Taxation For Business Income

Retention money received as part of business income is not taxable in the year of billing but only in the year of receipt. Also, remember that losses under the head ‘Income from Capital Gains’ are not eligible to be set off against ‘Income from Other Sources’ such as business, etc.

Key Points

• Income becomes taxable only on accrual, i.e. when the right of the assessee to the income accrues or arises.
• For shares held as investments, you cannot book notional losses. In order to claim losses for a particular year, you will have to actually transfer or sell the shares.
• Long Term Capital Losses can be set off only against Long Term Capital Gains, and Short Term Capital Gains/Losses can be set off only against ‘Income from Capital Gains’.

Q: I have just started a new business as a civil contractor. My clients normally retain a certain percentage (say five or 10 per cent) of the gross bill as ‘retention money’, which is payable only after the lapse of the specified time period as an assurance of the quality of the work. Most of it is payable in the next year. Is the same amount taxable in the year of billing or that of receipt? Please advise me

- Suhas Masurkar

A: It may be noted that income becomes taxable only on accrual, i.e. when the right of the assessee to the income accrues or arises. In your case, it appears that as per the agreement with your client, you are entitled to receive the retention money only after a certain time period has elapsed. Thus, the said retention money is not taxable in the year of billing but only in the year of receipt, as it accrues in that year.

However, it may be noted that for the purpose of Sales Tax (in your case, Works Contract Tax), the entire gross billing will constitute your sales and VAT would be payable accordingly.

Q: I have certain shares and stocks as investments. There has been a substantial fall in the BSE/NSE indices. Can I take advantage of the fall in prices by claiming losses? I have other income such as ‘Income from Business’ and ‘Income from Other Sources’, so would claiming losses help me to reduce my tax liability?

- Vina Arvindlal

A: The shares that you are holding are investments, and as such, they are to be accounted at cost in the books of account. You cannot book notional losses. In order to claim losses, you will have to actually transfer or sell the shares.

Besides, the loss under the head ‘Income from Capital Gains’ would not be eligible to be set off against your ‘Income from Other Sources’ such as business, etc. Long Term Capital Losses (LTCL) can be set off only against Long Term Capital Gains, and Short Term Capital Gains/Losses (STCGL) can be set off against ‘Income from Capital Gains’ only.

If you are desirous of claiming the ups and downs every year, you will have to convert your investments into stocks and pay Capital Gains Tax on such a conversion. Thereafter, the income would fall under the head ‘Income from Business’ and would be taxed at the normal rates of tax, as against Long Term Capital Gains (LTCG), which are taxed at a special rate of 20 per cent.

You may also note that LTCG, in respect of which Securities Transaction Tax (STT) is paid, are exempt. In case of a LTCL, in respect of which STT is paid, the loss lapses and is not eligible to be set off at all. Whereas, in case of STCG, in respect of which STT is paid, the income is taxed at a specific rate, viz. 15 per cent u/s 111 of the Income Tax Act, 1961.