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CA Final · Direct Tax Laws & International Taxation · Aggregation of Income, Set Off or Carry Forward of Losses

Arvind Reddy owns race horses and maintains them for running in lawful horse races. In a tax year he received stake money (gross prize money) of Rs 4,00,000 and incurred revenue expenditure of Rs 7,50,000 wholly and exclusively on maintaining the horses, besides Rs 5,00,000 of capital expenditure on a stable. He also has Rs 9,00,000 profit from his trading business. What loss from the specified activity is computed, and how may it be used?

The loss is Rs 3,50,000, being revenue maintenance expenditure of Rs 7,50,000 less stake money of Rs 4,00,000, excluding capital expenditure. It can be set off only against income from owning and maintaining race horses and carried forward for at most four succeeding tax years.

  1. ARs 3,50,000; set off only against income from owning and maintaining race horses, carried forward up to four succeeding tax yearsCorrect
  2. BRs 8,50,000; set off against trading business profit in the same year
  3. CRs 3,50,000; set off against trading profit and carried forward for eight years
  4. DRs 12,50,000; set off only against race horse income with no time limit

Explanation

Loss equals revenue expenditure less stake money: 7,50,000 - 4,00,000 = 3,50,000. Capital expenditure is excluded by the definition. Under section 115 the loss is set off only against income from the specified activity and carried forward for not more than four succeeding tax years. The Rs 8,50,000 option wrongly includes the capital expenditure net of stake money and allows set off against business profit.

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