The Karnataka High Court ruling has drawn attention to companies that may pass on profits or losses from “non-business income” or from non-essential activities. The latest ruling stated that if a company classifies a certain amount as “other business income” when paying taxes or preparing financial statements, that amount can be used to carry over profits or losses.

According to accounting regulations, companies can in most cases record profits and losses in their annual financial statements for up to eight years. This accounting treatment has an impact on the company’s profitability, as well as its tax expense.

In the Karnataka High Court case, a steel company compared its transferred business loss to capital gains from the transfer of a business asset – land. The tax office had contradicted this treatment. The court ruled that any loss of business carried forward can be set off against profits or gains, if any, from any business conducted in a company. Tax laws use the phrase “income or profits, if any, from a business” and do not refer to the director of the income and earnings of the business or profession, the court found.

“According to the ruling, the appraiser (taxpayer) has the right to offset the expected loss with income that has the characteristics of business income, although this may be assessed under the heading other than business income,” said Yashash Ashar, partner at Bhuta Tax Consultancy Bhuta Shah and Co. According to the court ruling, many companies can now withdraw profits or losses from non-essential operations, including property sales or capital market gains, tax experts say. “This decision can be of great help to companies in obtaining compensation for income that could be treated as business income but is not taxed as primary and business income,” said Ashar.


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