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10. Carry Forward And Set-Off Business Loses

10.1. Business Loss [Section 72 (1)].

As explained earlier, the loss under business head except speculation loss, shall be adjusted against the income from any other head in the same assessment year. If the whole business loss cannot be set-off because of insufficiency of income under other heads in the same assessment year, such business loss shall be carried forward and set-off against the income of any business or profession carried on by the assessee and assessable in that assessment year. Thus a business loss can be carried forward over 8 subsequent assessment years and set-off wherever profits are available provided the same business is continued for which the loss was originally computed. A carried forward non-speculation business loss can be set-off against the income of any business (including speculation business profit) carried on by the assessee.

 
The other important points to be noted in the carry forward and set-off business loss, are given as follows:


(1) The person who has incurred the loss, alone has the right to carry it forward. The successor except succession by inheritance (business passing from father to son) cannot claim to carry forward the loss incurred by his predecessor in business. Where a company merges with another under the scheme of amalgamation, the past loss of the amalgamating company can be carried forward by the new company.


(2) The business loss which can be carried forward must have been computed by the Assessing Officer on the basis of return filed by the assessee under Section 139.


(3) The unabsorbed business loss of an industrial undertaking which was discontinued due to natural calamities (as discussed u/s 33B), shall be carried forward and set-off against the profit of the reconstructed, re-establised business upto a period of 8 years as reckoned from the previous year in which the business is re-started.

 


(4) Carry forward of business loss [Section 72(1)]

The business loss could be carried forward for 8 succeeding previous years to be set off from income under the head ‘Profits and gains of business or profession’.


(5) Loss from any asset held as stock-in-trade can be set-off from any income from such asset even if it is taxable under the head ‘Other Sources’.

 

(6)     Unabsorbed Depreciation

With effect from AIY 2002-03 depreciation which remains unadjusted as either there is no income or less income in the relevant previous year, it can be carried forward till it is fully adjusted from any income during the succeeding previous years. It shall be treated as depreciation of the succeeding previous year.


In case there is C/F business as will as C/F unabsorbed depreciation, then his following order should be followed for set off.


(t) Firstly Current depreciation


(u) Secondly Brought forward business loss


(iii) Thirdly Brought forward/unabsorbed depreciation.

 

10.2.        Loss of speculation business.

Where for any assessment year the loss under speculation business has not been wholly set-off against the income of another speculation business, such part of speculation loss shall be carried forward to the following assessment year and set-off only against the profits of any speculation business carried on by the assessee and assessable during those assessment, years. The unabsorbed speculation business loss is eligible for carry forward upto eight assessment years immediately succeeding the assessment year for which the loss was computed.


If the assessee leaves one type of speculation business and its unabsorbed loss could not be set-off against the income of any other speculation business which the assessee may start, the carry forward loss of speculation business which is discontinued, is eligible for setting off against the assessee’s income Of another speculation business.

10.3.        Loss under the head capital gains

(1)       It can be carried forward for 8 succeeding previous yeats to be set off only from income under
the head capital gains in following manner:


(a) Short term capital loss can be set off from either short term capital gain or long term capital gain.

(b) Long term capital loss can be set off only from long term capital gain


(2)       No loss under the head Capital Gain shall be carried forward for more than 8 assessment years succeeding the assessment year in which such loss wa first computed. [Section 74 (2))

10.4.  Loss under the head ‘Other Sources’ [Section 74A (3)).

Under the head ‘Other Sources’ only expenses on maintenance of horses can be set-off from income of same activity if any. If it still remains unadjusted, such loss can be carried forward for 4 succeeding previous years to be set off only from stake/prize money received on account of winning a position by these horses in races.

 

 

10.5.  Carry forward and Set-off  Loses of Certain Companies [Section 79]

Where change in shareholding has taken place in a previous year in the case of a company not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set-off against the income of the previous year unless: On the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by person who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred.


In case change in voting power takes place in a previous year due to death of a shareholder or on account of transfer of shares by way of gift to any relative, the above-mentioned provision shall not be applicable. [Proviso to section 79(a)]

 

10.6.        Order In Which Current And Brought Forward Losses Are To Be Adjusted

In case different types of allowances and losses of current and that of past years are accumulated.. the following order is to be observed. It means, if in any year past losses, unabsorbed depreciation, current depreciation, unabsorbed investment allowance etc., are to be allowed against the current business profits, the order to be followed is given as follows:


Out of profits of the current previous year the losses and expenses will be adjusted in following Order.


I. Current depreciation of the year;


2. Current expenditure on scientific research whether capital or revenue;


3. Current loss of another business;


4. Brought forward business losses of earlier years (oldest loss to be adjusted first);


5. B/F unabsorbed depreciation;


6. Brought forward expenditure on promotion of fttmily planning (only in case of companies);


7. Brought forward unabsorbed expenditure on scientific research;

 

 

10.7.        Sec. 78(2) : Losses in Case of Succession of Business or Profession


Sec. 78(2) says that where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, that another person shall not be entitled to carry forward and set-off the losses incurred by his predecessor against the profits earned by him after succession. In case of inheritance, the heir would be entitled to carry forward the loss incurred by the previous owner i.e., the predecessor. The successor in business is normally treated as if he had commenced a new business.


In case there has been a reorganization of business due to succession of a firm by a company or of a sole proprietary concern by a company u/s 47(xiii) or u/s 47(xiv), the accumulated loss and unabsorbed depreciation of the firm and sole proprietary concern shall be deemed to be the loss or depreciation of successor company for the previous year in which succession takes place and the loss and depreciation shall be carried forward as per other provisions of this Act.


In case the provisions as prescribed u/s 47(xiii) or u/s 47(xiv), are not complied with, the amount of loss or depreciation allowed to successor company shall be deemed as income of the company and shall be taxable in the year in which breach of any condition takes place.


10.8.    Provisions relating to carry forward and set-off accumulated loss and unabsorbed depreciation in certain cases of amalgamation [Section 72 (A)]


In case a company owning an industrial undertaking amalgamates with another company, the accumulated loss and the unabsorbed depreciation of amalgamating company shall be deemed to be the loss or depreciation of the amalgamated company for the previous year in which amalgamation was effected and the other provisions of this Act relating to set-off and carry forward of loss and unabsorbed depreciation shall apply accordingly provided the following conditions are fulfilled:


(i)         that the accumulated loss of the amalgamating company before amalgamation exceeds fifty. per cent of the aggregate of its paid-up share capital;.


(ii)       that the amalgamating company was not immediately before its amalgamation financially viable;


(iii)       that amalgamation was in public interest


(iv)       that such other conditions as Central Government may notify in the Official Gazette to ensure that the benefit under this section would facilitate the rehabilitation; or revival of the business of amalgamating company; and


(v)        the Central Government makes declaration to this effect [Section 73A(1)].

 

The benefit to set-off or carry forward shall not be available to the amalgamated company if it carries on the business of amalgamating company after making any modification or reorganisation and such modification or reorganisation are not approved by prescribed authority. The amalgamated company shall have to furnish, alongwith return of income, a certificate from the specified authority to the effect that adequate steps have been taken by the company for the rehabilitation or revival of the business of the amalgamating company [Seëtion 72(2)1.


The Finance Act, 1987 has introduced sub-section (3) under which specified authority shall communicate to the amalgamating company about the fact that it is satisfied with the scheme submitted and it would make such recommendations to the Central Government after amalgamation is affected


Accumulated Loss. Means so much of loss of the amalgamating company under the head “profits and grains of business or profession” (not being a loss sustained in a speculation business) which the amalgamating company would have been entitled to carry forward and set-off under the provisions of [Section 72(2A) Explanation (a)] amalgamation had not been affected.


Unabsorbed Depreciation. Means so much of the allowance of depreciation of the amalgamating company which remains to be allowed and which would have been allowed to the amalgamating company under the provision of the Act if the amalgamation had not been affected. [Section 72A Explanation (e)]


10.9.   Carry forward and Set-off Lossess of Certain Companies [Section 79]

 

Where change in shareholding has taken place in a previous year in the case of a company not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set-off against the income of the previous year unless:


On the last day of the previous year the shares of the company carryihg not less than 51% of the voting power were beneficially held by person who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred.


In case change in voting power takes place in a previous year due to death of a shareholder or on account of transfer of shares by way of gift to any relative, the above-mentioned provision shall not be applicable. [Proviso to section 79(a)]


10.10.      Provisions relating to carry forward and set off of accumulated losses and unabsorbed depreciation on amalgamation and demerger [Section 72A]


1. If there is amalgamation of an industrial company or a shipping company, the accumulated loss and unabsorbed depreciation of amalgamating company shall be deemed to be the loss or unabsorbed depreciation of the amalgamated company and it shall be allowed to carry forward and set off these losses and depreciation as per rules provided and conditions as prescribed in point (2) below are fulfilled.


2. The carry forward and set off these losses and unabsorbed depreciation shall he allowed only if:


(a) the amalgamated company continues to hold at least 3/4th in book value of the assets of amalgamating company for a minimum period of five years.


(b) the amalgamated company continues to carry on the business of amalgamating company for 5 years from the date of amalgamation.


(c) it fulfils all other conditions as are prescribed.


3. In case the conditions prescribed above are not complied with, the amount of loss or unabsorbed depreciation adjusted by the amalgamated company in any previous year shall be deemed as income of the previous year in which breach takes place.


4. In case of demerger, the accumulated losses of the demerged company shall be allowed to be carried forward by the resulting company in following manner


(a) any amount of loss or unabsorbed depreciation which is directly attributable to the undertaking transferred under demerger, shall be deemed as loss of he resulting company and shall be allowed to be carried forward and set off.

 

(b) any amount of loss or unabsorbed depreciation which is not directly attributable to the undertaking transferred under demerger, the proportionate loss to be computed in following manner shall be allowed to be carried forward and set off:


Loss of demerged company      X  Value of assets transferred under demerger

                                                            Total value of assets of demerged company

5. The Central Government may specify the conditions for ensuring the genuine demerger.


10.11.      Filling of Return of Loss [Sec. 80]

For any loss to be carried forward and set-off against the income of a subsequent year the return of such loss must be filed under Sec. 139 and the I.T.O must determine the loss on the basis of the return riled. Only such loss is eligible for carry forward which was determined by the I.T.O. on the basis of return filed by the assessee and after determining the loss, the I.T.O. should have informed or notified the loss to the assessee. On the basis of this explanation, the conclusion can be that if no return is filed for the year in which the loss was incurred, the right to carry forward the loss would be lost.


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