.

The meaning of turnover for in case of transactions in Futures and Options of shares is not defined under the I T Act.In case of derivative trading-Futures and Option- the difference on which the contract is purchased or sold is important. Although the value of contract is number of contract multiplied with the shares price , yet what is actually given or taken is differential amount in contract. For example if you purchase a future contract for Rs 105 for a share having a lot of 100,you pay nothing at the time of buying a contract, yet at the time of expiry if contract , you are either gainer or loser which is determined whether there is positive or negative difference. So , for the purpose of determining the turnover in case of future and options , for the purpose of 44AB , based on the guidance note of ICAI , following items should be considered to constitute turnover

• The total of positive and negative differences , plus
  
• Premium received on sale of options is also to be included in turnover ,plus
  
• In respect of any reverse trades entered, the difference thereon

But not the total value of contract .

Accounts with Return
Regarding your third question, if you do not fall in case of tax audit or a case that regular books of accounts are maintained , even in that case your return of income should be accompanied by a statement indicating the amounts of turnover or, as the case may be, gross receipts, gross profit, expenses and net profit of the business or profession and the basis on which such amounts have been computed, and also disclosing the amounts of total sundry debtors, sundry creditors, stock-in-trade and cash balance as at the end of the previous year [this is as per explanation section 139(9)]

Tags: Shares, India, income tax, Speculation

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Future Trading Is Business Activity!

Is income from Futures trading is business income or capital gain. If business income whether i have to file tax audit report, if the gross turnover exceeds Rs.40 lacs? rangarajan_s1@....mail.com

The future trading has been classified as business activity from Asst yr 2006-07 by removing the trading in derivative segment from the definition of speculative transactions. Section 43(5) defines Speculation in following words
"(5) speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:"

However , proviso (d) to this subsection , introduced from Asst Year 2006-07 stated

"Provided that for the purposes of this clause

(a) ..................; or

(b) ........ or

(c) .............

(d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange;
shall not be deemed to be a speculative transaction.

Eligible transaction has also been explained which in simple terms mean that all those derivative transaction-futures and Option -done screen based trading through a broker of recognised stock exchange .

As far as the issue of getting the accounts audited u/s 44Ab is concerned, in my opinion, one should get the accounts audited for two reasons

1. The derivative trading now a business activity, controversy may arise between you and department whether statutory tax audit is required.
2. Your accounts will be free from error.

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Do Not Pay Gratuity Over Rs 20000 In Cash.

Is it an allowable expenditure ,(100%)if we disburse gratuity settlement by cash to employees under income tax act,.Please refer rule6DD,sec269ss &40A.

Your Email : raja@ayyanar.com

There is no application of section 269 SS in case of payment of gratuity in cash exceeding Rs 20,000 because the said section 269SS is only related to receipt of loan or deposit in cash .

However, Section 40A (3) provides that in case any expenditure ,barring the cases enumerated in Rule 6DD ,is incurred in cash exceeding Rs 20,000, such expense is not allowable for computation of income.Section 40 A(3) is given as under

"40A(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft twenty per cent of such expenditure shall not be allowed as a deduction :..."

Gratuity is part of salary and a case has been given under sub clause [j] of rule 6 DD by which law provides the circumstances under which the salary can be paid in cash exceeding Rs 200000. The Rule 6DD(j) is given as under

"6DD(j) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Income-tax Act, 1961, and when such employee

(A) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and

(B) does not maintain any account in any bank at such place or ship;"

Apart from this ,if the place has no banking facility, then when you can pay salary exceeding Rs 20000 in cash. Please also note that the dis allowance under section 40A(3) now is technical and A.O has no power to go into facts and circumstances to decide if the payment requires dis allowance after the old Rule 6DD(j) has been deleted under which such power was vested in him/her.

Budget 2007 update

It has been proposed in the recent budget that the dis allowance for contravention of provision of Section 40A(3) is now 100 % .Previously it was only 20% of the total expenditure.

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Teaching Is Profession!

I work as a freelance teacher for IIT entrace exam coaching institutes. If I take all the classes assigned to me in a given month I get a flat professional fee for my services. In months where I have no work I don't get paid. For the year 2006-07 my total income is Rs.3,60,000. My questions are

• a) Under what head do I have to declare this income? Is it salary or income for business or profession.
• b) I and my wife are both PhD's. Pooling our previous savings and also availing a bank loan I bought a car and use it commute to the place of work. Can I claim depreciation for the car?
• (c)My office is my home. Can I claim rent paid as expense?

santy_5@......com

As you are paid by coaching institute, I presume they also deduct the tax at source.You have not given any details regarding contract signed with the coaching institute, but your earning is certainly in my view is "Income from profession" ,if you are not appointed as an employee by the coaching institute.

In case, you are not employee,you should show the income as follows:

• Income from Business & profession xxxxxxxx

less

• Depreciation on Car xxxxxx
• Fuel expense xxxxxx
• Any other expense related to your coaching xxxxxx
• ----------------
• Gross total Income xxxxxx
• 
  

As far as house rent is concerned, I would not suggest to claim as an expense unless you really do some thing related to your profession from your home. I suggest you should avail deduction u/s 80GG because you are not getting any HRA . To claim the deduction u/s 80G , you should read this

Tags: business income, India, income tax

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Letting Out of Factory Along With Machinery- Buisness Income or House Property Income ??

The assessee Company was doing job work with its own machinery.In F.Y.2004-05 it give the premises with machinery on lease.Whether the income should be assessed u/the head Income from House property or business income.kirans_agrawal@,,,..........com

This is a classic question and decision whether the income is from house property or business income is a matter of facts which you have not given. First of all , it should be understood that rent on machinery can not be assessed under house property . The rental of factory building can be . But prima facie , it seems that the assessee was exploiting the machinery installed in the factory premise,but for some reason given the whole property on rent. That going by the decision of the Apex court and other courts , the letting of factory along with machinery should be assessed under Buisness Income.

The principle upon which this is to be decided has been enunciated by the Supreme Court in Sultan's case [1964] 51 ITR 353, that "whether a particular letting is business has to be decided in the circumstances of each case. Each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by its owner."

Vikram Cotton Mills Ltd. [1988] 169 ITR 597 (SC), it has been observed as follows (headnote) :

"Whether a particular income is income from business or from investment must be decided according to the general commonsense view of those who deal with those matters in the particular circumstances and the conduct of the parties concerned."

In Ambica Tobacco Co. (P.) Ltd. v. CIT [1988] 172 ITR 343, the Andhra Pradesh High Court has also observed that : "the actual user acquires importance in a situation where the asset can be exploited for a dual purpose, i.e., both business and letting out. If the asset is merely let out without any trace of business activity, the question of considering the asset as a commercial asset does not arise".

Gujarat High Court in CIT vs Vania Silk Mills Pvt Ltd 112 ITR 701 held

• " The concern is a manufacturing concern and there was no dispute that these two machines can be used by the assessee in its own manufacture and were actually used by the sister concern in identical business. Merely because for want of air conditioning facilities the assessee at present could not install them in its premises, it could not be said that these two machines were not part of commercial assets of the assessee's business in which it can be used. There was no question of any redundancy when the intention was so eloquently expressed in the terms of the lease of these machines, reserving therein the priority rights whenever occasion arose as per the need of the assessee's business and even the right was reserved to terminate the lease before it got further renewed for five years' term. It would be completely a misreading of the objects clause when such a manufacturing concern was only with a view to better exploitation of its commercial assets was leasing only two machines to the sister concern when it could not install them for want of adequate air conditioning facilities in its premises."

If the machinery is given on rent , it means that its commercial exploits is still possible.Therefore, the income generated by the commercial asset is a business income. Even the building where the machineries were installed , are having the same fate. The aforesaid decision of Gujarat High court is based on Supreme Courts order in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC) .In the said case, the Apex Court held that

• "We respectfully concur in the opinion of the learned Chief Justice that if the commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the business, but we cannot accept the view that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. Suppose, for instance, in a manufacturing concern the use of its plant and machinery can advantageously be made owing to paucity of raw materials only for six hours in a working day, and in order to get the best yield out of it, another person who has got the requisite raw materials is allowed to use it as a licensee on payment of certain consideration for three hours, can it be said in such a situation with any justification that the amount realised from the licensee is not a part of the business income of the licensor. In this case the company was incorporated purely as a manufacturing concern with the object of making profit. It installed plant and machinery for the purpose of its business, and it was open to it if at any time it found that any part of its plant " for the time being " could not be advantageously employed for earning profit by the company itself, to earn profit by leasing it to somebody else. It is difficult to hold that the income thus earned by the commercial asset is not income from the business of the company that has been solely incorporated for the purpose of doing business and earning profit"

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Sales Tax Liability Can Not Be Disallowed If State Govt. Considered It As Deemed Collected !

Advanced Topic

An assessee had been allowed sales tax claim u/s 43B pursuant to a scheme of the state government whereby the government had converted his sales tax liability into a loan. The CBDT had issued two circulars---No.496 in 1987 and 674 in 1993---to provide that in cases where incentives were granted to an assessee by way of sales tax deferment, payment of ST will be deemed to have been made and no dis allowance will be made u/s43B.The assessee had been allowed such a deduction in A Y 1994-95, when his unpaid ST was converted into a loan.The loan instalment was due to be paid before31.03.2006, but it was not paid even before 31.10.2006, the due date for filing return of income.

Now the AO seeks to disallow this amount of loan instalment treating it as part of sales tax.My understanding is that once the amount of unpaid ST was converted into a loan, it ceased to be an expense altogether. How can it acquire the colour of sales tax again? Isn’t the AO violating the CBDT circulars mentioned above? Besides, only expenses can be disallowed u/s 43B, which implies that Section 43B applies only to the Profit and Loss items. A loan is a Balance Sheet item. So there’s no question of“dis allowance” of a capital payment. How can the AO do that?Please let me know how we can put up a good case before the AO. Can you cite some case laws that can help us out? CA Sanjeev Bedi

The moot point of your question is "if the sales tax liability was converted into loan by the State govt, whether the "unpaid loan" can be disallowed u/s 43B of the I T Act."

In my opinion , it can not be disallowed on account of Circular No 496 dated 25-9-1987 and Circular 674 . The circular is binding on A.Os. Let us start Circular No 496 which vide point 4 sates as follows:

• "4. The matter has been examined in consultation with the Ministry of Law and the various State Governments. The Ministry of Law has opined that if the State Governments make an amendment in the Sales Tax Act to the effect the sales tax deferred under the scheme shall be treated as actually paid, such a deeming provision will meet the requirements of section 43B."

Later it was seen that many states govt. were notifying the scheme by govt. orders and Circular : No. 674, dated 29-12-1993 gave relief even in that case.The circular is reproduced below

• "1. The scope of application of the provisions of section 43B to the sales tax collected but not actually paid under deferral schemes of the State Governments was considered in Boards Circular No. 496, dated 25-9-1987 [Clarification 2], and it was decided that, where the State Governments make an amendment in the Sales-tax Act to the effect that the sales tax deferred under the scheme shall be treated as actually paid, the statutory liability shall be treated as discharged for the purposes of section 43B.
  2. It has since been brought to the notice of the Board that some State Governments, instead of amending the Sales-tax Act, have issued Government Orders notifying schemes under which sales tax is deemed to have been actually collected and disbursed as loans. Such Government Orders also provide that entries shall be made in the Government accounts giving effect to deemed collections by crediting the appropriate receipt-heads relating to sales-tax collections and debiting the heads relating to disbursal of loans. It has, therefore, been represented that, as such conversion of the sales tax liability into loans have similar statutory effect as can be achieved through amendments of the Sales-tax Act, the amounts covered under the scheme should be allowed as deduction for the previous year in which the conversion has been permitted by the State Governments.
  3. The Board have considered the matter and are of the opinion that such deferral schemes notified by the State Governments through Government Orders meet the requirements of the Boards Circular No. 496, dated 25-9-1987 in effect though in a different form. Accordingly, the Board have decided that the amount of sales tax liability converted into loans may be allowed as deduction in the assessment for the previous year in which such conversion has been permitted by or under Government Orders."

As per the aforesaid circular , disallowance u/s 43B should not be made if following conditions are satisfied

1. State Govt. issues orders under which the outstanding amount is Deemed Collected and disbursed as loan.
2. The State Govt made necessary entries in govt. accounts giving effect to such deemed collection.

If in your clients case, the aforesaid conditions are fulfilled, there can not be any reason for disallowance of the said amount.Once the said amount is considered as Deemed Payment by the State govt., there can not be any question of going into the fact whether such payment was actually done or not.

Remember , the condition that State Govt has to amend its own Sales Tax Act or do the necessary entries as per the govt's order is of prime importance. Supreme Court in CIT v. Gujarat Polyerete Pvt. Ltd. [2000] 246 ITR 463 (SC), in following words :
. . . provisions (of Circular No. 496) would apply only if a State Government had amended its Sales Tax Act to provide that the sales tax that was deferred under an incentive scheme framed by it would be treated as actually paid, so as to meet the requirements of section 43B. . . . "

In Morvi Horological Industries v. ITO [1991] 36 ITD 115 (Ahd. - Trib.), the Tribunal quoted the above circular dated 25-9-1987, and observed :
In the State of Gujarat, necessary amendments have been made by executive instructions, copies of which have been filed before us. The above instructions of the Board would be applicable as far as applicability of section 43B to the liability of payment of sales-tax to sales tax deferred scheme. . . . . "

Rajasthan High Court in Commissioner of Income-tax v. Devendra Udhyog [2003] 264 ITR 701 (Raj) 10-3-2003 reversed the order of Tribunal stating that there is nothing on record that necessary amendment by State govt was not done in Sales Tax Act

In your case, however I have following opinion:

1. The impugned amount was related to A.Y 1994-95 , therefore out of ambit of any type of consideration for an I T Authority , on account of time limitation.

2. Once the said amount is considered by the State Govt as Deemed Paid or Collected, there can not be question of payment by an I T Authority.

3. The Circular is binding on the A.O.

4. There is no provision under the I T Act to assess such "Deemed Paid amount" as receipt .

5. You do not need any case law for your case. However , two such favourable cases are :

• Kalpana Lamps and Components Ltd. v. Dy. CIT [2002] 255 ITR 491 (Mad).
• CIT v. K.N. Oil Industries [1997] 226 ITR 547 (MP),

If the A.O is hell bent on misinterpreting the provision, apply u/s 144A of the I T Act before the Jt/Add.C.I.T of range.

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Profit of Commodity Future Maybe Business or Speculation Income. Facts Will Decide.

bubna.manish@.........in Asked : I want to know that commodity trading (Futures) profits/ loss comes in which chapter/head in Income tax? whether it is a business profit/ capital gain/ speculation gain?

The trading in commodity futures can happen either with delivery or without delivery. In normal circumstance, when delivery takes place ,the future commodity trading shall be taken as as business income . If the contract is settled without delivery , such future trading of commodity comes within the meaning of Speculation Business .

Explanation 2 under the provision 28 of the I T Act ,describe that if anybody carries out Speculation Business ,it shall be distinct from other business. The exact wording of the I T Act is

"Explanation 2.Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as speculation business) shall be deemed to be distinct and separate from any other business"

Section 43(5) of the I T Act defines 'Speculation Business" . The relevant extract is given as under :

• "5) speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:"

It is also to be noted that the I .T Act provides that there are circumstances in which speculation transactions are not taken as Speculation , but taken as Speculation Business. These circumstances , when business is not speculation ,are

"Provided that for the purposes of this clause

• (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
  (b) ............................
• (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; "

Tags: India, F.A.Q., Tax, Speculation Business, Future Trading

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