Set Off & Carry Forward of Losses

INTRODUCTION

If income is one side of the coin, loss is the other side. When a person earns income, he pays tax. However, when he sustains loss, law affords him to have benefit in the form of reducing the said loss from income earned during the subsequent years.

Thus, tax liability is reduced at a later date, if loss is sustained. Certain provisions govern the process of carry forward and set off of loss.

This will be discussed on :
1. Set off of Loss in the Same Year
2. Carry forward and Set off of Loss in Subsequent Years
i) Basic Conditions for carry forward of loss.
ii) Conditions applicable to each Head of Income
As stated in section 14 of the Act computation of total income is made under certain heads      viz.    (i) Salaries (ii) Income from House Property (iii) Profits and gains of Business or Profession (iv) Capital gains and (v) Income from other sources.

In case computation results in to a positive figure, it is income. Likewise, if the computation results into a negative figure, it is ‘Loss”. Therefore, there cannot be loss from the head ‘Salary’. Loss can occasion from all the remaining heads.

SUMMARY RULE

Sec Nature of loss Details of set off Conditions / Exceptions
72 Brought forward
unabsorbed
business loss
other than
Speculation loss
Set off only against
income under the
head profits and
gains of business or
profession.
1. Carry forward and set off is permissible for 8 assessment
years immediately succeeding the assessment year for which
the loss was computed.
2. Loss can be carried forward only if the return is filed
u/s 139(1) and it is determined and communicated u/s 157.
32(2) Brought forward
unabsorbed
depreciation
Set off against any
head of income
Unabsorbed depreciation loss can be carried forward for any
number of years until it is fully set off.
73 Brought forward
unabsorbed
Speculation
business loss
Set off only against
income under
Speculation business
1. Carry forward and set off is permissible for 4 assessment
years immediately succeeding the assessment year for which
the loss was computed.
2. Loss can be carried forward only if the return is filed
u/s 139(1) and it is determined & communicated u/s 157.
74 Brought forward
unabsorbed loss
under the head
Capital Gains.
Set off only against
income under the
head Capital Gain.
1. Carry forward and set off is permissible for 8 assessment
years immediately succeeding the assessment year for which
the loss was computed.
2. STCL can be set off against any Capital Gain.
However, LTCL can be set off only against LTCG.
3. Loss can be carried forward only if the return is filed
u/s 139(1) and it is determined & communicated u/s 157.
74A Brought forward
unabsorbed loss
from activity of
owning &
maintaining race
horses
Set off only against
income from owning
and maintaining race
horses
1. Carry forward and set off is permissible for 4 assessment
years immediately succeeding the assessment year for which
the loss was computed.
2. Loss can be carried forward only if the return is filed
u/s 139(1) and it is determined & communicated u/s 157.

SET OFF OF LOSS IN THE SAME YEAR
For the purpose of computing total income and charging tax thereon, income from various sources is classified under the following heads :
A. Salaries
B. House Property
C. Profits and gains of Business or Profession
D. Capital gains
E. Other sources
These five heads of income are mutually exclusive. If any income falls under one head, it cannot be considered under any other head. Income under each head has to be computed as per provisions under that head. Then, subject to provisions of Set off of Losses (Sec. 70 to Sec. 80) between the heads of income, the income under various heads has to be added to arrive at a gross total income. From this gross total income, deductions under chapter VIA are to be allowed to arrive at the total income.
In this part, the provisions relating to set off, carry forward and set off of losses are categorised as under :-

SECTION 70
Where the net result for any Assessment Year in respect of any source falling under any head of income is a loss,the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.

(1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than “Capital gains”, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.

(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.

(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.)

SECTION 71
Where the net result of the computation under any head of income in respect of any Assessment Year is a loss, the assessee shall be entitled to have such amount of loss set off against his income assessable for that Assessment Year under any other head of income.

Exceptions to provisions of sections 70 and 71 are as follows :
(a) Loss from speculation business: “Speculation transaction” means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scripts. [Sec. 43(5)] Loss from speculative transaction, if it is in the nature of business, can be set off only against income of another speculative business.
(b) Loss under the head long term capital gains arising from transfer of long-term capital assets will be allowed to be set off only against long term capital gains.
Note:
1. Loss can be set off against deemed income.
2. Inter head adjustment is made only when the net income computed under a head is a loss.
3. The scheme of inter source and inter head adjustment is mandatory.
(c) Loss from owning and maintaining race horses can be set off only against income of that activity.
(d) No expenditure or allowance is allowed from wining from lotteries, crossword puzzles, card games etc. similarly, no loss from any lottery, card games, races, etc. is allowed to be set off from the income of such sources. [Sec. 58(4)]
(e) loss incurred by an assessee from a source, income from which is exempt cannot be set off against income from a taxable source.

CARRY FORWARD AND SET OFF OF LOSS IN SUBSEQUENT YEARS BASIC CONDITIONS FOR CARRY FORWARD OF LOSS

SECTION 80: LOSS RETURNS.
In order to carry forward loss under section 72, 73, 74 and 74A. The due date is prescribed in section 139(1). No loss which has not been determined in pursuance of a return filed within the date in accordance with the provisions of section 139(3) shall be carried forward under the provisions of section.
The condition for filing of return in accordance with the provisions of sec. 139(3) shall not apply to loss from House Property carried forward u/s. 71B and unabsorbed depreciation u/s. 32(2).
Brought forward loss of earlier assessment Year in accordance with Ss. 72, 73, 74, 74A can be set off against the income of that Assessment Year and can be carried forward further, even if the return is not filed within the due date specified in section 139(1) of the Act.

CBDT has issued circular vide No. 8 of 2001 dated 16.5.2001 clarifying that the power has been delegated to Commissioner to condone delay in filing return and carry forward losses in cases where the claim for loss does not exceed ` 10,000 for each Assessment Year and to Chief Commissioner/Director General upto 1 lakh and beyond such limit CBDT will exercise the power.

CONDITIONS APPLICABLE TO EACH HEAD

71B.Carry forward and set off of loss from house property

Where for any assessment year the net result of computation under the head “Income from house property” is a loss to the assessee and such loss cannot be or is not wholly set off against income from any other head of income in accordance with the provisions of section 71 so much of the loss as has not been so set-off or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year and—
(i) be set off against the income from house property assessable for that assessment year; and
(ii) the loss, if any, which has not been set off wholly, the amount of loss not so set off, shall be carried forward to the following assessment year, not being more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

Sec 72AA: Carry forward and set –off accumulated loss in scheme of amalgamation of banking company

Where there has been an amalgamation of

(a) a company owning an industrial undertaking or a ship or a hotel with another company; or
(b) a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; or
(c) one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business.
accumulated loss and the unabsorbed depreciation of such company shall be deemed to be the loss of such banking institution for the previous year in which the scheme of amalgamation was brought into force.
Provision relating to carry forward and set- off of accumulated loss and unabsorbed depreciation allowance in a scheme of amalgamation of banking company in certain cases [Section 72 AA]
Not withstanding anything contained in section 72(2)(1B)(i)to (iii) where there has been an amalgamation of a banking company with any other banking institution under a scheme sanctioned and brought into force by the Central Government under sec 45(7)of Banking Regulation Act , 1949 the accumulated loss and the unabsorbed depreciation of such banking company shall be deemed to be the loss or , as the case may be, allowance for depreciation of such banking institution for the previous year in which the scheme of amalgamation was
brought into force and other provision of this Act relating to set- off and carry forward of loss and allowance for depreciation shall apply accordingly.

For the purposes of this section :

(i) “Accumulated loss” means so much of the loss of the amalgamating banking company , under the head “Profits and gains business” (not being a loss sustained in a speculation business) which such amalgamating banking company, would have been entitled to carry forward and set-off under the provision of section 72 if the amalgamation had not taken place;

(ii) “banking company” shall have the same meaning assigned to it in sub-section (15) of section 45(15) of the Banking Regulation Act,1949.

(iii) “banking institution” shall have the same meaning assigned to it in sub-section (15) of sec 45(15) of the Banking Regulation Act, 1949.

(iv) “unabsorbed depreciation” means so much of the allowance for depreciation of the amalgamating banking company which remains to be allowed and which would have been allowed to such banking company if amalgamation had not taken place.

Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in business reorganisation of co-operative banks [Sec. 72AB]

(1) The assessee, being a successor co-operative bank, shall, in a case where the amalgamation has taken place during the previous year, be allowed to set off the accumulated loss and the unabsorbed depreciation, if any, of the predecessor co-operative bank as if the amalgamation had not taken place, and all the other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.

(2) The provisions of this section shall apply if—

(a) the predecessor co-operative bank—
(i) has been engaged in the business of banking for three or more years; and
(ii) has held at least three-fourths of the book value of fixed assets as on the date of the business
reorganization, continuously for two years prior to the date of business reorganization;

(b) the successor co-operative bank—
(i) holds at least three-fourths of the book value of fixed assets of the predecessor co-operative bank
acquired through business reorganization, continuously for a minimum period of five years immediately succeeding the date of business reorganisation;
(ii) continues the business of the predecessor co-operative bank for a minimum period of five years from the date of business reorganisation; and
(iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the predecessor co-operative bank or to ensure that the business reorganisation is for genuine business purpose.

(3) The amount of set-off of the accumulated loss and unabsorbed depreciation, if any, allowable to the assessee being a resulting co-operative bank shall be,—
(i) the accumulated loss or unabsorbed depreciation of the demerged co-operative bank if the whole of the amount of such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting co-operative bank; or
(ii) the amount which bears the same proportion to the accumulated loss or unabsorbed depreciation of the demerged co-operative bank as the assets of the undertaking transferred to the resulting cooperative bank bears to the assets of the demerged co-operative bank if such accumulated loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting cooperative bank.

(4) The Central Government may, for the purposes of this section, by notification in the Official Gazette, specify such other conditions as it considers necessary, other than those prescribed under sub-clause (iii) of clause (b) of sub-section (2), to ensure that the business reorganisation is for genuine business purposes.

(5) The period commencing from the beginning of the previous year and ending on the date immediately preceding the date of business reorganisa-tion, and the period commencing from the date of such business reorganisa-tion and ending with the previous year shall be deemed to be two different previous years for the purposes of set off and carry forward of loss and allowance for depreciation.

(6) In a case where the conditions specified in sub-section (2) or notified under sub-section (4) are not complied with, the set off of accumulated loss or unabsorbed depreciation allowed in any previous year to the successor co-operative bank shall be deemed to be the income of the successor co-operative bank chargeable to tax for the year in which the conditions are not complied with.

Insertion of section 73A for set of off loss of the specified business : (w.e.f A.Y. 2010-11)
With reference to newly inserted Section 35AD (w.e.f A.Y. 2010-11). Any loss computed in respect of the specified business shall not he set off except against profits and gains, if any, of any other specified business. To the extent business in the following assessment year and so on.

   Section Losses
72 Carried forward and set-off of business losses other than speculative
73 Losses in speculation business.
74 Losses under the head Capital Gains.
               74A Losses from owning and maintaining race Horses.

SUMMARY RULE

Sec Nature of loss Details of set off Conditions / Exceptions
72 Brought forward
unabsorbed
business loss
other than
Speculation loss
Set off only against
income under the
head profits and
gains of business or
profession.
1. Carry forward and set off is permissible for 8 assessment
years immediately succeeding the assessment year for which
the loss was computed.
2. Loss can be carried forward only if the return is filed
u/s 139(1) and it is determined and communicated u/s 157.
32(2) Brought forward
unabsorbed
depreciation
Set off against any
head of income
Unabsorbed depreciation loss can be carried forward for any
number of years until it is fully set off.
73 Brought forward
unabsorbed
Speculation
business loss
Set off only against
income under
Speculation business
1. Carry forward and set off is permissible for 4 assessment
years immediately succeeding the assessment year for which
the loss was computed.
2. Loss can be carried forward only if the return is filed
u/s 139(1) and it is determined & communicated u/s 157.
74 Brought forward
unabsorbed loss
under the head
Capital Gains.
Set off only against
income under the
head Capital Gain.
1. Carry forward and set off is permissible for 8 assessment
years immediately succeeding the assessment year for which
the loss was computed.
2. STCL can be set off against any Capital Gain.
However, LTCL can be set off only against LTCG.
3. Loss can be carried forward only if the return is filed
u/s 139(1) and it is determined & communicated u/s 157.
74A Brought forward
unabsorbed loss
from activity of
owning &
maintaining race
horses
Set off only against
income from owning
and maintaining race
horses
1. Carry forward and set off is permissible for 4 assessment
years immediately succeeding the assessment year for which
the loss was computed.
2. Loss can be carried forward only if the return is filed
u/s 139(1) and it is determined & communicated u/s 157.

SPECIAL PROVISIONS
Section 78(1):
Where a change has occurred in the constitution of the firm, the firm shall not be entitled to carry forward and set off so much of the loss proportionate to the share of a retired or deceased partner remaining unabsorbed shall not be allowed to be carried forward by the firm. These restriction shall not apply to unabsorbed depreciation.

Change in constitution of the firm takes place :–

(i) If one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change (provided the firm is not dissolved on the death of any of its partners).(ii) Where all the partners continue with a change in their respective shares or in the shares or in the shares of some of them.

Section 78(2) :

Where any person carrying on any Business or Profession has been succeeded in such capacity by another person otherwise than by inheritance, then the successor cannot have the loss of predecessor carried forward and set off against his income.

Section 79 :

Losses (other than unabsorbed depreciation) in case of closely held company In case of a company in which public are not substantially interested (defined in sec. 2(18) of the Act), the
unabsorbed business loss relating to any Assessment Year can be carried forward and set off against the income in a subsequent Assessment Year only (if the shares of the company carrying not less than 51% of the voting power were beneficially held by the same persons) both on the last day of the Previous Year(s) in which the loss, claimed to be set off and on the last day of the Previous Year in which loss was incurred.

Exceptions
The provisions stated supra shall not apply if the change in the voting power takes place due to the following reasons :
(a) the death of a shareholder; or
(b) transfer of shares by way of gifts to any relative of the shareholder making such gift.
(c) W.e.f. AY 2000-01, this section shall not apply to any change in the shareholding of an Indian company which is subsidiary of a foreign company arising as a result of amalgamation or demerger of a foreign company subject to the condition that 51% of the shareholders of the amalgamating or demerged foreign company continue to remain the shareholders of the amalgamated or the resulting foreign company.
Notes : Unabsorbed business losses can be carried forward and set off against profits from any business from A.Y. 2000-01. There is no need to continue the same business in which the loss was incurred. Depreciation can be carried forward and set off against the profits from any business in the succeeding assessment year up to A.Y. 2001-02. The business in which the loss was incurred need not be continued in that year. The effect of depreciation, business loss and investment allowance should be given in the following order:
• Current year’s Depreciation
• Unabsorbed Business loss
• Unabsorbed Depreciation
• Unabsorbed Investment Allowance.
A return of loss is required to be furnished for determining the carry forward of such losses, by the due date prescribed for different assesses under section 139(1) of the Act. (Sec. 80).

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