Capital loss ?

This query is : Resolved

Somsuvra Mukherjee (Querist)
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09 September 2017 Respected Experts and my Fellow friends,

A partnership firm is having four partners with Rs. 1,00,000 capital each i.e Rs. 4,00,000 as on 31.03.2016. The firm had an arrear rent of Rs. 15,00,000. Two of the active partners have deposited Rs. 7.5 lakhs each in the current account of the firm from their own bank account and from there, the firm paid the arrear rent of Rs. 15,00,000 by issuing cross cheque.
What will be the treatment in the balance sheet as at 31.03.2017 ?
How the loss can be shown in Trading and Profit & Loss Account or/and Balance Sheet ?
What kind of loss is this relating to further introduction of Rs. 7.5 lakhs each by these two partners?
Can this loss be carried forward in IT for adjustment with profit in future years ?
For Information - I.T. Return has not yet been filed for the Firm and as well as of the partners for A.Y. – 2017-18. The firm is having a very low profit of every year … say around Rs. 20,000 – Rs. 30,000/ annum.

Thank you for your valuable suggestions in advance.
.

Somsuvra Mukherjee

Somsuvra Mukherjee (Querist)
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11 September 2017 Anyone, please reply

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 In the scenario described, here's how the treatment of the financial transactions and losses would typically be addressed:

1. **Treatment in Balance Sheet as at 31.03.2017:**
- The arrear rent payment of Rs. 15,00,000 made by the firm using Rs. 15,00,000 deposited by two partners should be reflected as a liability in the Balance Sheet under 'Current Liabilities' or 'Sundry Creditors'. This represents the amount owed to the partners who advanced the funds.

2. **Treatment in Trading and Profit & Loss Account:**
- Since the firm incurred an expense (arrear rent payment) of Rs. 15,00,000, this should be accounted for in the Trading and Profit & Loss Account as an expense under 'Rent' or 'Administrative Expenses', depending on the nature of the rent.
- This expense will reduce the net profit of the firm for the financial year ending 31.03.2017.

3. **Nature of Loss:**
- The loss incurred by the firm due to the arrear rent payment funded by the partners is an operational loss. It reflects an expense incurred to maintain the business operations and is not directly related to capital loss in the traditional sense (such as loss on investment).

4. **Carrying Forward Loss for Income Tax Adjustment:**
- In terms of Income Tax, losses incurred by a partnership firm can generally be carried forward and set off against future profits. However, the specific rules and provisions of the Income Tax Act would apply.
- Losses can typically be carried forward for up to 8 assessment years immediately succeeding the assessment year for which the loss was first computed.

5. **Filing Income Tax Returns:**
- It's crucial for the partnership firm to file its Income Tax Return (ITR) for A.Y. 2017-18 to declare this loss and avail any potential benefit of carrying it forward.
- Each partner, including those who contributed funds for the arrear rent payment, would also need to reflect their share of the partnership income (or loss) in their personal tax returns.

**Summary:**
- The arrear rent payment funded by partners should be recorded as a liability in the Balance Sheet and as an expense in the Trading and Profit & Loss Account.
- This expense reduces the firm's taxable income for the year and can potentially be carried forward to offset future profits for tax purposes.
- Proper documentation and compliance with Income Tax regulations are essential to ensure the firm and its partners maximize tax efficiency and comply with legal requirements.

For precise guidance tailored to your specific circumstances and jurisdiction, consulting with a qualified accountant or tax advisor is recommended. They can provide detailed advice on optimizing tax implications and ensuring compliance with all relevant laws and regulations.

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