The Act does not have provisions for an individual to carry forward or set off losses of a partnership firm in his individual capacity
My friend invested ₹2 croreas capital in a partnership firm and ₹50 lakhas loan to the firm during 2013-14. The firm incurred huge losses and my friend’s capital was fully eroded. His loan also was not repaid. The partnership was dissolved in the current financial year 2022-23. Can my friend claim this investment of ₹2 croreand ₹50-lakhloan as business loss or long term capital loss? If business loss, can he set off the loss against profit from his own proprietary business? Please advise.
We note that your friend has invested ₹2 crore in a partnership firm as capital and has given ₹50 lakh as loan to that firm during FY 2013-14. Further, the firm incurred huge losses, and your friend’s capital was fully eroded. We assume in the instant case that the individual is not in the business of financing/providing loans and is a partner only in one firm that has been dissolved. Further, we also assume he is not taking over the business of the firm in his individual capacity.
As the individual is not in the business of financing/providing loans, the amount given as a loan to the firm would be in his personal capacity. Hence non-payment of the loan would tantamount to a capital loss that he would need to forego. It is to be noted this is different from a capital loss arising from a transfer of a capital asset i.e. a long-term capital loss. Hence, he may not be able to claim any deduction or carry forward the same as a business loss.
As regards the partnership firm profit/loss, per the Income Tax Act, 1961 (‘the Act’) in case of profit (if any) transferred from the firm, the same would not be subject to tax in the hands of the individual partner (as per section 10(2A) of the Act) since the firm would be paying taxes on the same. Drawing the same rationale, any losses transferred would also not be allowed to be set off against any other proprietary business. The amount of profit/loss from the firm is a mere disclosure in the tax return of the individual.
The amount of ₹2 crore is part of losses of the firm and cannot be treated as business loss in the hands of the individual partner even if transferred to his name on dissolution of firm. The Act does not have any provisions for an individual to carry forward or set off losses of a partnership firm in his individual capacity.
The writer is a Partner with BDO India LLP.
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