I am a regular reader of BusinessLine . I will appreciate if you could guide me in the following matter. I am a partner in a firm that is engaged in the business of trading of chemicals. The accounts of the firm are subject to audit as per the provisions of the Income Tax Act. As a partner, I filed my ITR under form No: 3 within the original due date for AY2019-20. Besides showing income from business/profession in the form of interest received on capital employed in my firm, I have also shown income from other sources in ‘Schedule OS’ in the form of interest received or accrued on fixed deposits/bonds/NCDs, etc. I also claimed a depreciation expense of ₹2,42,768 in ‘Schedule OS’ as per the provisions of Section 32 of the I-T Act, the requirements of which I fully satisfy as follows:

1) The block of assets comprising tangible assets such as furniture and fixtures, electrical appliances on which depreciation has been claimed @10 per cent, are fully owned by me (the assessee), and

2) The assets on which depreciation has been claimed are used for the purpose of business by my firm in which I am a partner.

I have received communication of the proposed adjustment u/s 143(1)(a) of the I-T Act, asking me to respond to the proposed adjustment, mentioned below, within 30 days from the date of issue of the communication.

Adjustment: Incorrect claim u/s 143(1)(a)(ii) that depreciation expense of ₹2,42,768 can be claimed in the Schedule OS provided. Rental income from plant and machinery is greater than zero.

Please advise whether the depreciation expense so claimed by me is allowable or not.

Vishnu Kumar Maheshwari

As per the provisions of Section 28(v) of the Income Tax Act, any interest, salary, bonus, commission or remuneration received from a firm by a partner is taxable in the hands of the partner as ‘profits and gains of business or profession’ (PGBP). Further, as per the provisions of Section 10(2A) of the I-T Act, such share of income from a firm is exempt in the hands of a partner, provided the firm is assessed as a separate assessee.

Accordingly, the interest received on the capital employed in the partnership firm shall be taxable as PGBP.

Such income should be reported by the partner in the return in schedule ‘BP’ of Form ITR-3. While filing your return of income, you have reported such income in Schedule OS. Thus, your return has to be revised to report the income correctly in the appropriate schedule.

Being a partner in a partnership firm, you are also required to furnish the details in schedule ‘IF’ of Form ITR–3. The revised return for FY 2018-19 may be filed up to March 31, 2020. After revision, your revised return shall replace the original return, and processed separately. You may respond to the Section 143(1) intimation stating that a revised return is being filed.

Further, as per Section 32 of the I-T Act, following are the preconditions for claiming depreciation on an asset:

1) The asset should be owned by the assessee: We understand that the subject assets are owned by you and we assume that you have contributed the said asset as your capital contribution to the firm.

2) The asset should be used for the purpose of business or profession. In the instant case, the asset is being used by the partnership firm for its business and not being used by you. Since the asset is not used by you but by the firm, you may not be eligible to claim depreciation.

Can short-term capital gains be offset against long-term losses? I have short-term capital gains of ₹ 1,10,000 and a long-term capital loss of ₹71,000 in FY 2019-20. What will be my tax liability?

KK Aggarwal

Under Section 70 of the I-T Act, long-term capital loss (LTCL) can only be set off against long-term capital gains (LTCG). Such loss cannot be set-off against short-term capital gains (STCG).

Accordingly, for FY2019-20, the STCG of ₹ 1,10,000 will be considered taxable in your hand. As the LTCL of ₹71,000 is not allowed to be set off, the same can be carried forward to the next year to be set off against any future LTCG. Such loss can be carried forward for the next eight years.

However, please note that carry-forward of the loss is allowed only if the return of income is filed in time.

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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