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Parag (Querist)

22 April 2009 actually i was solving RTP of PCC and there i saw sums like in many sums of capital budgeting they actually calculate tax on negative profits
but in JK shah classes its not this way
so either we should strictly follow RTP even its wrong or should follow our classes way.
Please help

Manmohan ACA, CS

Manmohan ACA, CS (Expert)

22 April 2009 While solving capital Budgeting one should calculate tax on negative profit, the Logic behind is that Negative profit (i.e. loss) can be setted - off from other income and can be carried forward and in such a case it saves tax amount.

For example if negative profit of rs 50000 arise it can be setted off with other income and then it will save Rs. 15000 (assuming Tax Rate 30%).
This is a general assumption that the -ve profit can be setted - off , however if the sum specifically indicates(which is found in CA final ) that the business has no other sources to set off and Carry forward then , NO need to compute TAx on loss.

See tax on negative profit reduces loss. E.g. -ve profit 50000 tax on it @ 30% rs -15000, So final loss is [(-50000-(-15000)]
= (-50000 + 35000) = - 35000

Hope it is clear now

CA Nitin Wadhwani

CA Nitin Wadhwani (Expert)

22 April 2009 I agree with Mr.Manmohan.
But tax is not calculated on negative profit in the year of it is incuured but it is deducted from next year's profit and tax is calculated on net profit.
This approach is as per income tax laws and correct discounting rate application.

Parag

Parag (Querist)

22 April 2009 So ultimately is CA institute's RTP correct or not?
and we should follow which method in PCC

Manmohan ACA, CS

Manmohan ACA, CS (Expert)

23 April 2009 NO tax is calculated in case of negative profit assuming that the loss will be setted off in the same year with some other income of the same management and RTP is completely right. If it is expressly given that the company does not any other business then only it will be setted with the profit of next year.

"RTP is right"

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