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

Sundaram Ltd., a company whose principal business is manufacturing, incurred a speculation loss of Rs 5,00,000 in tax year 1 and had no speculation business in tax years 2 to 4. In tax year 5 it earned speculation profit of Rs 2,00,000. In tax year 6 it earned speculation profit of Rs 4,00,000. Assuming all returns were filed in time, what is the speculation loss set off in tax years 5 and 6 respectively?

The loss can be carried forward only for four tax years after year 1, meaning years 2 to 5. In year 5 Rs 2,00,000 is set off against the profit. In year 6 the period has expired, so no set off is allowed and the balance lapses.

  1. ARs 2,00,000 and Rs 3,00,000
  2. BRs 2,00,000 and Rs 0Correct
  3. CRs 0 and Rs 0
  4. DRs 2,00,000 and Rs 1,00,000

Explanation

Under section 113(3), a speculation loss can be carried forward for no more than four tax years immediately succeeding the year it was first computed. Those years are 2, 3, 4 and 5. In year 5 the loss sets off Rs 2,00,000 of profit. By year 6 the time limit has expired, so the balance Rs 3,00,000 lapses and nothing is set off.

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