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Set off or Carry Forward and Set off of Losses [Sections 70 to 80]

If the losses could not be set off under the same head or under different heads in the same assessment year, such losses are allowed to be carried forward to be claimed as set off from the income of the subsequent assessment years. All losses are not allowed to be carried forward. The following losses are only allowed to be carried forward and set off in the subsequent assessment years:

  1. House property loss;

  2. Business loss;

  3. Speculation loss;

  4. Loss on account of owning and maintaining race horses.

  5. Capital loss;

  6. Loss from a specified business referred to in section 35AD.

Compulsory filing of loss returns [Section 80]:

Although the above losses are allowed to be carried forward, but the carry forward is allowed only when such loss has been determined in pursuance of a return of loss submitted by the assessee on or before the due date for filing of the returns prescribed under section 139(1). However loss under the head Income from house property can be carried forward even if the return is not filed within the due date mentioned under section 139(1).

  1. Although submission of return of loss, on or before the due date mentioned under section 139(1) is compulsory for carry forward of losses mentioned in clause (b) to (f) above, but this provision is not applicable for carry forward of unabsorbed depreciation which is covered under section 32(2).

  2. There are two conditions which are to satisfied before loss is allowed to be carried forward. Firstly the return of loss must be submitted on or before the due date and secondly such loss has been determined by the Assessing Officer.

1. Carry Forward and Set Off of Loss from House Property [Section 71B]

A loss under the head house property, if could not be set off or was not wholly set off in the same assessment year from other heads of income, will be allowed to be carried forward for 8 assessment years to claim it as a set off in the subsequent years under the head 'Income from house property'. Therefore, if the loss of house property of the previous year 2016-17 which could not be set off because of—

  1. absence of income under other head, or

  2. loss under the head house property being more than Rs. 2,00,000 in the previous year, or

  3. inadequacy of the income under other head,

it may be carried forward for 8 assessment years succeeding assessment year 2017-18 (i.e. assessment years 2018-19 to 2025-26) to be set off from income under the head house property.

  1. Provisions of section 80 and 139(3) are not applicable to section 71B and as such, loss under the head income from house property can be carried forward even if return is not submitted under section 139(1).

  2. Although, the loss is allowed to be carried forward for 8 assessment years but it must be set off in the subsequent assessment year if there is income under the head house property and the balance in the next immediately succeeding subsequent assessment year and so on.

2. Carry Forward and Set off of Business Losses other than Speculation Loss (Section 72)

Where the loss under the head 'profits and gains of business or profession' other than loss from speculation business and loss from specified business, could not be set off in the same assessment year because either the assessee had no income under any other head or the income was less than the loss, such loss which could not be set off in the same assessment year, can be carried forward to the following assessment years and it shall be set off against the profit and gains of business or profession subject to the following conditions:

1. Loss can be Set Off only against Business Income :

The following points should be noted:

(A). Loss Can be set off only against Business Income -

A loss under the head, “Profits and gains of business or profession” can be set off against profits of any business1 in the subsequent year. For this purpose, business profits would also include profits derived from a business activity but assessable under a head other than “Profits and gains of business or profession”.

For instance, where shares are held by an assessee as a part of his trading assets, dividend from a foreign company on such shares would form part of business income and, consequently, he will be entitled to claim set off of business loss brought forward from earlier years against dividend of the current year.

(B). Loss Can be set off against any other Business (Not necessarily the same Business) -

It is not necessary that business loss of year 1 should be set off against income from the same business in year 2. In other words, loss of Business A of year 1 can be set off against profit of business A or some other business in year 2.

(C). Set Off of Losses from a Specified Business -

Brought forward loss of a business referred to in section 35AD can be set off in a subsequent year only against income from the business referred to in section 35AD.

2. Losses can be Set Off only by the Assessee who has incurred Loss [Section 78(2)]

The loss can be carried forward and set off against the profits of the assessee who incurred the loss.

However, this rule has the following exceptions:

(A) Inheritance:

Where a business carried on by one person, is acquired by another person through inheritance.

For example:

X is carrying on a business and there are losses to the extent of Rs. 5,00,000 which can be carried forward and set off against the income of the subsequent years. X dies and his son S inherits his business. The losses incurred by X can be set off by his son S against the income from a business activity carried on by S.

However such loss can be carried forward by the son for the balance number of years for which the father could have carried forward the loss.

However, the unabsorbed depreciation cannot be carried forward by the legal heir as inheritance is not covered under section 32(2).

(B) Amalgamation:

Business losses and unabsorbed depreciation of an amalgamating company can be set off against the income of the amalgamated company if the amalgamation is within the meaning of section 72A/72AA of the Income-tax Act. If the amalgamation is not of the nature specified in section 72A/72AA, the business loss and unabsorbed depreciation of the amalgamating company cannot be carried forward by the amalgamated company. Similarly, business losses and unabsorbed depreciation of an amalgamating co-operative bank can be set off against the income of successor co-operative bank i.e. the amalgamated co-operative bank, if the amalgamation is within the meaning of section 72AB.

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 of the amalgamated company for the previous year in which the amalgamation is effected—

  1. There has been—

    1. an amalgamation of a company owning an industrial undertaking or 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.

  2. 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.

  3. 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.

  4. 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.

  5. The amalgamated company continues the business of the amalgamating company for a minimum period of 5 years.

  6. 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.

  7. 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 years falling within 5 years from the date of amalgamation.

If the above conditions are satisfied, then accumulated business loss and unabsorbed depreciation (including unabsorbed capital expenditure on scientific research/family planning) of the amalgamating company shall be deemed to be loss and depreciation of the amalgamated company for the previous year in which amalgamation is effected.

(C) Succession of Proprietary Concern or a Firm by a Company [Section 72A(4)]:

In cases of succession of business, whereby a firm is succeeded by a company fulfilling the conditions laid down in section 47(xiii) or a proprietary concern is succeeded by a company fulfilling the conditions laid down in section 47(xiv), 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 reorganisation 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.

(D) Succession of a Private Company or Unlisted Public Company by a Limited Liability Partnership [Section 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(xiiib), 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 reorganisation 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.

(e) Demerger:

In the case of demerger, the accumulated business loss and unabsorbed depreciation of the 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. Business Loss can be Carried Forward for 8 Years

The loss cannot be carried forward for more than eight assessment years.

Each year's loss is a separate loss and no loss shall be carried forward for more than 8 assessment years immediately succeeding the assessment year for which the loss was first computed. Therefore, a loss of previous year 2017-18 i.e. assessment year 2018-19 can be carried forward till assessment year 2026-27.

Besides the above, the following can also be carried forward indefinitely although these are not business losses as per Income-tax law:

  1. unabsorbed depreciation;
  2. unabsorbed capital expenditure on scientific research;
  3. unabsorbed expenditure on family planning.
  4. Loss of a “specified business” under section 35AD can be carried forward without any limit.

4. Return of Loss should be Submitted in Time (Section 80) for Carry Forward and Set Off of Business Loss

The following losses cannot be carried forward unless the return of income (for the year in which the loss is incurred) is submitted within the due date [of submission of return as given in section 139(1)].

  1. loss of a speculative or non-speculative business (not being unabsorbed depreciation etc.,;

  2. short or long-term capital loss; and

  3. loss (not being unabsorbed depreciation etc., from the activity of owning and maintaining race horses.

The delay in submission of return of loss may be condoned if a few conditions are satisfied. CBDT has power under section 119(2) to condone delay in case of a return which is filed late and where a claim for carry forward of losses is made.

5. Continuity of Business Not Necessary for Carry Forward and Set Off of Business Loss

The business or profession in which the loss was originally suffered may or may not continue to be carried on by the assessee during the year in which brought forward loss is sought to be set off.

6. Carry Foward of Unabsorbed Depreciation , Capital Expenditure on Scientific Research and Family Planning Expenditure

Unabsorbed depreciation, unabsorbed capital expenditure on scientific research and unabsorbed expenditure on family planning are not parts of business losses and they can also be carried forward.

However, as per section 72(2), the business loss should be set off before setting off unabsorbed depreciation, etc. Such carried forward business loss will be set off against business head only after the current year's depreciation, current capital expenditure on scientific research and expenditure on family planning have been claimed. Therefore, the order of set off will be as under:

  1. current year depreciation [Section 32(1)];

  2. current year capital expenditure on scientific research and current year expenditure on family planning to the extent allowed;

  3. brought forward business or profession losses [Section 72(1)];

  4. unabsorbed depreciation [Section 32(2)];

  5. unabsorbed capital expenditure on scientific research [Section 35(4)];

  6. unabsorbed expenditure on family planning [Section 36(1)(ix)].

3. Carry Forward and Set off of Speculation Loss (Section 73)

The loss of a speculation business of any assessment year is allowed to be set off only against the profits and gains of another speculation business in the same assessment year.

But, if a speculation loss could not be set off from the income of another speculation business in the same assessment year, it is allowed to be carried forward to be claimed as a set off in the subsequent year, but only against the income of any speculation business. Such loss is allowed to be carried forward for 4 assessment years immediately succeeding the assessment year for which the loss was first computed. It may be observed that it is not necessary that the same speculation business must continue in the assessment year in which the loss is set off. As already discussed, filing of return before the due date is necessary for carry forward of such loss.

1. (Explanation to Section 73) : Companies carrying on Business of Buying and Selling Shares -

This provision is applicable if the following conditions are satisfied—

  1. Taxpayer is a company.

  2. It is not a company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources”. Alternatively, it is a company whose principal business is other than that of trading in shares or banking or the granting of loans and advances.

  3. The business of the company consists of the purchase and sale of shares of other companies.

If the above conditions are satisfied, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase/sale of such shares. This rule is applicable even if there is no avoidance of tax by the assessee.

This Explanation shall not apply to the following companies:

  1. Investment companies i.e. a company whose gross total income consists mainly of income chargeable under the heads 'Income from House Property', 'Capital Gains' and 'Income from Other Sources'.

  2. A company whose principal business is of banking or granting of loans/advances.

  3. A company the principal business of which is the business of trading in shares.

It may be noted that the above Explanation applies only to a company. It does not apply to an individual, HUF, Firm, AOP, etc. Further, this Explanation only covers transaction of sale and purchase of shares. Debentures, units of Unit Trust of India or units of Mutual Funds are not covered by this Explanation.

Thus Explanation to section 73 is not applicable if—

  1. shares are purchased by the company as investment and not as stock-in-trade; or

  2. a company the principal business of which is the business of trading in shares.

2. Speculatative Loss can be Set Off only against Speculative Income (Section 73)

Loss in a speculation business can be carried forward to the subsequent year and set off only against the profits of a speculation business carried on in that year.

3. Speculative Loss can be carried forward for 4 years.

Such loss can be carried forward for 4 assessment years, immediately succeeding the assessment year for which the loss was first computed.

4. Continuity of Business Not necessary for Carry forward and Set Off of Speculation Loss

It is not necessary that the speculation business in which the loss was incurred should continue to be carried on in the subsequent year in which the assessee wants to set off of the loss but the assessee should be the same.

5. Return of Loss should be Submitted in Time (Section 80) for Carry Forward and Set Off of Speculation Loss

The following losses cannot be carried forward unless the return of income (for the year in which the loss is incurred) is submitted within the due date [of submission of return as given in section 139(1)].

  1. loss of a speculative or non-speculative business (not being unabsorbed depreciation etc.,;

  2. short or long-term capital loss; and

  3. loss (not being unabsorbed depreciation etc., from the activity of owning and maintaining race horses.

The delay in submission of return of loss may be condoned if a few conditions are satisfied. CBDT has power under section 119(2) to condone delay in case of a return which is filed late and where a claim for carry forward of losses is made.

6. Other Points towards Carry Forward and Set Off of Speculation Loss

  1. Loss incurred in speculative business in banned items cannot be carried forward to the next year.

  2. Loss in a speculative transaction entered into on behalf of principal, is non-speculative loss of agent.

  3. Income from forward transactions entered into on behalf of constituents is not income from speculative business carried on by the assessee.

4. Carry Forward and Set-Off of Loss from activity of Owning and Maintaining Race Horses (Section 74A)

Loss from the activity of owning and maintaining race horses in any assessment year shall be set off against the income from the activity of owning and maintaining race horses in the same assessment year.

But, if any loss from the activity of owning and maintaining race horses, could not be set off in the same assessment year, it shall be carried forward and set off only against the income from the activity of owning and maintaining race horses in the subsequent assessment years. Such set off is, however, permitted only if the activity of owning and maintaining race horses is carried on by the assessee in the previous year relevant to the assessment year in which the loss is sought to be adjusted.

The loss can be carried forward for a maximum of 4 assessment years, immediately succeeding the assessment year for which the loss was first computed.

The following points one should keep in view —

  1. Such loss can be carried forward only if the activity of owning and maintaining race horses is carried on by the assessee in the previous year in which the brought forward loss is sought to be set off.

  2. Loss can be carried forward for four assessment years immediately succeeding the assessment year in which the loss was first computed.

  3. Such loss cannot be carried forward unless return is filed within the time limit of section 139(1) [see para 135.1-4].

  4. For this purpose, loss shall be calculated as follows—

Amount of stake money xxxx
Less: Revenue expenditure incurred by the taxpayer wholly and exclusively for the purposes of maintaining such horses xxxx
Balance (if it is negative, it is taken as loss from the activity of owning and maintaining race horses) xxxx
  1. . The aforesaid provisions of section 74A are applicable only in the case of loss from the activity of owning and maintaining race horses. Loss from the activity of owning and maintaining other race animals is governed by section 72 and not by section 74A.

5. Carry Forward and Set-Off of Capital Loss under the head 'Capital Gains' (Section 74)

If the net result of the computation under the head “Capital gains” is a loss, the whole of the loss shall be carried forward to the following assessment year as follows—

  1. Long-term capital loss can be set off only against long-term capital gains.

  2. Short-term capital loss can be set off against short-term or long-term capital gains.

  3. Such loss can be carried forward for 8 (eight) assessment years immediately succeeding the assessment year in which the loss was first computed.

  4. Such loss cannot be carried forward unless return is filed within the time limit of section 139(1)

6. Carry Forward and Set off of Loss of a 'Specified Business' referree in Section 45AD (Section 73A)

The 'Loss of a Specified Business' referred to in section 35AD of any assessment year is allowed to be set off only against profit and gains, if any, of any other specified business. But if such loss of specified business has not been wholly set off, so much of the loss as is not so set off or the whole loss where the assessee has no income from any other specified business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—

  1. it shall be set off against the profits and gains, if any, of any specified business carried on by him assesssable for that assessment year; and

  2. if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.

In other words, loss of specified business can be carried forward indefinitely till it is set off.

Return of Loss should be Submitted in Time (Section 80) for Carry Forward and Set Off of Loss of Specified Business.

Loss under section 73A cannot be carried forward unless the return of loss has been furnished before the due date prescribed u/s 139(1).

 

Related Topics...Set Off or Carry Forward and Set Off of Losses

1. Set off or Carry Forward and Set off of Losses [Sections 70 to 80]

2. Carry Forward and Set Off of Loss from House Property [Section 71B]

3. Carry Forward and Set off of Business Losses other than Speculation Loss (Section 72)

4. Carry Forward and Set-Off of the Accumulated Business Losses and Unabsorbed Depreciation Allowance in Amalgamation or Demerger, etc. (Section 72A)

5. Carry Forward and Set off of Speculation Loss (Section 73)

6. Carry Forward and Set-Off of Loss from activity of Owning and Maintaining Race Horses (Section 74A)

7. Carry Forward and Set-Off of Capital Loss under the head 'Capital Gains' (Section 74)

8. Carry Forward and Set off of Loss of a 'Specified Business' referree in Section 45AD (Section 73A)

 
 
 
 
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