What is Tax Evasion?

Tax evasion refers to the illegal act of deliberately avoiding tax payments through fraudulent
means. This includes underreporting income, inflating deductions, concealing assets, or
falsifying financial records. Tax evasion constitutes a criminal offence and carries severe legal
penalties such as fines, imprisonment, and reputational damage.

Key Characteristics of Tax Evasion

Illegality: Tax evasion is a direct violation of tax laws and is considered a criminal offence.
Authorities actively pursue tax evaders to ensure compliance and uphold the integrity of the tax
system.

Intent: Tax evasion involves a deliberate effort by taxpayers to mislead tax authorities and avoid
paying their rightful dues. It requires conscious and intentional deceit, where taxpayers
knowingly engage in fraudulent practices to reduce their tax liabilities.

Common Methods: Some of the common methods used in tax evasion include:

Underreporting income to lower taxable earnings.

Falsifying financial documents or inflating deductions to reduce tax obligations.
Concealing assets in offshore accounts to evade tax liabilities.
Consequences of Tax Evasion
The consequences of tax evasion are severe and can include:

Substantial penalties, including hefty fines and imprisonment.

Revocation of professional licenses, which can impact a taxpayer’s career and business
operations.
Significant damage to an individual’s or business’s reputation, leading to increased scrutiny from
tax authorities and potential loss of trust from stakeholders.
Landmark Case Laws on Tax Evasion
Commissioner of Income Tax vs. Ramkanth Mohanlal Gandhi (1978)
In Commissioner of Income Tax vs. Ramkanth Mohanlal Gandhi case, the Supreme Court of
India established that tax evasion requires “wilful” intent, meaning that the taxpayer must have
knowingly committed fraudulent actions. The court ruled that ignorance of tax laws or
inadvertent errors do not qualify as tax evasion. This judgment set a crucial precedent in
distinguishing between honest mistakes and deliberate fraud in tax matters.

State of Gujarat vs. Rameshchandra Ramniklal Shah (1983)

State of Gujarat vs. Rameshchandra Ramniklal Shah clarified the concept of “gross negligence”
in tax evasion. The court defined gross negligence as a conscious and deliberate disregard for
tax laws, thereby setting a high threshold for the imposition of penalties. The ruling emphasised
that penalties should only be applied when there is clear and deliberate intent to evade taxes,
protecting taxpayers from unjust punitive actions for minor or unintentional errors.

What is Tax Avoidance?

Tax avoidance, on the other hand, is the practice of legally minimising tax liabilities by exploiting
existing tax laws and loopholes. Unlike evasion, tax avoidance operates within the legal
framework but can sometimes be seen as ethically questionable.

Key Characteristics of Tax Avoidance

Legality: Tax avoidance is a legal practice as long as it adheres to existing tax regulations. It
involves strategic financial planning to reduce tax liabilities by making use of available
deductions, exemptions, and incentives allowed by the law. As taxpayers operate within the
legal framework, they can structure their financial affairs in a way that minimises tax obligations
without violating any regulations.

Intent: Tax avoidance is characterised by the use of legal provisions to minimise tax obligations.
While it is a lawful strategy, it can sometimes be perceived as aggressive, as it exploits gaps
and loopholes within tax laws. Despite staying within the boundaries of legality, the ethical
considerations of tax avoidance often come under scrutiny, with critics arguing that it deprives
governments of much-needed revenue for public services.

Common Methods:
Taxpayers employ various strategies to legally minimise their tax burdens, including:

Utilising tax deductions and credits: Making the most of available tax benefits, such as claiming
deductions for business expenses, home loans, or charitable donations.
Structuring transactions: Arranging financial transactions in ways that take advantage of lower
tax rates or benefits in specific jurisdictions.
Income shifting: Moving income to lower-tax jurisdictions or entities to reduce overall tax
liabilities. This is commonly used by multinational corporations to optimise their global tax
obligations.
Consequences of Tax Avoidance
While tax avoidance is legally permissible, it does come with certain risks and considerations:

No legal penalties: As long as tax avoidance strategies comply with the law, there are no
penalties imposed.
Scrutiny and audits: Tax authorities may closely examine aggressive tax avoidance strategies to
ensure compliance and prevent abuse of tax provisions.
Ethical concerns: Even though it is legal, tax avoidance can raise ethical questions about
fairness and corporate social responsibility, especially when corporations or high-net-worth
individuals exploit tax laws to pay minimal taxes.
Landmark Case Laws on Tax Avoidance
CIT vs. McDowell & Co. (1985)
In this landmark case of CIT vs. McDowell & Co., the Supreme Court of India introduced the
concept of “business purpose” in tax avoidance transactions. The court ruled that for a
transaction to be considered legitimate tax planning, it must have a genuine business purpose
beyond simply obtaining tax benefits. This case distinguished between legitimate tax planning,
which serves a business function, and tax avoidance, which solely aims to reduce tax liabilities
through artificial means. The ruling set an important precedent by encouraging businesses to
justify tax-saving measures based on valid commercial reasons.

Azadi Bachao Andolan vs. Union of India (2003)

Azadi Bachao Andolan vs. Union of India reaffirmed the legality of tax avoidance within the
boundaries of the law while upholding the validity of the General Anti-Avoidance Rule (GAAR).
The Supreme Court emphasised the principle of “substance over form,” which means that tax
authorities have the right to look beyond the legal structure of transactions to determine their
true economic purpose. The ruling allowed tax authorities to challenge transactions whose
primary objective is to obtain tax benefits rather than serve a legitimate commercial purpose.
This case played a significant role in shaping India’s anti-avoidance framework and guiding
future tax reforms.
Deemed income and clubbing of income are anti-tax avoidance provisions in the Income Tax
Act, 1961. They are legal fictions that treat certain amounts as income or attribute someone
else's income to a taxpayer for taxation purposes.

1. Deemed Income
Deemed income refers to certain receipts or transactions that are not actual income but are
treated as such under the law to prevent tax evasion. The provisions for deemed income,
particularly Sections 68 to 69D, target unexplained or unaccounted sources of funds.

A. Key Provisions for Deemed Income

●​ Section 68: Unexplained Cash Credits 💰

○​ If any amount is credited in a taxpayer's books of account, and the taxpayer fails to
provide a satisfactory explanation for its nature and source, the amount is treated
as deemed income of the taxpayer.
○​ This section is often used to tax unaccounted cash deposits, especially during
demonetization or other tax scrutiny periods. The burden of proof lies with the
taxpayer to explain the source of the credit.
●​ Section 69: Unexplained Investments
○​ If a taxpayer makes an investment that is not recorded in their books of account,
and they fail to explain the source of the funds used for the investment, the value of
the investment is treated as deemed income.
○​ This is a crucial provision for bringing unaccounted wealth, like undisclosed
property or shares, into the tax net.
●​ Section 69A: Unexplained Money, etc.
○​ If a taxpayer is found to be the owner of any money, bullion, jewelry, or other
valuable articles that are not recorded in their books and the source of which is not
satisfactorily explained, the value of such assets is treated as deemed income.
○​ This section is frequently invoked during search and seizure operations conducted
by the Income Tax Department.
●​ Section 69B: Amount of Investments not fully disclosed in books of account
○​ If the value of an investment as recorded in the books of account is less than its
actual value, the difference is treated as deemed income.
●​ Section 69C: Unexplained Expenditure
○​ If a taxpayer incurs an expenditure for which they cannot provide a satisfactory
explanation, the amount of the expenditure is treated as deemed income. This
provision is often used for lavish spending that is disproportionate to the declared
income.
●​ Section 69D: Amount borrowed or repaid on hundi
○​ Any amount borrowed or repaid on a hundi (an informal financial instrument)
otherwise than by a way of an account payee cheque or draft is treated as deemed
income.

B. Tax Implications

Deemed income is taxed at a special rate of 60%, along with a surcharge and a cess, making
the effective tax rate around 78%. No deductions or allowances are permitted against this
income.

2. Clubbing of Income
Clubbing of income refers to a legal fiction where the income of a person is included in the
total income of another person for tax purposes. The primary objective is to prevent taxpayers
from reducing their tax liability by diverting income to their family members who may be in a
lower tax bracket.

A. Key Provisions for Clubbing of Income

●​ Section 60: Transfer of Income without Transfer of Asset

○​ If a person transfers the right to receive income from an asset without transferring
the ownership of the asset itself, the income is still clubbed in the hands of the
transferor.
○​ Example: A person transfers the rental income from a house they own to their
spouse. The rental income will be clubbed with the owner's income.
●​ Section 61: Revocable Transfer of Assets
○​ If an asset is transferred under a "revocable" agreement (one that can be reversed
by the transferor), any income from that asset is clubbed in the hands of the
transferor.
○​ A transfer is considered revocable if the transferor retains the right to resume the
asset or the income.
●​ Section 64: Income of Spouse, Minor Child, etc.
○​ This is the most widely applied section for clubbing. It covers several scenarios:
■​ Transfer of Assets to Spouse: Income from assets transferred to a spouse
for inadequate consideration (i.e., less than market value) is clubbed with
the transferor's income. This rule does not apply if the transfer is in
connection with an agreement to live apart.
■​ Remuneration from a Concern: If a spouse receives remuneration (salary,
commission, etc.) from a business in which the other spouse has a
substantial interest (at least 20% of voting power or profit share), the
income is clubbed with the higher-earning spouse's income. However, an
important exception exists: the clubbing provisions do not apply if the
remuneration is solely due to the spouse's technical or professional
qualifications.
■​ Income of a Minor Child: All income of a minor child is clubbed with the
income of the parent whose total income (before clubbing) is higher.
■​ Exceptions:
■​ Income earned by the minor child through their own skill, talent,
or specialized knowledge (e.g., a child actor's income, a child
artist's earnings).
■​ Income of a minor child suffering from a disability as specified
under Section 80U.
■​ An exemption of ₹1,500 per minor child is available.
●​ Section 64(1)(vi) & (viii): Transfer of assets for the benefit of daughter-in-law or
spouse
○​ These sections cover transfers made to any person or association of persons for
 the direct or indirect benefit of a son's wife or spouse for inadequate consideration.
The income from such transferred assets will be clubbed with the transferor's
income.

B. Rationale of Clubbing of Income

The rationale behind clubbing provisions is to prevent a taxpayer from reducing their tax burden
by fragmenting their income among family members who may not have a real source of income.
It ensures that the tax is paid by the person who earned the income or the person who is the
true owner of the asset.
Caselaws on Deemed Income
Deemed income provisions, primarily found in Sections 68 to 69D of the Income Tax Act, 1961,
treat certain unexplained transactions as taxable income. The caselaws below clarify the
application of these sections.
●​ Fakir Mohmed Haji Hasan v. Commissioner of Income-Tax, Gujarat
○​ Citation: (2000) 247 ITR 290 (Guj.)
○​ Principle: This landmark case clarifies that when an assessee fails to provide a
satisfactory explanation for the nature and source of an investment or cash credit,
the Assessing Officer is justified in treating the amount as "deemed income" under
Section 69. The burden of proof lies with the assessee.
●​ Commissioner of Income-Tax v. P.K. Noorjahan
○​ Citation: (1999) 237 ITR 570 (SC)
○​ Principle: The Supreme Court held that the Assessing Officer cannot make an
addition under Section 69 if the assessee's explanation is plausible and not proved
to be false. The court emphasized that the Assessing Officer's power to treat an
unexplained investment as income is not arbitrary; it must be exercised based on a
valid and objective assessment of the facts.
●​ Rishabh Agro Industries Ltd. v. P.N.B. Capital Services Ltd.
○​ Citation: (2000) 5 SCC 415
○​ Principle: While this isn't a direct tax case, it provides a crucial legal interpretation
of the word "deemed." The Supreme Court explained that the term "deemed" is
used to create a legal fiction, treating something as true which may not be true in
reality. This principle is fundamental to understanding the application of deeming
provisions in the Income Tax Act.

Caselaws on Clubbing of Income

The clubbing of income provisions (primarily Sections 60 to 64) prevent taxpayers from avoiding
tax by diverting their income to other family members. The following cases illustrate the
principles governing this topic.
●​ Commissioner of Income-Tax v. Keshavlal L. Parikh
○​ Citation: (1997) 228 ITR 33 (SC)
○​ Principle: The Supreme Court ruled that income earned by a minor, which is
derived from a business or profession carried on by them, cannot be clubbed with
the income of the parent. The court clarified that Section 64(1A) (which deals with
clubbing of minor's income) applies only to income from assets transferred without
adequate consideration, not to income from the minor's own skill, profession, or
manual labor.
●​ P.K. Sarojini v. Commissioner of Income-Tax
○​ Citation: (1990) 184 ITR 137 (Ker.)
○​ Principle: This case addresses the transfer of assets to a spouse. The Kerala High
Court held that if an asset is transferred to a spouse for adequate consideration, the
income arising from that asset will not be clubbed with the transferor's income. The
focus is on the genuineness and adequacy of the consideration for the transfer.
●​ Commissioner of Income-Tax v. B.M. Khadija Begum
○​ Citation: (2011) 330 ITR 160 (Kar.)
○​ Principle: The Karnataka High Court explained that for the clubbing provisions
under Section 64 to be applicable, there must be a direct nexus between the
transfer of the asset and the income earned by the transferee. If the income is not
directly from the transferred asset but from a business or investment made by the
spouse, the clubbing provisions may not apply.
1. Residential Status for Individuals
The residential status of an individual is based on the number of days they've stayed in India
during the financial year. There are three categories:
●​ Resident and Ordinarily Resident (ROR)
●​ Resident but Not Ordinarily Resident (RNOR)
●​ Non-Resident (NR)

Conditions to be a Resident

An individual is considered a Resident in India for a financial year if they satisfy at least one of
the following two basic conditions:
1.​ Stayed in India for a total of 182 days or more during the previous year. 🗓️
2.​ Stayed in India for a total of 60 days or more during the previous year AND 365 days or
more during the four preceding years.
Exceptions to the 60-day rule: The 60-day period is extended to 182 days for two specific
categories of Indian citizens:
●​ An Indian citizen who leaves India during the previous year for the purpose of
employment outside India as a member of the crew of an Indian ship.
●​ An Indian citizen or a Person of Indian Origin (PIO) who, being outside India, comes on a
visit to India during the previous year.

Conditions to be ROR or RNOR

If an individual is a Resident as per the above conditions, they must then satisfy two additional
conditions to determine if they are ROR or RNOR. They are considered a Resident and
Ordinarily Resident (ROR) if they satisfy both of the following conditions:
1.​ They have been a resident in India for at least 2 out of the 10 years preceding the
previous year.
2.​ They have stayed in India for a total of at least 730 days or more during the 7 years
preceding the previous year.
If a Resident fails to satisfy even one of these two conditions, they are classified as a Resident
but Not Ordinarily Resident (RNOR).

Deemed Resident (A special category introduced by the Finance Act, 2020)

An Indian citizen with a total income (excluding foreign sources) exceeding ₹15 lakh in the
previous year will be considered a Resident but Not Ordinarily Resident (RNOR) if they are
not liable to pay tax in any other country due to their domicile, residence, or similar criteria. This
applies regardless of their physical stay in India.

2. Residential Status for Other Assessees

The rules for companies and other entities are different from those for individuals.

Companies 🏢
A company is considered a Resident in India if either of the following conditions are met:
 ●​ It is an Indian company. An Indian company is always a resident, irrespective of where
its control and management are situated.
●​ Its Place of Effective Management (POEM) is in India. POEM is the place where key
management and commercial decisions necessary for the business as a whole are, in
substance, made.
A company that doesn't meet either of these conditions is a Non-Resident.

Hindu Undivided Family (HUF), Firms, and Association of Persons (AOP)

An HUF, firm, or AOP is a Resident in India unless the control and management of its affairs
are situated wholly outside India during the previous year. If the control and management are
even partially in India, the entity is a resident.
Similar to individuals, a resident HUF is further classified as ROR or RNOR based on the
residential status of its Karta (head of the family). If the Karta is an ROR, the HUF is an ROR. If
the Karta is an RNOR, the HUF is an RNOR.

3. Tax Implications
The residential status directly impacts the tax liability.
●​ ROR (Resident and Ordinarily Resident): Taxable on worldwide income. This includes
income earned, accrued, or received in India as well as income earned outside India.
●​ RNOR (Resident but Not Ordinarily Resident) & NR (Non-Resident): Taxable only on
income that is earned, accrued, or received in India. Foreign income is generally not
taxable in India unless it's from a business controlled from or a profession set up in India.
The way income is taxed in India is directly linked to the residential status of the assessee for
that particular financial year. The Income Tax Act, 1961, follows a principle of progressive
taxation, but the scope of taxable income is determined by whether you are a Resident, RNOR,
or a Non-Resident.
Here is a detailed breakdown of how tax applies to each category of assessee:

1. Resident and Ordinarily Resident (ROR)

An ROR is subject to the most comprehensive tax liability in India.
●​ Taxable Income: An ROR is taxed on their worldwide income. This includes:
○​ Income earned in India: Any income that accrues, arises, or is received in India
(e.g., salary for work done in India, rent from a property in India, interest from an
Indian bank account).
○​ Income earned outside India: All income that accrues or arises outside India,
whether it is remitted to India or not. This includes:
■​ Salary earned abroad.
■​ Rental income from a property outside India.
■​ Interest, dividends, or capital gains from investments held outside India.
■​ Profits from a business or profession carried on outside India.
●​ Tax Rates: The tax rates are based on the regular income tax slab rates, which can be
under the old tax regime or the new tax regime. The tax regime that provides a lower tax
liability can be chosen by the individual.
●​ Double Taxation Relief: To avoid being taxed on the same income in both India and a
foreign country, an ROR can claim relief under a Double Taxation Avoidance
Agreement (DTAA). India has DTAAs with many countries, which provide a mechanism
to either exempt the income in one country or provide a tax credit for the tax paid in the
other country.

2. Resident but Not Ordinarily Resident (RNOR)

The RNOR status provides a middle ground with certain tax benefits, particularly for those who
have recently returned to India or are new to the country.
●​ Taxable Income: An RNOR is taxed on:
○​ All income earned, accrued, or received in India.
○​ Foreign income that is derived from a business controlled in or a profession
set up in India. For example, if an RNOR owns a business in the UK, but its
management and key decisions are made from India, the profits of that business
would be taxable in India.
●​ Income Not Taxable: Foreign income that is not from a business controlled in or a
profession set up in India is not taxable in India for an RNOR. This is a significant
advantage as it allows them to maintain tax efficiency on their foreign assets and income,
such as:
○​ Rental income from property abroad.
○​ Capital gains from the sale of foreign assets.
○​ Interest from foreign bank accounts.
●​ Tax Rates: The tax rates are the same as for an ROR, based on the slab rates of the
chosen tax regime.
3. Non-Resident (NR)
A Non-Resident has the least tax liability in India.
●​ Taxable Income: A Non-Resident is only taxed on income that is earned, accrued, or
received in India. Foreign income is completely exempt from Indian tax. The taxable
income includes:
○​ Salary for services rendered in India.
○​ Rent from a property located in India.
○​ Capital gains from the sale of assets located in India (e.g., shares of an Indian
company, a house in India).
○​ Interest from an NRO (Non-Resident Ordinary) account. Interest on NRE
(Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts is
generally tax-exempt.
●​ Tax Rates: Non-Residents are subject to the same tax slab rates as residents. However,
certain special income types, such as interest, royalties, or technical fees, may be taxed
at special flat rates as per the provisions of the Income Tax Act or a beneficial rate as per
the DTAA, if applicable.
●​ Tax Deduction at Source (TDS): For many types of income paid to non-residents (e.g.,
rent, interest), the payer is required to deduct a higher TDS to ensure tax collection at the
source. The Non-Resident can then claim a refund if the actual tax liability is lower.
1. CIT v. S. R. Bhaiya
●​ Citation: (2011) 338 ITR 161 (Bom.)
●​ Principle: This Bombay High Court judgment is significant for clarifying the term "visit to
India" under the first proviso to Section 6(1)(c). The court held that the proviso, which
substitutes the 60-day period with 182 days for a citizen of India or a person of Indian
origin who comes on a "visit to India," applies only when the individual comes to India for
a temporary period. It doesn't apply if the individual returns to India with the intent to settle
permanently. This distinction is crucial for determining the residential status of returning
NRIs.

2. P.A. Menon v. Commissioner of Income-Tax

●​ Citation: (1996) 220 ITR 383 (SC)
●​ Principle: The Supreme Court in this case emphasized that the purpose of a person's
visit to India is irrelevant for determining their residential status. The only factor to be
considered is the duration of their stay. The court reiterated that the law is strict and
based on a count of days, not on the intent behind the stay.

3. Manoj Kumar v. Deputy Commissioner of Income-tax

●​ Citation: (2019) 105 taxmann.com 322 (Bang. - Trib.)
●​ Principle: This case from the Bangalore Tribunal dealt with the computation of days of
stay. The Tribunal ruled that a fraction of a day should be counted as a full day for the
purpose of computing the period of stay in India. This interpretation can have a significant
impact on an individual's residential status, particularly when their stay is close to the
statutory thresholds.

4. Harshad S. Mehta v. Union of India

●​ Citation: (2001) 249 ITR 412 (SC)
●​ Principle: While this case is widely known for other reasons, it also touched upon a
principle related to residential status. The Supreme Court's decision reaffirmed the
principle that a person's residential status is determined by the provisions of the Income
Tax Act and not by their status in other laws. It underscores that the tax law's specific
criteria for residency are paramount for tax purposes.

5. Triveni Engineering & Industries Ltd. v. Commissioner of

Income-Tax
●​ Citation: (2013) 357 ITR 124 (Del.)
●​ Principle: The Delhi High Court addressed the concept of "control and management" of a
company in this case. Although it's for companies and not individuals, the underlying
principle is a good illustration for understanding residential status for non-individuals.
The court held that the control and management of a company must be wholly outside
India to be considered a non-resident. This highlights that "de facto" control is a crucial
factor.
The set-off and carry-forward of losses are crucial provisions under the Income Tax Act, 1961,
that allow a taxpayer to reduce their overall taxable income by adjusting losses incurred in a
financial year. This mechanism ensures fairness and provides relief to taxpayers who have
suffered losses.

1. Set Off of Losses

Set-off refers to the adjustment of a loss from one source of income against the income from
another source within the same assessment year. This process is divided into two stages:
Intra-head set-off and Inter-head set-off.

a) Intra-Head Set-Off (Section 70)

This is the first step where a loss from one source is adjusted against the income from another
source under the same head of income.
●​ Example: A business owner has two businesses: Business A and Business B. If
Business A has a loss of ₹50,000 and Business B has a profit of ₹1,00,000, the loss from
Business A can be set off against the profit of Business B, making the net taxable
business income ₹50,000.
Exceptions to Intra-Head Set-Off:
●​ Speculation Business Loss: A loss from a speculation business (e.g., intra-day trading)
can only be set off against a profit from another speculation business.
●​ Loss from a Specified Business (Section 35AD): Loss from a specified business can
only be set off against profits of another specified business.
●​ Long-Term Capital Loss: A long-term capital loss can only be set off against a long-term
capital gain.
●​ Short-Term Capital Loss: A short-term capital loss can be set off against either a
short-term capital gain or a long-term capital gain.
●​ Loss from a source where income is exempt: A loss from a source of income that is
otherwise exempt from tax (e.g., agricultural income) cannot be set off against any taxable
income.

b) Inter-Head Set-Off (Section 71)

If a loss cannot be fully adjusted through an intra-head set-off, the remaining loss can be
adjusted against income from a different head of income in the same financial year.
●​ Example: After intra-head set-off, a taxpayer has a remaining loss of ₹1,50,000 from a
house property. This loss can be set off against their salary income of ₹5,00,000, reducing
their taxable income to ₹3,50,000.
Exceptions to Inter-Head Set-Off:
●​ Loss from "Profits and Gains of Business or Profession": A business loss (other than
a speculative or specified business loss) cannot be set off against "Income from Salaries."
●​ Capital Loss: Losses under the head "Capital Gains" cannot be set off against income
from any other head.
●​ Speculation Business Loss: This can only be set off against speculation business
profits and cannot be adjusted against any other head of income.
●​ House Property Loss: An assessee can set off a loss from a house property against any
other head of income, but the maximum amount allowed is limited to ₹2 lakh in a financial
 year.

2. Carry Forward of Losses

If the loss cannot be fully set off within the same financial year, the remaining unadjusted loss
can be carried forward to subsequent financial years to be set off against future income. The
rules for carry forward differ for each head of income.

a) House Property Loss (Section 71B)

●​ Carry Forward: Can be carried forward for 8 assessment years.

●​ Set-Off: Can only be set off against Income from House Property in subsequent years.
This applies even if it could have been set off against other income in the original year.
●​ Condition: The loss can be carried forward even if the return is filed after the due date.

b) Non-Speculation Business Loss (Section 72)

●​ Carry Forward: Can be carried forward for 8 assessment years.

●​ Set-Off: Can only be set off against profits from any business or profession in the
subsequent years. It cannot be set off against salary or capital gains.
●​ Condition: The return of loss must be filed within the original due date specified under
Section 139(1).

c) Speculation Business Loss (Section 73)

●​ Carry Forward: Can be carried forward for 4 assessment years.

●​ Set-Off: Can only be set off against profits from a speculation business.
●​ Condition: The return of loss must be filed within the original due date.

d) Capital Losses (Section 74)

●​ Carry Forward: Can be carried forward for 8 assessment years.

●​ Set-Off: A long-term capital loss can be set off only against a long-term capital gain. A
short-term capital loss can be set off against both short-term and long-term capital
gains.
●​ Condition: The return of loss must be filed within the original due date.

e) Unabsorbed Depreciation (Section 32)

●​ Carry Forward: Unabsorbed depreciation can be carried forward for an unlimited period
indefinitely.
●​ Set-Off: In subsequent years, it can be set off against any head of income (except
salary).
●​ Condition: The return of loss can be filed after the due date.
Note: The provisions for unabsorbed depreciation are more lenient than for other business
losses. This encourages businesses to invest in assets by providing a long-term tax benefit for
their depreciation.
Mistral Solutions (P) Ltd. v. Dy. CIT (ITD) 199 (Bang. - Trib.)
●​ Case Details: The assessee company filed its return and subsequently filed a revised
return. After the assessment, the assessee filed a rectification application before the
Assessing Officer (AO) claiming a set-off of unabsorbed business loss. The AO rejected
the application stating that the claim could not be considered since the assessee had
omitted to file such a claim with the original return.
●​ Held: In view of the provision of section 154, the assessee has a right to set off losses in
any year. The Assessing Authorities are required to give effect to the provisions of set-off
and carry forward losses. Therefore, the AO was directed to consider the assessee’s
claim for a set-off of unabsorbed losses/depreciation against declared income.

Cargo Service Centre India (P.) Ltd. v. Dy. CIT [2021] 132 taxmann.com
237 (Mum. - Trib.)
●​ Case Details: The assessee company filed its return for a relevant year with a loss of
₹19.06 crore, which was subject to scrutiny assessment, where the returned income was
accepted. The assessment order did not specifically mention about the eligibility for carry
forward of such loss. The assessee submitted a rectification application, which was
decided in the assessee's favor. However, the Commissioner revised the rectification
order under section 263, holding that the Assessing Officer's decision not to examine the
assessee's claim for carry forward of loss in sufficient detail could not be carried forward.
●​ Held: It was held that since a loss had been disclosed in the income tax return and
treated as accepted during scrutiny assessment proceedings, a loss of this nature was to
be treated as accepted, and its quantification could not have been disturbed. Therefore,
the revision of the rectification order was quashed.

Dy. CIT v. UBS Securities India (P) Ltd. [2021] 125 taxmann.com 254
(Mum. - Trib.)
●​ Case Details: The assessee was a share broker who purchased and sold shares on
behalf of their clients. The loss incurred was on account of dealing errors or mistakes in
carrying out client instructions. This loss was incidental to the share broking business, and
the provisions of Explanation to section 73 were not applicable.
●​ Held: It was held that the assessee was not engaged in the business of
purchasing/selling shares of other companies, and the loss was incurred in the course of
error trades in respect of dealings of clients. This loss was in line with accepted market
practices, and therefore, the provisions of Explanation to section 73 were not applicable.

Shiv Kumar Jatia v. ITO [2021] 127 taxmann.com 179/190 ITD 181
(Delhi - Trib.)
●​ Case Details: This case involves the set-off of long-term capital loss.
●​ Held: Loss from the sale of long-term capital on which Security Transaction Tax (STT)
has been paid should be allowed to be carried forward for set-off even though the income
from the transfer of a long-term capital asset is exempt under section 10(38). This
decision was in favor of the assessee.
Michael E Desa v. ITO, IT [2021] 130 taxmann.com 314/191 ITD 691
(Mum. - Trib.)
●​ Case Details: The assessee, a Non-Resident Indian (NRI), sold a property and claimed a
Long-Term Capital Loss (LTCG). He also reported a long-term capital gain from the sale
of equity shares of a company, which he had received as a gift. The Assessing Officer
(AO) rejected the set-off of the long-term capital loss from the property against the
long-term capital gains from the sale of shares, arguing that the purchase of shares was
motivated by tax benefits to the assessee.
●​ Held: It was found that the ownership of shares was transferred on its net effective and
book value, showing a legitimate transaction. The benefit of long-term capital loss could
not be declined, and the assessee was allowed to set off the long-term capital loss
against the long-term capital gain.

Shelf Drilling Ron Tappmeyer Ltd. v. Dy. CIT (IT) [2021] 123
taxmann.com 49 (Mum. - Trib.)
●​ Case Details: The assessee claimed a loss, but the Assessing Officer rejected the books
of account. The matter was remitted to the Tribunal. Set-off of the said loss, which was
returned by the assessee in subsequent assessment years, was denied only because the
assessment for the year the dispute was in progress.
●​ Held: This case was decided in favor of the assessee. The set-off of the loss was
allowed.