Set Off And Carry Forward Of Losses | Income Tax | Study Notes | Bachelor of Commerce | 3rd Semester CBCS (Honours) | Dibrugarh University

Set Off And Carry Forward Of Losses | Income Tax | Study Notes | Bachelor of Commerce | 3rd Semester CBCS (Honours) | Dibrugarh University

SET OFF AND CARRY FORWARD OF LOSSES

What is the mode of set off and carry forward?

-> The process of setting off losses and their carry forward may be covered in the following steps:-

Step 1- Inter-source adjustment under the same head of income.

Step 2- Inter-source adjustment in the same assessment year. This step is applied only if a loss cannot be set off under Step 1.

Step 3- Carry forward of a loss. This is applied only if a loss cannot be set off under Step 1 and 2.

 Inter-Source Adjustment- How Made (Sec. 70)

-> Inter source adjustment [Section 70]:

(i) Under this section, the losses incurred by the assessee in respect of one source shall be set-off against income from any other source under the same head of income, since the income under each head is to be computed by grouping together the net result of the activities of all the sources covered by that head. In simpler terms, loss from one source of income can be adjusted against income from another source, both the sources being under the same head.

Example 1: Loss from one house property can be set off against the income from another house property.

Example 2: Loss from one business, say textiles, can be set off against income from any other business, say printing, in the same year as both these sources of income fall under one head of income. Therefore, the loss in one business may be set -off against the profits from another business in the same year.

(ii) Inter-source set-off, however, is not permissible in the following cases –

(a) Long-term capital loss

(1) Where the net result in respect of any short term capital asset is a loss, such loss shall be allowed to be set-off against income, if any, for that assessment year under the head “capital gains” in respect of any other capital asset, and

(2) Where the net result in respect of any long-term capital asset is a loss, such loss shall be allowed to be set-off against income, if any, for that assessment
year under the head “capital gains” in respect of any other asset not being a short-term capital asset.

Thus, short-term capital loss is allowed to be set off against both short -term capital gain and long-term capital gain. However, long-term capital loss can be set-off only against long-term capital gain and not short-term capital gain.

(b) Speculation loss – A loss in speculation business can be set-off only against the profits of any other speculation business and not against any other business or professional income. However, losses from other business can be adjusted against profits from speculation business.

(c) Loss from the activity of owning and maintaining race horses.

(iii) It must be noted that loss from an exempt source cannot be set -off against profits from a taxable source of income. For example, long-term capital loss on sale of shares sold through a recognized stock exchange cannot be set -off against long-term capital gains on sale of land.

Inter-Head Adjustment-How Made (Sec. 71)

-> The provisions of section 71 are given below-

General rule- Where the net result of computation made for any assessment year in respect of any head income is a loss, the same can be set off against the income from other heads. 

 Exceptions- The following are the exceptions to the aforesaid rule-

  • Loss in a speculation business – Loss in a speculation business cannot be set off against any other income.
  • Loss in a business specified under section 35AD- Loss, computed in respect of any specified business referred to in section 35AD, cannot b set off against any other income. 
  • Loss under the head “Capital gains”-Losses under the head “Capital gains” cannot be set off against any income except income under the head “Capital gains”. 
  • Loss from the activity of owning and maintaining race horses-Losses from the activity of owning and maintaining race horses cannot be set off against any other income. 
  • Business loss cannot be set off against salary income-Loss from business or profession (including depreciation) cannot be set off against income under the head “Salaries”.
  • House property loss exceeding Rs. 2, 00,000 [Sec. 71(3A)]-House property loss (in excess of Rs. 2 lakh) cannot be set off against income under other heads of income (applicable from the assessment year 2018-19).
  • Loss cannot be set off against winnings from lotteries, etc.-By virtue of section 58(4) a loss cannot be set off against winnings from lotteries, crossword puzzles, races (including horse races), card games and other games of any sort or from gambling or betting of any form or nature.
  • Loss from purchase of securities.

Other points- The following points should be considered –

  1. Before adjusting loss under section 71, one has to set off the loss under section 70.

2.  Barring the aforesaid cases, any loss can be set off against income under other heads of income for the same year. For instance,

a. loss under the head “Income from house property” can be set off against business income, capital gains, salary income or income from other sources;

b. business loss can be set off against property income, capital gains or other income; c. a loss under the head “Income from other sources” [not being from the activity of owning and maintaining race horses] can be set off against salary income, property income, business income or capital gains. 

3. No order of priority is given in the Act. One should try to first set off those losses which cannot be carried forward to the next year. 

4. Barring the cases, in all other cases a loss has to be first adjusted against available income under other heads of income. No option is available to set off a loss or not to set off a loss.

Carry Forward of Loss- How to Set off

-> If a loss cannot be set off either under the same head or under the different heads, because of absence or inadequacy of the income of the same year, it may be carried forward and set off against the income of the subsequent year. Under the Act, the following losses can be carried forward:  

Losses from House Property:

  • Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred
  • Can be adjusted only against Income from house property 
  • Can be carried forward even if the return of income for the loss year is belatedly filed.

Losses from Non-speculative Business (regular business) loss:

  • Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred
  • Can be adjusted only against Income from business or profession
  • Not necessary to continue the business at the time of set off in future years
  • Cannot be carried forward if the return is not filed within the original due date.

Speculative Business Loss:

  • Can be carry forward up to next 4 assessment years from the assessment year in which the loss was incurred
  • Can be adjusted only against Income from speculative business
  • Cannot be carried forward if the return is not filed within the original due date.
  • Not necessary to continue the business at the time of set off in future years

Specified Business Loss under 35AD:

  • No time limit to carry forward the losses from the specified business under 35AD
  • Not necessary to continue the business at the time of set off in future years
  • Cannot be carried forward if the return is not filed within the original due date
  • Can be adjusted only against Income from specified business under 35AD

Capital Losses:

  • Can be carry forward up to next 8 assessment years from the assessment year in which the loss was incurred
  • Long-term capital losses can be adjusted only against long-term capital gains.
  • Short-term capital losses can be set off against long-term capital gains as well as short-term capital gains
  • Cannot be carried forward if the return is not filed within the original due date

Losses from owning and maintaining race-horses:

  • Can be carry forward up to next 4 assessment years from the assessment year in which the loss was incurred
  • Cannot be carried forward if the return is not filed within the original due date
  • Can only be set off against income from owning and maintaining race-horses only

Carry forward and Set off of Business Loss and Depreciation- When Permissible in the Hands of Amalgamated and Demerged Company or Co-Operative Bank [Secs. 72A, 72AA and 72AB]

-> Generally, depreciation and business loss can be carried forward by a person who has incurred the loss Sections 72A and 72AA provide a few exceptions this rule, These sections are applicable in the case of amalgamation, demerger, conversion of firm/proprietary concern into company, conversion of a company into LLP, amalgamation of banking companies, demerger of co-operative banks. 

1. Amalgamation – If the following conditions are satisfied, then the accumulated business loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be business loss/depreciation amalgamated company for the previous year in which the amalgamation is effected-

  • Condition one- There has been-
  1. an amalgamation of a company owning an industrial undertaking for a ship or a hotel with another company or
  2. an amalgamation of a banking company with SBI or any subsidiary of SBI; or 
  3. an amalgamation of a public sector airlines with another public sector airlines.
  • Condition two- The amalgamating company has been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed for 3 years or more years.
  • Condition three- The amalgamating company has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation.
  •  Condition four- The amalgamated company continues to hold at least three-fourths in the book value of fixed assets of the amalgamating company which it has acquired as a result of amalgamation for five years from the effective date of amalgamation.
  • Condition five- The amalgamated company continues the business of the amalgamating company for a minimum period of 5 years 
  • Condition six-The amalgamated company, which has acquired an industrial undertaking of the amalgamating company by way of amalgamation, shall achieve the level of production of at least 50 per cent of the installed capacity of the said undertaking before the end of 4 years from the date of amalgamation and continue to maintain the said minimum level of production till the end of 5 years from the date of amalgamation.

 However, the Central Government, on an application made by the amalgamated company, may relax the condition.

  • Condition seven- The amalgamated company shall electronically furnish to the Assessing Officer a certificate in Form No. 62, from a chartered accountant, with reference to the books of account and other documents showing particulars of production. This certificate should be submitted along with the return of income for the assessment year relevant to the previous year during which the prescribed level of production is achieved and for subsequent assessment years relevant to the previous year’s falling within 5 years from the date of amalgamation.
  1. Demerger- In the case of demerger, the accumulated business loss and unabsorbed depreciation of demerged company will be allowed to be carried forward and set off in the hands of the resulting company.

 The Central Government may, for this purpose, by notification in the Official Gazette, specify such conditions as it considers necessary to ensure that the demerger is for genuine business purposes.

3. Loss of proprietary concern/firm (Sec. 72A (4)] – In cases of succession of business, whereby a firm’s succeeded by a company fulfilling the conditions laid down in section 47(xiii) or a proprietary concern a succeeded by a company fulfilling the conditions laid down in section 47(x), the accumulated business loss and the unabsorbed depreciation (including unadjusted capital expenditure on scientific research) of the predecessor firm or proprietary concern, as the case may be, shall be deemed to be the business loss or as the case may be, allowance for depreciation of the successor company for the previous year in which business reorganization was effected and the other provisions of the Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.

4. Carry forward of loss/depreciation in the case of conversion of a company into LLP (Sec. 72A(6A)- In the case of succession of business, whereby a company (i.e., a private limited company or unlisted public limited company) is succeeded by a limited liability partnership fulfilling the conditions laid down in section 47(b), the accumulated business loss and the unabsorbed depreciation (including unadjusted capital expenditure on scientific research) of the predecessor company, shall be deemed to be the business loss or as the case may be, allowance for depreciation of the successor limited liability partnership for the previous year in which business reorganization was effected and the other provisions of the Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly. 

5. Set off of losses of a banking company against the profit of a banking institution under a scheme of amalgamation [Sec. 72AA)- Section 72AA permits set off of business losses of banking company in the case of amalgamation if a few conditions are satisfied. 

6. Carry forward and set off of accumulated loss and unabsorbed depreciation allowance in business reorganization of co-operative banks [Sec. 72AB]- The successor co-operative bank can set off and carry forward business loss and depreciation allowance of the predecessor co-operative bank if a few conditions are satisfied.

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