Question 5 (b)
Set-off of a business loss, long-term capital gain and tax liability (as set, 1961 Act, AY 2017-18)
6 marks
- Time to write
- About 12 minutes
From an older CBCS paper
Question
Question 5 (b) · 6 marksArti (30 years) is an assessee who is resident and ordinarily resident in the previous year 2016-17; for that year she reports the following income:
| (Rs.) | |
|---|---|
| Salary | 200,000 |
| The Business Income | (–900,000) |
| Short-term capital gain | 10,000 |
| The long-term capital gain on the sale of non-listed shares | 11,00,000 |
Arti deposits Rs. 80,000 in a Public Provident Fund Account in the year 2016-17. Find her tax liability for the assessment year 2017-18. 6
Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2017-18 (previous year 2016-17), with the dates as printed. Arti is stated to be resident and ordinarily resident. The business loss is printed (–900,000) in brackets and the amounts in mixed forms (200,000; 11,00,000); all stand as printed.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- tax liabilityHead by head: each income under its head, exempt items marked exempt, then the deductions and the tax.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Set-off rules (section 71) 1½ marks 3 min
- 2 Gross total income and the section 80C deduction 1½ marks 3 min
- 3 Long-term capital gain with the unused exemption limit 1½ marks 2 min
- 4 Rebate, cess and tax liability 1½ marks 2 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
- Arti is a resident and ordinarily resident individual of 30, so the ordinary rates for an individual below 60 apply.
- The salary is taken as the income under the head Salaries; the business loss of ₹9,00,000 is the loss of the year.
- The short-term capital gain is taken to be taxable at the normal rates (nothing says it is on listed shares sold with securities transaction tax). The long-term capital gain on non-listed shares is as given.
- A business loss cannot be set off against salary (section 71(2A)).
- It can be set off against capital gains, short-term or long-term (section 71(2)).
- The loss of ₹9,00,000 is set off first against the short-term gain of ₹10,000 and the remaining ₹8,90,000 against the long-term gain. Nothing is left to carry forward.
Computation of total income for assessment year 2017-18
| Particulars | Rs. |
|---|---|
| Income from salary | 2,00,000 |
| Short-term capital gain | 10,000 |
| Less: business loss set off (section 71(2)) | 10,000 |
| Long-term capital gain on non-listed shares | 11,00,000 |
| Less: balance of business loss set off (section 71(2)) | 8,90,000 |
| Long-term capital gain after set-off | 2,10,000 |
| Gross total income (₹2,00,000 + ₹2,10,000) | 4,10,000 |
| Less: deduction under section 80C, PPF deposit (section 80C(2)(v)) | 80,000 |
| Total income | 3,30,000 |
The section 80C deduction is allowed only against income other than the long-term capital gain (section 112(2)); that income is ₹2,00,000, more than the ₹80,000 claimed, so the full deduction is allowed. Income other than the long-term capital gain is ₹2,00,000 − ₹80,000 = ₹1,20,000. The PPF is a provident fund notified under section 80C(2)(v), and the deposit is taken to be to an account standing in her own name; section 80C(2)(v) requires the account to stand in the name of a person specified in sub-section (4) of that section; her own name is taken to meet that condition. ₹80,000 is within the ₹1,50,000 limit on the aggregate deduction (section 80C(1) and section 80CCE).
For a resident individual below 60 the amount not chargeable to tax for 2016-17 is ₹2,50,000 (Finance Act, 2017, First Schedule, Part I, Paragraph A, item (I)); cess as Finance Act, 2017, section 2(11) and (12).
| Particulars | Rs. |
|---|---|
| Tax on income other than long-term capital gain (₹1,20,000, below ₹2,50,000) | Nil |
| Long-term capital gain | 2,10,000 |
| Less: unused exemption limit, ₹2,50,000 − ₹1,20,000 (proviso to section 112(1)(a)) | 1,30,000 |
| Long-term capital gain taxable | 80,000 |
| Tax on it at 20% (section 112(1)(a)) | 16,000 |
| Less: rebate under section 87A (total income not above ₹5,00,000) | 5,000 |
| Tax after rebate | 11,000 |
| Education cess 2% and secondary and higher education cess 1% | 330 |
| Tax liability | 11,330 |
The rebate under section 87A for assessment year 2017-18 is the tax or ₹5,000, whichever is less (its amendment footnote: Act 28 of 2016, with effect from 1-4-2017, that is the Finance Act, 2016, section 46). The total ₹11,330 is already a multiple of ten (section 288B).
- Had the whole loss been set off against the long-term gain instead, income other than that gain would be ₹1,30,000 and the gain ₹2,00,000; the unused limit would be ₹1,20,000, leaving ₹80,000 taxable: the same tax of ₹11,330.
- The business loss cannot be used against the salary, so the salary is taxed in full even though the year shows an overall loss on business.
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Set-off rules (section 71) | 1.5 |
| 2 | Gross total income and the section 80C deduction | 1.5 |
| 3 | Long-term capital gain with the unused exemption limit | 1.5 |
| 4 | Rebate, cess and tax liability | 1.5 |
| Total | 6 |
Report a problemopens an email to admin@getkunji.com with the question ID7854-Q5balready filled in.