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Taxation issue on profit on the sale of industrial land

Can I adjust the profit on the sale of industrial land against the business loss?

Mr.Bhushan, an industrialist, is finding it hard to run his business over the last couple of years and has accumulated Rs.57 Lakh as a business loss. Now (in July 2015) he has decided to sell a portion of the industrial land (brought in 1998) of the company to repay the overdue bank loans. He wants to know about the tax implication on the sale of the land after adjusting the business loss.

 

Facts

  1. The business loss accumulated up to March 2015 is considered as carried forward loss.
  2. The business loss for Financial Year 2015-16 (April 2015 to March 2016) is considered as Loss for the current year.
  3. The sale price minus the indexed cost of purchases of land is called Long Term Capital Gain.

 

Set Off of business loss against Long-term capital gain

  • Any business loss can be set off against income from any other sources, except ‘salary’. This means, the business loss for FY 2015-16 (Loss for the current year) can be set off against Long Term Capital Gain (Set Off during the year possible)
  • Any business loss to the extent that is not adjusted against other incomes in the same year may be carried forward for eight years and set off against the business income of those years. This means, the carried forward loss up to March 2015 can’t be set off against Long Term Capital Gain (Set Off carried forward loss not possible)

 

Tax Payable

  • The sale of industrial land that was held for more than 36 months is considered as Long Term Capital Asset. The gain from the sale of such asset (after reducing the indexed cost of purchases plus business loss for the current year) is taxable at 20.60%
  • Suppose, the sale was land and building, instead of land Then the gain from the sale of building is considered as Short-Term capital gain. In case of transfer of a depreciable asset, the capital gain is taken as short-term, irrespective of the period of holding.

 

Scenario II

Suppose the company is making a profit and incurring a capital loss. Can similar adjustments as mentioned above be done?

No. There is a difference!

  • Any Long-Term Capital Loss can be set off against Long Term Capital Gain only and no other income. Thus, the capital loss can’t be set off against business profits.
  • Any Short-Term Capital Loss can be set off against Short-term or Long Term Capital Gain and no other income.
  • Any short-term capital loss can be carried forward to the next eight assessment years and set off against capital gain (short term or long term) in those years.
  • Any long-term capital loss can be carried forward to the next following eight assessment years and set off only against the long-term capital gain in those years.

 

Thought for the day

Adjustment with right people is always better than an argument with wrong people.

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CA Prasad Chartered Accountant
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