Set-off and Carry forward of Losses amended provisions from 2020-21: There are five heads of income under the Income Tax Act. Though every person is motivated to earn income however there are situations where incurring loss in a venture cannot be ruled out. There may be loss under one head and/or from one activity under the same head of income. It is true that income -tax is levied on income but at the same time while determining the income, the Income tax act recognizes ‘Loss’ to be adjusted with the income before finally deriving the ‘net income’ on which tax is levied.
Introduction
Set off of losses in the year in which loss is incurred and carry forward and set off of losses in the subsequent years reduces the total income and thus the tax liability.
In the process of adjustment of losses with the income, we have the following circumstances-
The amount of ‘Loss’ arising for the first time: When the loss is incurred for the first time by the assessee, whether under different heads of income or under different activities under the same head of income, adjustment of this loss with other income is called ‘Set-off’ of loss.
If the entire amount of loss cannot be set-off in the first year itself due to inadequacy of income or due to restrictions under the law, the unadjusted or unabsorbed loss is carried forward to next year(s) to be set-off with the income in the future years, the same is called ‘carry forward of loss’.
Carry forward and set-off of Loss from previous year(s): Apart from the current year’s loss, one may have loss carried forward from previous financial year(s) available to be set-off with the current year’s income.
Legal Provisions for Set-off and Carry Forward of Losses
For computation of Gross Total Income (GTI), income from various sources is computed under the five heads of income. If all the sources and heads are having positive income (i.e. profit) then the same can simply be added to compute Gross Total Income. However, if certain source(s) or certain head(s) have negative income (i.e. loss) then such loss needs to be adjusted with income of another source(s) or head(s). Section 70 to section 79 which falls under Chapter VI of the Income Tax Act, 1961.
Section wise details of Chapter VI related to ‘set off of loss’ and ‘carry carry forward and set off of loss’ is given below-
Set off of loss means adjustment of loss from one source or one head against income from another source or another head. If a negative income or ‘Loss’ is not fully set off in the first year or current year, then the unabsorbed loss shall be carried forward for set-off in subsequent years subject to certain restrictions and conditions.
It is governed by section 70 and section 71 of the Income Tax Act. Section 70 covers Intra Head or Inter-source adjustment which means set off of loss within the same head of income. Section 71 deals with Inter Head Adjustment which means set-off of loss with other heads of income.
Hence the adjustment of loss from income under the income tax are of two types-
Set-off of loss in the first year
Intra-head or Inter-source adjustment of loss in the first year [Section 70]
‘Intra-head’ means the same head. If in any year the taxpayer has incurred loss from any source under a particular head of income, then he is allowed to adjust such loss against income from any other source falling under the same head.
The process of adjustment of loss from an activity under a particular head of income against income from another activity under the same ‘head of income’ is called intra-head adjustment, e.g. Adjustment of loss from business A against profit from business B is intra-head adjustment.
Section 70 deals with the set off of loss from one source against income from another source under the same head of income, subject to the certain exceptions.
Section 70 provides that where the net result of any source of income falling under any head is a loss, the assessee shall be entitled to set-off his loss with any other income under the same head. [Section 70(1)]
1) Long-term Capital Loss cannot be set off against any income other than income from long-term capital gain. In other words, Loss from Long Term Capital Gains can be set-off only against income from other long term capital gain. [Section 70(3)]. This has been done since long term capital gains are subject to lower incidence of tax.
However, Short-term Capital Loss can be set off against income from long-term capital gains and short-term capital gains. [Section 70(2)]
Apart from section 70, there are other provisions in the Income Tax Act which restricts intra head adjustment of loss:
1) Loss from speculative business cannot be set off against any income other than income from speculative business. [Section 73(1)]. However, loss from non-speculative business can be set off against income from speculative business.
2) No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature. Under section 58(4), no expenditure or allowance is allowed winnings from any lottery or crossword puzzle or card game and other gambling game or betting.
3) Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses. [Section 74A]
4) Loss from business specified under section 35AD cannot be set off against any other income except income from specified business (Section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing and building a housing projects, etc.).
5) Loss from exempt sources of income cannot be adjusted against taxable income. If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax. [CIT vs SS Thiagarajan (1981) 129 ITR 115 (Mad.) and CIT vs. Harprasad 99 ITR 118 (SC)]
For example, agricultural income is exempt from tax, hence, if the taxpayer incurs loss from agricultural activity, then such loss cannot be adjusted against any other taxable income.
6) The presence of the phrase 'under a similar computation' in section 70(2) does not apply to long term capital loss computed without indexation benefit and long term capital gains computed with indexation. Such loss is allowed to be set off with long term capital gain income under the same head though the method of computation is different.
[Vipul A Shah vs ACIT (2011) 13 taxmann.com 40 (Mum-Trib) ITAT Mumbai
Mohanlal N Shah (HUF) vs ACIT (2008) SOT 380 (Mum-Trib) ITAT Mumbai
Keshav H Phansalkar vs ITO 32 DTR 454 (Mum-Trib)]
Inter-head or Inter-source adjustment of loss in the first year [Section 71]
The first step in adjustment of losses is the ‘Intra-head’ adjustment as discussed above. After making intra-head adjustment (if any) the next step is to make inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income and is having income under another head of income, then he can adjust the loss from one head against income from other head(s), for example, Loss under the head income from house property can be adjusted against income from salary.
However, inter-head adjustment is also subject to certain restrictions and limitations which are discussed below-
1) Before making inter-head adjustment, the taxpayer has to first make intra-head adjustment.
2) Loss from speculative business cannot be set off against any other income except profits of speculation business. However, loss under any other head, e.g. loss from house property, shall be allowed to be set off against income of a speculation business.
3) Loss under head “Capital gains” cannot be set off against income under other heads of income. However, loss under any other head, e.g. business loss, shall be allowed to be set off against income under the head ‘Capital gains’.
4) No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature. Under section 58(4), no expenditure or allowance is allowed winnings from any lottery or crossword puzzle or card game and other gambling game or betting.
5) Loss from the business of owning and maintaining race horses cannot be set off against any other income.[Section 74A]. However, loss under any other head, e.g. business loss, shall be allowed to be set off against income from activity of owning and maintaining race-horses.
6) Loss from business specified under section 35AD cannot be set off against any other income. However, loss from other heads can be set off against income from specified business.
7) Loss from business and profession cannot be set off against income chargeable to tax under the head “Salaries”.
8) With effect from the assessment year 2018-19, loss under the head “income from house property” shall be allowed to be set-off against any other head of income only to the extent of Rs. 2,00,000 for any assessment year. In other words, loss in excess of Rs. 2,00,000 under the head ‘Income from house property’ cannot be set off with income under other heads of income.
9) However, unabsorbed loss shall be allowed to be carried forward for set-off in subsequent years as per the existing provisions of section 71B.
Under the Income Tax Act, there are 5 heads of income. For the purpose of study of set-off and carry forward of Loss, these 5 heads of income are further sub-divided into different sub-heads. This is due to the fact that certain restrictions were imposed in the set-off of losses even in the same head of income. Hence the heads of Loss relevant for the study of set-off of losses are tabulated below-
Basic principles of set-off of loss
Some basic principles of set-off of loss with other income are given below:
1. No loss can be set off against winning from lotteries, crossword puzzles, races, card games, gambling or betting, etc. [Section 58(4) & Section 115BB]. Casual income shall be fully taxable as no loss can be set off against such income.
2. By virtue of section 71(2A), an assessee shall not be entitled to set off any loss under the head "Profits and gains of business or profession" against income under the head "Salaries".
3. There is no provision in the law which specifies or prescribes carry forward of Loss under the head income from other sources and hence such loss cannot be carried forward.
4. Section 71 takes precedence over Section 72 and Section 74: In this context, effect has first to be given to the provisions of section 71, i.e., where in respect of an assessment year, there is income under a head, the loss, if any, under any other head for that assessment year should first be set-off against it before the carried forward losses under the former head can be set-off against such income. This position is, however, subject to the exceptions provided in Chapter VI of the Income-tax Act which prohibit inter-head adjustments with regard to certain losses, such as speculation loss or the loss incurred in the activity of owning and maintaining race horses. [Circular No. 587, dated 11-12-1990]
5. Priority of set off of loss: There is no provision in the Act related to priority to set off the losses (both intra-head and inter-head), hence, losses which cannot be carried forward or near to expire should be adjusted first. An assessee can set off the losses in a manner which is most beneficial to him.
6. Set off of loss is mandatory and not optional: Assessee has no choice or option whether to set off the loss or not. Further, partial set off of loss is not permissible when entire loss can otherwise be set off. [Atherton & Co. vs CIT (1987) 165 ITR 527 (Cal.)]
7. No set off of any loss is allowed from any undisclosed income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D from AY 2017-18. Since the term 'or set off of any loss' was specifically inserted only vide the Finance Act 2016, w.e.f. 01.04.2017, an assessee is entitled to claim set-off of loss against income determined under section 115BBE of the Act till the assessment year 2016-17 [Circular No. 11/2019 dated 19.06.2019]
8. No set off of any loss is allowed from dividend income referred to in section 115BBDA. The taxation of dividend income shall be on gross basis and no deduction for any expenditure or allowance or set off of loss shall be allowed in computing the income by way of dividend. [Section 115BBDA was applicable till AY 2020-21.]
9. Deduction under section 80M before allowing set off of losses: In the case of an assessee being a company, where a part of the dividend income is utilised for setting off loss under any other head, relief under section 80M, is to be allowed on the dividend income before such set off, subject to the overall limit imposed by section 80A(2). [Circular No. 58 [F. No. 167/24/70-IT (A-I)] dated 15-4-1971]
Section 80A(2) provides that the aggregate amount of the deductions under Chapter VI-A shall not exceed the gross total income of the assessee.
10. Provisions of section 112 do not override section 71, thus, do not deny the benefit of set-off of loss from a source other than "capital gains" with income from long-term capital gains.
The total income is to be computed in the manner prescribed in the Income-tax Act. Set-off of loss as per the provisions of sections 70 to 80 is a stage which is part of this procedure. When this procedure is adopted for computing gross total income or total income, only the amount of income after set-off remains under a head as part of gross total income or total income. Only that amount of long-term capital gains which is included in the total income would be subject to tax at a prescribed flat rate.
Thus, if there was a loss of Rs. 10,000 from business and there is long-term capital gains of Rs. 30,000, then after setting off of loss of Rs. 10,000 with long-term capital gains, only Rs. 20,000 would remain under the head "Capital gains" to be included in the gross total income or total income.
The flat rate of tax will be applicable in respect of Rs. 20,000 and not Rs. 30,000, since the amount of long-term capital gains included in that total income is Rs. 20,000. (Here it is assumed that the total income ignoring, long-term capital gains, is above the exemption limit). [Circular No. 721, dated 13-9-1995]
11. Loss from Dividend stripping and Bonus stripping not allowable under section 94(7) and section 94(8).
12. Meaning of Speculative Business
Meaning of ‘Speculative Income: Income Tax Act has not defined the term ‘speculative income’ but has defined ‘speculative transaction’. Therefore, it can be said that income that is derived from the speculative transaction is speculative income.
As per explanation to section 73, where any part of the business of a company consists of purchase and sale of shares of other companies, such company shall be deemed to be carrying on speculation business to the extent of purchase and sale of shares.
However, this rule is not applicable in case of companies -
a) whose gross total income consists of mainly income which is chargeable under the head “Income from house property”, “Capital gains”, and “Income from other sources”; or
b) whose principal business is the business of banking or granting of loans and advances.
In other words, if these companies undertakes transactions of purchase and sale of shares of other companies the income or loss shall not be treated as speculative income or loss.
It should be noted that the explanation covers only transactions of purchase and sale of shares settled through delivery (if not settled through delivery, it is always speculative). Thus, purchase and sale of debentures, units of UTI or Mutual Funds are not covered by this explanation. Further, this provision applies to a company only not to an Individual, firm, etc.
Further, as per section 43(5), "speculative 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 the actual delivery or transfer of the commodity or scrips.
Therefore, to qualify a transaction to be a speculative transaction, there must be-
(i) a contract
(ii) for purchase and sale of any commodity, and
(iii) the contract must be settled without actual delivery of the commodity or shares.
Exceptions: The following transactions should not be considered as speculative transactions -
(a) Hedging contract for raw materials or merchandise: It is a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him. These are, basically, contracts to cover business losses of raw materials or merchandise through actual delivery.
(b) Hedging contract by dealers or investors of stocks and shares: A contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations.
(c) Jobbing or arbitrage contracts: It is a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member.
(d) Derivative Trading: An eligible transaction, being a transaction which is carried out electronically on screen-based systems through a stock broker or sub-broker or such other registered intermediary and which is supported by a time stamped contract note indicating unique client identity number and PAN, in respect of trading in derivatives referred to in section 2(ac) of the Securities Contracts (Regulation) Act, 1956 carried out in a recognised stock exchange shall not be treated as a speculative transaction.
(e) Commodity derivatives: An eligible transaction, being a transaction carried out electronically on screen-based systems through a member or a registered intermediary and which is supported by a time stamped contract note indicating unique client identity number and PAN, in respect of trading in commodity derivatives (as defined in Chapter VII of the Finance Act, 2013) carried out in a recognised stock exchange and which is chargeable to commodities transaction tax (CTT) shall not be treated as a speculative transaction.
The term "recognised stock exchange" means a recognised stock exchange as referred to in section 2(f) of the Securities Contracts (Regulation) Act, 1956 and which fulfils such conditions as may be prescribed and notified by the Central Government.
CBDT, vide the following notifications, has so far notified 6 stock exchanges as recognized stock exchanges:
From the above discussion, the following rules are emerging for income or loss trading in shares and derivatives:
1. Profit or loss from intra day transactions which does not result in actual delivery of shares are always speculative transactions. It also covers BTST transactions where transactions are settled without actual delivery of shares.
2. Profit or Loss from future and options trading on NSE/BSE, etc. are not speculative transactions.
Loss from future and option transactions cannot be termed as speculation loss in view of the explanation to section 73 of the Act and further such loss cannot be termed as loss from purchase and sale of shares as provided in explanation to section 73 of the Act. Loss from future and option transactions falls under the proviso (d) to section 43(5) and therefore cannot be treated as speculative loss and as such the assessee is eligible to set off the loss from future and option transactions against other business income earned by the assessee during the year.
[D & H Sechron Electrodes Pvt. Ltd. vs JCIT (ITA No.62/Ind/2015) ITAT Indore] Also see Gajendra Kumar T Agarwal vs ITO (ITA No. 1798/Mum/2010) ITAT Mumbai.
Loss arising activity of trading in shares (a loss arising from the business of speculation) cannot be set off against the profits which is earned from the business of futures and options since the latter did not constitute profits and gains of a speculative business. [Snowtex Investment Limited vs PCIT (Civil Appeal No(s). 4483 of 2019) (Supreme Court)]
Note: If F&O transactions are undertaken to hedge the portfolio of the shares then such F&O transactions will amount to hedging contracts and hence such F&O transactions can be carried on any stock exchanges. Such income will always be considered as non-speculative since it will be covered by clause (b) to Proviso to section 43(5). However, if the F&O transactions are undertaken simply as trading instruments, then such F&O transactions must be carried on a recognised stock exchange to qualify the income as non-speculative income. [Clause (d) to Proviso to section 43(5)]
3. Trading from shares in the cash segment with actual delivery of shares are non-speculative transactions.
Speculative business as separate and distinct business: If an assessee carries on many transactions including speculative transactions then such speculative transactions shall be treated as distinct and separate business from any other business carried out by the assessee. Profit and loss from speculative and non-speculative transactions should be separately identified.
Note: Under the income tax, basically there is no difference for profit from speculative and non-speculative business. The difference lies where there is loss from speculative business. This is because loss from speculative business can be set-off only against speculative income in the first year as well as subsequent years. Whereas, loss from non-speculative business can be set-off from speculative income.
13. Timely filing of return is mandatory: It is mandatory to file return of income within the prescribed due date of filing of return of income under section 139(1) for carry-forward the loss in the next year(s) except for the followings-
Loss from House property
Unabsorbed depreciation
Unabsorbed capital expenditure on scientific research
Unabsorbed capital expenditure on family planning
Hence, loss cannot be carried forward if belated return is filed except for the above mentioned cases. This is required only for the first year in which loss is incurred. In subsequent years, the loss is allowed to be carried forward even if belated return of income is filed.
14. Loss of earlier years can be carried forward if the return of loss of those years were furnished within the due date in the respective assessment years but the return for current year if filed belated.
15. Set-off of loss in case of clubbed income: In case of clubbing of income which is a loss, such loss should be treated as if it were a loss sustained by that individual. [Circular : No. 104 [F. No. 208/8/72-IT (A-II)], dated 19-2-1973] Also decided similarly in CIT vs Gotla (J.H) (1985) 156 ITR 323 (SC).
16. Loss incurred by one person can be set off by another person only if there is a specific provision in this regard entitling another person for such set-off of losses. [Indian Iron & Steel Co. Ltd. v. CIT [1943] 11 ITR 328]
17. Intimation of loss under sector is not mandatory in non-scrutiny cases: Section 157 requires the Assessing Officer to notify the amount of loss which an assessee is able to carry forward under section 72(1), section 73(2), section 74(1) or section 74(3) or section 74A(3). This section applies where the case is taken up for scrutiny. In case, the case is not taken up for scrutiny, then the amount of loss claimed in the return of income shall be eligible to be carried forward.
18. Only intra head carry forward and set off of loss: It is a common rule for carry forward and set off of loss that once a loss is carried forward under a particular head, the same is allowed to be set off only against income under the same head in the succeeding assessment years. In other words, in case of carry forward and set off of loss, inter head adjustment is not provided.
Carry forward and Set-off of loss
Carry forward of unadjusted loss for adjustment in next year: If losses could not be set off under intra-head and inter-head adjustment of losses, such unadjusted losses can be carried forward to next year for adjustment against subsequent year(s)’ income. It means losses which could not be set off against income of the assessment year, do not lapse, but are allowed to be carried forward to be set off against income of subsequent years.
Since it is mandatory to set off the losses if there is income in the subsequent year, one can carry forward the loss to the next year in case of absence or inadequate profit or income in the next year. This will continue till the period for which the loss can be carried forward since it was first computed, after which the unadjusted loss shall lapse.
Loss computed in each year is a separate loss and shall be kept separately with the current year loss. This is due to the fact that different rules have been prescribed for adjustment of losses in the first year of computation and in subsequent years of carry forward.
Separate provisions have been framed under the Income-tax Law for carry forward of loss under different heads of income. However, all losses cannot be carried forward.
Following unabsorbed losses can be carried forward to next year(s):
Loss under the head ‘Income from house property’ [Section 71B]
Carry forward of loss from house property: If loss under the head “Income from house property” cannot be fully adjusted or set off in the year in which such loss is incurred, then unadjusted loss from house property can be carried forward to next year.
Adjustment of brought forward HP Loss: In the subsequent years(s) such loss can be adjusted only against income under the same head. In other words, carried forward house property loss can be set off only with the income chargeable to tax under the head “Income from house property”.
Period of carry forward: Such loss can be carried forward for 8 assessment years immediately succeeding the year in which the loss is first computed.
Filing of return: Loss under the head “Income from house property” can be carried forward even if the return of income or loss of the year in which loss is incurred is not furnished on or before the due date of furnishing the return as prescribed under section 139(1). This is because section 80 and section 139(3) are not applicable to section 71B.
Note: Loss from self occupied house property can be set off against income from other sources. [CIT vs. K. K. Dhanda (HUF) [1989] 178 ITR 602 (P & H)]
Loss under head “Profits and gains of business or profession” other than speculation loss [Section 72]
Carry forward of loss from non-speculative business: If loss of any business/profession (other than speculative business) cannot be fully adjusted in the year in which it is incurred, then the unadjusted loss can be carried forward for making adjustments in the next year.
Adjustment of brought forward business Loss: In the subsequent year(s) such loss (Loss from non-speculative business) can be adjusted only against the profits and gains of any business or profession carried on by the assessee. In other words, loss under the head “Profits and gains of business or profession” (other than speculation loss) can be carried forward and set off against income under the same head-Income from any business (whether speculative or non-speculative).
Period of carry forward: Loss under the head “Profits and gains of business or profession” can be carried forward for 8 assessment years immediately succeeding the year in which the loss is first computed.
In the assessment year 2020-21, losses prior to the assessment year 2012-13 cannot be set off.
However, in the following cases, loss can be carried forward for indefinite period:
(i) Unabsorbed Depreciation
(ii) Unabsorbed Capital expenditure on scientific research
(iii) Unabsorbed Capital expenditure on family planning
Mandatory to file timely return of income: Loss under the head “Profits and gains of business or profession” can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1). As per section 80, the business loss cannot be carried forward unless it is determined in pursuance of a return filed by the assessee u/s 139(3) i.e. within the due date as prescribed under section 139(1).
Order of set off of business losses
In case of insufficient profit, losses shall be set off in the following order:
Note: Depreciation for the current year must first be deducted before deducting the unabsorbed carry forward business loss. [CIT, Kanpur v. Mother India Refrigeration Industries Pvt Ltd. (1985) 155 ITR 711 (SC)]
Notes:
1. Brought forward business loss can be set off against any business income. It is not necessary that the business in which the loss was originally incurred must remain in existence. Such business may or may not be continued.
2. Set off of carried forward loss shall be allowed only to the person who has incurred the loss. In other words, business loss shall be allowed only to the same person who has incurred the loss and not to any other person who has succeeded the business. This exception is, however, not applicable in case of succession of business by inheritance. [Section 78(2)]
3. Business need not be continued: The business losses can be carried forward, even the business in respect of which the loss was originally computed, is not carried on during the previous year.
Cases where business loss can be carried forward and set off by other person:
(i) Inheritance of business: In case of inheritance of a business, the successor can carry forward and set off the loss even if the loss was incurred by the predecessor.
If the legal heirs form a partnership firm to carry on the business of the deceased, such loss of the predecessor could be carried forward and set off by the successors. [CIT v. Madhukant M. Mehta [2001] 247 ITR 805 [2002] (SC)].
(ii) Amalgamation of companies: In case of amalgamation of companies, the amalgamated company is entitled to carry forward and set-off the business loss and unabsorbed depreciation of amalgamating company if the amalgamation satisfies the conditions prescribed in section 72A, section 72AA and section 72AB.
(iii) Demerger of companies: In case of demerger, a resulting company is allowed to carry forward and set-off the business loss and unabsorbed depreciation of the demerged company as per section 72A(4).
(iv) Succession of business by a company/LLP: Where due to reorganization of business-
(i) a firm is succeeded by a company fulfilling the conditions laid down in section 47(xiii), or [Section 72(6)]
(ii) a proprietary concern is succeeded by a company fulfilling the conditions laid down in section 47(xiv), or [Section 72(6)]
(iii) a private company or unlisted public company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to clause (xiiib) of section 47 [Section 72(6A)]
then the accumulated loss and the unabsorbed depreciation of the predecessor firm or the proprietary concern, as the case may be, shall be deemed to be the loss or allowance for depreciation of the successor company for the purpose of previous year in which business reorganisation was effected and the provisions related to carry forward and set off of losses shall apply to the successor.
Cases where business loss cannot be carried forward and set off by the other person:
From the plain reading of section 78(2), it follows that the following persons cannot carry forward and set off the business loss (including unabsorbed depreciation) if the same is not incurred by them:
(i) Where a partner of a firm succeeds the business of the firm and the loss was incurred by the firm
The loss suffered by the dissolved firm cannot be carried forward and set off by a partner taking over the business after the dissolution of firm as it does not amount to succession by inheritance.
Where the speculation business of the deceased sole proprietor is continued by legal heirs forming a partnership firm, the firm is entitled to carry forward and set-off such loss. [CIT vs Madhukant M. Mehta (2001) 247 ITR 805 (SC), affirmed the decision of Gujarat High Court reported in 132 ITR 159]
(ii) Where a member of a HUF succeeds the business of the HUF and the loss was incurred by HUF
(iii) Where the business of a proprietor is converted to a firm or taken over a firm and the loss was incurred by the proprietor, irrespective of the fact whether the proprietor becomes the partner or not in the firm,
(iv) Where a firm is taken over by another firm, the successor firm cannot carry forward and set off the loss of the predecessor firm.
3. Business loss can be set off against dividend income despite being assessed under the head ‘Income from other sources’ if the dividend income is derived from shares held as stock in trade. [CIT vs. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC); CIT vs. Excellent Commercial Enterprises And Investments Ltd. 2006 282 ITR 423 (Delhi High Court); Western States Trading Co. Pvt Ltd. vs CIT (1971) 80 ITR 21 (SC)]
Similarly, carried forward business loss can be set off with interest income where the interest income is assessable as business income and not income from other sources. [Snam Progetti S.P.A. v. ACIT (1981) 132 ITR 70 (Del.)]
When the period of 8 years of carry forward and set off of loss does not apply
The exceptions to the period of 8 assessment years for carry forward and set off of losses are mentioned below-
1. Closure of business due to reasons specified in Section 33B
The current year unabsorbed business loss of a business undertaking which is discontinued in the circumstances specified in section 33B, including the past business losses of that undertaking brought forward from earlier years, is eligible for being carried forward and set off against profits of the re-established, reconstructed or revived business up to a period of succeeding 7 years, reckoned from the year in which the business is re-established, reconstructed or revived by the assessee.
Section 33B specifies the following circumstances where the business of any industrial undertaking carried on in India is discontinued in any previous year by reason of extensive damage to, or destruction of, any building, machinery, plant or furniture owned by the assessee and used for the purposes of such business as a direct result of—
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with / without a declaration of war)
and such business is re-established, reconstructed or revived by the assessee, within a period of 3 years from the end of the previous year in which such business is discontinued.
2. Set off of losses on closure of business against deemed profit [Section 41(5)]
Where the business of profession is closed or ceases to exist and there is income chargeable under section 41(1) or section 41(3) or section 41(4) or section 41(4A), then the unabsorbed business loss (not being speculation loss) of such business or profession in the year in which it ceased to exist can be set off with the these incomes.
In this case, the time limit of 8 assessment years shall not apply. Further, since section 41(5) is not covered by section 80, hence it is not mandatory to file return of income within the due date specified in section 139(1).
Loss from speculation business [Section 73]
If loss of any speculative business cannot be fully adjusted in the year in which it is incurred, then the unadjusted loss can be carried forward for making adjustments in the next year. In the subsequent year(s) such loss can be adjusted only against income from speculative business (may be same or any other speculative business). In other words, Losses from speculative transactions or business can be carried forward and set off against income from speculative business only.
Loss from speculative business can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1). As per section 80, the loss cannot be carried forward unless it is determined in pursuance of a return filed by the assessee u/s 139(3), within the due date prescribed in section 139(1).
Such loss can be carried forward for 4 assessment years immediately succeeding the year in which the loss is first incurred.
Notes:
1. Continuity of business: It is not necessary that the same speculation business must be continued in the year in which carry forward and set off of the losses takes place.
2. Derivative Trading: An eligible transaction in respect of trading in derivatives referred to in sec.2(ac) of the Securities Contracts (Regulation) Act, 1956 carried out in a recognised stock exchange shall not be treated as speculative transaction. Similarly, an eligible transaction in respect of trading in commodity derivatives carried out in a recognised association (and liable for Commodities Transaction Tax in case of trading in commodity derivatives other than agricultural commodity derivatives) shall not be treated as speculative transaction. Taxpoint: In respect of trading in agricultural commodity derivatives, the requirement of chargeability of commodity transaction tax is not applicable.
3. Losses of illegal speculative business: Loss arising from illegal speculative business cannot be carried forward to the subsequent years for set off against the profits of another speculative business. [CIT Vs. Kurji Jinabhai Kotecha, (1977) 107 ITR 101 (SC)]
Loss from specified business covered u/s 35AD [Section 73A]
Carry forward of loss from non-speculative business: Loss from business specified under section 35AD cannot be set off against any other income except income from such specified business.
Section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facilities for storage of agricultural produce, developing and building housing projects, etc.
Period of carry forward: Such loss can be carried forward for adjustment against income from specified business for any number of years i.e indefinite period.
Mandatory to file timely return of income: Loss from business specified under section 35AD can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return as prescribed under section 139(1). As per section 80, such loss cannot be carried forward unless it is determined in pursuance of a return filed by the assessee u/s 139(3), within due date as prescribed in section 139(1).
Note: Loss from business specified under section 35AD shall be set off only against any other income except income from such specified business whether or not claiming dedcution under section 35AD but must be the business speciifed in section 35AD.
Loss under the head ‘Capital gains’ [Section 74]
Carry forward of loss from capital gains: If loss under the head “Capital gains” incurred during a year cannot be adjusted in the same year, then unadjusted capital loss can be carried forward to next year. In the subsequent year(s), such loss can be adjusted only against income chargeable to tax under the head “Capital gains”, however, long-term capital loss can be adjusted only against long-term capital gains. Short-term capital loss can be adjusted against long-term capital gains as well as short-term capital gains.
In other words, losses under the head ‘Capital gains’ can be carried forward and set off against income under the same head, subject to the restriction that the loss on transfer of long-term capital assets can be set off only against long term capital gain. However, Loss on transfer of short-term capital assets can be set off against any income under the head capital gain (whether short-term capital gains or long-term capital gains).
Period of carry forward: Losses under the head ‘Capital gains’ [both short term capital loss and long term capital loss] can be carried forward for 8 assessment years immediately succeeding the year in which the loss is first computed.
Mandatory to file timely return of income: Loss under the head ‘Capital gains’ can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1). As per section 80, such loss cannot be carried forward unless it is determined in pursuance of a return filed by the assessee u/s 139(3), within the due date as prescribed in section 139(1).
Notes:
1. Short-term capital gain computed u/s 50 on long-term depreciable assets can be set off against long term capital loss u/s 74. [CIT vs. Manali Investment (2013) 219 Taxman 113 (Bom); ITO v. Smart Sensors & Transducers Ltd. (2019) 176 ITD 104 (Mum-Trib)]
2. Short-term capital loss arising from STT paid transactions can be set off against short-term capital gain arising from non-STT transactions [Capital International Emerging Markets Fund .v. Dy. DIT (2013) 145 ITD 491 (Mum.-Trib.)]
Loss from ‘Activity of owning and maintaining race horses’. [Section 74A]
Carry forward of loss: Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses.
Adjustment of brought forward business Loss: In case of an assessee, being the owner of horses maintained by him for running in horse races (race horses), the amount of loss incurred by the assessee in the activity of owning and maintaining race horses in any assessment year shall be set off only against income from the activity of owning and maintaining race horses.
Period of carry forward: Loss from the business of owning and maintaining race horses can be carried forward only for a period of 4 assessment years from the year in which such loss is first computed.
Mandatory to file timely return of income: Loss under the head ‘activity of owning and maintaining race horses’ can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return, as prescribed under section 139(1). As per section 80, such loss cannot be carried forward unless it is determined in pursuance of a return filed by the assessee u/s 139(3), within the due date as prescribed in section 139(1).
Notes:
1. Continuity of activity: Activity of owning and maintaining race horses must be carried on by the assessee in the previous year in which set off is claimed.
2. Treatment of other race animals: Section 74A provides for loss from activity of owning and maintaining race horses, other race animals like camels, etc. are governed by section 72.
3. "Amount of loss incurred by the assessee in the activity of owning and maintaining race horses" means—
(i) in a case where the assessee has no income by way of stake money the amount of expenditure (not being in the nature of capital expenditure) laid out or expended by him wholly and exclusively for the purposes of maintaining race horses;
(ii) in a case where the assessee has income by way of stake money, the amount by which such income falls short of the amount of expenditure (not being in the nature of capital expenditure) laid out or expended by the assessee wholly and exclusively for the purposes of maintaining race horses;
4. "Horse race" means a horse race upon which wagering or betting may be lawfully made;
5. "Income by way of stake money" means the gross amount of prize money received on a race horse or race horses by the owner thereof on account of the horse or horses or any one or more of the horses winning or being placed second or in any lower position in horse races.
Carry forward and set off of accumulated loss in case of Amalgamation, Demerger, etc [Section 72A]
Carry forward and set off of accumulated loss in case of Amalgamation [Section 72A]
Section 72A provides for carry forward and set off of accumulated loss and unabsorbed depreciation allowance in case of:
(i) Amalgamation of companies [Section 72A(1), (2) and (3)]
(ii) Demerger of companies [Section 72A(4) and (5)]
(iii) Reorganisation of business and succession by a company [Section 72A(6) and (6A)].
Carry forward and set off of accumulated loss and unabsorbed depreciation allowance in case of Amalgamation
1. The amalgamated company is entitled to ‘set off’ and ‘carry forward and set off’ the accumulated loss and the unabsorbed depreciation of the amalgamating company from the previous year in which the amalgamation was effected. Such amalgamation shall take place in the following cases-
(a) Amalgamation of a company owning an industrial undertaking or a ship or a hotel with another company, or
(b) Amalgamation of a banking company with a specified bank, or
(c) Amalgamation of one or more public sector companies engaged in the business of operation of aircraft with one or more public sector companies engaged in similar business.
2. (i) The amalgamating company must be engaged in the business (in which the accumulated loss occurred or depreciation remains unabsorbed) for at least 3 years, and
(ii) the amalgamating company is holding at least 3/4th (75 per cent) of the book value of fixed assets for a continuous period of at least 2 years prior to the date of amalgamation. [Section 72A(1)]
3. (i) The amalgamated company must hold at least 3/4th (75 per cent) of the book value of fixed assets (which it acquired from the amalgamating company in a scheme of amalgamation) for a continuous period of at least 5 years from the date of amalgamation,
(ii) continues the business of the amalgamating company for a minimum period of 5 years from the date of amalgamation, and
(iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose. [Section 72A(2)]
Rule 9C of the Income Tax Rules, 1962 prescribes the following Conditions for carrying forward or set-off of accumulated loss and unabsorbed depreciation allowance in case of amalgamation for the purpose of section 72A(2)(iii)-
(i) The amalgamated company, owning 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.
(ii) The amalgamated company shall furnish to the Assessing Officer a certificate in Form No. 62, duly verified by an accountant, with reference to the books of account and other documents showing particulars of production, 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.
For this purpose, “installed capacity” means the capacity of production existing on the date of amalgamation.
Note: Once the above conditions are satisfied, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or depreciation of the amalgamated company for the previous year in which the amalgamation was effected.
4. Period of carry forward of accumulated loss by amalgamated company: It is further provided that all other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply to the amalgamated company. As a result, the amalgamated company is entitled to carry forward the accumulated loss for a further period of 8 assessment years from the assessment year in which amalgamation is effected.
5. Section 72A(3) provides that in case the amalgamated company violates any of the condition specified in section 72A(2) then the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with.
Hence, non-compliance of any of the conditions will result in deemed income in the hands of the amalgamated company.
6. Meaning of certain terms: Section 72A(7) defines certain terms which are given below-
(i) “Accumulated loss” in case of amalgamation of companies means unabsorbed business loss (other than speculation loss) which the amalgamating company would have been entitled to carry forward and set off under the provisions of section 72 if the amalgamation had not taken place.
(ii) "Unabsorbed depreciation" means so much of the allowance for depreciation of the amalgamating company which remains to be allowed and which would have been allowed to the amalgamating company under the provisions of this Act, if the amalgamation had not taken place.
(iii) "Industrial undertaking" means any undertaking which is engaged in—
(i) the manufacture or processing of goods; or
(ii) the manufacture of computer software; or
(iii) the business of generation or distribution of electricity or any other form of power; or
(iiia) the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services; or
(iv) mining; or
(v) the construction of ships, aircrafts or rail systems;
Carry forward and set off of accumulated loss in case of Demerger [Section 72A(4) and (5)]
In case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall be computed as follows-
Section 72A(5) empowers the Central Government to notify such conditions as it considers necessary to ensure that the demerger is for genuine business purposes.
6. Meaning of certain terms: Section 72A(7) defines certain terms which are given below-
(i) “Accumulated loss” in case of demerger of companies means unabsorbed business loss (other than speculation loss) which the demerged company would have been entitled to carry forward and set off under the provisions of section 72 if the demerger had not taken place.
(ii) "Unabsorbed depreciation" means so much of the allowance for depreciation of the demerged company which remains to be allowed and which would have been allowed to the demerged company under the provisions of this Act, if the demerger had not taken place.
Carry forward and set off of accumulated loss in case of conversion into a company [Section 72A(6)]
Where there is a reorganisation of a business under which -
(i) a firm is succeeded by a company fulfilling the conditions laid down in section 47(xiii) or
(ii) a proprietary concern is succeeded by a company fulfilling the conditions laid down in section 47(xiv)
then the accumulated loss and the unabsorbed depreciation of the predecessor firm or the proprietary concern, as the case may be, shall be deemed to be the loss or allowance for depreciation of the successor company for the previous year in which business reorganisation was effected.
It is further provided that the provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply to the successor company which means the successor company is entitled to carry forward such accumulated loss and the unabsorbed depreciation for a further period of 8 assessment years.
The proviso to Section 72A(6) provides that in case the successor company violates any of the condition specified in section 47(xiii) or section 47(xiv) then the set off of loss or allowance of depreciation made in any previous year in the hands of the successor company shall be deemed to be the income of the successor company chargeable to tax for the year in which such conditions are not complied with.
Hence, non-compliance of any of the conditions will result in deemed income in the hands of the successor company.
Carry forward and set off of accumulated loss in case of conversion into LLP [Section 72A(6A)]
Where there is a reorganisation of a business under which a private company or unlisted public company is succeeded by a limited liability partnership (LLP) by fulfilling the conditions laid down in the proviso to section 47(xiiib) then the accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or allowance for depreciation of the successor limited liability partnership for the purpose of the previous year in which business reorganisation was effected.
It is further provided that the provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply to the successor company which means the successor company is entitled to carry forward such accumulated loss and the unabsorbed depreciation for a further period of 8 assessment years.
The proviso to Section 72A(6A) provides that in case the LLP violates any of the condition specified in section 47(xiiib) then the set off of loss or allowance of depreciation made in any previous year in the hands of the LLP shall be deemed to be the income of the LLP chargeable to tax for the year in which such conditions are not complied with.
Hence, non-compliance of any of the conditions will result in deemed income in the hands of the LLP.
6. Meaning of certain terms: Section 72A(7) defines certain terms which are given below for section 72A(6) and section 72A(6A)-
(i) “Accumulated loss” in case of conversion into company or LLP means unabsorbed business loss (other than speculation loss) which the predecessor firm or the proprietary concern or the private company or unlisted public company would have been entitled to carry forward and set off under the provisions of section 72 if the reorganization of business had not taken place.
(ii) "Unabsorbed depreciation" means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the private company or unlisted public company which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or the private company or unlisted public company under the provisions of this Act, if the reorganization of business had not taken place.
Carry forward and set off of accumulated loss and unabsorbed depreciation allowance in scheme of amalgamation of banking companies [Section 72AA]
Section 72AA of the Act provides for carry forward of accumulated losses and unabsorbed depreciation allowance in the case of amalgamation of banking company with any other banking institution under a scheme sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of the Banking Regulation Act, 1949. This section operates notwithstanding anything contained in sub-clause (i) to (iii) of section 2(1B) or section 72A of the Act.
This section provides to extend the benefit of this section to amalgamation of public sector banks and public sector General Insurance Companies-
(i) amalgamation of one or more corresponding new bank or banks with any other corresponding new bank under a scheme brought into force by the Central Government under section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or under section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or both, as the case may be, or
(ii) amalgamation of one or more Government company or companies with any other Government company under a scheme sanctioned and brought into force by the Central Government under section 16 of the General Insurance Business (Nationalisation) Act, 1972.
“Corresponding new bank” is given the meaning as assigned to it in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or clause (b) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
“Government company” is given the meaning assigned to it in section 2(45) of the Companies Act, 2013. In addition, it is to be engaged in the general insurance business and has come into existence by operation of section 4 or section 5 or section 16 of the General Insurance Business (Nationalisation) Act, 1972. “General insurance business” is proposed to be given the meaning assigned to it in clause (g) of section 3 of the General Insurance Business (Nationalisation) Act, 1972.
This amendment is effective from the assessment year 2020-21.
Carry forward and set off of accumulated loss and unabsorbed depreciation allowance in business reorganization of cooperative banks [Section 72AB]
1. This provision is applicable in case of amalgamation and demerger of cooperative banks.
2. The amalgamated or resulting cooperative bank is entitled to ‘set off’ and ‘carry forward and set off’ the accumulated loss and the unabsorbed depreciation of the amalgamating or demerged cooperative bank from the previous year in which the amalgamation or demerger was effected.
3. (i) The amalgamating or demerged cooperative bank must be engaged in the business of banking for at least 3 years, and
(ii) the amalgamating or demerged cooperative bank is holding at least 3/4th (75 per cent) of the book value of fixed assets for a continuous period of at least 2 years prior to the date of amalgamation or demerger. [Section 72AB(2)]
4. (i) The amalgamated or resulting cooperative bank must hold at least 3/4th (75 per cent) of the book value of fixed assets (which it acquired from the amalgamating or demerged cooperative bank in a scheme of amalgamation or demerger) for a continuous period of at least 5 years from the date of amalgamation or demerger,
(ii) continues the business of the amalgamating or demerged cooperative bank for a minimum period of 5 years from the date of amalgamation or demerger, and
(iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating or demerged cooperative bank or to ensure that the amalgamation or demerger is for genuine business purpose. [Section 72AB(4)]
5. Amount of loss and depreciation to be carried forward and set off incase of amalgamation and demerger shall be as follows-
6. Period of carry forward of accumulated loss by amalgamated cooperative bank: It is further provided that all other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply to the amalgamated cooperative bank. As a result, the amalgamated cooperative bank is entitled to carry forward the accumulated loss for a further period of 8 assessment years from the assessment year in which amalgamation is effected.
Note: As per section 72AB(5), the period commencing from the beginning of the previous year and ending on the date immediately preceding the date of business reorganisation (amalgamation or demerger), and the period commencing from the date of such business reorganisation 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. Hence the two period of previous years are as follows-
7. Section 72AB(6) provides that in case the successor co-operative bank violates any of the condition specified in section 72A(2) then the set off of loss or allowance of depreciation made in any previous year in the hands of 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 such conditions are not complied with.
Hence, non-compliance of any of the conditions will result in deemed income in the hands of the successor co-operative bank.
8. Meaning of certain terms: Section 72AB(7) defines certain terms which are given below-
(i) “Accumulated loss” in case of amalgamating co-operative bank or the demerged co-operative bank, as the case may be means unabsorbed business loss (other than speculation loss) which the amalgamating co-operative bank or the demerged co-operative bank, as the case may be would have been entitled to carry forward and set off under the provisions of section 72 if the amalgamation or demerger had not taken place.
(ii) "Unabsorbed depreciation" means so much of the allowance for depreciation of the amalgamating co-operative bank or the demerged co-operative bank, as the case may be which remains to be allowed and which would have been allowed to the amalgamating co-operative bank or the demerged co-operative bank, as the case may be under the provisions of this Act, if the amalgamation or demerger had not taken place.
(iii) The expressions "amalgamated co-operative bank", "amalgamating co-operative bank", "amalgamation", "business reorganisation", "co-operative bank", "demerged co-operative bank", "demerger", "predecessor co-operative bank", "successor co-operative bank" and "resulting co-operative bank" shall have the meanings respectively assigned to them in section 44DB.
Carry forward and set off of losses in case of change in constitution of firm or on succession [Section 78]
In case of change in constitution of firm: Where there is change in the constitution of a firm due to retirement or death of a partner, the proportionate loss of such partner (in proportion of his profit sharing ratio) shall not be carried forward and set off by the firm in respect of the previous year. [Section 78(1)]
Note:
1. This section does not apply where the change in constitution takes place due to admission of a partner.
2. This section does not apply to unabsorbed depreciation.
A,B and C are three partners and their profit sharing ratio is 2:2:1. For the FY 2019-20, the loss from business comes to Rs. 2,00,000. C retires on 31.03.2020 from the firm. Loss that cannot be carried forward is Rs. (-) 2,00,000 x 1/5 = 40,000.
Hence, the firm can carry forward loss of Rs. 1,60,000 (2,00,000 - 40,000) only for the AY 2020-21.
In case of succession of business or profession: Where a business or profession is succeeded by another person otherwise than by inheritance, then the other person shall not be entitled to carry forward and set off the loss of the erstwhile business or profession who incurred the loss against the income of the successor. [Section 78(2)]
Note:
1. Section 78(2) does not apply in case of succession by inheritance.
2. In this context the provisions of section 170(1) is noteworthy. Section 170(1) provides for a situation where a person carrying on business or profession is succeeded by another person, who continues to carry on that business. In such a situation, the sub-section says that the predecessor in business shall be assessed in respect of the income of the previous year up to the date of succession and the successor in business shall be assessed in respect of the income after the date of succession. This sub-section only provides as to who will be assessable in respect of the income of the previous year from business, when there is a change in the person carrying on the business by succession.
3. Section 78(2) speaks only of carrying forward the losses of a person who was carrying on a business or profession and who was succeeded by another person. It makes no provision for the division of the income of the previous year between the predecessor and successor. It says that it is only the person who incurred or suffered the loss will be entitled to carry forward the same and set it off, and no other person. An exception to this rule is the case of succession by inheritance.
4. On the death of a partner of the firm having two partners and if the business of the firm is carried on by the surviving partner, then it is a case of succession of business and not by inheritance. Hence, the surviving partner cannot carry forward and set off the loss of the erstwhile firm. [Ramesh Kocha vs ITO (ITA Nos. 1379 & 1380/Mum/2017) (Mum-Trib.)]
Carry forward and set off of losses in case of change in shareholding of closely held company [Section 79]
Section 79 of the Income Tax Act provides conditions for carry forward and set off of losses in case of a company not being a company in which the public are substantially interested.
Section 79 is amended by Finance (No. 2) Act, 2019 effective from AY 2020-21.
Under section 79(1), 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 percent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than 51 percent of the voting power on the last day of the year or years in which the loss was incurred.
In other words, in case of change in shareholding of a closely held company which has incurred loss, at least 51% of the shareholders shall remain same as on the end of the PY in which loss was incurred and at the end of the PY in which such loss is set off.
Provision not to apply to a startup company: In case of a company, being a company in which the public are not substantially interested and an eligible start-up as referred to in section 80-IAC, the loss incurred in any year prior to the previous year in which change in shareholding has taken place, shall be allowed to be carried forward and set off only if all the shareholders of the company who held shares carrying voting power on the last day of the previous year in which the loss was incurred, continue to hold shares on the last of the current year. Further, the loss should have been incurred during the period of 7 years beginning from the year in which the company is incorporated.
However, w.e.f. Assessment Year 2020-21, in case of an eligible start-up, it is provided that loss incurred, by the closely held eligible start-up, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the two conditions specified above, i.e., continuity of 51% shareholding or continuity of 100% of original shareholders
Exceptions: The provisions of section 79(1) shall not apply in the following cases:
1. Where the change in shareholding is due to the death of a shareholder.
2. Where the change in shareholding is due to transfer of shares by gift to any relative of the shareholder.
3. Where there is a change in the shareholding of an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger of a foreign company and at least 51 percent shareholders of amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company.
4. Where change in shareholding is due to a resolution plan approved by the Insolvency and Bankruptcy Code, 2016.
5. Where the Tribunal (as defined in section 2(90) of the Companies Act, 2013) has suspended the Board of Directors of such company and has appointed new directors nominated by the Central Government on an application moved by the Central Government under section 241 of the Companies Act, 2013 in case of a company and its subsidiary and the subsidiary of such subsidiary.
6. Where change in shareholding is due to a resolution plan approved by the Tribunal under section 242 of the Companies Act, 2013 in case of a company and its subsidiary and the subsidiary of such subsidiary.
Submission of return for losses [Section 80]
As per section 80, the following losses shall be allowed to be carried forward and set off only if the return of income is filed as per the provisions of section 139(3)-
Section 139(3) states that above mentioned losses shall be allowed to be carried forward and set off in accordance with the provisions of this Act only if the return of income is filed within the time allowed under section 139(1). Hence, it is mandatory to file the return of income within the due date of filing of return of income as specified in section 139(1).
Notes:
1. If no return is filed or filed belatedly then any unabsorbed loss shall lapse and cannot be carried forward.
2. If belated return is filed, set off of loss in the year in which loss is incurred will be allowed to be set off against other income u/s 70 or u/s 71 but cannot be allowed to be carried forward.
3. It is mandatory to file a return of income within the due date prescribed in section 139(1) for the first year of incurring loss only. Once a loss is allowed to be carried forward in subsequent years, there is no requirement to file the return of income within the due date in the subsequent year.
4. The condition to file the return of income within the due date is only for those losses which have been expressly mentioned in this section. Other losses which have not been covered by section 80, shall not be mandatorily required to file the return of income in time. For example, section 80 does not cover section 71B and hence loss from house property is allowed to be carried forward and set-off even belated return of income is filed. Similarly, this provision is not applicable for carry forward of unabsorbed depreciation which is covered u/s 32(2).
5. Filing of return is mandatory: To set off the loss and carry forward and set off the loss one has to file the return of income whether timely or belated, as the case may be. If no return is filed, no loss can be set off or allowed to be carried forward and set off. [CIT vs Haryana Hotels Ltd. (2005) 276 ITR 521 (P&H)]. This restriction is not applicable to unabsorbed depreciation. This applies only to the brought forward business loss.
6. Section 80 mentions filing of return under section 139(3)/139(1) only. Hence if a return is filed under another section viz. In response to a notice under section 148 beyond the due date mentioned in section 139(1), even though filed within the time allowed in the notice, cannot be carried forward where no return was filed u/s 139(3)/(1). [Koppind (P) Ltd. Vs. CIT (1994) 207 ITR 228 (Cal)].
7. It is the Original return which must be filed within the due date specified in section 139(1) and not the revised return. If the Original return was filed within the time limit and if a revised return is filed after the time limit, date of filing of revised return shall not be considered for this purpose. [Dy.CIT .v. Ashok Walia (2013) 60 SOT 72(URO) (Kol.)(Trib.)]
Summary
Set off of Loss (Intra Head and Inter Head) in the first year of computation
Carry forward and Set off of Loss in the subsequent years
5 Comments
Hi Sujit
ReplyDeleteFirst of all, I would really like to say a big THANKS for writing such a detailed article on set-off and carry forward of losses. It is really informative.
I have a simple query on this and I am sure you will be able to give correct advice on this.
Suppose I have F&O derivatives business loss of 5 lakhs, 80k LTCG and 20k savings account interest. As per set off rules you have mentioned, I can carry forward only 5 lakhs - 80k - 20k = 4 lakhs loss to next year.
But in doing so, I am also losing the exemption on LTCG where income is exempted from tax till 1 lakh and I am also losing the exemption under section 80 TTA where savings account interest income is exempted till 10k.
So it’s a double whammy for me. My carry forward loss is getting reduced and I am not being able to take the exemptions the govt. is giving to everyone else. It feels weird and unjust actually that because I incurred some loss, I cannot avail the exemptions which is otherwise for everyone.
Is there any solution to this? How to avoid this? Has there been any ruling or appeal on this?
Can you suggest something. Thanks a lot.
Regards,
Rohan
Your understanding is correct. This is the whole scheme of income tax. First you have to determine the aggregate of all the incomes/losses under all the five heads. This adjusts the loss too. Then if you have positive income deduction for section 80TTA, etc comes into picture and is allowed.
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ReplyDeleteI have a question about set off of carry forward loss. I have some house property related losses from previous years but i have not had enough taxable income in subsequent years to apply the offset. Example, my total income after VIA deductions which comes from house property is say 240,000. This is not taxable. If i adjust it with losses from previous years then it gives me no benefit since my income is not taxable anyway. Do i have an option to not offset this year? ITR2 compulsorily offsets it when i enter the carry forward amounts. How do i avoid it? I do not see any option in the iTR2 excel utility. OR do i have no option? thanks
If your total income before chapter VI-A deduction is more than basic exemption limit of Rs. 250000 then you are compulsorily required to file ITR. Read this article for more details. Section 139 Provisions for filing Return of Income
DeleteIncome tax department has disallowed set off F&O business loss of 29000 from rental income for AY 2020-21 without mentioning any reason and sent Demand notice for Tax payment. They have treated this loss as Zero. Could this be due to low turnover of less than 1.5 lakhs or some other reason?
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