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

Rajan owns race horses and maintains them for running in lawful horse races. In a tax year his stake money was Rs 2,10,000 and revenue expenditure wholly and exclusively for maintaining the horses was Rs 3,60,000. He also has business income of Rs 5,00,000 from a textile shop. In the following year he earns stake money of Rs 80,000 with maintenance expenditure of Rs 30,000. What is the position?

The first-year loss of Rs 1,50,000 is confined to the race-horse activity and cannot be set off against textile income. Next year the activity's income is Rs 50,000 (80,000 less 30,000), so that amount is set off and Rs 1,00,000 remains to be carried forward.

  1. ALoss of Rs 1,50,000 set off against textile income in the first year; no carry forward
  2. BLoss of Rs 1,50,000 cannot be set off against textile income; it is carried forward and set off in the next year against Rs 50,000 income from the activity, with Rs 1,00,000 carried furtherCorrect
  3. CLoss of Rs 1,50,000 is carried forward and set off in the next year against Rs 80,000 gross stake money, with Rs 70,000 carried further
  4. DLoss is ignored since only gains from horse races are taxable

Explanation

Under section 115, the loss is stake money less revenue maintenance expenditure: 2,10,000 - 3,60,000 = 1,50,000. It can be set off only against income from the specified activity. Next year's income of the activity is 80,000 - 30,000 = 50,000, so Rs 1,00,000 is carried forward. Using gross stake money ignores the expenditure.

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