Non-commercial profit / loss can be carried forward: High Court of Karnataka

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The Karnataka High Court ruling shone the spotlight on the issue of which companies are allowed to defer profits or losses from “non-business income” or non-core activities.

The recent ruling stated that if a business, when paying taxes or preparing financial statements, classified a certain amount as “other business income”, that amount could be used to defer profits or losses. losses.

According to accounting rules, companies are allowed to carry forward profits and losses in their financial statements for up to eight years in most cases. This accounting treatment affects the profitability of the company as well as the tax exit.

In the case before the Karnataka High Court, a steel company offset its deferred business loss with capital gains resulting from the transfer of a business asset – land. The tax authorities were opposed to this treatment.

The court ruled that a business loss carried forward could be deducted from the profits or gains, if any, of any business carried on by a corporation. The tax laws use the phrase “profits or gains, if any, of any business” and do not refer to the head of the profits and gains of a business or profession, the court observed.

“According to the decision, the assessed (taxpayer) has the right to offset the loss carried forward with income which has the attributes of business income even if it is taxable under headings other than business income “said Yashesh Ashar, a partner. at the tax consultancy firm Bhuta Shah & Co.

As a result of the court ruling, many companies may now be able to defer profits or losses from non-core transactions, including the sale of land or capital market gains, according to tax experts.

“This decision can go a long way in helping businesses obtain income compensation that could be treated as business income but not taxed against the profits and gains of businesses and the profession,” Ashar said.

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