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Business loss could be set off only against business income

Q: Due to lack of demand, our private limited company has discontinued ten years back all the manufacturing and trading activities. It has an accumulated but unabsorbed business loss of over a lakh of rupees. Since then, the only source of income has been some interest from a fixed deposit with the bank. After setting off expenses like office rent, printing and stationery, audit fee, profession tax, filing fee and the like against the interest income, a small amount of profit is earned every year, but nil income is returned after set off of the unabsorbed loss to the extent of available income.

After a long period of time, the company's income-tax return for the AY 2002-03 has been selected for scrutiny.

The assessing officer contends that the interest income is income from other sources and not business income, so that the entire expenditure should be disallowed as it has not been incurred for earning the interest and that the unabsorbed business loss cannot be set off against the interest income. Is this argument correct?

A: Sec. 72 of the Income-tax Act, while permitting carry forward and set off of business loss, clearly lays down that it can be set off only against income from the same business or any other business carried on by the assessee in eight successive years. Income and expenses during a suspension of business may be accepted as relating to business, but where business has been totally discontinued and the assessee does not carry on any other business, there can be no business income or loss.

Where there is income from interest etc. on undistributed moneys, such interest income would be taxable under the head `Other Sources', subject only to the deduction of such amounts as is spent wholly and exclusively for earning that income, so that only such of those expenses for earning that amount of interest will be deductible.

Since past losses cannot be set off, tax becomes payable on such net interest income assessable as income from `Other Sources'.

S. Rajaratnam

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