Your tax queries answered

Please consider the following situation and advise.

• For Assessment Year (AY) 2009-2010, the assessee has earned a net profit of Rs 2022445 from the business of purchase and sale of shares as follows: (i) Gain on delivery transactions is Rs 772834. (ii) Gain in the FAO market is Rs 249611. Thus, the total gain is Rs 2022445.
• The assessee had unabsorbed brought forward losses from AYs 2001-2002 and 2002-2003 as follows: (i) Delivery loss of (-) Rs 869833. (ii) FAO market loss of Rs 1163357. (iii) Carried forward loss of Rs 2033190.
• The assessee claimed set off of income of Rs 2022445 against B/F losses of Rs 2033190, and carried forward the remaining unabsorbed loss of Rs 10745 (Rs 2033190 minus Rs 2022445) to the subsequent AY. The assessee submitted before the Assessing Officer (AO) that as per the amendments made by the Finance Act, 2005, in the definition in Section 43(5) of the Income Tax Act, 1961, rendered from AY 2006-2007, losses in the derivative markets (FAO markets), earlier treated as Losses from Speculative Business, are to be assessed as Business Losses. Therefore, the set off claimed by the assessee is as per the law. 
• The AO however held that the loss of Rs 1163357 suffered by the assessee in the FAO market prior to AY 2006-2007 would remain B/F Losses from Speculative Business, and would therefore not be eligible to be set off against business income of Rs 2022445 earned in the AY 2009-2010. The AO computed the income as follows: Income from Delivery/ FAO transactions: Rs 2022445 Less: Delivery loss B/F from AY 2001-2002/2002-2003 set off: (-) Rs 772834. The AO refused to set off the unabsorbed loss of Rs 1163357 against the income of `2022445 in AY 2009-2010. Kindly explain the correct legal position as supported by judicial pronouncements.

- Balaji V

The assessment in respect of AYs 2001-02 and 2002-03 was completed before the amendments made to the Finance Act, 2005, whereby the provisions of Section 43(5) were introduced. The section does not state that the same is applicable retrospectively. Thus, the said section is applicable prospectively. The assessment states that the loss is a speculation loss, and the character of the loss cannot change merely because there is an amendment at a subsequent date.

In the circumstances, the AO’s stand that the said speculation loss (as then specified in the assessment order) cannot be set off against non-speculation business income is correct.

I had purchased a flat at Rs 9 lakh 6.6 years ago, which I sold for `20 lakh in October 2010. Following that, in December 2010, I reinvested an amount of Rs 15 lakh in a new flat to get tax benefits. If I sell this flat now and buy a new flat, will I have to pay a tax even if I reinvest the full amount received from selling this flat?

- Sanchali Upadhye

During the financial year ended March 31, 2011, you have earned a Long Term Capital Gain of Rs 6.67 lakh on the sale of the flat acquired by you about six and half years ago (say in the financial year ended March 31, 2005). Since you have invested more than Rs 6.67 lakh in the purchase of a new flat within two years of the transfer of the old one, you are entitled to exemption under Section 54 of the Income Tax Act, 1961. However, this exemption is available only if you hold the new house for a period of at least three years after its acquisition.

If you wish to sell the flat, the exemption will be revoked. You will have to pay the tax on the amount of Rs 6.67 lakh as Short Term Capital Gain, besides a tax on the difference of the sale price of the house and the cost of acquisition of the new house.